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At BAT we recognise that consumer and societal needs are
changing. Expectations that evolve at an accelerated pace.
We are committed to delivering a broad range of consumer
choice through our investment in new categories globally.
Central to that commitment is to shape a better tomorrow
for our consumers, society, shareholders and employees.
At BAT we are working hard to create A Better Tomorrow.
We are clear about the challenges of transformation.
Our technology and innovation partnership with
McLaren provides a global platform which enables
the acceleration of our ambition.
Central to that ambition is shaping a better tomorrow
for our consumers, society, shareholders and employees.
DISCOVER
MORE
YOU CAN FIND OUT
MORE ABOUT OUR
GROUP ONLINE AT
BAT.COM/REPORTING
AND BAT.COM/INVESTORS
OR DOWNLOAD OUR
BAT IR APP
This year’s Annual Report and
Accounts features a new corporate
logo, and look and feel, that reflects
changes in both the world around
us and our business. Our previous
logo has, for decades, served the
company well as a strong symbol
of a world-leading tobacco company.
Today, however, our purpose has
evolved as we aim to reduce the health
impacts of our business by offering
consumers a greater choice of New
Category products. Our dynamic new
logo reflects our company today and
our journey ahead: a unification of our
international and American businesses
and, moreover, the representation
of our multi-category portfolio.
CONTENTS
STRATEGIC
REPORT
Overview
Chairman’s introduction
Chief Executive’s review
The foundations of our evolved strategy
Finance Director’s overview
Our year in numbers
Strategic Management
Global industry overview
Our business model
Our global business
Engaging with our stakeholders
Delivering our strategy
Financial Review
Financial performance summary
Income statement
Treasury and cash flow
Other
Regional review
Business Environment
Principal Group risks
GOVERNANCE
Directors’ Report
Chairman’s introduction on governance
Board of Directors
Management Board
Leadership and purpose
Our culture and values
Board engagement with stakeholders
Board activities in 2019
Division of responsibilities
Board evaluation
Nominations Committee
Audit Committee
Remuneration Report
Annual statement on remuneration
Annual report on remuneration
Responsibility of Directors@
63
66
68
69
70
71
74
76
78
79
83
90
93
114
02
03
06
16
18
20
22
24
26
28
43
44
48
51
52
58
FINANCIAL
STATEMENTS
Group Financial Statements
Independent auditor’s report
Group companies and undertakings
Parent Company financial statements@
OTHER
INFORMATION
Additional disclosures
Shareholder information
115
237
247
254
299
British American Tobacco p.l.c. (No. 3407696)
Annual Report 2019
This document constitutes the Annual Report and Accounts of British American Tobacco p.l.c. (the ‘Company’) and the British American Tobacco Group prepared in accordance with UK requirements
and the Annual Report on Form 20-F prepared in accordance with the US Securities Exchange Act of 1934 (the ‘Exchange Act’) for the year ended 31 December 2019, except that certain phrases,
paragraphs or similar sections denoted with a ‘@’ symbol do not form part of the Annual Report on Form 20-F as filed with the US Securities and Exchange Commission (the ‘SEC’) and certain
phrases, paragraphs or similar sections denoted with a ‘»’ symbol do not form part of the Annual Report and Accounts. In addition, the Report of Independent Registered Public Accounting Firm on
pages 122-123 will only be included in the Annual Report on Form 20-F. Moreover, the information in this document may be updated or supplemented only for purposes of the Annual Report on Form
20-F at the time of filing with the SEC or later amended if necessary. Any such updates, supplements or amendments will also be denoted with a ‘»’ symbol. Insofar as this document constitutes the
Annual Report and Accounts, it has been drawn up and is presented in accordance with, and reliance upon, applicable English company law and the liabilities of the Directors in connection with this
report shall be subject to the limitations and restrictions provided by such law.
This document is made up of the Strategic Report, the Governance Report, the Financial Statements and Notes, and certain other information. Our Strategic Report, pages 2 to 62, includes our
purpose and strategy, global market overview, business model, global performance, as well as our financial performance and principal group risks. The Strategic Report has been approved by the
Board of Directors and signed on its behalf by Paul McCrory, Company Secretary. Our Governance Report on pages 63 to 114 contains detailed corporate governance information, our Committee
reports@ and our Responsibility of Directors@. The Directors’ Report on pages 63 to 89 (the Governance pages)@, page 114 (Responsibility of Directors)@ and 254 to 323 (the Additional disclosure
and Shareholder information pages) has been approved by the Board of Directors and signed on its behalf by Paul McCrory, Company Secretary. Our Financial Statements and Notes are on pages
115 to 253. The Other Information section commences on page 254.
This document provides alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards (IFRS). We believe these
APMs provide readers with important additional information on our business. We have included a Non-GAAP measures section on pages 258 to 268 which provides a comprehensive list of the APMs
that we use, an explanation of how they are calculated, why we use them and a reconciliation to the most directly comparable IFRS measure where relevant.
British American Tobacco p.l.c. has shares listed on the London Stock Exchange (BATS) and the Johannesburg Stock Exchange (BTI), and, as American Depositary Shares, on the New York Stock
Exchange (BTI).
The Annual Report is published on bat.com. A printed copy is mailed to shareholders on the UK main register who have elected to receive it. Otherwise, shareholders are notified that the Annual
Report is available on the website and will, at the time of that notification, receive a short Performance Summary (which sets out an overview of the Group’s performance, headline facts and figures
and key dates in the Company’s financial calendar) and Proxy Form.
Specific local mailing and/or notification requirements will apply to shareholders on the South Africa branch register.
References in this publication to ‘British American Tobacco’, ‘BAT’, ‘Group’, ‘we’, ‘us’ and ‘our’ when denoting opinion refer to British American Tobacco p.l.c. and when denoting tobacco business
activity refer to British American Tobacco Group operating companies, collectively or individually as the case may be.
The material in this Annual Report is provided for the purpose of giving information about the Company to investors only and is not intended for general consumers. The Company, its directors,
employees, agents or advisers do not accept or assume responsibility to any other person to whom this material is shown or into whose hands it may come and any such responsibility or liability is
expressly disclaimed. The material in this Annual Report is not provided for product advertising, promotional or marketing purposes. This material does not constitute and should not be construed as
constituting an offer to sell, or a solicitation of an offer to buy, any of our products. Our products are sold only in compliance with the laws of the particular jurisdictions in which they are sold.
References in this document to information on websites, including the web address of BAT, have been included as inactive textual references only. These websites and the information contained
therein or connected thereto are not intended to be incorporated into or to form part of the Annual Report and Form 20-F.
Cautionary statement
This document contains forward-looking statements. For our full cautionary statement, please see page 298.
01
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 CHAIRMAN’S
INTRODUCTION
A STRONG
OPERATIONAL
PERFORMANCE
Welcome to our combined Annual Report and
Form 20-F for 2019. I’m pleased to report a
strong operational performance with growth
in revenue, as well as both value and volume
share. Notwithstanding a number of one-off
charges that led to a decline in reported profit
from operations, performance was strong on
an adjusted basis, growing on the back of
our combustibles business and our continued
progress in New Categories.
It has also been a busy year as we accelerate
our ambition to transform our business.
The Board and I are confident in the vision and
focus of our new CEO, Jack Bowles, and his
drive to satisfy evolving consumer preferences
with new and innovative products.
Jack has already made great progress in his
stated aim to simplify the Group and he and
his management team have spent significant
time looking at how we can accelerate the
progress already made in our New Categories
business. This has been instrumental in the
Board’s endorsement of an evolution of our
strategy and I am excited and energised
about the possibilities for the future.
A sustainable and
well‑governed business
Our sustainability agenda is at the heart
of our strategic plans to build a long-term
sustainable business. We have made a clear
commitment to providing consumers with
a range of potentially less harmful products,
which is central to our corporate purpose
around which long-term growth is planned.
I am proud to see that the continuing growth
in our New Categories business reflects the
significant success we have already made
in this vital area.
However, we are also clear that long-term
sustainability, as well as our ability to meet
short-term financial and other targets,
will be underpinned by successful delivery
against other environmental, social and
governance measures.
Last year, our newly-revised environmental
targets gained the approval of the Science-
Based Target initiative, and I’m very pleased
to report that we are performing well against
our goals. The Group’s direct carbon dioxide
equivalent emissions are already 10% lower
than its 2017 baseline, and we have also been
honoured to have been named on the Carbon
Disclosure Project’s prestigious ‘A List’ for
climate change. This recognises our actions
to cut emissions, mitigate climate risks and
develop the low-carbon economy.
The Group’s commitment to improving social
conditions, from respecting Human Rights
in every country in which we operate to our
own workforce diversity, remains central to
the business. Human rights commitments,
in particular involving issues such as child
labour, sit at the heart of both our Standards
of Business Conduct and Supplier Code
of Conduct, and we have an array of due
diligence procedures to monitor our entire
supply chain. Our management comprises
141 different nationalities, while women
made up 51% of senior recruits in 2019.
The Group’s governance practices promote
transparent and responsible corporate
behaviour. All our staff worldwide must
comply with our Standards of Business
Conduct, and we have continued to expand
compliance training, which complements
our internal ‘Speak Up’ channels.
Overall, the quality and success of our
Sustainability Agenda continues to be
recognised externally, and I am proud to
report that we are once again the only
company in the industry to have been
included in the Dow Jones Sustainability
Indices’ prestigious World Index in 2019.
This is our 18th consecutive year of
inclusion in the Index series, which reflects
BAT’s long-standing commitment to
delivering against ESG measures.
Dividends
The Board has declared a dividend of 210.4p
per ordinary share, payable in four equal
instalments of 52.6p per ordinary share,
to shareholders registered on the UK main
register or the South Africa branch register
and to American Depository Shares (ADS)
holders, each on the applicable record dates.
The dividends receivable by ADS holders in
US dollars will be calculated based on the
exchange rate on the applicable payment
dates. Further information on dividends
can be found on page 47 of the Financial
Review and page 300 in the Shareholder
information section.
Board composition and outlook
I am very pleased to welcome Jerry Fowden
to the Board this year. He brings with him
a wealth of executive experience relating to
operations, transformation and marketing,
which will complement the expertise of the
other two North American members of our
Board, and we look forward to the insights he
will provide as we grow our business.
Kieran Poynter will retire from the Board
with effect from the conclusion of the
Annual General Meeting on 30 April
2020. Mr Poynter has served as a Non-
Executive Director since July 2010, as Senior
Independent Director since October 2016,
and is currently a member of the Audit and
Nominations Committees.
As we enter 2020, I feel strongly that the
business is in excellent shape. As I write
this opening statement, the Group is
closely monitoring the development of
Covid 19 (Coronavirus). We believe that
our business continuity plans will ensure
the business is prepared to manage the
challenges as and when they may develop.
Notwithstanding Covid 19, with our new
management team and strategy, I am
confident that we are well placed to deliver
sustainable growth for many years to come.
Richard Burrows
Chairman
02
OverviewBAT Annual Report and Form 20-F 2019 CHIEF EXECUTIVE’S
REVIEW
DELIVERING
TODAY AND
BUILDING
A BETTER
TOMORROW
Dear shareholders
and stakeholders,
I write this reflecting
on my first year as
Chief Executive of BAT.
It is a privilege to lead
the Group, with its record
of achievements both
past and present.
Since taking the helm
in early 2019, I have
focused the business
on three clear priorities:
driving value from
combustibles, ensuring
a step change in New
Categories performance
and simplifying the
business. Stronger,
simpler, faster.
My new management
team has fully embraced
these priorities and
is already delivering
against them.
In my first Annual Report
as Chief Executive,
I want to take this
opportunity to set out my
vision for BAT’s future.
03
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 CHIEF EXECUTIVE’S REVIEW
CONTINUED
I HAVE FOCUSED THE
BUSINESS ON THREE
CLEAR PRIORITIES:
– DRIVING VALUE FROM
COMBUSTIBLES
– ENSURING A STEP
CHANGE IN NEW
CATEGORIES
PERFORMANCE
– AND SIMPLIFYING
THE BUSINESS
STRONGER, SIMPLER,
FASTER.
OUR PURPOSE IS TO
BUILD A BETTER
TOMORROW BY
REDUCING THE HEALTH
IMPACT OF OUR
BUSINESS THROUGH
OFFERING A GREATER
CHOICE OF ENJOYABLE
AND LESS RISKY
PRODUCTS FOR
OUR CONSUMERS.
WE ARE ON A
JOURNEY TO BECOME
A BUSINESS THAT
DEFINES ITSELF NOT
BY THE PRODUCTS
IT SELLS BUT BY THE
CONSUMER NEEDS
IT MEETS.
Delivering today
In 2019, building on our foundations,
we delivered strong operational results
and cash generation, creating a solid
base for delivering today and building
a better tomorrow.
I am especially pleased to report 6% revenue
growth (at current rates of exchange) of
£1.4 billion to £25.9 billion. This growth was
achieved while also increasing investment in
the business, growing our New Categories
business by 37%, and increasing our value
and volume share by 30bps and 20bps
respectively. @Operating cash conversion
of 97% demonstrates our commitment to
maximising cash to reduce leverage and
invest in the business@.
Of course, we live in an age of relentless
change. Consumers’ desires and tastes
evolve, while societal attitudes are changing.
These changes are providing us with growth
opportunities we could not previously
have imagined.
A clear corporate purpose
Our purpose is to build a better tomorrow by
reducing the health impact of our business
through offering a greater choice of enjoyable
and less risky products for our consumers.
We will evolve our growth model through
the development of our portfolio in tobacco,
nicotine and beyond, meeting our consumers’
evolving need for enjoyment and satisfaction.
By building on our strong foundations, we
will build a better tomorrow for consumers,
employees, shareholders and society.
Our ambition is to increasingly transition our
revenues from cigarettes to non-combustible
products over time. We aim to achieve at
least £5 billion in New Categories revenues in
2023/2024.
To achieve that, we need to continue to drive
value from our combustible business and
accelerate the growth of our New Categories.
Supporting this is our new ‘ethos’, which
I am delighted to launch in 2020. Our ethos
is about being bold, fast, empowered,
responsible and diverse. This annual report
is a showcase of our new ethos in action.
Acting responsibly
As a leading multinational business we
understand our global impact, the importance
of high standards of integrity, and our
evolving societal responsibilities. As a result,
we are moving from a business where
sustainability has always been important,
to one where it is front and centre in all
that we do.
For our consumers, we want to offer a range
of enjoyable and responsibly-marketed
products in tobacco, nicotine and beyond.
For society, we aim to reduce the health and
environmental impacts of our business.
For our suppliers and customers, we want
to raise standards for everyone across our
value chain.
For our employees, we want to create a
dynamic, inspiring and purposeful place for
them to work.
And for our shareholders, we want to deliver
superior and sustainable returns.
Meeting consumer needs
Today, we see new opportunities to capture
consumer moments which have, over time,
become limited by societal and regulatory
shifts, and to satisfy evolving consumer needs
and preferences.
Consequently, we have evolved our strategy
to put a sharper focus on delivering a step
change in New Categories performance,
fuelled by investment from the continued
delivery of our combustible business.
Our evolved strategy is about anticipating
and satisfying the ever-evolving consumer:
providing pleasure, reducing risk, offering and
increasing choice, and stimulating the senses
of adult consumers worldwide.
BAT will satisfy consumer needs through
a focused portfolio of products that offer
sensorial enjoyment for a variety of moods
and moments. We will build fewer but
stronger global brands.
This strategy is underpinned by a unique view
of the consumer across four categories, which
is increasingly driven by powerful consumer
data and analytics and we are accelerating our
investment further.
Our business will be further enabled by
simplifying our management structure, truly
embracing digital transformation, rigorously
managing our cost base, and enhancing our
internal culture.
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
04
OverviewBAT Annual Report and Form 20-F 2019 WE BELIEVE IN A
MULTI‑CATEGORY
STRATEGY TO BETTER
MEET CONSUMER
NEEDS AND LEVERAGE
OUR SCALE.
@
OUR FOCUS ON
OPERATING CASH
CONVERSION
DEMONSTRATES OUR
COMMITMENT TO
REDUCE LEVERAGE
AND INVEST.
WE WILL FOCUS
OUR PORTFOLIO
DEVELOPMENT
ON CONSUMER
OFFERS THAT WILL
CAPITALISE ON OUR
CORE BUSINESS
CAPABILITIES.
OUR FUTURE IS
ABOUT BEING BOLD,
FAST, EMPOWERED,
RESPONSIBLE AND
DIVERSE.
WE HAVE A STRATEGY
FOR GROWTH AND
SUSTAINABILITY.
Parameters of our
developing portfolio
We will focus our developing portfolio on
consumer offers that will capitalise on our
core business capabilities.
Specifically, we consider there to be four key
parameters that create the boundaries of our
portfolio development.
First, we will leverage our unique global
marketing reach and scale.
Second, we will build on our existing delivery
platforms in vapour and modern oral where
we have hard-earned technological expertise.
Third, given our well-developed regulatory and
scientific expertise, we will operate in product
categories that require those capabilities.
Finally, any portfolio investment will be judged
by stringent strategic and financial metrics.
As we explore these portfolio development
opportunities, our new corporate
ventures team will accelerate the creation,
development and commercialisation of new-
to-world innovation on a test-and-learn basis.
Strong foundations
As the world’s largest international tobacco
company by revenue, we are exceptionally
well-placed for future growth. Our deep
understanding of consumers, significant
geographic spread, supply chain proficiency
and experience engaging with diverse
stakeholders are essential capabilities.
Few consumer goods companies can claim
over 150 million consumer interactions
every day; distribution in 11 million points of
sale across a well-balanced, developed and
emerging market footprint; and approaching
11 million consumers of non-combustible
tobacco and nicotine products.
This year we have grown the New Categories
revenue to £1.3 billion – a growth rate
of 37% in 2019 (both at current rates of
exchange) and more than double our
revenues from two years ago. This provides
us with a vital platform for the future.
Maximising efficiencies
I have been clear that we need to simplify
the business and I have been dedicated to
that end in my first year as Chief Executive.
During 2019, we launched both a
fundamental re-evaluation of how we are
organised and a redesign of management
layers that eliminated duplication and
entrenched accountability. We called this
Project Quantum and it is the first, not the
last, step, as we will constantly need to refine
our business as the Group evolves.
Project Quantum created new capabilities
in the organisation, and will help us release
valuable funds for further reinvestment in
our growth ambition.
Empowered and diverse
Our 53,000 plus people remain our
most important asset. As we recast our
structure, we are clarifying accountability
and empowering real ownership to
our teams.
As our business evolves, so too does our
employee value proposition. Today, we
are attracting a different and wider range
of people and skillsets than we did before,
injecting exciting new capability into the
business. This is exemplified by our over 300
new specialist hires in 2019, who are bringing
with them new capabilities in digital, product
development and design.
For both our long-time BAT employees and
those who have more recently joined, we
are inspiring an ethos that is responsive to
constant change and embodies a learning
culture dedicated to continuous improvement.
Sustainable future
I am honoured to be at the helm of an
exceptional business with such a successful
history. My responsibility is to ensure that it is
faster, bolder and stronger in the years to come.
We now have a business with a new corporate
identity that reflects our company today
and our journey ahead. We are becoming a
business that defines itself not by the products
it sells but by the consumer needs it meets.
Our total commitment to a multi-category
business powered by investment from our
combustibles category will drive sustainable
growth and underpin continued delivery
of high single-digit earnings growth on an
adjusted constant currency basis.
I am confident that we have a strategy for
growth and sustainability which will deliver
a better tomorrow.
Yours
Jack Bowles
Chief Executive
OUR TOTAL COMMITMENT
TO A MULTICATEGORY
BUSINESS POWERED
BY INVESTMENT FROM
OUR COMBUSTIBLES
CATEGORY WILL
DRIVE SUSTAINABLE
GROWTH AND UNDERPIN
CONTINUED DELIVERY
OF HIGH SINGLE‑DIGIT
EARNINGS GROWTH.
05
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 THE FOUNDATIONS OF
OUR EVOLVED STRATEGY
We are committed to providing a better tomorrow for all our
stakeholders. Our ambition is to deliver long-term sustainable
growth with a range of innovative and less harmful products
that stimulate the senses of new adult generations.
STRONG
FOUNDATIONS
SATISFYING CONSUMER
MOMENTS
>180
markets in which
we operate
>150m
daily consumer
interactions
>11m
points of sale across
over 180 markets
Our wide range of capabilities make us
exceptionally well-placed for future growth:
– our unique global marketing and
distribution reach;
– our track record of R&D strength
and innovation;
– our decades’ worth of consumer insights,
and brand building expertise; and
– our £1.3 billion New Categories business
built in just a few years.
20 years ago
Traditional cigarettes fulfilled a multitude
of consumer moments
Night-time
First thing in
the morning
At home
with others
After
breakfast
At home
while
relaxing
At home
while
working/
activities
At the pub
Commuting
to work
At work
with others
At work
alone
Outdoor
activities
Returning
home
After
meal/drink
For decades, cigarettes satisfied a
need for sensorial enjoyment for many
individuals. While occasions for tobacco
consumption are now reduced, new
opportunities have arisen:
– new products provide us with an
opportunity to capture in a focused
way the lost consumer moments
previously associated with tobacco.
– evolving and fragmenting consumer
needs provide us with opportunities
for additional growth in a variety
of new categories.
06
OverviewBAT Annual Report and Form 20-F 2019 A DEVELOPING
PORTFOLIO
PARAMETERS TO GUIDE GROWTH
OPPORTUNITIES
Beyond
nicotine
New nicotine
categories
y
t
i
l
i
b
a
t
p
e
c
c
a
l
a
i
c
o
S
Tobacco
Less
Usage
Regain
Additional
A wider portfolio of products that offer
sensorial enjoyment for different moods
and moments will allow us to capture the
consumer moments previously associated
with tobacco use, as well as satisfy new
evolving consumer needs, through:
– traditional tobacco and
nicotine products;
– new nicotine products; and
– ultimately, a portfolio of products beyond
tobacco and nicotine that leverages our
proven delivery technologies.
Reduced health impact
compared to cigarettes
Science and
regulatory expertise
BAT global
marketing
reach
NEW CATEGORY
GROWTH
OPPORTUNITIES
Leveraging
current
delivery
platforms
Strategic and financial
attractiveness
Positive environmental
contribution
Our new growth opportunities will
capitalise on our core business strengths,
creating clear boundaries for our
portfolio development:
– reducing the health and environmental
impacts of our business;
– leveraging our global marketing reach
and scale;
– building on existing delivery platforms
and technological expertise;
– relying on our experience in managing
complex regulatory and scientific
matters; and
– meeting stringent strategic and
financial metrics.
07
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
A STRATEGY FOR
ACCELERATED GROWTH
While combustible tobacco will be at the core of our business for some time
to come, we aim to generate an increasingly greater proportion of our revenues
from products other than cigarettes, thereby reducing the health impact
of our business.
This will deliver a better tomorrow for our consumers who will have a range of
enjoyable and potentially less risky choices for every mood and moment; for society
through reducing the overall health and environmental impacts of our business;
for our employees by creating a dynamic and purposeful place to work; and for
our shareholders by delivering sustainable superior returns.
OUR MISSION
Stimulating
the Senses
of New Adult
Generations
HOW WE WIN
Must win
High
Growth
Segments
Priority
Markets
How to win
Inspirational foresights
Remarkable innovation
Powerful brands
Connected organisation
People & partnerships
US focus
OUR MISSION
Stimulating the senses
of new adult generations
Today, we see opportunities to capture
consumer moments which have, over time,
become limited by societal and regulatory
shifts, and to satisfy evolving consumer needs
and preferences.
MUST WINS
High Growth Segments
Driven by our unique and data-driven
consumer insight platform (PRISM), we will
focus on product categories and consumer
segments across our global business that
have the best potential for long-term
sustainable growth.
Our mission is to anticipate and satisfy this
ever-evolving consumer: provide pleasure,
reduce risk, increase choice and stimulate
the senses of adult consumers worldwide.
Priority Markets
By relying on a rigorous market prioritisation
system (MAPS), we will focus the strengths
of our unparalleled retail and marketing reach,
as well as our regulatory and scientific
expertise, on those markets and marketplaces
with the greatest opportunities for growth.
HOW WE WIN
Inspirational foresights
As one of the most long-standing and
established consumer goods businesses in
the world, we have a unique view of the
consumer across four product categories,
which is increasingly driven by powerful data
and analytics. These insights ensure that the
development and responsible marketing of
our products is fit to satisfy consumer needs.
Remarkable innovation
As consumer preferences and technology
evolve rapidly, we rely on our growing global
network of digital hubs, innovation super
centres, world-class R&D laboratories, external
partnerships and an upcoming corporate
venturing initiative to stay ahead of the curve.
08
OverviewBAT Annual Report and Form 20-F 2019 OUR STRATEGY PUTS THE CONSUMER FIRST, FOCUSING ON
UNDERSTANDING ADULT CONSUMER CHOICE AND ENJOYMENT.
WE WILL CAPTURE LOST CONSUMER MOMENTS WITH A
PORTFOLIO IN TOBACCO, NICOTINE AND BEYOND. THIS WILL
ENABLE SUSTAINABLE, LONG‑TERM GROWTH WITH A CLEAR
FOCUS ON FORESIGHTS, INNOVATION, BRANDS, ACTIVATION,
TEAMS AND TECHNOLOGY. WE WILL BECOME A BUSINESS
THAT DEFINES ITSELF NOT BY THE PRODUCTS IT SELLS BUT
BY THE CONSUMER NEEDS IT MEETS.
Kingsley Wheaton
Chief Marketing Officer
OUR PURPOSE
KEY STAKEHOLDER
OUTCOMES
Consumers
enjoyable choices for every mood
and moment, today and tomorrow
Society
reduced overall health
& environmental impact
Employees
a dynamic, inspiring and
purposeful place to work
Shareholders
sustainable and superior returns
ETHOS
Empowered
Bold
Fast
Diverse
Responsible
Powerful brands
For over a century, we have built trusted
and powerful brands that satisfy our
consumers and serve as a promise for quality
and enjoyment. We will focus on fewer,
stronger and global brands across all our
product categories, delivered through
our deep understanding and segmenting
of our consumers.
Connected
Few companies can claim over 150 million
daily consumers, over 11 million retail
points of sale, as well as a network of
expert and skilled employees around
the world. Staying connected to all of
them, especially through digital means
(including e-commerce), ensures better
consumer connections, access to markets
and innovations that offer sensorial
enjoyment and satisfy consumer needs.
People and partnerships
Our highly-motivated people are being
empowered through a new ethos that is
responsive to constant change, embodies
a learning culture and is dedicated to
continuous improvement. But we cannot
succeed on our own, and our partnerships
with farmers, suppliers and customers are also
key for ensuring sustainable future growth.
US focus
The United States comprises nearly half of
our global business. It is also the single largest
economy in the world, the largest single
centre for technology and the key driver of
global consumer trends, and is where we
have the deep consumer understanding and
financial strength to support the delivery of
our mission to stimulate consumer senses
around the rest of the world.
OUR PURPOSE
By stimulating the senses of new adult
generations, our purpose is to create
A Better Tomorrow for all our stakeholders.
We will create A Better Tomorrow for:
Consumers
By responsibly offering enjoyable and
stimulating choices for every mood and every
moment, today and tomorrow;
Society
By reducing the health impact of our business
by offering a range of alternative products,
as well as by reducing our environmental
and social impacts;
Employees
By creating a dynamic, inspiring and
purposeful place to work; and
Shareholders
By delivering sustainable and superior returns.
09
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 PUTTING SUSTAINABILITY
FRONT AND CENTRE
As we evolve our Group strategy, we are also evolving our
Sustainability Agenda. We are moving ourselves from a
business where sustainability has always been important,
to one where it is front and centre in all that we do.
Our commitment to reduce the health impacts
of our cigarette business – by providing a range
of potentially less risky products – is central to
our corporate purpose. This is underpinned
by excellence in all other environmental, social
and governance (ESG) measures.
Each year we engage with a wide range of
stakeholders to understand the issues that
are most important to them. 2019 was a
significant year, with many stakeholders re-
emphasising the importance of addressing
the health impacts of our cigarette business
and with governments and cities around the
world declaring a climate emergency.
Consequently, we refreshed our
Sustainability Agenda (as an integral part
of our evolved Group Strategy) to reflect
the prominence of tobacco harm reduction
and also to place a greater emphasis on
the importance of addressing climate
change and environmental management.
At the same time, we remain committed
to delivering a positive social impact and
ensuring robust corporate governance
across the Group.
OUR SUSTAINABILITY AGENDA
S
New Sustainability Targets
We are committed to making a step-
change in our sustainability ambition.
As a result, we have announced a
number of stretching targets that we are
confident will deliver A Better Tomorrow
for all our stakeholders.
These include:
– increasing our number of non-
combustible product consumers from
11 million to 50 million by 2030;
– achieving carbon neutrality by 2030*;
and
– bringing forward our existing 2030
environmental targets to 2025.
* Based on Scope 1 and 2 carbon dioxide equivalent
(CO2e) emissions.
Reducing the HEALTH impact
of our business
World-class
science
Consumer
choice
Standards
and regulation
E
S
G
Excellence in
ENVIRONMENTAL
management
Climate change
Water and waste
Delivering a positive
SOCIAL impact
Robust corporate
GOVERNANCE
Human rights
Business ethics
Farmer livelihoods
Responsible marketing
Sustainable agriculture
Health and safety
Circular economy
People and culture
Regulation and
policy engagement
Creating shared value for
Consumers
Society
Employees
Shareholders
10
OverviewBAT Annual Report and Form 20-F 2019 ETHOS
Our purpose is to build a better tomorrow by reducing
the health impact of our business through offering a greater
choice of enjoyable and less-risky products for our consumers.
A KEY DRIVER TO DELIVER THIS WILL BE OUR ETHOS – AN EVOLUTION OF
OUR GUIDING PRINCIPLES – WHICH GUIDES OUR CULTURE AND BEHAVIOURS
ACROSS THE ENTIRE GROUP. IT HAS BEEN DEVELOPED WITH SIGNIFICANT
INPUT FROM OUR EMPLOYEES, AND ENSURES AN ORGANISATION
THAT IS FUTURE FIT FOR SUSTAINABLE GROWTH.
Hae In Kim
Director, Talent and Culture
We are
BOLD
Dream big – with
innovative ideas
Make tough decisions
quickly and proudly stand
accountable for them
Resilient and fearless
to compete
We are
FAST
Speed matters. Set clear
direction and move fast
Keep it simple.
Focus on outcomes
Learn quickly and
share learnings
We are
EMPOWERED
Set the context for
our teams and trust
their expertise
Challenge each other.
Once in agreement,
we commit collectively
Collaborate and hold
each other accountable
to deliver
We are
DIVERSE
Value different
perspectives
Build on each others’
ideas, knowledge
and experiences
Challenge ourselves
to be open-minded
recognising
unconscious bias
We are
RESPONSIBLE
Take action to reduce
the health impact of
our business
Ensure the best quality
products for our
consumers, the best place
to work for our people,
and the best results
for shareholders
Act with integrity, never
compromising our
standards and ethics
11
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 OUR
PEOPLE
As our business evolves, so too does our employee value
proposition. Today, as we have expanded our portfolio across
a number of new categories, we are attracting a different
and wider range of people and skillsets than we did before,
injecting exciting new capabilities into the business.
THERE ARE 141
NATIONALITIES
REPRESENTED AT
MANAGEMENT LEVEL
WITHIN OUR GROUP
OUR GLOBAL EMPLOYEE
SURVEY RESULTS
DEMONSTRATE THAT
WE OUTPERFORM
OUR FMCG
COMPARATOR GROUP
12
OverviewBAT Annual Report and Form 20-F 2019 LAST YEAR WE
RECEIVED OVER 60,000
APPLICATIONS TO OUR
GLOBAL GRADUATE
PROGRAMME
WE WERE AWARDED
‘BEST PLACE TO WORK
FOR LGBTQ EQUALITY’
BY THE HUMAN RIGHTS
CAMPAIGN FOUNDATION
IN THE US, AND HAD
SEVEN FINALISTS IN
THE GLOBAL WOMEN
IN I.T. AWARDS
DIVERSITY
MATTERS TO THE
GROUP BECAUSE
IT MAKES GOOD
COMMERCIAL SENSE
13
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 BUILDING WORLD‑CLASS
CAPABILITIES FOR INNOVATION
To achieve a step-change in New Categories, we are building new capabilities
around the world focused on science, innovation, and digital information.
Consumer preferences and technology are evolving rapidly, and we are staying
ahead of the curve with our digital hubs, the creation of innovation super centres,
and further development of our world-class R&D laboratories. We are also
leveraging the expertise of our external partners, and are looking forward to
exciting results from our upcoming venturing initiative.
Key
Innovation
R&D
Science
Digital
San Francisco
Upcoming innovation hub
OUR CUTTING EDGE
TECHNOLOGIES TURN
CONSUMER INSIGHTS
INTO INNOVATIVE
AND OUTSTANDING
PRODUCTS THAT
MEET THEIR NEEDS
Paul Lageweg
Director, New Categories
I AM VERY PROUD OF OUR
GLOBAL TEAM OF WORLD‑
CLASS SCIENTISTS AND
WHAT THEY ARE DOING TO
ENSURE THE PERFORMANCE,
EFFICACY AND SAFETY
OF OUR PRODUCTS
David O’Reilly
Director, Research and Science
14
Winston Salem
US R&D Centre
OverviewBAT Annual Report and Form 20-F 2019 WE ARE EMBEDDING DIGITAL
CAPABILITIES ACROSS BAT.
THROUGH DATA AND
E‑LEARNING, THIS IS
DELIVERING MORE
EFFICIENT WAYS OF
WORKING, AGILE SUPPLY
CHAINS AND ENHANCED
CONSUMER CONNECTIONS
Marina Bellini
Director, Digital and Information
London
Upcoming digital hub
Tel Aviv
Upcoming innovation hub
Southampton
Global R&D Centre
Shenzhen
Innovation hub
Four
New and upcoming
tech hubs
50+
toxicologists
1,500+
R&D specialists
600+
scientists
and engineers
300+
new specialist
hires in 2019
330
Global Graduate
hires in 2019
200+
external partners
150+
PhDs
15
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 @
IN 2019, BUILDING ON OUR FOUNDATIONS,
WE HAVE DELIVERED STRONG
OPERATIONAL RESULTS, CREATING
A SOLID BASE FOR DELIVERING TODAY
WHILE BUILDING A BETTER TOMORROW
EXCLUDING CURRENCY, WE GREW
OUR ADJUSTED REVENUE 5.6%,
ADJUSTED PROFIT 6.6%
ADJUSTED OPERATING MARGIN
GREW 50 BPS TO 43%
OPERATING CASH FLOW CONVERSION
RATIO OF 97% GENERATED £1.9BN OF
FREE CASH FLOW AFTER DIVIDENDS
FUELLING DELEVERAGING OF 0.5X
Tadeu Marroco
Finance Director
16
Overview FINANCE DIRECTOR’S
OVERVIEW
CASH GENERATION
FUELS DIVIDENDS,
DELEVERAGING
AND INVESTMENT
Our financial ambitions as
fundamentals improve
As we build A Better Tomorrow, we will be
focused on three key priorities: releasing funds
to support our growth agenda, maximising
our marketing spend effectiveness and
generating cash to continue to deleverage
the balance sheet.
Our combustible portfolio and operational
efficiencies will fuel our financial performance
by providing the fire-power to invest in New
Categories, both inorganically, mainly through
our new corporate venturing initiative,
and organically, in products that meet
our consumers’ changing needs.
We remain committed to consistent and
sustainable long-term 3-5% revenue growth
which will deliver high single figure earnings
growth, on a constant currency basis,
whilst targeting a minimum of 95% cash
conversion and a dividend pay-out ratio
of 65% of adjusted diluted EPS over the
medium to long-term.
Pricing and New Categories
drive revenue growth
Revenue grew by 5.7% in 2019 to
£25,877 million driven by pricing across the
cigarettes portfolio (with price/mix of 9%)
and an increase in revenue from Traditional
Oral (up 15%, with 2018 up 127%) and New
Categories (up 37%, 2018 up 138%), which
more than offset a 4.7% reduction in cigarette
volume. In 2018, revenue grew 25.2% at
£24,492 million largely due to the full year
effect of the RAI acquisition. Adjusting for the
impact of acquisitions, excise on bought-in
goods and the impact of currency, constant
currency adjusted revenue grew 5.6% in 2019
(2018: up 3.5% on a representative constant
rate basis).
Increased focus on
operational efficiency
Profit from operations was down 3.2%
(2018: up 45.2%), as the improvement
in revenue and operational efficiencies
were more than offset by the charges
related to Canada, Russia, other smoking
and health litigation (including Engle in
the US) and Indonesia (as discussed on
page 154), the impact of the restructuring
programmes (including Quantum), the
ongoing investment in New Categories
and the impact of amortisation of acquired
brands. 2018 was positively skewed by the
inclusion of 12 months of results from RAI.
Our operating margin declined in 2019 by
320 bps to 34.8% on a reported basis.
Adjusted profit from operations grew by
6.6% on a constant currency basis (2018:
up 4.0% on a representative, constant rate
basis). On an adjusted basis, operating margin
increased by 50 bps to 43.1% (2018: 42.6%).
Focus on dividends
Dividends per share for 2019 will be 210.4p,
an increase of 3.6% (2018: 203.0p, up 4.0%),
in line with our commitment of a 65% payout
ratio on adjusted diluted earnings per share
(2018: 68.4%).
Net finance costs increased 16% to
£1,602 million partly due to a foreign
exchange headwind and interest on leases
recognised under IFRS16 (Leases). 2018 was
up 26.2% to £1,381 million due to higher
borrowings following the acquisition of RAI.
Our banking facilities require a gross interest
cover of at least 4.5 times. In 2019, our gross
interest cover was 7.1 times (2018: 7.2 times).
On a reported basis, basic EPS was 5.4%
lower than 2018 at 249.7p largely due to the
the reduction in profit from operations. EPS in
2018 declined 86% as 2017 was materially
affected by a deemed gain (£23.3 billion)
arising on the acquisition of RAI. Excluding the
adjusting items and the effect of foreign
exchange on the Group’s results, adjusted
diluted earnings per share, at constant rates,
increased by 8.4% to 321.6p, with 2018
ahead of 2017 by 11.8%.
Cash delivery leads to
deleveraging and investment
In 2019, net cash generated from operating
activities fell 12.6% to £8,996 million (2018:
up 93% to £10,295 million), with 2018
positively impacted by the timing of payments
related to the Master Settlement Agreement
(MSA) in the US.
@Adjusted cash generated from operations
(as defined on page 265) was £6,831 million,
a decline of 15% on 2018, or 16% on a
constant rate basis. Normalising for the timing
of the MSA liability, adjusted cash generated
from operations would have been 1.2%
higher than 2018.@
Based upon net cash generated from operating
activities, the Group’s cash conversion ratio
reduced from 111% in 2018 to 100% in 2019.
@Excluding the MSA timing impact (affecting
2018), operating cash flow conversion ratio (as
defined on page 264) was 97% (2018: 100%).
Free cash flow is a measure the Group uses
to assess total cash generated by the Group’s
operations, prior to the payment of dividends,
repayment of borrowings or undertaking of
investing activities. In 2019, free cash flow was
£6,519 million. After paying the dividend in
the year, free cash flow was £1,921 million
demonstrating the Group’s ability to service
and repay borrowings which reduced in 2019
to £45,366 million from £47,509 million, whilst
continuing to pay dividends to shareholders.@
Adjusted net debt to adjusted EBITDA, as
defined on page 267 provides a measure to
assess the Group’s ability to meet its borrowing
obligations. The Group continues to focus on
a balanced approach of deleveraging, while
investing for the future and providing a return
via dividends to shareholders. This measure
will be a key performance indicator in 2020
@(replacing adjusted cash generated from
operations)@, demonstrating our commitment
to the deleveraging agenda. In 2019, the
adjusted net debt to adjusted EBITDA ratio
improved from 4.0 times to 3.5 times.
The Group continues to deliver against the
financial objectives, which allows for growth
in dividends while deleveraging and investing
in A Better Tomorrow.
Tadeu Marroco
Finance Director
The term ‘representative’ is used to compare the 2018 results
against an equivalent 2017 if that year included results from
RAI for the whole of that period, including certain additional
adjusting items related to the acquired companies.
@ Denotes phrase, paragraph or similar that does not form part of
BAT’s Annual Report on Form 20-F as filed with the SEC.
17
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 OUR YEAR
IN NUMBERS
Group cigarette (and tobacco
heating products – THP) volume
+677bn
-4.4%
2018: +3.3% (-3.5% representative4)
2017: +3.2% (-2.6% organic³)
Group volume share
of Key Markets
+20 bps
2018: +40 bps
2017: +40 bps
Strategic Cigarette
and THP volume
439bn
-2.5%
2019
2018
2017
2018: +17.9% (+5.8% representative4)
2017: +17.9% (+7.6% organic3)
Modern Oral
(no. pouches)
1.2bn
+188%
2019
2018
2017
IFRS-GAAP
Revenue
(£m)
£25,877m
+5.7%
2019
2018
2017
KPI
£25,877m
+6%
£24,492m
+25%
+39%
£19,564m
Definition: Revenue recognised, net of duty,
excise and other taxes.
In 2019, revenue includes £18,793 million of revenue from
the Strategic Portfolio, an increase of 9% (2018: £17,257
million). Within the Strategic Portfolio, revenue from New
Categories was £1,255 million (2018: £917 million).
IFRS-GAAP
Profit from operations
(£m)
£9,016m
-3.2%
KPI
Change in adjusted2 revenue
at constant rates1 (%)
Non-GAAP
+5.6%
2019
2018
2018 (rep4)
2017
2017 (org3)
+6%
+33%
+4%
+32%
+3%
Definition: Change in revenue before the impact
of adjusting items and the impact of fluctuations in foreign
exchange rates.
Change in adjusted² profit from
operations at constant rates¹ (%)
KPI
Non-GAAP
+6.6%
+7%
+38%
+4%
+39%
+4%
439bn
451bn
382bn
2019
2018
2017
£9,016m
-3%
£9,313m
+45%
2019
2018
£6,412m
+38%
2018 (rep4)
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.
2017
2017 (org3)
Definition: Change in profit from operations before the
impact of adjusting items and the impact of fluctuations in
foreign exchange rates.
IFRS-GAAP
Net cash generated from operating
activities (£m)
Non-GAAP
@Change in adjusted² cash generated
from operations at constant rates1 (%)
KPI
£8,996m
-12.6%
-16.3%
1.2bn
0.4bn
0.2bn
2019
2018
2017
£8,996m
-13%
£10,295m
+93%
£5,347m
+16%
2019
2018
2017
-16%
+158%
+0%
2018: +108%
2017: n/a – no sales of modern oral in 2016
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.
Definition: Change in adjusted cash generated from
operations, as defined on page 265, before the impact
of fluctuations in foreign exchange rates.@
Vapour
(units)
226m
+19%
2019
2018
2017
IFRS-GAAP
Diluted earnings per share (EPS)
(p)
Change in adjusted2 diluted EPS
(%)
KPI
Non-GAAP
249.0p
-5.4%
226m
189m
2019
249.0p
2018
263.2p
95m
2017
+9.1%
-5%
-86%
1827.60p
+633%
2019
2018
2017
+9%
+5%
+14%
2018: +100% (+35% representative4)
2017: +120%
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.
Definition: Change in diluted earnings per share before the
impact of adjusting items.
Notes: To supplement our results of operations presented in
accordance with IFRS, the information presented also includes
several non-GAAP measures used by management to monitor
the Group’s performance. See the section non-GAAP measures
beginning on page 258 for information on these non-GAAP
measures, including their definitions and reconciliations from
the most directly comparable IFRS measure, where applicable.
Certain of our measures are presented based on constant rates
of exchange, on an adjusted basis, and on a representative basis
and on an organic basis.
18
The information presented also includes several non-financial key
performance indicators (“KPIs”) used by management to monitor
the Group’s performance. The Group’s Management Board believes
that these KPIs provide information that enables investors to better
understand the Group’s performance across periods. See the
section “Non-Financial KPIs” on page 257 for more information on
these non-financial KPIs.
1. Where measures are presented ‘at constant rates’, the measures
are calculated based on a re-translation, at the prior year’s
exchange rates, of the current year results of the Group and,
where applicable, its segments. See page 51 for the major
foreign exchange rates used for Group reporting.
2. Where measures are presented as ‘adjusted’, they are presented
before the impact of adjusting items. Adjusting items represent
certain items of income and expense which the Group considers
distinctive based on their size, nature or incidence.
OverviewBAT Annual Report and Form 20-F 2019 Non-GAAP
Change in adjusted² revenue from the
Strategic Portfolio at constant rates¹ (%)
KPI
Change in adjusted² revenue from
New Categories at constant rates¹ (%)
Denotes IFRS-GAAP financial measure
KPI
KPI
Non-GAAP
IFRS-GAAP
+7.3%
2019
2018
2018 (rep4)
+32.4%
+7%
+56%
2019
2018
+8%
2018 (rep4)
+32%
+143%
+97%
Definition: Change in revenue from the strategic portfolio
before the impact of adjusting items and the impact of
fluctuations in foreign exchange rates.
Definition: Change in revenue from New Categories 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.
Operating margin
(%)
34.8%
2019
2018
2017
Adjusted2 operating margin
(%)
43.1%
34.8%
38.0%
32.8%
2019
2018
2017
Non-GAAP
43.1%
42.6%
41.1%
Definition: Profit from operations as a percentage of revenue.
Definition: Adjusted profit from operations as a percentage
of adjusted revenue.
Denotes key performance indicator (KPI) measure
Non-GAAP
Denotes non-GAAP financial measure, see Non-GAAP
measures on pages 258 to 268
@Changes in 2019
In 2019, the Group introduced the measure
‘free cash flow before and after payment
of dividends to shareholders’. This measure
supplements the existing measures related
to cash flow. It is used to demonstrate the
level of net cash generated by the Group, in
any one year, after payment of all operating
expenses, interest, tax, capital expenditure
and payments to non-controlling interests
and inclusive of dividends received from
associates. This provides users of the
financial statements with the available
cash generation from which dividends to
shareholders are paid, with the remaining
cash being available for other activities such
as investment or repayment of debt.
@ Denotes table and accompanying text that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
Operating cash flow conversion ratio@
(%)
Free cash flow before and after
dividends paid to shareholders (£m)
KPI
Non-GAAP
Non-GAAP
After dividends paid
Before dividends paid
Cash conversion
(%)
100%
2019
2018
2017
97%
100%
111%
83%
2019
2018
2017
97%
113%
79%
Definition: Net cash generated from operating activities
as a percentage of profit from operations.
Definition: Operating cash flow, as defined on page 264 as a
percentage of adjusted profit from operations.
Change in adjusted2 diluted EPS
at constant rates1 (%)
Total dividends per share
(p)
KPI
Non-GAAP
+8.4%
2019
2018
2017
210.4p
+3.6%
+8%
+12%
+9%
2019
2018
2017
210.4p
203.0p
+4%
+4%
195.2p
+15%
Definition: Change in diluted earnings per share before the
impact of adjusting items and the impact of fluctuations in
foreign exchange rates.
Definition: Dividends 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.
3. Where measures are presented as ‘organic’ or ‘org’, they are
4. Where measures are presented as ‘representative’, ‘rep’ or ‘on a
presented before the impact of the contribution of brands and
businesses acquired during the comparator period, including
Reynolds American, Bulgartabac, Winnington and Fabrika
Duhana Sarajevo in 2017. There were no material acquisitions or
disposals in 2018 or 2019.
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.
2019
2018
2017
£1,921m
£3,337m
£3,500m
£35m
£6,519m
£7,684m
Definition: The level of free cash flow, as defined on
page 266, earned by the business in the year, before and after
the payment of dividends to shareholders.
KPI
@Total shareholder return (TSR) of the
FMCG group – 1 January 2017
to 31 December 2019 (%)
The FMCG group comparison is based
on three months’ average values
Lower quartile
Upper quartile
BAT
-9.1%
Median
9.7%
40
20
0
-20
Definition: Relative TSR to a peer group of international
FMCG companies, with the constituent FMCG peer group
listed on page 104.
19
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 Strategic Management
GLOBAL INDUSTRY
OVERVIEW*
While the total tobacco and nicotine market comprises a growing
user pool of over one billion individual adult consumers, global trends
are shifting and our industry is experiencing a period of ongoing change.
Generational differences, as well as shifting attitudes towards health and
wellness, are expected to increase the growth of new categories of products
including and beyond tobacco and nicotine, which are able to provide
stimulation and pleasure for consumers in ways previously associated with
cigarettes. This is expected to play a role in off-setting the predicted steady
decline in cigarette consumption.
Global combustible regulation
Tobacco is one of the world’s most
regulated and most taxed industries,
contributing in excess of $200 billion
to government treasuries each year.
Manufacturers are required to comply
with a swath of regulations that vary
considerably across markets.
Legislation and subsequent regulation has
been focused mainly on the introduction of
plain packaging, product-specific regulation,
graphic health warnings on packs, tougher
restrictions on smoking in enclosed public
places and bans on shops displaying tobacco
products at the point of sale.
In more recent years, governments have
begun considering and adopting regulations
aimed at menthol flavourings, as well as
environmental concerns resulting from the
litter associated with cigarette consumption.
THE RETAIL VALUE
OF TOBACCO SALES
IS EXPECTED TO
INCREASE BY
BETWEEN 2%
AND 4% EACH YEAR
Global New Categories market
The last five years have seen the global
tobacco and nicotine market diversify beyond
traditional combustible tobacco with the
growth of vapour and tobacco heating
products (THPs), and modern oral tobacco.
The success of these new categories is the
result of their ability to offer consumer
satisfaction in circumstances where the
consumption of combustible tobacco is
no longer permitted or socially acceptable,
as well as to offer potentially reduced risk
compared to traditional cigarettes. With new
adult generations increasingly focused
on health and lifestyle considerations,
technological innovation, and personalised
consumer experiences, it is expected that the
growth of new categories will continue to
accelerate as they can better meet consumer
preferences and demands.
New category nicotine products have grown
quickly across the world, with an estimated
54 million vapour consumers and 15 million
THP consumers.
The latest global figures (2018) suggest that
global vapour sales are worth $15.7 billion,
while global THP revenues stand at
$11.9 billion.
While traditional oral products show steady
incremental growth, new modern oral
products (which comprise tobacco-free
nicotine pouches) are showing accelerated
volume expansion in both Europe and the US.
There has also been growth in the market
for wellbeing and ‘new active’ products.
This growth is expected to continue as
consumer tastes fragment and evolve.
Within this space, cannabidiol (CBD) oil
is expected to gain wider use, as already
evidenced by its recent growth in market size.
Global combustible market
While combustible cigarettes remain the
largest global tobacco category, their volumes
have seen a gradual fall over many years
driven by increased regulation and changing
societal attitudes. Total tobacco consumption,
including illicit, declined 2% from 2018
to 2019; this decline rate is forecasted to
remain between 2%-3% over the next three
years, while the retail value of tobacco sales
is expected to increase by between 2%-4%
each year, driven principally by pricing.
The most recent estimates for the legal global
tobacco market (2018) indicate that sales
are worth approximately US$814 billion.
More than US$700 billion of this comes from
the sale of conventional cigarettes, with over
5,300 billion cigarettes consumed per year by
over 19% of the world’s population.
A contributing factor to the decline of
legal tobacco volumes is the continued
rise in the consumption of illicit products.
Cigarettes are a reliable source of tax revenue
for governments worldwide, and price
differentials between markets, regulatory
changes and broader macroeconomic
pressures have driven the establishment of a
significant and growing illicit cigarette trade,
now estimated to account for 11.2% of the
global tobacco market.
It is generally accepted that there is a direct
correlation between steep and ad hoc
increases in taxes and an increase in illicit
sales, with the current sanctions in many
countries doing little to deter criminals for
whom profits from the illegal sale of tobacco
remain an appealing prospect. For example,
following successive excise increases, the
Australasia region has seen legal volumes
decline substantially. However, in markets
such as South Africa, where effective action
has reduced the prevalence of illegal tobacco,
legal volumes have been restored.
See pages 58 to 62 to read more about
our Principal Group risks
For further discussion regarding the regulation
of our business, please see pages 287 to 290
* All data sources on this page are from Euromonitor
International unless otherwise stated.
20
Strategic ManagementBAT Annual Report and Form 20-F 2019 THE TOBACCO INDUSTRY
CONTRIBUTES IN EXCESS
OF US$200 BILLION IN
TAXES TO GOVERNMENT
TREASURIES EACH YEAR
New Categories regulation
The THP and vapour markets are relatively
nascent. Regulation is in its early stages in
many countries and, while many governments
are considering regulation specific to this
category, it has often not been enacted.
Globally, there is a mix of attitudes between
regulators who aim to encourage THPs and
vapour as products that are potentially lower
risk for smokers and those who view them
with greater scepticism – including some
countries where they are banned.
Although many jurisdictions have yet to
implement clear regulations concerning new
category products, an increasing number of
governments are passing laws that allow and
encourage the growth of these categories,
while also balancing concerns regarding
increased youth usage.
The UK is an example of what can happen
with the support of regulators and public
health bodies. Driven by influential reports
from Public Health England and the Royal
College of Physicians on the reduced
risk potential of vapour products, the UK
Government has implemented a balanced
regulatory regime that discourages youth
uptake while also encouraging adult
smokers to migrate to potentially less
harmful products.
Litigation
Legal and regulatory court proceedings
continue in a number of forms against the
tobacco industry, and more recently the
vaping industry, with the most common
being third-party reimbursement cases, class
actions and individual lawsuits.
Special factors that led to product liability
litigation in the US and Canada are not
typically replicated in other countries, which
is why large volume and high-value litigation
has not generally spread to other parts of the
globe. The industry has a proven track record
of defending its rights and managing risks
such as these.
THE LAST FIVE YEARS
HAVE SEEN THE GLOBAL
TOBACCO AND NICOTINE
MARKET DIVERSIFY
BEYOND TRADITIONAL
COMBUSTIBLE TOBACCO
WITH THE GROWTH OF
VAPOUR AND TOBACCO
HEATING PRODUCTS,
AS WELL AS MODERN
ORAL TOBACCO
IT IS EXPECTED
THAT THE GROWTH
OF NEW CATEGORIES
WILL CONTINUE TO
ACCELERATE AS
THEY CAN BETTER
MEET CONSUMER
PREFERENCES
AND DEMANDS
21
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 OUR BUSINESS MODEL
Our global business understands our diverse consumers, develops
products to satisfy their preferences, and ultimately distributes them
across over 200 markets. Five key enablers support us in turning powerful
insights into products that provide enjoyment to our consumers, while
engagement helps our key stakeholders benefit from our sustainable growth.
Enablers that support the long-term
success of our business model
Our people
Financial capital
Environmental
Partnerships
Technology/IP
S I G H T
IN
INNO
V
A
T
L
L
E
S
M
CONSUMER
O
V
E
E
M A K
E
D
N
A
R
B
Suppliers
Consumer
Customers
Governments and wider society
Shareholders
Our people
Engaging with
external stakeholders
For information about our key
stakeholders, see pages 26 to 27
S
R
E
L
B
A
N
E
O
D
E
W
T
A
H
W
S
R
E
D
L
O
H
E
K
A
T
S
22
Strategic ManagementBAT Annual Report and Form 20-F 2019
CONSUMER
Consumers sit in the centre of our business model. BAT strives to
first identify consumer needs and desires, and ultimately provide
satisfaction through the development and delivery of innovative
products. With societal attitudes and regulatory restrictions
narrowing the opportunities for tobacco-related consumer moments,
we are committed to providing alternative products that consumers
can enjoy in a variety of moods and moments.
INSIGHT
INNOVATE
Our global community of consumers
is diverse and has differing needs.
We have a deep understanding of
our 150 million daily consumers and
anticipate trends with powerful data
and analytics. We reject a ‘one size
fits all’ approach, and satisfy their
evolving preferences with a broad
portfolio that takes into account
geographic and market differences,
while leveraging our own strengths.
From combustibles to New
Categories, exciting new products
are the key to success. We make
significant investments in research
and development to deliver
innovations that satisfy consumer
tastes and generate growth for the
business. Our new corporate ventures
team will set a new benchmark for
innovation by allowing us to assess,
test and invest in new ideas, concepts
and portfolio offers.
BRAND
MAKE
Our global brands communicate
quality and value, and establish trust
in our products. They are essential
to our credibility around the world,
and their scale provides far-reaching
awareness of our products, while our
diverse portfolio allows us to meet
the needs of different consumer
segments. We have a proven track
record of building and managing
some of the most iconic brands in
history, and will continue to leverage
this expertise to grow our business
across all categories.
We manufacture high-quality
cigarettes, THP consumables and
oral tobacco products in facilities all
over the world, and 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 and liquids
are manufactured in a mix of our own
and third-party factories, and we work
to ensure that our costs are globally
competitive and that we use our
resources as effectively as possible.
MOVE
SELL
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
combustibles and New Categories,
including our relationships with
wholesalers, distributors and
logistics providers.
We offer adult consumers a range
of products including cigarettes,
vapour, tobacco heating products,
and oral products in markets around
the world. Our range of high-quality
products covers all segments, from
value-for-money to premium, while
also offering choices based on
levels of potentially reduced risk.
We are governed by our International
Marketing Principles, which
ensure that all of our products are
marketed responsibly.
Key performance indicators
Group volume share of Key Markets
Change in adjusted revenue at constant rates (%)
Change in adjusted revenue from the Strategic
Portfolio at constant rates (%)
Change in adjusted revenue from New
Categories at constant rates (%)
Change in adjusted profit from
operations at constant rates (%)
@Change in adjusted cash generated from
operations at constant rates (%)
Operating cash flow conversion ratio (%)@
Change in adjusted diluted EPS (%)
Change in adjusted diluted EPS at
constant rates
Total shareholder return of the FMCG group
For more key detail on our key performance
indicators, see pages 18-19
DELIVERING
DELIVERING
MEASURABLE
MEASURABLE LONG‑
LONG‑TERM
TERM SUSTAINABLE
SUSTAINABLE
GROWTH
GROWTH
Non‑financial information statement
Non-financial information reporting required
under the UK Companies Act is included in the
Strategic Report as referenced below:
Our business model is
set out on these pages.
Pages 58 to 62 for
Principal Group Risks
Our reporting in the following areas includes
information about the policies and principles that
govern our approach, due diligence processes,
outcomes and non-financial performance indicators.
Environmental matters
pages 28 to 30
Social matters
pages 28 to 31
Employees
pages 40 to 42
Anti-bribery and anti-
corruption matters
pages 31 to 32
Respect for human rights
pages 30 to 31
Further details of our
Group policies and
principles can be
found at www.bat.com
23
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
OUR GLOBAL
BUSINESS
BAT is a leading, multi-category consumer goods business
dedicated to stimulating the senses of adult consumers worldwide.
Our Strategic Portfolio comprises our key brands in both the
combustible and new categories. This drives focus and investment on
the brands and categories that will underpin the Group’s future growth.
We also have a portfolio of international and local brands which,
while not the focus of our investment, contribute valuable returns
across several key markets.*
STRATEGIC PORTFOLIO
Non-Combustible
New Categories
Traditional Oral
Vapour
Combustible
Combustible
Tobacco
Tobacco Heating
Modern Oral
* These combustible brands include Vogue, Viceroy, 555, Benson and Hedges, Peter Stuyvesant, Double Happiness, Kool, and Craven A,
while oral brands include Granit, Mocca, and Kodiak.
24
Strategic ManagementBAT Annual Report and Form 20-F 2019
Our portfolio reflects our commitment to meeting the evolving
and varied needs of today’s consumer who seeks sensorial
enjoyment for different moods and moments.
BAT’s marketplace analysis delivers insights regarding
consumer trends and segmentation, which ultimately
facilitates our geographic brand prioritisation across over
180 markets. Our business is divided into four regions, and
covers over 150 million consumers and 11 million retail
points of sale, with a balanced presence in both high-growth
emerging markets and highly profitable developed markets.
United States
of America
Americas and
Sub-Saharan
Africa
Europe and
North Africa
Asia-Pacific
and Middle East
for more key detail on our Regional performance,
see pages 52 to 57
Map is representative of general geographic regions and
does not suggest that the Group operates in each country
of every region.
25
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 ENGAGING WITH
OUR STAKEHOLDERS
CIVIC PARTICIPATION IS A FUNDAMENTAL ASPECT OF
RESPONSIBLE BUSINESS AND POLICY MAKING, AND BRITISH
AMERICAN TOBACCO EMPLOYEES WILL PARTICIPATE IN THE
POLICY PROCESS IN A TRANSPARENT AND OPEN MANNER,
IN COMPLIANCE WITH ALL LAWS AND REGULATIONS
OF THE MARKETS IN WHICH IT OPERATES
Jerry Abelman Director, Legal & External Affairs and General Counsel
Consumers
Shareholders/
Bondholders
Our people
Why this
stakeholder is
important to us
As preferences and attitudes
change in an evolving industry,
understanding our consumers is
essential to both successful portfolio
and business growth.
It is essential that we maintain the
support of our shareholders and
bondholders to maintain access to
capital. This allows us to implement
our strategy and achieve our
business objectives.
A winning organisation is a core
pillar of the Group’s strategy.
We understand the value of
listening and responding to
feedback from our people to
maintain a fulfilling, rewarding
and responsible work environment.
Examples of how
we engaged
in 2019
– Consumer panels and focus groups
– Consumer product testing
– Consumer care helplines
– Responsible advertising
and marketing
– Pack inserts / product leaflets
– Consumer feedback channels
– Real-time feedback via
digital platforms
– Annual General Meeting
– Investor relations programme
– Institutional shareholder meetings
– Capital Markets Days
– Investor roadshows
– Results announcements
– Annual Report & Form 20-F
– Sustainability Report
– Stock exchange announcements
– Shareholder information on website
– Director market and site visits
– Employee town halls
– Global and regional webcasts
– 2019 ‘Your Voice’ employee survey
– Works councils and European
Employee Council meetings
– Graduate and management
trainee events
– Individual performance reviews
– Speak Up channels
Read more
pages 29, 32 and 72
Read more
pages 71
What matters to
our stakeholders
– Product quality and innovation
– Affordability, value and price
– Product anxiety (addiction, harm,
social considerations)
– Responsible marketing
– Business performance
– Corporate governance
– Strength of Group leadership
– Board succession planning
– ESG considerations
Read more
pages 41 to 42 and 72
– Reward
– Career development
– Diversity and inclusion
– Corporate responsibility
– Health and safety
– Business ethics
How we respond
– Development of innovative
products taking into account
consumer feedback
– Product quality and
safety standards
– Product stewardship
– Clear and accurate
product information
– International Marketing Principles
– Regular dialogue with shareholders
– Robust corporate governance
– Enhanced ESG reporting
– Continual improvement of our
– Introduction of BAT Ethos, taking
into account employee feedback
– Board review of and feedback on
workforce engagement
Delivery with Integrity programme
– Training and
– Our range of enjoyable and
development programme
innovative products
– Product quality and safety standards
– Clear and accurate
product information
– International Marketing Principles
– Introduction of revised management
incentive schemes (below Executive
Director level)
– Diversity & Inclusion Strategy
– Delivery with Integrity Programme
Strategic
impact*
Principal risk
impact
Growth
Sustainability
Productivity
Growth
Sustainability
Sustainability
Winning organisation
– Market size reduction/
consumer downtrading
– Inability to develop,
commercialise and deliver
New Categories strategy
– Solvency and liquidity
– Work place safety
* These engagement examples took place in 2019 and the strategic impact of engagement is measured against the strategic pillars in place for 2019.
Reporting for FY2020 will measure against our evolved strategy discussed on pages 8 to 9.
26
Strategic ManagementBAT Annual Report and Form 20-F 2019 Governments and
wider society
UK Companies Act:
Section 172(1)
Statement
OUR 2019 ‘YOUR VOICE’ GLOBAL EMPLOYEE
OPINION SURVEY RESULTS SHOW WE CONTINUE
TO OUTPERFORM OUR GLOBAL FMCG COMPARATOR
GROUPS IN ALL CATEGORIES, INCLUDING
THE SUSTAINABLE ENGAGEMENT AND HIGH
PERFORMANCE INDICES
Suppliers
Customers
Effective relationships with farmers,
and suppliers of leaf, direct materials
and services are essential to an
efficient, productive and secure
supply chain.
Our customers include distributors,
wholesalers, and retailers.
Engagement with our customers
is essential for driving growth
and embedding responsible
marketing practices.
– Ongoing farmer support,
– Ongoing dialogue,
training and monitoring by our
extension services
– Sustainable Tobacco Programme
assessments, reviews and meetings
– Supplier reviews and audits
– Supplier Voice survey and dialogue
– Strategic partnerships
– Eliminating Child Labour
in Tobacco Growing (ECLT)
Foundation engagement
Read more
pages 29 to 31 and 38 to 39
contract discussions and
account management
– Customer Voice programme
– Audits and performance reviews
– Sales calls and visits by
trade representatives
– Business-to-business programmes
– Performance tracking
– Participating in industry Digital
Code and Tracking Association
We engage transparently with
governments and regulators to share
our views on regulation that impact
our business whilst respecting the
WHO’s FCTC Article 5.3 provision.
We actively cooperate with law
enforcement and customs authorities,
governments and regulators to
combat the rise of illicit trade.
We also engage with scientific
and public health communities.
– Face-to-face meetings and
ongoing dialogue
– Presentations and submissions to
government committees
– Participation in business, industry
and multi-stakeholder groups
– Presentations and participation
at conferences
– Submissions to peer-
reviewed journals
– BAT External Scientific Panel
– Submissions to sustainability indices
– Stakeholder Sustainability Panel
– Costs and payment practices
– Efficiencies and forecasting
– Quality and crop yields
– Sustainable agriculture and
farmer livelihoods
– Human rights
– Route-to-market planning
– Contingency planning
– Cost, price and quality
– Availability and stock levels
– Consumer buying behaviour
– Youth access prevention
– Public health impacts
– Tax, excise and illicit trade
– Corporate behaviour
– Youth access prevention
– Human rights, sustainable agriculture
and economic development
– Supplier Code of Conduct
– ‘Thrive’ sustainable agriculture and
farmer livelihoods programme
– Operational standards for child
labour prevention
– Supplier and farmer training and
capacity building
– Customer loyalty programmes
– Standards of Business Conduct
and incentives
(SoBC)
– Youth Access Prevention Guidelines
– International Marketing Principles
– Youth Access Prevention Guidelines
– Science-based carbon
reduction targets
– Community investment projects
Productivity
Growth
Sustainability
Productivity
Growth
Sustainability
Productivity
Growth
Sustainability
– Inability to develop, commercialise
and deliver New Categories strategy
– Inability to develop, commercialise
and deliver New Categories strategy
– Geopolitical tensions
– Geopolitical tensions
– Geopolitical tensions
– Competition from illicit trade
– Significant excise increases
– Regulation that inhibits growth
Our Directors have a duty,
individually and collectively as the
Board, to act as they consider most
likely to promote the success of the
Company for the benefit of our
members as a whole. As part of this
duty, our Directors must have regard
for likely long-term consequences
of decisions and the desirability of
maintaining a reputation for high
standards of business conduct.
Our Directors must also have
regard for our employees’ interests,
business relationships with our
wider stakeholders, the impact of
our operations on the environment
and communities in which we
operate and the need to act fairly
between shareholders.
Consideration of these factors and
other relevant matters is embedded
into all Board decision-making,
strategy development and risk
assessment throughout the year.
Our key stakeholders and primary
ways in which we engage with
them are set out in the table to
the left. Pages 71 to 73 provide
further explanation of our Board’s
approach to understanding
stakeholder interests to enable
relevant considerations to be
drawn on in Board discussion and
decision-making. Where the Board
delegates authority for decision-
making to management, our Group
governance framework discussed
on pages 69 to 70 mandates
consideration of these factors and
other relevant matters as a critical
part of delegated authorities.
Just some of the ways that these
factors have shaped Group strategy
and initiatives during the year are
illustrated in the table to the left.
Examples of how these factors
have been taken into account in
Board decision-making and strategy
development during the year are
highlighted on pages 74 to 75.
27
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING
OUR STRATEGY*
SUSTAINABILITY
Our Sustainability Agenda is at the heart of our strategic
plans to build a long-term sustainable business.
Within it, our clear commitment to providing our consumers with a range of potentially
less risky products addresses the principal health impacts of our business.
We also know that our long-term sustainability will be driven by ensuring best-in-class
delivery against all our other environmental, social and governance (ESG) measures.
In 2019, we refreshed our Sustainability Agenda to reflect the prominence of the health
risks of smoking as our principal focus and to place greater emphasis on the importance
of addressing climate change and environmental management.
Our priority areas are:
A commitment to reducing the health impact of our business
Excellence in environmental management
Delivering a positive societal impact
Robust corporate governance
Highlights during the year
– growth of our New Categories revenues by 37% to £1.3 billion.
– a 9.5% reduction of our direct Scope 1 and 2 carbon dioxide equivalent (CO2e)
emissions from our 2017 baseline.
– revised Group Standards of Business Conduct to strengthen controls around human
rights and incorporate a new Lobbying and Engagement Policy.
– new independent research published into the impacts of tobacco growing
and the role it plays in rural livelihoods.
Read more about our sustainability performance
in each area at www.bat.com/sustainabilityreport
Emissions**
Scope 1 CO2e emissions ('000 tonnes)
Scope 2 CO2e emissions ('000 tonnes)
Scope 3*** CO2e emissions ('000 tonnes)
Total statutory emissions (Scope 1 and 2 in '000 tonnes)
Intensity (tonnes per £ million of revenue)
2019
396
386
n/a
782
30.4
2018
415
426
7,547
841
32.6
2017
427
438
8,254
864
34.7
All data is calculated on the basis of the Greenhouse Gas (GHG) Protocol Corporate Standard.
** Scope 1 reporting includes: energy consumed at our factories and offices (coal, natural gas, wood, diesel and LPG),
emissions from our dry ice expanded tobacco plants, and fuel consumed by our fleet vehicles.
Scope 2 reporting includes: electricity purchased and consumed at our factories and offices, purchased steam and hot water.
Scope 3 reporting includes: all 15 categories of the GHG Protocol.
*** Consolidation and verification of our 2019 Scope 3 data is ongoing to fully align with the GHG Protocol.
2019 data will be reported in the 2020 Annual Report and Form 20-F.
* This year’s Annual Report and Accounts measures all backward-looking reporting against the strategy, which includes
the four strategic pillars and KPIs, that was in place until March 2020. Next year’s Annual Report and Accounts will
measure our delivery against our evolved strategy, which is detailed on pages 8 to 9.
28
New Sustainability Targets
We are committed to making a step-
change in our sustainability ambition.
As a result, we have announced a
number of stretching targets that we are
confident will deliver A Better Tomorrow
for all our stakeholders.
These include:
– increasing our number of non-
combustible product consumers from
11 million to 50 million by 2030;
– achieving carbon neutrality by 2030*;
and
– bringing forward our existing 2030
environmental targets to 2025.
* Based on Scope 1 and 2 carbon dioxide equivalent
(CO2e) emissions.
CO2e emissions
(in ’000 tonnes)
782
9.5% lower than 2017 baseline
2019
2018
2017
782
841
864
-7.0%
-2.7%
Definition: Group Scope 1 and Scope 2 carbon dioxide
equivalent (CO2e) emissions.
Target: To reduce our Scope 1 and Scope 2 CO2e emissions
by 30% by 2025 compared to our 2017 baseline.
Water use
(total water withdrawn in mn metres3)
4.51
13.1% lower than 2017 baseline
2019
2018
2017
4.51
4.77
-5.3%
-8.2%
5.19
Definition: Group water use in million cubic metres.
Target: To reduce water use to 3.38 mn metres3 by 2025,
35% lower than our 2017 baseline.
Recycling
(percentage of waste recycled)
90.5%
2019
2018
2017
90.5
90.2
89.6
Definition: Total percentage of Group waste re-used
or recycled against total waste generated.
Target: To recycle 95% or more by 2025 in each year.
Strategic ManagementBAT Annual Report and Form 20-F 2019 A commitment to reducing the
health impact of our business
Excellence in environmental
management
As harm reduction is our most material ESG
issue, we have long been committed to
reducing the public health impact of smoking.
Satisfying consumer moments
Smokers are more likely to switch to new
products if they can find satisfying alternatives
that offer sensorial enjoyment and recapture
consumer moments long-associated with
tobacco that have been lost to shifting
trends. We have a deep understanding of
our consumers and we use these insights to
develop an exciting product portfolio across
a range of categories, including Vapour,
Tobacco Heating Products (THPs) and
Modern Oral products.
World‑class science
The reduced-risk potential of new category
products needs to be supported by sound
science. We conduct cutting-edge research
to evaluate our new category products and
apply the highest standards for product
safety and quality. Globally, we have over
1,500 scientists focused on researching and
developing new category products and we
openly share our science on bat-science.com.
To date, we have published 59 peer-reviewed
research papers on our new category
products and the results indicate they have
the potential to be significantly less risky than
cigarettes. We are continuing to establish
more evidence to support this.
Standards and regulation
New category products can only meet their
potential if they are widely available with
the right regulatory and market conditions
in place, alongside high standards and
responsible practices across the industry.
To support the success of our new product
categories, we advocate for regulation that
enables market availability, applies the highest
product quality and safety standards, allows
communication of the potential benefits and
risks, and ensures affordability for consumers
by taxing them appropriately, while
preventing youth appeal and access.
Other ESG focus areas
In addition to our commitment to address
the health impacts of smoking, we also
continue to focus on a wide range of other
important ESG issues.
Read more about our ESG reporting
on page 10
We are committed to reducing our
environmental impact across our operations
and supply chain. Our Environment
Policy is supported by a comprehensive
Environmental, Health and Safety (EHS)
management system which has been in place
for many years and is based on international
standards including ISO14001.
Addressing the impacts
of climate change
Climate change is one of the most important
global issues facing the world today.
We recognise that addressing the impacts
of climate change is not only the right thing
to do, but also makes sound business sense
given how much we depend on natural
resources for our products.
In 2019, our targets for reducing our C02e
emissions by 2030 were given formal approval
by the Science-Based Targets initiative (SBTi)
and we have now brought forward our Scope
1 and 2 targets to 2025. Building on this,
we are now setting ourselves an even more
ambitious target: to be carbon neutral
by 2030.
We are also committed to align our reporting
with the Taskforce on Climate-related
Financial Disclosures (TCFD) framework by
2022. We are also proud to have been named
on the Carbon Disclosure Project’s prestigious
2019 ‘A List’ for our leading approach to
climate change.
We have achieved a 7.0% year-on-year
reduction in our Scope 1 and 2 carbon
emissions in 2019. In total, these equalled
782,394 tonnes, 9.5% lower than 2017,
our baseline year. Drivers include a 6.5%
reduction in direct energy consumption and
an increase in renewable energy use which
now stands at 10.8%, an 1.6% increase
over 2018.
Supporting our continued drive to reduce
our emissions, we have developed a new
Climate Change and Energy Standard which
requires our subsidiaries to include renewables
in their energy purchase agreements and we
are also identifying opportunities to increase
on-site energy generation and purchase more
renewable energy certificates.
Meeting our ambitious climate targets will
require collective effort across the Group and,
given our Scope 3 emissions represent around
90% of our total carbon footprint, addressing
impacts in our supply chain is also crucial.
We are engaging with our largest suppliers
to raise awareness of carbon reduction in
our supply chain and we continue to make
progress in the tobacco leaf supply chain,
where more efficient curing technologies,
smarter use of fertilisers and increases in yields
are all contributing to reduced emissions.
In 2018, our Scope 3 emissions decreased by
3.3% compared to our 2017 baseline, driven
by a reduction in purchase volume, changes
to emissions factors and decreases in fertiliser
and fossil fuel use for tobacco leaf curing.
Water and waste
As well as a priority focus on carbon and
energy, our approach to environmental
management also addresses a wide
range of issues, including water use and
waste management.
We have been steadily decreasing our water
use and increasing water recycling for several
years and 2019 saw a 5.3% year-on-year
reduction in total water withdrawn.
Additionally, our increased focus on
environmental management has resulted in
us bringing forward our existing 2030 target
for water and waste to 2025.
We are committed to recycling at least
95% of our total waste generated, which is
more challenging in locations with limited
recycling and waste management facilities.
Nevertheless, 28% of our manufacturing sites
have already achieved zero waste to landfill
and another 24% are recycling at least 95%
of their waste.
Sustainable agriculture
We have a long and proud history of working
directly with farmers around the world to
advance agriculture. We provide farmers
with best practice environmental information
and introduce them to new sustainable
farming practices. For example, we have
been successful in introducing drip irrigation
technology to farmers in Brazil and Mexico,
which has been shown to increase water
usage efficiency by up to 90%, as well as
reducing soil erosion and salination, and
ultimately boosting yields.
We have an ongoing commitment to
eliminate the use of unsustainable sources of
wood by our contracted farmers for curing
fuels. Monitoring of the last three years of our
contracted farmers' wood use for curing has
shown 99% was from sustainable sources.
We also support community-based
afforestation programmes in a number of
countries. For example, our afforestation
programmes in Bangladesh and Pakistan date
back to the early 1980s and have planted over
185 million tree saplings combined. Both are
recognised to be among the largest private
sector-driven programmes in these countries.
29
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING OUR STRATEGY
CONTINUED
Circular economy
Globally, there is growing concern around
the use and disposal of plastics and other
materials and increased pressure on
businesses to address post-consumption
waste. Adopting circular economy principles
will deliver better products for our consumers,
create efficiencies in our operations and
reduce our overall impacts.
This is a new focus area for us and, in 2019,
we established a cross functional project team,
led by our Management Board, to develop a
Group-wide circular economy strategy and
oversee its implementation across all product
categories. Initially, this is focusing on the
recovery of post-consumption waste, reducing
plastic waste in packaging and exploring
opportunities to improve the recyclability of
our products. Already, we have established
new electronic device return and recycling
schemes in France, Japan, Korea and Mexico.
Delivering a positive
societal impact
Reducing the harm associated with smoking
and the opportunity to have a positive impact
on public health is the most material issue
for our business, but as one of the world’s
most international businesses, we also have
a larger role to play in delivering a positive
societal impact.
Human Rights
Our integrated human rights strategy is
aligned to the UN Guiding Principles and
includes policies, due diligence, grievance
channels and remediation procedures for our
own business operations and supply chain,
as well as working to understand and address
the root causes. Our Human Rights policy
forms part of our Group Standards of Business
Conduct and is reflected in our Supplier Code
of Conduct.
The most significant challenges for human
rights are in our tobacco leaf supply chain and
this has been a priority area for us for many
years. The industry-wide Sustainable Tobacco
Programme focuses on leaf supplier due
diligence and compliance with international
standards, and our own Thrive programme
is focused at farm-level and seeks to identify
and address the root causes and long-term
challenges around human rights, including
rural poverty.
To further enhance our understanding
and ability to address human right issues
in the tobacco supply chain, in 2019
we commissioned human rights impact
assessments in tobacco growing areas in
Indonesia and India, with two more planned
for 2020 in Mozambique and Mexico. We will
report on the results in a Human Rights Focus
Report, to be published later in 2020.
All our other products materials and
goods and services suppliers are subject
to annual human rights risk assessments.
Further independent audits are conducted
on the highest risk by Intertek, our audit
partner. In 2019, a total of 94 supplier audits
in 31 countries were conducted, including 65
audits of tier 1 materials suppliers, 20 audits
of tier 2 materials suppliers and nine audits of
indirect goods and services suppliers.
The vast majority of issues identified in
these audits were categorised by Intertek
as ‘moderate’, relating to hours and wages,
poor record keeping, and health and safety
procedures. Eleven suppliers had issues
identified that were categorised as ‘major’
by Intertek. These related to preventing
worker interviews, excessive working hours,
wages below the legal minimum, fire and
emergency preparedness, lack of required
permits or licences, poor record keeping
and, in one case, retention of workers’
original documents.
By the end of the year, 71% of corrective
actions had been fully completed and
verified by Intertek, in desktop reviews for
the moderate issues and 11 on-site follow-up
audits for the major issues. All outstanding
actions are in progress and being
closely monitored.
Further details of our approach to human rights
and our Modern Slavery Act statement are
available at bat.com/msa
Sustainability: Our policies*
Summary of areas covered
Standards of Business
Conduct (SoBC)
Environmental Policy
Speak Up, conflicts of interest, anti-bribery and anti-corruption, gifts and
entertainment, respect in the work place, human rights, lobbying and
engagement, political and charitable contributions, corporate assets and
financial integrity, competition and anti-trust, anti-money laundering and
tax evasion, anti-illicit trade, data privacy and information security.
Our commitments to following high standards of environmental protection,
adhering to the principles of sustainable development and protecting
biodiversity covering our direct operations and supply chain, including
agricultural, manufacturing and distribution operations.
Health and Safety Policy
Our commitments to applying the highest standards of health and safety.
Supplier Code of Conduct
Strategic Framework
for Corporate
Social Investment (CSI)
International Marketing
Principles
Standards required of our suppliers worldwide, including business integrity,
anti-bribery and anti-corruption, environmental sustainability, anti-illicit trade
and respect for human rights (covering equal opportunities and fair
treatment, health and safety, prevention of harassment and bullying, child
labour and modern slavery, conflict minerals and freedom of association).
Sets out our Group CSI strategy and how we expect our local operating
companies to develop, deliver and monitor community investment
programmes within two themes: Sustainable Agriculture and Rural
Communities; and Empowerment.
The standards that govern marketing across all our product categories
and including the requirement for all our marketing to be targeted at adult
consumers only.
Key stakeholder groups
Our People
Governments
and Wider
Society
Suppliers
Governments
and Wider
Society
Suppliers
Governments
and Wider
Society
Our People
Consumers
Customers
Our People
Our People
Customers
Governments
and Wider
Society
Consumers
Customers
Suppliers
Our People
These policies and procedures are endorsed by our Board, apply to all Group companies and support the effective identification,
management and mitigation of risks and issues for our business in these and other areas.
* Further details of our Group policies and principles can be found at www.bat.com/principles
Further details of our Strategic Framework for Corporate Social Investment can be found at bat.com/csi
30
Strategic ManagementBAT Annual Report and Form 20-F 2019 With the majority of our employees
working in business areas where we have
direct oversight and control, human rights
challenges in our own operations are
substantially avoided.
The challenges that do exist are mitigated
by our robust policies and procedures in
place across all Group companies. However,
we recognise that we need to continually
work to ensure these are effectively applied
and that we carefully monitor the situation,
particularly in countries assessed as higher
risk, such as where regulation or enforcement
regimes are limited, or there are higher levels
of corruption, criminality or unrest. Our due
diligence includes conducting an annual
review of compliance with applicable Group
policies and additional measures in place for
operations in higher risk countries.
Farmer livelihoods
Rural poverty is recognised as a root cause
for wider issues in agriculture, such as child
labour, poor safety standards and urban
migration. If we can support tobacco farmers
to have prosperous livelihoods, we can help
address these issues while also securing
our tobacco leaf supply chain. We support
our 90,000+ directly-contracted farmers
through our Extension Services of expert field
technicians. We develop new tobacco seed
varieties that offer greater yields and higher
quality and so help boost farmers’ profits, as
well as introducing them to more efficient
farming technologies that save farmers time
and money. Our Extension Services also
provide training and advice and help our
farmers to grow other crops to enhance food
security and generate additional sources
of income. For instance, in 2019 our leaf
operations and strategic third-party suppliers
reported that 92% of their contracted farmers
grew other crops, including fruit, vegetables,
wheat, maize, cotton and soy.
To further increase our understanding of
the role tobacco plays in rural livelihoods,
we commissioned IMC Worldwide,
one of the world’s leading international
development consultancies, to conduct
independent research in Bangladesh, Brazil
and Kenya to identify if tobacco growing
reduces resilience and prevents farmers
and rural communities from prospering.
Overall, IMC found no evidence of this: IMC
concluded that tobacco growing plays an
important and positive role in the livelihoods
of tobacco farmers and labourers interviewed,
while no evidence supporting a causal link
between tobacco cultivation and poverty
was found.
Read more about the IMC Report at
bat.com/farmers/research
Read more about our Group risk factors related to
tobacco leaf supply on page 275
Culture and workplace health
and safety
The health and safety of our employees and
creating a great place to work are also key
components of our Sustainability Agenda.
We focus on building an inclusive and
supportive culture that attracts, engages
and retains diverse and talented people,
develops the next generation of leaders, and
creates a fulfilling, rewarding and responsible
work environment.
We also have a comprehensive workplace
health and safety approach based on risk
management and assessment, employee
training and awareness, and tailored initiatives
for specific issues and higher-risk areas. You can
read more about our culture on pages 40 to
42 and page 70. More information on our
approach to workplace health and safety is set
out on page 42.
Community investment
and social initiatives
As an international business, we play an
important role in countries around the world
and have built close ties with local communities.
We encourage our employees to play an
active role both in their local and business
communities. Our charitable contributions
policy in our SoBC is supported by the Group
Strategic Framework for CSI, which sets out
our Group CSI strategy and how we expect
our local operating companies to develop,
deliver and monitor community investment
programmes within two themes: Sustainable
Agriculture and Rural Communities,
and Empowerment.
Our Group Head of Sustainability has oversight
of the Group CSI strategy, and Board-level
governance is managed through our Audit
Committee, which reviews the strategy and an
analysis of activities (including investment and
alignment to the Group’s priorities) annually.
Our performance indicator in this area relates
to the total amount of money contributed to
charitable giving and CSI projects. In 2019, the
Group contributed over £13 million in cash
for charitable contributions and CSI projects,
including £1.1 million given for charitable
purposes in the UK. Much of this contribution
is delivered through partnerships with
external stakeholders including communities,
NGOs, governments, development agencies,
academic institutions, industry associations
and peer companies.
Corporate governance
Robust corporate governance is key
to our sustainable long-term growth.
We are committed to achieving our business
objectives in an honest, transparent and
accountable way, and sustaining a culture
of integrity in everything we do.
Our actions and behaviours impact all areas
of our business, which is why corporate
governance is such an important focus for us.
Our commitment to responsible corporate
behaviour is underpinned by our SoBC
which mandate high standards of integrity
and require every Group company, joint
venture which the Group controls and all staff
worldwide, including senior management
and the Board, to act with a high degree of
business integrity, comply with applicable
laws and regulations and ensure our
standards are not compromised for the
sake of results. We expect our contractors,
secondees, trainees, agents and consultants
to act in a way consistent with our SoBC
and to apply similar standards within their
own organisations.
Our SoBC comprise our global policies
referenced on page 30 and are available
in 12 languages. SoBC awareness and
understanding is promoted through regular
training and communications. Our SoBC are
fully aligned with the provisions of applicable
laws including the UK Bribery Act, the US
Foreign Corrupt Practices Act and the UK
Criminal Finances Act.
Corrupt practices are illegal, cause distortion
in markets and harm economic, social
and political development, particularly in
developing countries. Our SoBC make it
clear that it is wholly unacceptable for Group
companies, our employees or our business
partners to be involved or implicated in any
way in corrupt practices. We keep our SoBC
under regular review to maintain best practice
and to take employee and stakeholder
feedback into account. Our Board approved
a revised version of the SoBC in 2019,
which came into effect on 1 January 2020,
supported by a global awareness campaign
across the Group.
Delivery with integrity
Our Delivery with Integrity programme is
focused on driving a globally consistent
approach to compliance across the Group.
This programme is led by our Business
Conduct & Compliance Department reporting
directly to the Director, Legal & External
Affairs and General Counsel. This programme
provides employees with ways to raise
concerns without fear of retaliation and
assurance that investigations will be fair and
thorough. It drives a consistent approach to the
mitigation of key compliance risk areas such
as bribery and corruption, money laundering,
tax evasion, competition law, sanctions, and
data protection through tools and guidance for
Group company employees and business units.
Read more about our Group risk factors related
to corporate behaviour and compliance with
sanctions regimes and competition laws on
pages 279 and 281
31
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING OUR STRATEGY
CONTINUED
We monitor regulatory developments to
ensure the continued evolution of our Delivery
with Integrity programme.
Mitigating third-party risk is a key component
of our compliance programme. We do
this through a Third-Party Anti-Bribery and
Corruption Procedure (the ABAC Procedure)
which assists business units in identifying
and mitigating bribery and corruption risks.
The ABAC Procedure mandates a consistent
methodology for due diligence of third
parties, complemented by mandatory
mitigation packages for third parties
assessed as medium and high risk. In 2019,
this due diligence procedure was applied
retrospectively to over 4,500 existing third
parties engaged by Group companies.
In addition, given the challenges associated
with intermediaries engaged to interface with
public officials on the Group’s behalf, detailed
due diligence and mitigation measures were
completed for 903 service providers with
external input and oversight. In 2019 we
also launched an ABAC risk assessment tool
to assist our markets to identify, assess and
evaluate bribery and corruption risks.
In 2019, over 25,000 Group company
employees completed our annual SoBC sign-
off and e-learning through the online SoBC
portal. Other Group company employees
(over 30,000) who do not have easy online
access completed the SoBC sign-off in face-to-
face sessions which included training. In 2019,
our SoBC e-learning through the online
portal resulted in 10,800 training hours and it
included scenarios covering product diversion,
money laundering and bribery and corruption
risks. To further increase awareness and
accessibility, in 2019 we launched a new SoBC
app, which provides easy access to our SoBC,
Speak Up channels, procedures and guidance.
Information on compliance with our SoBC
is gathered at a regional and global level
and reported to the Regional Audit and CSR
Committees, Corporate Audit Committee and
to the Audit Committee.
32
Responsible marketing
Our International Marketing Principles (IMP)
govern marketing across all our product
categories and require all our marketing to
be responsible, accurate and not misleading,
targeted at adult consumers, transparent and
compliant with all applicable laws.
Our IMP are applied consistently everywhere
we operate, even when more stringent than
applicable local laws. Through our long-
standing IMP, responsible marketing is well
embedded in the culture of our organisation
and inherent to the way we operate.
We continually evolve our IMP to reflect
developments in marketing, our product
portfolio, technology, changing regulations
and stakeholder expectations, and the
Board approved a revised version of the
IMP in 2019.
To support our strict requirement to only
direct marketing at adult consumers, all Group
companies are required to adhere to our global
Youth Access Prevention (YAP) Guidelines.
These apply to all markets where our products
are sold, including where distributed through
third parties and include a mandatory
requirement to provide retailers with point-
of-sale materials with YAP messaging (unless
prohibited by local laws). In 2019, 100% of
Group companies to which our YAP Guidelines
apply reported compliance.
Regulatory engagement
Truly effective regulation needs cooperation
between governments and industry, and we
have a legitimate role to play in policy-related
debate that affects our business. We also
respect the World Health Organization's
FCTC 5.3 provision, which calls for transparent
and accountable interaction between
governments and the tobacco industry.
By conducting all our engagement with
politicians, policy makers and regulators
transparently and with high regard for
accuracy and integrity, we can make a valuable
contribution to policy development and help
enable the best information to be used as a
foundation for decisions in policy making.
Our Principles for Engagement have long
provided clear guidance for our external
engagement with regulators, politicians
and other third parties. In 2019, these were
incorporated into a new Lobbying and
Engagement Policy in our SoBC. The revised
SoBC took effect from January 2020 and all
lobbying and engagement activities across
the Group are now subject to our SoBC
compliance procedures.
Speak Up channels
We encourage anyone working for, or with,
any Group company to raise concerns,
including regarding accounting or auditing
matters, through our Speak Up channels,
which are independently managed and
available 24 hours a day online, by text
or telephone. The channels can be used
in confidence, and anonymously where
preferred, and are available in multiple
local languages. Speak Up channels contact
information is promoted through staff
training and communications and through
our SoBC app and Supplier Code of Conduct.
Our Speak Up policy makes it clear no one
will suffer any direct or indirect reprisal
for speaking up about actual or suspected
wrongdoing, even if they are mistaken.
Our Speak Up policy is supplemented by
local procedures throughout the Group,
providing staff with further guidance on
reporting matters and raising concerns,
and the channels through which they can
do so. We do not tolerate the harassment
or victimisation of anyone raising concerns
or anyone who assists them. Such conduct
is itself a breach of our SoBC and a serious
disciplinary matter. In 2019, our global ‘Your
Voice’ employee survey, completed by 90% of
Group company employees, found that 79%
strongly agreed they “can report concerns
about actual or suspected wrongdoing at
work without fear of reprisal”, 8% higher
than the FMCG comparator norm.
Not all contacts made via our SoBC Portal
involve SoBC allegations; some contacts
relate to questions regarding the SoBC or
other matters. There were 497 SoBC contacts
in 2019, representing a 40% increase on
the total number of SoBC contacts in 2018
(355 contacts).
In the year ended 31 December 2019, 359
of the 497 SoBC contacts were assessed as
SoBC allegations and reported to the Audit
Committee, representing a 35% increase on
2018 SoBC allegations (266). Of the 359 SoBC
allegations reported, 130 were established
as breaches and appropriate action taken
(2018: 126). In 179 cases, an investigation
found no wrongdoing (2018: 140). In 50
cases, the investigation continued at year-end
(2018: 69), including investigation through
external legal advisers of allegations of
misconduct. Disciplinary action taken as a result
of the 130 established SoBC breaches resulted
in 80 dismissals (2018: 92). In 184 of the 359
SoBC allegations (51%), the person raising the
allegation chose to remain anonymous.
Please refer to the Governance Report for more
information about Board and Audit Committee
oversight and monitoring of compliance with
our SoBC. Our SoBC, and information on the
total number of incidents reported under it,
are available at bat.com/sobc.
Strategic ManagementBAT Annual Report and Form 20-F 2019 Our sustainability efforts and commitment to high
standards have received notable independent
recognition over the years, including the following.
CDP Climate A List
These recognise our actions
to cut emissions, mitigate
climate risks and develop the
low-carbon economy, as well
as engaging with our suppliers
to manage climate risk and
reduce Scope 3 carbon
emissions in our supply chain.
Dow Jones
Sustainability Indices
BAT is the only company
in our industry listed in the
prestigious World Index,
representing the world’s
top 10% ESG performers.
We have achieved
inclusion in the DJSI for
18 consecutive years.
Global Top Employer
We have been accredited
as a Global Top Employer
for three consecutive
years, acknowledging
our commitment to
providing best-in-class
working environments
and career opportunities.
SEAL Awards
BAT has been awarded with
the SEAL Organizational
Impact Award, which
recognises overall
corporate sustainability
performance and represents
the 50 most sustainable
companies globally.
Top 5 FTSE ranking for
our Modern Slavery
Statement
The Business and Human
Rights Resource Centre and
Development International
ranked BAT as being among
the top five highest scoring
companies in the FTSE
for the detailed disclosure
and action reflected in our
Modern Slavery Statement.
Diversity leader in
the Financial Times
Diversity Leaders report
BAT was ranked in the top
10% of the total of 8,000
organisations covered by
this inaugural report. It was
compiled from extensive
research, with 80,000
people surveyed across
10 European countries.
Leader status in the
Global Child Forum’s
benchmark study
In the Global Child Forum’s
2019 benchmarking study
of children’s rights across the
work place and supply chain,
we were awarded ‘leader’
status with a score of 9.2 out
of 10, compared to ‘industry’
and ‘all companies’ averages
of just 5.6.
International Women’s
Day Best Practice
Winner
Our global campaigns for
International Women’s Day
have been recognised for
two consecutive years as
examples of best practice and
featured as case studies by
the International Women’s
Day Association.
33
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING OUR STRATEGY
CONTINUED
GROWTH
Our multi-category portfolio of brands continued
to deliver strong growth in 2019, driven by our
Strategic Portfolio.
Growth remains a key focus of our evolved strategy, and
will be delivered by our inspirational foresights, remarkable
innovation and powerful brands.
Highlights during the year:
– group revenue grew by 6%, driven by price mix and growth in New Categories;
– New Categories revenue grew 37%; and
– Strategic Portfolio revenue grew 9%, driven by robust cigarette pricing and growth
from New Categories and Traditional Oral.
New Categories
Traditional Oral
Combustibles
Vapour
THP
Modern oral
KPI
Non-GAAP
Change in adjusted revenue
from New Categories,
at constant rates (%)
Non-GAAP
Change in adjusted revenue from
Traditional Oral, at
constant rates (%)
Non-GAAP
Change in adjusted revenue
from combustibles
at constant rates (%)
+32.4%
2019
2018
2018 (rep)
+10.2%
+4.6%
+32%
+143%
+97%
2019
2018
2018 (rep)
+10%
+135%
+8%
2019
2018
2018 (rep)
+5%
+30%
+2%
Definition: Change in revenue from New Categories
before the impact of adjusting items and the impact of
fluctuations in foreign exchange rates.
Definition: Change in revenue from Traditional Oral
before the impact of adjusting items and the impact of
fluctuations in foreign exchange rates.
Definition: Change in adjusted revenue from
Combustibles before the impact of adjusting items and
the impact of fluctuations in foreign exchange rates.
34
Strategic ManagementBAT Annual Report and Form 20-F 2019 Volume by product category
Cigarette
Other (incl RYO/MYO)
Combustibles
New categories:
Vapour
THP
Modern oral
Traditional oral
Units
Sticks (bn)
Sticks (bn)
Sticks (bn)
10ml units/pods (mn)
Sticks (bn)
Pouches (mn)
Stick equivalent (bn)
Revenue by product category
2019
units
668
21
689
226
9
1,194
8
vs 2018
%
-5%
-7%
-5%
+19%
+32%
+188%
-1%
2018
units
vs 2017 (rep)
%
2017 (rep)
units
701
22
723
189
7
414
8
-4%
-8%
-4%
+35%
+217%
+108%
-0.4%
732
24
756
140
2
199
9
2019
£m
23,001
vs 2018
%
+4%
401
728
126
1,255
1,081
540
25,877
+26%
+29%
+267%
+37%
+15%
-4%
+6%
Adjusting
items
£m
Impact of
exchange
£m
2019
adjusted at
constant
rates
£m
vs 2018
(adjusted)
%
2018
£m
(50)
(59)
22,892
+5%
22,072
–
–
–
–
–
–
(50)
(9)
(35)
3
(41)
(45)
1
(144)
392
693
129
1,214
1,036
541
25,683
+23%
+23%
+273%
+32%
+10%
-4%
+6%
318
565
34
917
941
562
24,492
vs 2017
adjusted
repres at
constant rates
%
+2%
+26%
+184%
+140%
+98%
+8%
-10%
+4%
vs 2017
%
+22%
+89%
+180%
+127%
+140%
+127%
-5%
+25%
Combustibles
New Categories:
Vapour
THP
Modern oral
Total New Categories
Traditional oral
Other
Revenue
Combustibles
Group cigarette volume declined 4.7% in
2019 to 668 billion sticks (2018: up 2.6%
to 701 billion, or a 4.1% decrease on a
representative basis). In 2019, growth in
Japan, the Middle East, South Africa, Romania
and Poland was more than offset by Russia
(partly due to the one-off stock reduction),
Egypt (largely due to the change in local taxes
impacting Pall Mall), Venezuela (due to the
ongoing macro-economic challenges) and the
impact of market decline in the US, Indonesia,
Pakistan and Ukraine.
2018 volume was positively impacted by
the full year effect of the RAI acquisition.
The decline in 2018, on a representative basis,
was despite growth in a number of markets,
including Pakistan (as the market recovered
following the revision to excise), Turkey,
Poland, Romania and Egypt. This growth
was more than offset by lower volume in
Saudi Arabia (due to down-trading and
market contraction following the 2017
excise-led price increase), the US (partly due
to the impact of fuel price rises on disposable
income, the change in excise in California and
the growth of vapour), Brazil (primarily due
to down-trading to illicit trade) and Russia
(largely due to both market contraction and
inventory movements in the supply chain).
Group cigarette value share increased 20
bps, with volume share up 20 bps in 2019,
maintaining the momentum of 8 successive
years of growth, and building on the 40 bps
increase in 2018.
Cigarette volume share in 2019 was higher
in Japan (driven by Lucky Strike and Kool),
Pakistan (as Pall Mall outperformed the
declining market), Bangladesh (as the Group’s
portfolio outperformed the declining market),
Mexico (driven by Pall Mall), Ukraine (driven
by Kent and Rothmans) and Russia (driven
by Rothmans which outperformed the
declining market).
Volume of the strategic cigarette brands
collectively declined 3.0% (2018: up 16.7%,
or an increase of 4.8% on a representative
basis). Volume share of the strategic cigarette
portfolio grew 70 bps in 2019, benefiting
from migrations in Brazil and Colombia.
Excluding migrations, the increase in strategic
cigarette volume share was 30 bps (2018: up
40 bps) with growth in all regions:
– Dunhill’s overall volume share was stable
(2018: stable) as growth in Bulgaria,
Netherlands and Romania was offset by
down-trading in Malaysia, South Africa,
South Korea and Saudi Arabia. Volume was
5.5% lower (2018: down 6.1%) as growth
in Bulgaria and Netherlands was more than
offset by the effect of the down-trading
noted above and industry contraction in
Indonesia, Malaysia and South Korea;
– Kent’s volume share grew 10 bps, (2018:
up 40 bps) with volume down 1.3% (2018:
down 2.2%), as growth in the Middle East,
Turkey, Uzbekistan, Romania and Peru was
more than offset by lower volume in Russia,
due to the one-off stock reduction;
– Lucky Strike’s volume share was in line
with 2018 (2018: up 20 bps), as growth
in Colombia, Japan, Spain, Bulgaria and
Argentina was offset by Chile, Belgium
and Indonesia. Volume was 3.5% down
(2018: 1.0% down) as growth in Japan was
more than offset by the impact of industry
contraction in Indonesia;
– Rothmans’ volume share continued to grow,
increasing 50 bps (2018: up 110 bps) with
volume 2.5% higher (2018: up 19.7%),
driven by Pakistan, Colombia, Bulgaria and
the full year effect of migrations in Brazil
and Poland, which more than offset lower
volume in Russia and Ukraine which were
impacted by competitive pricing and higher
illicit trade;
– Pall Mall volume share was up 10 bps,
as higher share in Pakistan, Australia,
Chile, South Africa and Mexico was offset
by reductions in the US and Turkey.
Volume declined 6.7% as growth in Kenya,
South Africa, Australia and Romania was
more than offset by lower volume in Egypt
(largely due to the change in local taxes),
Pakistan (following the excise-led price
increases), Venezuela (partly due to market
contraction driven by the macroeconomic
climate) and in the US (partly due to
the competitive pricing in the low-
price segment).
35
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING OUR STRATEGY
CONTINUED
In 2018, Pall Mall volume increased 20.4%
due to the full year impact of the US
acquisition, with volume up 9.9% on a
representative basis partly due to the strong
volume and market share growth in the
Middle East following a period of down-
trading arising from the excise-led price
increases in 2017.
After adjusting for the short-term impact
of excise on bought-in goods and the
translational foreign exchange tailwind of
0.6%, adjusted revenue from combustibles
at constant rates of exchange was up 4.6%
to £22,892 million. In 2018, this was an
increase of 30% or 1.8% on an adjusted,
representative constant currency basis.
The Group’s US strategic combustible
portfolio performed well in a market that was
estimated to be down 5.3% in volume:
– Newport volume share increased 40 bps
(2018: up 10 bps), while volume declined
3.9% (2018: down 4.6% representative);
– Natural American Spirit performed well
with volume share, including premium
volume share, up 10 bps (2018: up 20
bps). Volume was up 0.5% against 2018,
(2018: 3.5% increase on a representative
basis); and
– Camel’s volume share declined 10 bps in
the US (2018: flat) with volume lower by
6.0% (2018: down 4.4% representative), as
the capsule and menthol variants performed
well but were more than offset by a decline
in the remainder of the Camel portfolio.
Volume of other tobacco products (OTP)
declined 7.1% to 20.6 billion sticks
equivalent (2018: 6.6% decline, or 7.5% on a
representative basis), being 3% of the Group
portfolio (2018: 3%).
Revenue from combustibles grew 4.2% to
£23,001 million driven by higher pricing
across the Group notably in the US (including
a reduction in discounting), Canada, Kenya,
Mexico, Nigeria, Saudi Arabia, Japan,
Pakistan, Australia, New Zealand, Germany,
France, Turkey and Ukraine. An improved
performance in high value markets such as
Japan, South Africa, Romania and Australia
which, combined with reduced volumes in
lower value markets such as Pakistan and
Egypt, led to an enhanced geographic mix.
These were offset by an unfavourable portfolio
mix due to the relative growth of lower value
products such as Rothmans and Pall Mall.
In 2018, revenue from combustibles increased
by 21.5% to £22,072 million largely due to
the full year inclusion of RAI and pricing in a
number of markets, which more than offset
a translational foreign exchange headwind
of 6%.
2019 is the last year where the Group will
adjust for the excise on bought-in goods
as short-term contract manufacturing
agreements in ENA, to which such
adjustments relate, have either ended in
2019 or will be immaterial in 2020.
Tobacco heating products
The Group’s THP portfolio continued to
grow, with consumable volume up 32%
to 9.0 billion sticks (2018: up 217% to
6.8 billion sticks) while revenue increased
28.9% to £728 million (2018: up 180% to
£565 million). Excluding the impact of the
relative movements in sterling, at constant
rates of exchange, this was an increase of
22.7% in 2019 and 184% in 2018.
– In Japan, the Group’s volume share grew
to 5.0% in December 2019, an increase
of 60 bps on 2018, while the Group’s
THP category volume share reached
19.6%. Consumable volume grew 21%
against 2018 driven by the launch of new
device upgrades, ‘glo pro’, ‘glo nano’
and ‘glo sens’ together with a new range
of consumables which achieved national
distribution by the end of 2019. After an
encouraging launch of ‘glo sens’, the
Group will be reviewing the in-market
execution, broadening device penetration
and driving increased consumer uptake
in 2020. The Group’s integrated, cross
category approach to marketing has seen
the Group’s volume share of total nicotine
increase to 18.9% in December 2019
(up 210 bps from December 2018).
– In other markets, the Group continued to
grow volume and glo is above 1% volume
share in key cities in Eastern Europe,
including Moscow. The Group’s THP
products are now available in 17 markets
with further expansion planned for 2020.
Vapour
By December 2019, the Group’s vapour
products were present in a total of 27 markets
as the Group continued to expand its
geographic footprint during 2019, with the
Group the leading vapour company in the key
European markets.
The Group’s vapour portfolio continues to
perform strongly despite a slowdown in
the category growth rate in the US and in a
number of other markets in the second half of
2019, partly impacted by the US regulatory
environment. The Group welcomes the US
FDA’s recent actions to clarify regulations in
the US vapour market.
Total volume of vapour consumables was up
19% to 226 million units in 2019, driving
vapour revenue up 26.1% to £401 million.
In 2018, revenue was £318 million (up 89%)
with volume 100% higher to 189 million
units partly due to the full year impact of RAI.
Excluding the movement of foreign exchange
and adjusting for the impact of RAI (on 2018’s
growth rate), this was an increase, at constant
rates of exchange, of 23% in 2019 and 26%
in 2018 (on a representative basis).
In the US, total revenue from vapour was
£207 million, an increase of 12% on 2018,
(2018: up 149% at £184 million). On a
constant currency basis, this was an increase
of 7% in 2019, with the US up 20% in
2018 after adjusting for currency and on a
representative basis. Alto increased vapour
value share to 15.4% in December 2019,
driving total Vuse vapour value share higher
to 21.2% in December 2019 (December
2018: 12.5%), despite a 6.2% decline in
consumable volume.
On 2 January 2020, the US FDA announced
that all flavoured cartridges/pods (excluding
menthol and tobacco flavours) must be
withdrawn until they have cleared through
the Premarket Tobacco Application (PMTA)
process. A Group subsidiary in the US has
submitted a PMTA for Vuse Solo and the
Group believes it is well positioned to submit
applications for the remaining Vuse portfolio
and a range of flavours by 12 May 2020.
It is expected that, as required by the PMTA
process to remain on the market, all these will
be shown to be appropriate for the protection
of public health. There is no intention to
submit a PMTA for the Vapewild portfolio
and consequently the Group has recognised
an impairment charge in respect of the
trademarks of £37 million.
36
Strategic ManagementBAT Annual Report and Form 20-F 2019 Vype continued to perform strongly, largely
driven by the success of ePen3 and ePod.
In the UK, the Group maintained value
leadership of the category with 38% vapour
value share driven by Vype which performed
well, with vapour value share increasing
290 bps to 12% (December 2019), due to
the success of ePen3 (launched in 2018) with
10% vapour value share in December 2019.
In France, vapour value share reached 23%
(December 2019), an increase of 1,210 bps
(versus December 2018), driven by ePen3
and ePod, which was launched during
the year.
In Germany, Vype continues to grow with
an increase in Vype’s total share of vapour
consumers to 17%.
In South Africa, Twisp, a leading vaping
products company, was acquired in 2019.
Twisp has close to 70 dedicated stores
nationally, nationwide retailer distribution and
a modern e-commerce platform.
In Canada, following a period of value
share decline as competitors reacted to the
legalisation of the market, Vype returned to
growth and is the fastest growing vapour
brand in Canada in the second half of the
year, with value share in December 2019 of
28.2% (34.7% December 2018).
Following the announcement on
28 November 2019 regarding the intention to
simplify the New Categories product portfolio,
the Group expects to migrate certain vapour
brands (including Vype, Chic, Highendsmoke
and ViP) to Vuse during 2020, where possible,
and has recognised an impairment charge
of £29 million, as discussed on page 153.
Modern Oral
The Group is the leader in Modern Oral (on
a pouch basis), with volume of 1.2 billion
pouches in 2019. This was an increase
of 188% on 2018, when volume was
0.4 billion pouches, itself an increase of
108% on 2017. Revenue increased 267% to
£126 million (2018: up 127% to £34 million).
Excluding the impact of foreign exchange,
this was an increase of 273% in 2019 and
140% in 2018, on a representative, constant
rates basis. This was driven by:
Traditional Oral
In 2019, volume was marginally lower
than the prior year (down 0.6% to 8.4 bn
stick equivalents), with 2018 0.4% lower
than 2017. Total revenue grew by 15%
to £1,081 million (2018: up 127% to
£941 million), driven by pricing in 2019, with
the movement in 2018 due to the acquisition
of RAI. On a constant rates basis, this was an
increase in 2019 of 10% and 8% in 2018
(driven by pricing), after also adjusting for
the RAI acquisition uplift effect in that year.
In the US, moist value share grew 80 bps
in 2019, largely due to the performance
of Grizzly with total volume share of moist
up 10 bps. Total volume declined 1.5%.
In 2018, volume in the US declined 2.3%
on a representative basis.
The Modified Risk Tobacco Products (MRTP)
application for Camel Snus was discussed
by the Tobacco Products Scientific Advisory
Committee (TPSAC) in September 2018.
A response is expected soon.
Outside the US, volume was higher in Sweden
in 2019 with volume share increasing 50 bps
to 10.9% of the total oral category, driven by
growth in Lundgrens.
– The expansion, in 2019, in the US of Velo
to over 100,000 retail outlets, achieving
a category volume share of 10.1% in
December 2019;
– Norway, where volume share (of the total
oral category) grew, in 2019, to 14%,
building on the growth in 2018 to 8%;
– Switzerland, where volume share of the
total oral category reached 41% in 2019,
having reached 17% in 2018;
– Denmark, where the Group continues to
lead the development of the oral category
with 75% volume share of the total oral
category; and
– Russia where, following the launch in
2019, the Group achieved 27% volume
share (December 2019) within the
total oral category, in tracked channels.
In December 2019, following concerns in
Russia regarding irresponsible marketing
by our competitors, all sales of modern oral
have been temporarily suspended. There is
no indication of a concern regarding the
Group’s products or practices and we
expect a regulatory framework will be
implemented in 2020.
In line with the simplification agenda, the
Group expects to migrate the majority of its
modern oral portfolio to Velo during 2020.
37
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING OUR STRATEGY
CONTINUED
PRODUCTIVITY
We have continued our drive towards a more effective
and efficient globally-integrated organisation, in large
part through the consolidation of our Global Supply
Chain Service Centre. This global integration allows for
the lowest possible overheads cost, and has resulted
in a more agile and responsive supply chain.
This increased flexibility and agility will play an important
role in delivering our new strategy, which we look forward
to reporting on next year.
Highlights during the year
– another year of substantial productivity savings and RAI acquisition savings delivered
ahead of schedule;
– consolidation of our Global Supply Chain Service Centre; and
– challenges of Track and Trace and plain packaging regulations successfully overcome.
Agile global operations model
The 2018 completion of our Global
Supply Chain Service Centre resulted in
the synchronisation of our end-to-end
supply network, with Leaf supply chain,
procurement, manufacturing, planning,
logistics, and the introduction of new
products all consolidated. In 2019, we
built on these strong existing capabilities to
leverage cross-functional synergies.
Our fast-paced geographic expansion of our
New Categories business has necessitated
a prioritisation of flexibility and agility. As a
result, we have developed a more responsive
supply chain, which involved developing
different supply chain models to meet the
different demand models that arise in our
increasingly multicategory business.
This has improved response to markets,
which has supported NTO growth in
New Categories.
In 2019, supply chain flexibility and agility
were also proven in response to both plain
packaging regulation in Canada, as well as
Tobacco Products Directive (TPD) regulations
in the EU. In response to TPD regulations
that mandated the traceability of all products
and packs from manufacture to retail outlet,
our supply chain was successfully adapted
to ensure full compliance across 14 factories,
6,400 external warehouses, and 900,000
retailers. Similar successful flexibility was
demonstrated by significant changes to
ensure compliance while protecting revenue
following strict new packaging regulations
in Canada.
OUR FAST‑PACED GEOGRAPHIC
EXPANSION OF OUR NEW
CATEGORIES BUSINESS HAS
NECESSITATED A PRIORITISATION
OF FLEXIBILITY AND AGILITY
Alan Davy
Director, Operations
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
38
IFRS-GAAP
Profit from operations
(£m)
£9,016m
-3.2%
2019
2018
2017
£9,016m
-3%
£9,313m
+45%
£6,412m
+38%
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.
KPI
Change in adjusted profit from
operations at constant rates (%)
Non-GAAP
+6.6%
2019
2018
2018 (rep)
2017
2017 (org)
+7%
+38%
+4%
+39%
+4%
Definition: Change in profit from operations before the
impact of adjusting items and the impact of fluctuations in
foreign exchange rates.
Operating cash flow conversion ratio@
(%)
KPI
Non-GAAP
97%
2019
2018
2017
97%
113%
79%
Definition: Operating cash flow, as defined on page 264 as a
percentage of adjusted profit from operations.
Net cash generated from operating
activities (£m)
IFRS-GAAP
£8,996m
-12.6%
2019
2018
2017
£8,996m
-13%
£10,295m
+93%
£5,347m
+16%
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.
Strategic ManagementBAT Annual Report and Form 20-F 2019 Change in adjusted cash generated
from operations at constant rates@ (%)
KPI
Non-GAAP
-16.3%
2019
2018
2017
Definition: Change in adjusted cash generated from
operations, as defined on page 265, before the impact
of fluctuations in foreign exchange rates.
Operating margin
(%)
34.8%
2019
2018
2017
-16%
+158%
+0%
34.8%
38.0%
32.8%
Definition: Profit from operations as a percentage of revenue.
Adjusted operating margin
(%)
43.1%
2019
2018
2017
Non-GAAP
43.1%
42.6%
41.1%
Definition: Adjusted profit from operations as a percentage
of adjusted revenue.
Procurement
Global visibility of forward demand and
product specifications in one system has
delivered significant benefits with the tender
at a global level of print materials and
tow being notable examples. In addition
to the benefits of lower product cost,
the development of long-term supplier
relationships with key suppliers has improved
security of supply and enabled higher
flexibility in the supply chain.
International logistics
Whether by road, air or sea, our logistics
are organised and controlled centrally.
This facilitates opportunities to negotiate
globally with third-party providers and
allows us to benefit from our scale.
Furthermore, this maximises the use of return
shipments and economic order quantities
to allow for maximum efficiency while
maintaining the flexibility for fast response
to market opportunities.
Leaf operations
These are similarly managed globally to
ensure that the Group works with reliable,
efficient and responsible farmers in our source
countries. Our Global Leaf Pool operation
aggregates demand to meet supply across all
internationally traded tobacco. This approach
balances the lowest possible working capital
investment while reducing our exposure to
crop failure (from changes in climate) and
guaranteeing the best quality leaf to meet
consumer demands.
In 2019, we continued to improve our
productivity in all areas of our supply chain
and elsewhere in the Group. As a result, we
have increased our profitability and continue
to deliver returns to our shareholders today
and invest in the future.
Continued optimisation
of manufacturing and
leaf footprint
In 2019, we continued to optimise our
manufacturing footprint and at the end of
the year had 45 cigarette factories in 43
countries. The Group also has facilities that
are manufacturing New Categories products
and are co-located with the cigarette factories.
In ENA, the Group also has two facilities
manufacturing Modern Oral and one facility
producing vapour liquids.
Cigarette factories were closed in Saratov,
Russia and Phonm Penh, Cambodia.
While the Group does not own tobacco farms
or directly employ farmers, it sources over
400,000 tonnes of tobacco leaf each year
directly from over 90,000 contracted farmers
and through third-party suppliers mainly in
developing countries and emerging markets.
We continually strive to improve farmer
sustainability and viability with a focus on
improved quality, reduced costs of production
and increased yield. As a result, we review our
contracts on an annual basis to ensure that
production is aligned to the needs of both the
farmer and the Group.
The Group also purchases a small amount of
tobacco leaf from India where the tobacco
is bought over an auction floor. The price
of tobacco in US dollars varies from year-
to-year driven by domestic inflationary
pressures, supply, demand and quality.
The Group believes there is an adequate
supply of tobacco leaf in the world markets
to satisfy its current and anticipated
production requirements.
Increasing productivity savings
By operating globally, exploiting our systems
and striving for results, the Group delivered
substantial productivity savings in 2019,
supported in large part by the acquisition
of Reynolds American Inc. with annualised
savings of over US$400 million delivered by
the end of 2019, a year ahead of schedule.
These savings are returned to the business
for re-investment and to increase shareholder
return. The Group considers all opportunities
for productivity savings in the supply chain,
including procurement, international logistics
and leaf operations:
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
39
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING OUR STRATEGY
CONTINUED
WINNING ORGANISATION
We enable growth by having a winning and agile
organisation. We inspire diverse teams of committed
and engaged people by:
− investing in our people;
− attracting the best;
− developing high-performing leaders; and
− offering a fulfilling, rewarding and responsible
work environment.
Highlights during the year
– accelerated talent development and attraction in growth markets and growth
categories including tobacco heating products, vapour and modern oral;
– celebrated our first year anniversary of B United, a network for our LGBT+ employees;
– top Employer recognition in Europe, Africa, and Asia-Pacific; and
– recognised as a Diversity Leader in 2019 by the UK Financial Times in its inaugural Diversity
Leaders report, highlighting progress in promoting diversity across our organisation.
Investing in leaders
As our industry continues to transform, the
way we attract and develop talent continues
to evolve to meet these new challenges.
Our increasingly data-led and digitally-
enabled approach focuses on bringing new
skills and capabilities to our teams.
We continue to reshape our employer brand to
attract and retain capabilities needed to deliver
our strategy, supported by our strong social
media position that grew followership by over
20% in 2019. Our employee value proposition
remains strong and the Group was awarded
Global Top Employer recognition for the third
consecutive year with special recognition
in 35 countries, as well as the National
Undergraduate Employability Award in the UK.
Developing critical capabilities is at the highest
of the Group’s priorities and we are focused
on personalised digital opportunities for
upskilling employees.
You can read about our Group risk factor
related to talent on page 274
To support our people, in 2019 we launched
a new Digital Learning platform called The
Grid, which consolidates our internal and
external learning content together in one place
for ease of access. Additionally, we launched
the micro-learning mobile app Ed, which is
available to all our Group company employees
in marketing and provides mobile access to our
New Category products learning portfolio. As a
result, more than 6,700 marketeers and trade
marketing representatives regularly use the app
to support their daily sales visits to retail outlets
and wholesalers.
Growth through diversity
Diversity matters to the Group because it
makes good commercial sense. Having a
diverse workforce means we are better able to
understand and meet the varied preferences
of our global consumers. We are proud of our
Diversity and Inclusion Strategy, which is built
on the three pillars of:
1. driving ownership and accountability;
2. building diverse talent pools; and
3. creating enablers;
all of which are underpinned by an
inclusive culture.
1. Driving ownership and accountability
Ensuring ownership of and accountability for
our Diversity and Inclusion Strategy across the
Group is key to driving progress. Our regions,
markets and business units have specific
diversity action plans and initiatives in place
to support diversity across the Group and to
develop a pipeline of diverse talent at all levels
of our organisation.
Our Director, Talent and Culture, has overall
responsibility for all employee and human
resources matters, while our Management
Board oversees the development and
management of talent within the Group’s
regions and functions, and monitors progress
against our key objectives and performance
indicators. Our Board reviews progress on our
Diversity and Inclusion Strategy and initiatives
and diversity reporting forms a key part of
all Functional and Regional Leadership Team
meetings, with quarterly reviews.
40
Group diversity as at
31 December 2019
Total
Male
Female
11
8
3
576
443
133
53,185 38,402 14,783
Main Board
Senior
management
Total Group
employees
Main Board
Male
Female
72.7%
27.3%
Senior management
Male
Female
76.9%
23.1%
Total Group employees
Male
Female
72.2%
27.8%
Nationalities represented
Main Board
Global headquarters
Management level globally
Total
8
83
141
Senior managers:
Companies Act 2006
For the purposes of disclosure under Section
414C(8) of the Companies Act 2006, the Group
had 190 male and 30 female senior managers as
at 31 December 2019. Senior managers are defined
here as the members of the Management Board
(excluding the Executive Directors) and the
Directors of the Group’s principal subsidiary
undertakings. The principal subsidiary undertakings,
as set out in the Financial Statements, represented
approximately 70% of the Group’s employees and
contributed over 76% of Group revenue and 78%
of profit from operations in 2019.
Strategic ManagementBAT Annual Report and Form 20-F 2019 2. Building diverse talent pools
We are a diverse employer. There are 141
nationalities represented at management level
within our Group, and we are pleased with
the continuous progress we are making and
the sustainable pipeline we are building in
terms of nationality diversity.
We are also continuing to work hard to
improve gender diversity within the Group.
Women represent 27% of our Board and 15%
of our Management Board, and comprised
24% of our senior recruits and 23% of our
internal promotions in 2019. We support
women’s development into senior roles
through a variety of initiatives, including
our Women in Leadership programme and
participation in the 30% Club mentoring
programme. We have female executives on
all our senior functional and geographical
leadership teams, and 49% of our 2019
graduate intake were women, supporting
the development of a sustainable pipeline of
women for senior management roles.
Read about our Global Graduate Programme
at www.bat-careers.com/graduates
3. Creating enablers
To realise our diversity ambitions, we know
we must develop enablers to provide a
supportive environment for people to thrive.
One of the ways we do this is by maintaining
networks to share experiences. We currently
support 13 women’s networks across all levels
of our organisation, including Women in
BAT UK network. We also partnered with the
International Women’s Day Association for the
second year on the #BalanceforBetter campaign.
‘B United’ celebrated its first anniversary in 2019.
‘B United’ is a Group network that provides our
LGBT+ employees with a safe forum to share
experiences, mentoring opportunities and help
with overcoming hurdles, such as those relating
to adoption or travelling abroad with same
sex partners.
Employee engagement index
82%
FMCG comparator group 75%
Definition: Results from our ‘Your Voice’ employee opinion
survey, carried out in 2019, enabled us to calculate our
employee engagement index – a measure that reflects
employees’ level of commitment, energy and connection
towards the organisation.
Objective: To achieve a more positive score than
the norm for FMCG companies in our comparator
benchmark group.
Our other key metrics in this area include:
– Employee retention: In 2019, total
voluntary turnover of management-
grade employees was 1,085,
representing 8.1% of the total
management population.
– Diversity: Representation of women in
senior management roles increased from
16% in 2016, and 21% in 2017, to 23%
in 2019.
Inclusive culture
We can only truly harness the benefits of
a diverse workforce if we have an inclusive
culture that enables all our employees to
flourish regardless of their gender, ethnicity,
culture or other differences.
We were proud to be recognised as a
Diversity Leader by the Financial Times in its
inaugural Diversity Leaders report. The report,
which lists the top 700 companies across 10
European countries, recognises organisations
that have achieved a diverse and inclusive
workforce across a number of criteria.
Workforce engagement
The Group has a range of well-established
engagement channels worldwide covering
the Group’s global workforce. We define
the Group’s workforce as comprising all
Group company employees and individuals
contracted on a fixed term basis to undertake
permanent roles.
Our workforce engagement channels include
market and site visits by our Directors and
Management Board members to meet local
employees, town hall sessions, works councils,
European Employee Council meetings,
our ‘Your Voice‘ global employee survey,
global, functional and regional webcasts
and webcasts with the Chief Executive.
These engagement channels are implemented
as appropriate for the composition of
local workforce populations, at market,
business unit, functional or regional levels.
Our Speak Up channels are also available to
our workforce worldwide and are discussed
further on page 32.
The Board has taken account of the
requirements of the UK Corporate
Governance Code in its approach to
engagement with the Group’s workforce.
Given the spread, scale and diversity of the
Group’s workforce, the Board considers it
effective to use the established channels
referred to above, and has augmented these
from January 2019 by introducing Group-
wide reporting structures to capture feedback
from engagement channels at market,
business unit, functional and regional levels.
To ensure the Board understands the
views of our workforce, the Board now
reviews consolidated feedback from
these engagement channels annually.
Feedback from the Board, with associated
action planning, is cascaded back across our
workforce and the Board is kept updated on
progress against identified actions during
the year. This approach supplements the
Directors’ direct engagement, including
through market and site visits, discussed
further at page 72.
Our policies and principles*
Summary of areas covered
Employment Principles
Health and Safety Policy
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.
Health, safety and welfare of all employees, other members of our workforce
and third-party personnel.
Standards of Business
Conduct (SoBC)
Group Data Privacy Policy
Respect in the work place, including promoting equality and diversity,
preventing harassment and bullying, and safeguarding employee wellbeing.
The manner in which BAT processes personal data about all individuals,
including consumers, employees, contractors and employees of suppliers.
Key stakeholder groups
Our People
Customers
Our People
Suppliers
Our People
Our People
Consumers
Suppliers
Customers
These policies and procedures are endorsed by our Board, apply to all Group companies and support the effective identification,
management and mitigation of risks and issues for our business in these and other areas.
* Further details of our Group policies and principles can be found at www.bat.com/principles
41
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DELIVERING OUR STRATEGY
CONTINUED
Our global ‘Your Voice‘ employee survey is
conducted across the Group every two years,
most recently in 2019. The results from 2019
demonstrate that we continue to outperform
our global FMCG comparator group in all areas
surveyed, including our employee engagement
index at 7% higher than our FMCG
comparator group and our high performance
index at 13% above our FMCG comparator
group. Our Group results are also significantly
ahead of our FMCG comparator group in the
categories of corporate responsibility, diversity
& inclusion and talent development.
Our Employment Principles
Our Employment Principles set out a common
approach for our Group companies’ policies
and procedures, recognising that each Group
company must take account of local labour
law and practice, and the local political,
economic and cultural context.
In developing our Employment Principles, we
have sought the views of a cross-section of
internal and external stakeholders, and have
consulted with employee representatives and
(where relevant) with our works councils.
All Group companies have adopted our
Employment Principles and, through our
internal audit processes, are required to
demonstrate how these are embedded into
the work place.
In addition to our Employment Principles,
our Board Diversity Policy specifically applies
to our Board and Management Board and is
discussed further at pages 81 to 82.
Equal opportunities for all
We are committed to providing equal
opportunities to all employees. We do not
discriminate when making decisions on hiring,
promotion or retirement on the grounds of
race, colour, gender, age, social class, religion,
smoking habits, sexual orientation, politics
or disability. We are committed to providing
training and development for employees
with disabilities.
Rewarding people
Reward is a key pillar in ensuring that we have
the right people to drive the business forward.
Reward is necessarily local and we strongly
support this through global frameworks to
ensure leading edge policies, processes and
technology are available to all markets.
Base pay rewards core competence relative
to skills, experience and contribution to
the Group, while annual bonuses, long-
term incentives, recognition schemes and
ad hoc incentives provide the right mix to
ensure that sustained high performance is
recognised and rewarded. We also offer our
UK employees the chance to share in our
success via our Sharesave Scheme, Partnership
Share Scheme and Share Reward Scheme,
and operate several similar schemes for senior
management in our Group companies.
42
Our approach to rewarding Group company
employees is set out further on pages 95 to
96. Further information on the Company’s
Remuneration Policy for Directors can be
found on pages 93 to 113.
Gender pay
Since 2018, we have published data relating
to UK gender pay in accordance with
statutory requirements.
You can learn more about our published data
relating to UK gender pay in line with statutory
requirements at www.bat.com/genderpayreport
Safe place to work
Operating in challenging
environments
Providing a safe working environment for all our
employees and contractors is paramount. As a
global business, operating in diverse markets
including some of the world’s most volatile
regions, this can also be challenging.
Safety risks vary across our business. For example,
our manufacturing sites carry lower risks, while
the vast majority of all Group accidents are
in Trade Marketing & Distribution (TM&D),
which involves the distribution and sale of our
products. We have close to 30,000 vehicles and
motorcycles out on the road every day, often in
environments with difficult social or economic
conditions. Our goods have a high street
value, and in a small number of markets this
carries high risk of armed robbery and assault.
Poor road infrastructure and wide variations
in driving standards and behaviour provide
further challenges.
Although these challenges will always exist, our
goal is zero accidents across the Group. To help
achieve this, we have a comprehensive approach
based on risk management and assessments,
employee training and awareness, and tailored
initiatives for specific issues.
Since 2017, we have implemented a range
of additional initiatives, such as ensuring
drivers carry less stock, together with extra
security measures for route planning and
vehicle tracking. We use in-vehicle ‘telematics’
monitoring systems to analyse driver behaviour
data, and use the insights to tailor our training
programmes and improve driving skills and
hazard perception.
In markets where we have introduced
distribution by motorcycle, we provide training
programmes to reduce risk. These provide
practical techniques for different road conditions
and types of traffic, safe speeds and distances,
and how to spot a potential problem and take
action to deal with it safely.
We are pleased to report that our actions are
producing improvements. While vehicle-related
incidents remained flat in 2019, we saw an 18%
reduction in injuries reported across TM&D,
driven by a 40% decrease in the number of
assaults on our people.
Relatedly, the number of fatalities fell
significantly from 12 in 2018 to one across
the Group in 2019. This was primarily a result
of our concerted effort to address the rise
in attacks on our field-force. However, we
recognise that changing local conditions,
such as increased levels of violence and civil
unrest, continue in certain markets and that
this requires continuous assessments to ensure
the learnings from other markets are rapidly
deployed to mitigate any rising trends in
potential threats to our people.
We are making every effort to further address
these challenges in 2020, notably through
sharing best-practice examples across
our regions.
You can read about our Principal Group risk
relating to workplace health & safety on page 62
Health and Safety Policy
Our Health and Safety Policy recognises the
importance of the health, safety and welfare
of all our employees and third-party personnel
in the conduct of our business operations.
We are committed to the prevention
of injury and ill-health, and strive for
continual improvement in health and safety
management and performance. This policy is
supported by our Environmental, Health and
Safety (EHS) management system, outlined
on page 29.
Overall responsibility for Group health and
safety is held by the Director, Operations.
The Director, Group Talent and Culture, has
overall responsibility for all employee and
human resources matters.
Our key metrics* in this area include:
– Lost Workday Case Incident Rate
(LWCIR): There was a decrease in our
LWCIR from 0.29 in 2018 to 0.27
in 2019.
– Lost workday cases (LWC): The number
of work-related accidents (including
assaults) resulting in injury to employees
and to contractors under our direct
supervision, causing absence of one shift
or more, decreased from 213 in 2018 to
186 in 2019.
– Serious injuries and fatalities: The total
number of serious injuries and fatalities
to employees and contractors decreased
from 54 in 2018 to 38 in 2019.
* 2018 LWC data has been restated to include Health and Safety
data from our recent acquisitions.
Strategic ManagementBAT Annual Report and Form 20-F 2019 Financial Review
FINANCIAL PERFORMANCE
SUMMARY
STRONG
OPERATIONAL
PERFORMANCE
DRIVES
DELEVERAGING
Tadeu Marroco
Finance Director
Highlights
– Group revenue was up 5.7% with profit from operations 3.2% lower
than 2018;
– At constant rates of exchange, adjusted revenue grew 5.6% with adjusted
profit from operations up 6.6%;
– Diluted earnings per share decreased 5.4%. Adjusted diluted
earnings per share was up 9.1%, or 8.4% at constant rates;
– Dividend per share was up 3.6% at 210.4p;
– Net cash generated from operating activities declined 12.6%, @with adjusted
cash generated from operations at constant rates down 16.3%@; and
– Cash conversion at 100%, @with operating cash flow conversion ratio at 97%@.
Non‑GAAP measures
In the reporting of financial information, the
Group uses certain measures that are not defined
by IFRS, the Generally Accepted Accounting
Principles (GAAP) under which the Group
reports. The Group believes that these additional
measures, which are used internally, are useful to
users of the financial information in helping them
understand the underlying business performance.
The principal non-GAAP measures which
the Group uses are adjusted revenue,
adjusted revenue from New Categories,
adjusted revenue from the Strategic Portfolio,
adjusted profit from operations, adjusted
diluted earnings per share, @operating cash
flow conversion ratio and adjusted cash
generated from operations@. Adjusting items
are significant items in revenue, profit from
operations, net finance costs, taxation and
the Group’s share of the post-tax results of
associates and joint ventures which individually
or, if of a similar type, in aggregate, are
relevant to an understanding of the Group’s
underlying financial performance. As an
additional measure to indicate the results of
the Group before the impact of exchange
rates on the Group’s results, the movement
in adjusted revenue, adjusted revenue from
the Strategic Portfolio, adjusted profit from
operations and adjusted diluted earnings
per share are shown at constant rates of
exchange. The Group also includes, where
appropriate, measures termed ‘representative’
or ‘organic’ to provide the user with the
Group’s performance without the potentially
distorting effects of acquisitions, particularly
RAI. These non-GAAP measures are explained
on pages 258 to 268.
Revenue
In 2019, revenue grew 5.7% to
£25,877 million (2018: £24,492 million,
up 25.2% on 2017). The higher revenue in
2019 was due to pricing across the cigarettes
portfolio (with price mix of 9%) and an
increase in revenue from Traditional Oral (up
15%, 2018 up 127%) and New Categories
(up 37%, 2018 up 138%), which more than
offset a 4.7% decline in cigarette volume
(2018: increase of 2.6%). The growth in 2018
was mainly due to the inclusion of RAI as a
wholly-owned subsidiary from the acquisition
date as 2017 only included approximately five
months of revenue from RAI. 2018 revenue
was also driven by price mix of 6% (on the
combustible brands) and the growth of
the New Categories portfolio. Revenue was
also affected by the movements of foreign
exchange on our reported results which was
a tailwind of 0.6% in 2019, compared to a
headwind in 2018 of approximately 6%.
After adjusting for the short-term uplift to
revenue due to the treatment of excise on
bought-in goods and the effect of exchange
on the reported result, on a constant currency
basis, in 2019 adjusted revenue was up 5.6%
as combustibles pricing and the growth of
New Categories more than offset a decline
in cigarette volume of 4.7%. Excluding the
variance created to the Group’s results from
the acquisition of RAI and other businesses in
2017, in 2018 adjusted revenue grew 3.5% on
an adjusted, constant currency, representative
basis as pricing and the growth in New
Categories more than offset the decline in
combustibles volume on a representative basis.
Reconciliation of revenue to adjusted revenue at constant rates
IFRS-GAAP
Revenue
(£m)
£25,877m
+5.7%
2019
2018
2017
£25,877m
+6%
£24,492m
+25%
+39%
£19,564m
Definition: Revenue recognised, net of duty,
excise and other taxes.
In 2019, revenue includes £18,793 million of revenue from
the Strategic Portfolio, an increase of 9% (2018: £17,257
million). Within the Strategic Portfolio, revenue from New
Categories was £1,255 million (2018: £917 million).
Change in adjusted revenue
at constant rates (%)
KPI
Non-GAAP
+5.6%
2019
2018
2018 (rep)
2017
2017 (org)
+6%
+33%
+4%
+32%
+3%
Definition: Change in revenue before the impact
of adjusting items and the impact of fluctuations in foreign
exchange rates.
@ Denotes phrase, paragraph or similar that does not form part of
BAT’s Annual Report on Form 20-F as filed with the SEC.
Revenue
Adjusting items
Add impact of acquisition (for representative calculation)
Adjusted revenue (2017 shown on a representative basis)
Impact of exchange
Adjusted revenue at constant rates
2019
2018
2018
2017
Change %
(vs 2018)
£m
Change %
(vs 2017)
£m
25,877
(50)
–
25,827
(144)
25,683
+5.7%
–
–
+6.2%
–
+5.6%
24,492
(180)
–
24,312
1,448
25,760
+25%
–
–
-2.3%
–
+3.5%
£m
19,564
(258)
5,577
24,883
–
24,883
4343
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 INCOME
STATEMENT
Profit from operations
Profit from operations fell by 3.2% to
£9,016 million, compared to an increase
of 45% to £9,313 million in 2018. This was
driven by the recognition of charges related to
Quebec Class Action in Canada (£436 million),
the settlement of an excise dispute in Russia
(£202 million), amortisation and impairment
of trademarks and similar intangibles
(£481 million), the impairment of Indonesian
goodwill (£172 million), other smoking and
health litigation costs of £236 million (which
included Engle progeny in the US) and costs
related to the restructuring programmes, which
includes Quantum (£264 million). The growth
in 2018 was driven by the inclusion of RAI mid-
way through 2017.
Raw materials and other consumables
costs declined 1.4% to £4,599 million in
2019 mainly due to the end of the contract
manufacturing agreement which, due to
excise recognition, led to an increase in
revenue and in raw materials and other
consumables costs. In 2018, this was an
increase of 3.2% to £4,664 million due to
the higher volume following the acquisition
in 2017 of RAI as well as an increase in THP
volume, and a year-on-year movement
benefiting from a charge of £465 million
recognised in 2017 related to the purchase
price allocation adjustment to inventory
which did not repeat in 2018.
Employee benefit costs increased by
7.2% to £3,221 million in 2019, which
includes charges in relation to Quantum of
£264 million. In 2018, this was an increase
of 12.2% to £3,005 million, due to the
acquisition of RAI in 2017.
Depreciation, amortisation and impairment
costs increased by £474 million to
£1,512 million in 2019 and by £136 million
to £1,038 million in 2018. This includes
the amortisation and impairment charges
of £481 million (2018: £377 million)
largely related to the trademarks and
similar intangibles capitalised following
acquisitions (including RAI, TDR, Skandinavisk
Tobakskompagni A/S (ST) and VapeWild).
Profit from operations
(£m)
£9,016m
-3.2%
IFRS-GAAP
KPI
Change in adjusted profit from
operations at constant rates (%)
Non-GAAP
+6.6%
+7%
+38%
+4%
+39%
+4%
2019
2018
2017
£9,016m
-3%
£9,313m
+45%
2019
2018
£6,412m
+38%
2018 (rep)
Definition: Profit for the year before the impact of net
finance costs/income, share of post-tax results of associates
and joint ventures and taxation on ordinary activities.
Also included in 2019 are goodwill
impairment charges in relation to Bentoel
in Indonesia (£172 million) recognised in
the year following a change in excise rates
impacting forecast future performance.
The increase in 2018 reflects the full year
effect of RAI, with depreciation increasing in
2017 due to the higher depreciation charges
following the consolidation of RAI in that year.
Other operating expenses increased
by £1,183 million to £7,851 million in
2019 mainly due to the recognition of the
charges in respect of Quebec Class Action
in Canada (£436 million), Russia excise
dispute (£202 million) and other litigation
(including Engle progeny in the US) of
£236 million. 2018 was up £1,986 million
to £6,668 million, largely due to the
consolidation of RAI, including charges
in relation to the MSA.
Expenditure on research and
development was £376 million in
2019 (2018: £258 million) with a focus
on products that could potentially
reduce the risk associated with smoking
conventional cigarettes.
Adjusted profit from operations is the
Group’s profit from operations before adjusting
items. Adjusting items were £2,114 million
in 2019 (2018: £1,034 million), including
the charges related to trademark amortisation
and impairment (discussed above), and
restructuring and integration costs of
2017
2017 (org)
Definition: Change in profit from operations before the
impact of adjusting items and the impact of fluctuations
in foreign exchange rates.
£565 million (2018: £363 million), of which
Quantum incurred £264 million (2018: £nil).
Quantum will simplify the business and create
a more efficient and agile organisation to
support the growth of New Categories.
The charge in 2018 included costs related to
the implementation of the operating model,
integration costs associated with the
acquisition of RAI and factory rationalisations
(in Germany, Russia and APME).
In 2019, the Group also incurred a £436 million
charge in respect of the Quebec Class Action
in Canada, amortisation and impairment of
trademarks and similar intangibles (£481 million),
a charge of £202 million related to an excise
dispute in Russia, impairment of goodwill in
Indonesia (£172 million) and other smoking and
health litigation costs of £236 million, including
Engle progeny in the US.
In 2018, the Group incurred an impairment
of assets in Venezuela due to the accounting
revaluation (related to hyperinflationary
accounting) of £110 million and £178 million
charge due to Engle progeny cases in the US.
In 2019, adjusted profit from operations
grew by 7.6% to £11,130 million or 6.6%
to £11,032 million on a constant currency
basis. This compared to an increase of 38%
in 2018 which was largely driven by the full
year effect of the acquisition of RAI in 2017.
On a representative basis, adjusted profit
from operations at constant rates increased
by 4.0% in 2018.
Analysis of profit from operations, net finance costs and results from associates and joint ventures
Reported
£m
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at CC
£m
Reported
£m
Adjusting
items
£m
2019
4,410
1,753
1,204
1,649
9,016
(1,602)
498
7,912
626
306
638
544
2,114
80
(25)
2,169
5,036
2,059
1,842
2,193
11,130
(1,522)
473
10,081
(238)
43
70
27
(98)
56
(7)
49
4,798
2,102
1,912
2,220
11,032
(1,466)
466
10,032
4,006
1,858
1,544
1,905
9,313
(1,381)
419
8,351
505
90
194
245
1,034
(4)
(32)
998
2018
Adjusted
£m
4,511
1,948
1,738
2,150
10,347
(1,385)
387
9,349
Profit from operations
US
APME
AmSSA
ENA
Total regions
Net finance (costs)/income
Associates and joint ventures
Profit before tax
44
Financial ReviewBAT Annual Report and Form 20-F 2019 Operating margin
Operating margin in 2019 declined by 320
bps to 34.8% as the growth in revenue was
more than offset by continued investment
in the development of New Categories and
the impact of the charges related to Quebec,
Russia, Indonesia, amortisation of trademarks,
other litigation and Quantum as described in
note 3 in the Notes on the Accounts.
In 2018, operating margin 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 New Category portfolio and
restructuring and integration costs incurred.
In 2019, adjusted operating margin grew by
50 bps driven by combustibles pricing and
cost management initiatives, fuelling the
investment into New Categories.
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 New
Categories and inflation on the cost base.
Net finance costs
In 2019, net finance costs increased
£221 million to £1,602 million, largely
driven by higher short-term borrowings
required to fund the timing of payments,
interest on leases recognised under IFRS 16,
working capital movements in the period
and the impact of the translational headwind
on costs due to the relative weakness of
sterling against the US dollar. In 2018, net
finance costs increased by £287 million
to £1,381 million, largely due to the full
year effect of servicing higher level of debt
following the acquisition of RAI.
Operating margin
(%)
34.8%
2019
2018
2017
Adjusted operating margin
(%)
43.1%
34.8%
38.0%
32.8%
2019
2018
2017
Non-GAAP
43.1%
42.6%
41.1%
Definition: Profit from operations as a percentage
of revenue.
Definition: Adjusted profit from operations as a percentage
of adjusted revenue.
In 2018, the Group 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 the
Franked Investment Income Group Litigation
Order (FIIGLO), as discussed on page 147,
(£28 million in 2019 and £25 million in
2018), interest in relation to the Russia excise
dispute (2019: £50 million), a £12 million
charge in 2018 in relation to retrospective
guidance by a tax authority on overseas
withholding tax, the monetary gain in
Venezuela in 2018 and the translation
impact of foreign exchange, adjusted net
finance costs were 5.8% higher in 2019 and
59.2% higher in 2018. The movement in
2018 reflected the full year’s interest charges
following the acquisition of RAI, including
the increased borrowings to finance the
acquisition and the consolidation into the
Group’s accounts of RAI’s borrowings.
The Group’s average cost of debt in 2019
was 3.3%, compared to 3.0% in 2018.
Associates and joint ventures
Associates in 2019 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, increased 19%
to £498 million largely due to improved
operational performance of ITC and the
benefit from lower corporate tax following
the change in rates in India. In 2018, this
was a decline of 98% to £419 million, as
2017 included the results of RAI prior to the
acquisition, after which it was consolidated
as a wholly-owned subsidiary, with 2017
also including the recognition of a gain of
£23.3 billion, which arose as the Group was
deemed, under IFRS, to have disposed of RAI
as an associate in that period.
Excluding the effect of adjusting items,
including a gain arising on the deemed
disposal of part of the Group’s shareholding in
ITC (due to issuances to employee trusts), the
Group’s share of associates and joint ventures
on an adjusted, constant currency basis was
20% higher in 2019, at £466 million. In 2018,
this was a decline of 58.5% to £420 million as
the Group ceased to recognise the results of
RAI as an associate.
Analysis of profit from operations, net finance costs and results from associates and joint ventures
Profit from operations
US
APME
AmSSA
ENA
Total regions
Net finance (costs)/income
Associates and joint ventures
Profit before tax
Reported
£m
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
4,006
1,858
1,544
1,905
9,313
(1,381)
419
8,351
505
90
194
245
1,034
(4)
(32)
998
4,511
1,948
1,738
2,150
10,347
(1,385)
387
9,349
175
151
184
67
577
(30)
33
580
2018
Adjusted
at CC
£m
4,686
2,099
1,922
2,217
10,924
(1,415)
420
9,929
Reported
£m
Adjusting
items
£m
Adjusted
£m
Uplift due
to acq
£m
Adjusted
repres
£m
2017
1,165
1,902
1,648
1,697
6,412
(1,094)
24,209
29,527
763
147
134
473
1,517
205
(23,197)
(21,475)
1,928
2,049
1,782
2,170
7,929
(889)
1,012
8,052
2,502
25
22
29
2,578
4,430
2,074
1,804
2,199
10,507
45
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 INCOME STATEMENT
CONTINUED
Tax
In 2019, the tax charge in the Income
Statement was £2,063 million, compared
to £2,141 million in 2018 and a credit of
£8,129 million in 2017. 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 26.1% in 2019, a charge
of 25.6% in 2018 and a credit of 27.5% in
2017. 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 26.0%
in 2019, 26.4% in 2018 and 29.7% in 2017.
See the section Non-GAAP measures on page
263 for the computation of underlying tax
rates 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 Group by undertaking efficient
management of our tax affairs in line with
the Group’s commercial activity;
– transacting on an arm’s-length basis for
exchanges of goods and services between
companies within the Group; and
– engaging in pro-active discussions with
tax authorities on occasions of differing
legal interpretation.
Where resolution is not possible, tax disputes
may proceed to litigation. The Group seeks
to establish strong technical tax positions.
Where legislative uncertainty exists, resulting
in differing interpretations, the Group seeks to
establish that its position would be more likely
than not to prevail. Transactions between
Group subsidiaries are conducted on arm’s-
length terms in accordance with appropriate
transfer pricing rules and OECD principles.
46
Major taxes paid 2019
(£bn)
£41.4bn
Major taxes paid
Tobacco excise
(collected)
Net VAT and other sales
taxes (collected)
Corporation tax (borne)
Customs and import
duties (borne)
Taxes paid by
employees (collected)
Employment taxes
(borne)
2019
£bn
2018
£bn
32.4 31.1
5.8
2.2
5.9
1.9
0.3
0.3
0.5
0.5
0.2
0.2
41.4 39.9
The movements in deferred tax, taken
through other comprehensive income,
mainly relate to the change in the
valuation of retirement benefits in the year,
as disclosed in note 12 in the Notes on
the Accounts.
The tax strategy outlined above is applicable
to all Group companies, including the UK
Group companies. Reference to tax authorities
includes HMRC.
The publication of this strategy is considered
to constitute compliance with the duty under
paragraph 16(2) Schedule 19 Part 2 of the
UK Finance Act 2016.
The taxation on ordinary activities for 2019
was a charge of £2.1 billion, compared to a
charge of £2.1 billion in 2018 and a credit
of £8.1 billion in 2017. Corporation tax
paid (due to the timing of corporation tax
instalment payments which straddle different
financial years) was £2.2 billion in 2019
(2018: £1.9 billion, 2017: £1.7 billion).
Our tax footprint extends beyond corporation
tax, including significant payment of
employment taxes and other indirect taxes
including customs and import duties.
The Group also collects taxes on behalf
of governments (including tobacco excise,
employee taxes, VAT and other sales taxes).
The total tax paid in 2019 of £41.4 billion
(2018: £39.9 billion, 2017: £37.4 billion)
therefore consists of both taxes borne and
taxes collected as shown in the table provided.
In addition to the major taxes, there are
a host of other taxes the Group bears and
collects such as transport taxes, energy
and environmental taxes, and banking
and insurance taxes.
In 2017, as part of the acquisition of RAI, the
Group acquired the assets and liabilities of the
RAI Companies. These are required to be fair
valued at the date of acquisition. The fair value
of the net assets acquired created a deferred
tax liability, valued at the prevailing rate of
corporation tax at the date of acquisition,
being 25 July 2017. Subsequently, on
22 December 2017, the US federal corporate
tax rate was changed to 21%, effective from
1 January 2018. This revised rate was used
to revalue the deferred tax liability at the
balance sheet date, reducing the liability and
providing a credit to the income statement in
2017 of £9.6 billion. Due to the scale of the
impact, this credit was treated as an adjusting
item in that period.
Deferred tax asset/(liability)
Opening balance
Difference on exchange
Recognised on acquisition of RAI
Impact of US tax reforms
Changes in tax rates
Other (charges)/credits to the income statement
Other credits/(charges) to other comprehensive income
Other movements
Closing balance
2019
£m
2018
£m
2017
£m
(17,432)
680
–
–
47
(55)
138
(4)
(16,626)
(16,796)
(1,011)
–
–
70
304
(7)
8
(17,432)
(216)
852
(27,065)
9,620
–
152
(133)
(6)
(16,796)
Financial ReviewBAT Annual Report and Form 20-F 2019 Diluted earnings per share (EPS)
(p)
IFRS-GAAP
249.0p
-5.4%
2019
249.0p
2018
263.2p
2017
-5%
-86%
1827.60p
+633%
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.
Change in adjusted diluted EPS
(%)
KPI
Non-GAAP
+9.1%
2019
2018
2017
+9%
+5%
+14%
Definition: Change in diluted earnings per share before the
impact of adjusting items.
Change in adjusted diluted EPS
at constant rates (%)
KPI
Non-GAAP
+8.4%
2019
2018
2017
+8%
+12%
+9%
Definition: Change in diluted earnings per share before the
impact of adjusting items and the impact of fluctuations in
foreign exchange rates.
The quarterly dividends will be paid to
shareholders registered on either the UK main
register or the South Africa branch register
and to ADS holders, each on the applicable
record dates.
Under IFRS, the dividend is recognised in
the year that it is approved by shareholders
or, if declared as an interim dividend by
directors, in the period that it is paid.
Following a review of the Group’s 2018
Annual Report and Accounts conducted by
the Financial Reporting Council (FRC), an
error was identified whereby the Group had
previously recognised the interim dividend
that would be paid in the subsequent period
as a liability on the balance sheet. The effect
was to overstate liabilities and reduce equity
by £1.0 billion in 2017 and £1.1 billion in
2018. Assessing the nature of the error, it was
considered to be immaterial by the Directors
as it did not affect the primary users of the
financial statements (see page 130) as there
was no impact to the amount or timing of the
dividends received.
In 2019, the Group revised the recognition
of the dividend in the accounts to be in
accordance with IFRS. The 2019 Statement
of Changes in Equity reflects the remaining
three quarterly dividends that were paid
in the period, which, in total amount to
£3,476 million (2018: £4,463 million).
The cash flow, prepared in accordance
with IFRS, reflects the total cash paid in the
period. Further details of the total amounts
of dividends paid in 2019 (with 2018
comparatives) are given in note 18 in the
Notes on the Accounts.
Dividends are declared and payable in sterling
except for those shareholders on the branch
register in South Africa, where dividends are
payable in rand. The equivalent dividends
receivable by holders of ADSs in US dollars are
calculated based on the exchange rate on the
applicable payment date.
Further details of the quarterly dividends
and key dates are set out under ‘Shareholder
information’ on pages 300 and 301.
Earnings per share
Profit for the year was £5,849 million, a
5.8% decline compared to £6,210 million
in 2018 (itself a decline of 84% on 2017).
The movement in 2019 was driven by the
recognition of charges in relation to Quebec,
Russia, Indonesia, the impairment of acquired
brands, other litigation charges, Quantum
and higher net finance costs, as previously
discussed, which more than offset an increase
in revenue across all product categories.
The movement in 2018 was largely due
to accounting gains in 2017 related to the
acquisition of RAI and the deferred tax credit
arising from the US tax reform, which both
arose in the prior year.
Consequently, and after accounting for
the movement in non-controlling interests
in the year, basic earnings per share were
5.4% lower at 249.7p (2018: 264.0p,
2017: 1,833.9p). After accounting for the
dilutive effect of employee share schemes,
diluted earnings per share were 249.0p,
5.4% lower than 2018 (2018: 263.2p,
2017: 1,827.6p).
Earnings per share are impacted by
the adjusting items discussed above.
Adjusted diluted EPS, as calculated in note
7 in the Notes on the Accounts, was up
against the prior year by 9.1% at 323.8p,
with 2018 ahead of 2017 by 5.2% at 296.7p.
Adjusted diluted EPS at constant rates would
have been 8.4% ahead of 2018 at 321.6p,
with 2018 up 11.8% against 2017.
Dividends
The Group pays its dividends to shareholders
over four quarterly interim dividends.
Quarterly dividends provide shareholders with
a more regular flow of dividend income and
allow the Company to spread its substantial
dividend payments more evenly over the
year. The dividends align better with the
cash flow generation of the Group and so
enable the Company to fund the payments
more efficiently.
The Board has declared an interim dividend
of 210.4p per ordinary share of 25p, payable
in four equal quarterly instalments of 52.6p
per ordinary share in May 2020, August
2020, November 2020 and February 2021.
This represents an increase of 3.6% on 2018,
(2018: 203.0p per share), and a payout ratio,
on 2019 adjusted diluted earnings per share,
of 65.0% (2018: 68.4%).
The discussion of 2017 results that are not necessary to an understanding of the Group’s
financial condition, changes in financial condition and results of operations is excluded from
this Financial Review in accordance with applicable US Securities laws. Discussion of such
2017 metrics is contained in the Group’s Annual Report on Form 20-F 2018, which is
available at bat.com/annualreport and has been filed with the SEC. Information contained
in pages 33 to 47 of the Annual Report on Form 20-F 2018 are accordingly incorporated
by reference into this Annual Report on Form 20-F 2019 only to the extent such information
pertains to the Group’s financial condition and results of operations for the fiscal year ended
31 December 2017.
47
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 TREASURY AND
CASH FLOW
Treasury, liquidity and
capital structure
The Treasury Function is responsible for
raising finance for the Group and managing
the Group’s cash resources and the financial
risks arising from underlying operations.
Clear parameters have been established,
including levels of authority, on the type
and use of financial instruments to manage
the financial risks facing the Group.
Such instruments are only used if they relate
to an underlying exposure; speculative
transactions are expressly forbidden under
the Group’s treasury policy. All these activities
are carried out under defined policies,
procedures and limits, reviewed and approved
by the Board, delegating oversight to the
Finance Director and Treasury Function.
See note 22 in the Notes on the Accounts
for further detail.
It is the policy of the Group to maximise
financial flexibility and minimise refinancing
risk by issuing debt with a range of maturities,
generally matching the projected cash flows
of the Group and obtaining this financing
from a wide range of sources. The Group
targets an average centrally managed
debt maturity of at least five years with
no more than 20% of centrally managed
debt maturing in a single rolling year. As at
31 December 2019, the average centrally
managed debt maturity was 9.1 years
(2018: 8.8 years) and the highest proportion
of centrally managed debt maturing in a
single rolling 12-month period was 18.6%
(2018: 18.4%).
The only externally imposed capital
requirement the Group has is in respect of its
centrally managed banking facilities, which
require a gross interest cover of 4.5 times.
The Group targets a gross interest cover,
as calculated under its key central banking
facilities, of greater than 5 times. For 2019,
it was 7.1 times (2018: 7.2 times).
In order to manage its interest rate risk, the
Group maintains both floating rate and fixed
rate debt. The Group sets targets (within overall
guidelines) for the desired ratio of floating to
fixed rate debt on a net basis (at least 50% fixed
on a net basis in the short to medium term).
At 31 December 2019, the relevant ratios of
floating to fixed rate borrowings were 18:82
(2018: 21:79) on a net basis.
As part of the management of liquidity, funding
and interest rate risk, the Group regularly
evaluates market conditions and may enter into
transactions, from time to time, to repurchase
outstanding debt, pursuant to open market
purchases, tender offers or other means.
The Group has early adopted the Amendments
to IFRS 9 Financial Instruments in respect of the
Interest Rate Benchmark Reform as a result of the
UK Financial Conduct Authority’s announcement
on 27 July 2017.
48
Considering the relevant hedge relationships
impacted by these amendments, as at
31 December 2019, the Group has floating rate
borrowings with nominal value £1,929 million
and US$750 million (£566 million) that are due
to mature in January 2022 and August 2022,
respectively.
In relation to the Group’s floating rate
borrowings and hedge instruments, there is
exposure to uncertainty arising from changes
in the USD LIBOR, EURIBOR and GBP LIBOR
benchmarks. The Group believes that its
contracts with interest rates based on these
benchmarks adequately provide for alternate
calculations of interest in the event that they
are unavailable. The Group believes that any
resulting ineffectiveness consequent to the
Interest Rate Benchmark Reform is likely to be
immaterial. Although these calculations may
cause an administrative burden, the Group
does not believe that these would materially
adversely affect the Group or its ability to
manage its interest rate risk.
The Group continues to maintain
investment-grade credit ratings*, with ratings
from Moody’s/S&P at Baa2 (stable outlook)/
BBB+ (stable outlook), respectively, with a
medium-term rating target of Baa1/BBB+.
The strength of the ratings has underpinned
debt issuance and the Group is confident of
its ability to successfully access the debt capital
markets. All contractual borrowing covenants
have been met and these covenants are not
expected to inhibit the Group’s operations
or funding plans.
The Group maintains a two-tranche £6 billion
revolving credit facility. This consists of a
£3 billion 364-day revolving credit facility
(which, in July 2019, was extended to mature
in July 2020) and a £3 billion revolving credit
facility maturing in 2021. On 12 March 2020,
the Group refinanced the existing two-
tranche £6 billion revolving credit facility with
a new two-tranche £6 billion revolving credit
facility. This consists of a £3 billion 364-day
tranche (with two one-year extension options
and a one-year term-out option), and a
£3 billion five-year tranche (with two one-year
extension options).
In July 2019, the Group also arranged short-
term bilateral facilities with some of its core
banks for a total amount of £745 million.
The Group also maintains a £25 billion
EMTN programme, and US (US$4 billion)
and European (£3 billion) commercial paper
programmes to accommodate the liquidity
needs of the Group.
At 31 December 2019, the revolving credit
facility was undrawn (2018: undrawn)
with £1,056 million of commercial paper
outstanding (2018: £536 million).
In July 2019, the Group filed a shelf registration
statement on Form F-3 with the SEC pursuant
to which B.A.T Capital Corporation and B.A.T.
International Finance p.l.c. may issue debt
securities guaranteed by certain members of
the Group from time to time. This forms part of
the Group’s strategy to ensure flexible and agile
access to capital markets and the registration
statement is initially valid for three years.
Management believes that the Group
has sufficient working capital for present
requirements, taking into account the
amounts of undrawn borrowing facilities
and levels of cash and cash equivalents,
and the ongoing ability to generate cash.
Cash flow
Net cash generated from
operating activities
In 2019, net cash generated from operating
activities declined by £1,299 million (or
12.6%) largely due to the timing of part
of the 2018 MSA payment (£1.4 billion)
which was paid in 2017 and due to working
capital movements, particularly in Australia
where the payment terms related to excise
were changed in the year, removing bonded
warehousing and increasing inventory values.
In 2018, net cash generated from operating
activities increased by £4,948 million to
£10,295 million, principally due to the
full year effect from RAI, compared to
approximately five months’ contribution to
2017, the timing of payments related to the
MSA in the US and an increase in debtor
factoring by approximately £300 million.
These more than offset a reduction in
dividends from associates following the
acquisition of RAI. Other movements include:
– the increase in inventory in 2018 was
predominantly related to the timing of
leaf purchases and inventory movements
in Romania, Turkey and Russia;
– the increase in trade and other payables
was driven by higher excise payables which
are impacted by the timing of inventory
movements in the supply chain; and
– the final quarterly payments in relation
to the Quebec Class Action in 2017.
Net cash used in investing activities
In 2019, net cash used in investing activities
declined by £382 million to £639 million
(2018: £1,021 million), largely due to a
net inflow of £148 million from short-term
investment products, including treasury
bills (2018: £153 million net outflow) and
a reduction in purchases of property, plant
and equipment of £94 million.
* A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal
or revision at any time. Each rating should be evaluated separately of any other rating.
Financial ReviewBAT Annual Report and Form 20-F 2019 Included within investing activities is
gross capital expenditure which includes
purchases of property, plant and equipment
and certain intangibles. This includes the
investment in the Group’s global operational
infrastructure (including, but not limited to,
the manufacturing network, trade marketing
software and IT systems). In 2019, the Group
invested £807 million, a decrease of 8.6%
on the prior year (2018: £883 million).
The Group expects gross capital expenditure
in 2020 of £650 million, mainly related
to the ongoing investment in the Group’s
operational infrastructure including the
expansion of our New Categories portfolio.
Net cash used in financing activities
Net cash used in financing activities was
an outflow of £8,593 million in 2019
(2018: £9,630 million outflow).
The 2019 outflow was mainly due to the
repayment (at maturity) or early redemption
(as part of the Group’s liquidity management
strategy) of bonds in the year totalling
£5.1 billion, discussed below. This more
than offset the inflow from the four bonds
issued (totalling US$3.5 billion or £2.7 billion)
in September 2019, following the shelf
registration in the US referred to on page
48. The 2019 outflow also included the
increased dividend payment of £4,598 million
(2018: £4,347 million) due to the higher
dividend per share and interest paid in the
year of £1,601 million (2018: £1,557 million).
Summary cash flow
In March and June 2019, the Group repaid
€820 million and US$750 million of bonds
at maturity, respectively.
As part of the liquidity management strategy,
the Group redeemed, prior to their maturity
in 2020, US$2.25 billion and US$1.25 billion
of bonds in September 2019 and November
2019, respectively. The Group also repaid
US$650 million of bonds (in September 2019)
and £500 million of bonds (in December
2019) at maturity.
The 2018 outflow was also due to the
payment of a €0.4 billion bond (in
March 2018) and three bonds totalling
US$2.5 billion (in June 2018) at maturity,
the repayment of £0.6 billion, under the
revolving credit facility and £1.2 billion of
commercial paper outstanding in each case
at 31 December 2017.
Eight series of US$ denominated bonds
totalling US$17.25 billion were issued in
August 2017 pursuant to Rule 144A with
registration rights, whereby the Group
committed to investors that the bonds
would be exchangeable for registered notes.
In October 2018, investors were offered
to exchange their unregistered bonds for
registered bonds in line with the registration
rights. The exchange offer was completed
in November 2018 with 99.7% of the
bonds exchanged.
Cash generated from operations
Dividends received from associates
Tax paid
Net cash generated from operating activities
Net cash used in investing activities
Net cash (used in)/from financing activities
Differences on exchange
(Decrease)/increase in net cash and cash equivalents
2019
£m
10,948
252
(2,204)
8,996
(639)
(8,593)
(57)
(293)
2018
£m
11,972
214
(1,891)
10,295
(1,021)
(9,630)
(138)
(494)
2017
£m
6,119
903
(1,675)
5,347
(18,544)
14,759
(391)
1,171
@Reconciliation of net cash generated from operating activities
to free cash flow and adjusted cash generated from operations@
Net cash generated from operating activities
Dividends paid to non-controlling interests
Net interest paid
Net capital expenditure
Trading loans to third party
Other
Free cash flow
Net cash impact of adjusting items
Dividends and other appropriations from associates
Adjusted cash generated from operations
2019
£m
8,996
(157)
(1,550)
(774)
4
–
6,519
564
(252)
6,831
2018
£m
10,295
(142)
(1,533)
(845)
(93)
2
7,684
601
(214)
8,071
2017
£m
5,347
(167)
(1,004)
(767)
101
(10)
3,500
685
(903)
3,282
Free cash flow (before and after
dividends paid to shareholders)@
Free cash flow (before dividends paid to
shareholders), as defined on page 266,
was £6,519 million, a decrease of 15%
on the prior year (2018: £7,684 million;
2017: £3,500 million). This movement
was driven by the timing of the 2018 MSA
payment (brought forward to 2017) which
impacts the comparator periods and more
than offsets the enhanced delivery across the
remainder of the Group.
After payment of dividends to shareholders,
free cash flow was £1,921 million
(2018: £3,337 million; 2017: £35 million).
2018 was also impacted by the full year
inclusion of results from RAI, which led to
higher interest payments and a reduction in
dividends from associates (due to the change
in accounting recognition of RAI in 2017).
Adjusted cash generated from
operations (Adjusted CGFO)@
Adjusted CGFO is defined on page 265.
Adjusted CGFO was £6,831 million, a
decrease of 15% (2018: £8,071 million,
2017: £3,282 million), or 16% at constant
rates of exchange. The decrease in
2019 was driven by the timing of the
2018 MSA payment, paid in 2017 as it was
tax deductible at 2017 tax rates.
Excluding the timing impact of this payment,
adjusted cash generated from operations
would have increased by 1.2% in 2019 and
43%, in 2018. See page 265 for further
information on this measure.
Cash flow conversion
The conversion of profit from operations to
net cash generated from operating activities
may indicate the Group’s ability to generate
cash from the profits earned. Based upon
net cash generated from operating activities,
the Group’s conversion rate decreased from
111% to 100% in 2019. This was largely due
to the timing of the payment for the MSA
in December 2017 (positively impacting
2018 conversion).
@Operating cash flow conversion ratio
(based upon adjusted profit from operations)
decreased in 2019 to 97% from 113% in
2018, as 2018 was positively impacted
by the timing of the MSA payment which
was brought forward to December 2017.
Normalising for this timing difference in
both 2018 and 2017, the operating cash
flow conversion ratio would have been
97% in 2019 and 100% in 2018, reflecting
the Group’s ability to deliver cash from the
operating performance of the business.
See page 264 for further information on
this measure.
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
49
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 TREASURY AND CASH FLOW
CONTINUED
Borrowings and net debt
Total borrowings decreased to £45,366 million
in 2019 (2018: £47,509 million) largely due
to the repayment of borrowings in the year,
driven by the cash flow generated by the
business and a foreign exchange tailwind of
£1,566 million, partly offset by the recognition
of lease liabilities under IFRS 16 (£607 million),
which are included in ‘borrowings’ and the
payment of dividends to shareholders in the
period. The 4% decrease in 2018 was largely
due to the repayment, on maturity, of a
€400 million bond in March 2018 and three
bonds totalling US$2,500 million in June 2018.
Total borrowings includes £848 million
(31 December 2018: £944 million) in respect
of the purchase price adjustments related to
the acquisition of RAI.
As discussed on page 48, the Group remains
confident about its ability to access the debt
capital markets successfully and reviews its
options on a continuing basis.
Net debt is a non-GAAP measure and is
defined as total borrowings, including related
derivatives, less cash and cash equivalents and
current investments held at fair value.
Net debt, at 31 December 2019, was
£42,574 million (2018: £44,351 million;
2017: £45,571 million), with the movement
in net debt largely due to the repayment
of the outstanding bonds and a foreign
exchange benefit of £873 million largely
due to the movement of US$ to sterling
(2018: £1,963 million headwind).
@The movement in net debt also includes
the free cash flow before dividends
earned in the year (2019: £6,519 million;
2018: £7,684 million) as described on page
49. This is partly offset by dividends paid
to owners of the parent of £4,598 million
(2018: £4,347 million).@
Adjusted net debt
to adjusted EBITDA
The Group uses adjusted net debt to adjusted
EBITDA, as defined on page 267, to assess
its level of adjusted net debt in comparison
to the earnings generated by the Group.
This is deemed by management to reflect
the Group’s ability to service and repay
borrowings. In 2019, the ratio of adjusted
net debt to adjusted EBITDA was 3.5 times,
representing an improvement from 4.0 times
at the end of 2018. The improvement in
2018 from 5.3 times in 2017 was due to the
additional adjusted net debt arising as part
of the acquisition of RAI in 2017, with only
five months of RAI contribution to adjusted
EBITDA recognised in that year.
The Group’s adjusted net debt to adjusted
EBITDA ratio is subject to the fluctuations
in the foreign exchange market by virtue of
the Group’s foreign currency denominated
earnings and the exposure of the debt
portfolio to, predominantly, the US dollar.
In 2019, due to the relative movement in the
US dollar against sterling, the sterling value of
adjusted net debt declined by £873 million.
Excluding the impact of foreign exchange
on the Group’s reported results, adjusted
net debt to adjusted EBITDA declined 0.4x
in 2019 (2018: decline 0.4x) on a constant
rate basis.
Refer to page 267 for a full reconciliation from
borrowings to adjusted net debt, profit for
the year to adjusted EBITDA and the ratio of
adjusted net debt to adjusted EBITDA, at both
current and constant rates of exchange.
@Return on capital employed
(ROCE)
The Group’s ROCE, calculated in accordance
with our reported numbers was 7.1%
(2018: 7.3%) with the reduction partly
due to the lower profit from operations,
discussed earlier.
Reconciliation of total borrowings to adjusted net debt
Total borrowings
Derivatives in respect of net debt:
– assets
– liabilities
Cash and cash equivalents
Current investments held at fair value
Net debt
Purchase price adjustment (PPA) to RAI debt
Adjusted net debt
50
2019
£m
2018
£m
2017
£m
45,366
47,509
49,450
(527)
384
(2,526)
(123)
42,574
(848)
41,726
(647)
269
(2,602)
(178)
44,351
(944)
43,407
(640)
117
(3,291)
(65)
45,571
(947)
44,624
On an adjusted basis, as defined on page
268, including dividends from associates and
joint ventures (as a proxy to a return in the
period, given the inclusion of the investment
in associates and joint ventures in the Group’s
calculation of capital employed), adjusted
ROCE grew from 8.3% in 2018 to 9.0%
in 2019. This was partly due to the higher
adjusted profit from operations in the year
and foreign exchange tailwind reducing
average capital employed largely due to the
relative value of US$ to sterling. In 2018,
adjusted ROCE declined from 11.5% in 2017
to 8.3%, largely due to higher average capital
employed in 2018 following the acquisition
of RAI in 2017 and translational foreign
currency headwinds.@
Retirement benefit schemes
The Group’s subsidiaries operate over 190
retirement benefit arrangements worldwide.
The majority of the scheme members
belong to defined benefit schemes, most
of which are funded externally and many
of which are closed to new entrants.
The Group also operates a number of defined
contribution schemes.
The present total value of funded scheme
liabilities as at 31 December 2019 was
£11,726 million (2018: £11,317 million),
while unfunded scheme liabilities amounted
to £1,135 million (2018: £1,106 million).
The schemes’ assets declined to
£11,925 million in 2018 (largely due to
actuarial losses of £531 million) and declined
to £11,860 million in 2019, partly due to the
pension buy-in in the UK (discussed on page
159). After excluding unrecognised scheme
surpluses of £28 million (2018: £20 million),
the overall net liability for all pension and
healthcare schemes in Group subsidiaries
amounted to £1,029 million at the end of
2019, compared to £518 million at the end
of 2018. Contributions to the defined benefit
schemes are determined after consultation
with the respective trustees and actuaries of
the individual externally funded schemes,
taking into account regulatory environments.
Litigation and settlements
As discussed in note 27 in the Notes on the
Accounts, various legal proceedings or claims are
pending or may be instituted against the Group.
Government activity
The marketing, sale, taxation and use of
tobacco products have been subject to
substantial regulation by government and
health officials for many years. For information
about the risks related to regulation,
see page 59 and pages 276 to 281.
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
Financial ReviewBAT Annual Report and Form 20-F 2019
OTHER
Off‑balance sheet arrangements
and contractual obligations
Except for certain indemnities, the Group has
no significant off-balance sheet arrangements.
The Group has contractual obligations to
make future payments on debt guarantees.
In the normal course of business, it enters
into contractual arrangements where
the Group commits to future purchases
of goods and services from unaffiliated
and related parties. See page 270 for a
summary of the contractual obligations
as at 31 December 2019.
Accounting policies
The application of the accounting standards
and the accounting policies adopted by the
Group are set out in the Group Manual of
Accounting Policies and Procedures (GMAPP).
GMAPP includes the Group instructions in
respect of the accounting and reporting of
business activities, such as revenue recognition,
asset valuations and impairment testing,
adjusting items, the accrual of obligations and
the appraisal of contingent liabilities, which
include taxes and litigation. Formal processes
are in place whereby central management and
end-market management confirm adherence
to the principles and the procedures and to the
completeness of reporting. Central analyses
and revision of information are also performed
to ensure and confirm adherence.
In order to prepare the Group’s consolidated
financial information in accordance with
IFRS, management has used estimates
and assumptions that affect the reported
amounts of revenue, expenses, assets and the
disclosure of contingent liabilities at the date
of the financial statements.
The critical accounting estimates are described
in note 1 in the Notes on the Accounts
and include:
– review of asset values, including goodwill
and impairment testing;
– estimation and accounting for retirement
benefit costs; and
– estimation of provisions, including as related
to taxation and legal matters.
Foreign exchange rates
The critical accounting judgements are
described in note 1 in the Notes on the
Accounts and include:
– identification and quantification of
adjusting items;
– determination as to whether to recognise
provisions and the exposures to contingent
liabilities related to pending litigation or
other outstanding claims;
– determination that an error, identified
following a review by the FRC (and
discussed on page 175) was immaterial and
did not require restatement of the prior
periods as, whilst the effect was to overstate
liabilities and reduce equity by £1.0 billion
in 2017 and £1.1 billion in 2018, it did
not affect the primary users of the financial
statements (see page 175) as there was
no impact to the amount or timing of the
dividends received;
– determination as to whether control
(subsidiaries), joint control (joint
arrangements), or significant influence
(associates) exist in relation to investments
held by the Group; and
– review of applicable exchange rates for
transactions with and translation of entities
in territories where there are restrictions
on the free access to foreign currency
or multiple exchange rates.
Accounting developments
Other than as stated below, there were no
further material changes to the accounting
standards applied in 2019 from those applied
in 2018.
IFRS 9 Financial Instruments and IFRS 15
Revenue from Contracts with Customers became
effective from 1 January 2018, and the impact
of these changes is also disclosed in note 1 in
the Notes on the Accounts.
IFRS 16 Leases was published in January 2016
with a mandatory effective date of 1 January
2019. The effect is that virtually all leasing
arrangements are brought on to the balance
sheet as financial obligations and ‘right-of-use’
assets. The impact of applying the Standard to
the Group’s reported profit in 2019, 2018 or
2017 would not have been material.
Australian dollar
Brazilian real
Canadian dollar
Euro
Indian rupee
Japanese yen
Russian rouble
South African rand
US dollar
Average
Closing
2019
2018
2017
2019
2018
2017
1.836
5.035
1.694
1.140
89.898
139.234
82.623
18.437
1.277
1.786
4.868
1.730
1.130
91.227
147.376
83.677
17.643
1.335
1.681
4.116
1.672
1.142
83.895
144.521
75.170
17.150
1.289
1.885
5.329
1.718
1.180
94.558
143.967
82.282
18.525
1.325
1.809
4.936
1.739
1.114
88.916
139.733
88.353
18.321
1.274
1.730
4.487
1.695
1.127
86.343
152.387
77.880
16.747
1.353
Foreign exchange rates
The principal exchange rates used to convert
the results of the Group’s foreign operations
to sterling, for the purposes of inclusion and
consolidation within the Group’s financial
statements, are indicated in the table below.
Where the Group has provided results at
constant rates of exchange this refers to the
translation of the results from the foreign
operations at rates of exchange prevailing
in the prior period – thereby eliminating the
potentially distorting impact of the movement
in foreign exchange on the reported results.
Going concern
A description of the Group’s business
activities, its financial position, cash flows,
liquidity position, facilities and borrowings
position, together with the factors likely to
affect its future development, performance
and position, are set out in this Annual Report
and Form 20-F.
The key Group risks include analyses of
financial risk and the Group’s approach
to financial risk management. Notes 19 and
22 in the Notes on the Accounts provide
further detail on the Group’s borrowings
and management of financial risks.
The Group has, at the date of this report,
sufficient existing financing available for its
estimated requirements for at least the next
12 months. This, together with the ability
to generate cash from trading activities,
the performance of the Group’s Strategic
Portfolio, its leading market positions
in a number of countries and its broad
geographical spread, as well as numerous
contracts with established customers and
suppliers across different geographical areas
and industries, provides the Directors with the
confidence that the Group is well placed to
manage its business risks successfully in the
context of current financial conditions and
the general outlook in the global economy.
After reviewing the Group’s annual budget,
plans and financing arrangements for the next
three years, the Directors consider that the
Group has adequate resources to continue
operating and that it is therefore appropriate
to continue to adopt the going concern
basis in preparing the Annual Report and
Form 20-F.
51
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 REGIONAL REVIEW
Operational growth demonstrates inherent business model
strength in all regions – offset by short-term headwinds
UNITED
STATES
AMERICAS AND
SUB‑SAHARAN AFRICA
Volume
Volume
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
Vapour (10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
2019
units
73
–
73
vs 2018
%
-6.0%
–
-6.0%
103
–
112
8
-6.2%
–
–
-1.5%
2018
units
77
–
77
109
–
–
8
vs 2017
%
-5.3%
–
-5.3%
+36.0%
–
–
-2.3%
2017
units
82
–
82
80
–
–
8
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
2019
units
152
2
154
vs 2018
%
-3.1%
-8.2%
-3.1%
2018
units
157
2
159
vs 2017
%
-5.4%
-17.4%
-5.6%
Vapour (10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
14
–
8
–
+191%
n/m
n/m
n/m
5
–
–
–
n/m
n/m
n/m
n/m
* Other combustibles includes MYO/RYO
* Other combustibles includes MYO/RYO
Revenue
Revenue
2019
£m
9,078
vs 2018
%
+8.6%
vs 2018
(adj at cc)
%
2018
£m
+3.8% 8,358
vs 2017
%
+128%
1
9
n/m
207 +12.4%
+7.4%
-7.7% -11.7%
n/m
217 +17.1% +11.9%
+9.5%
26 -21.2% -27.1%
184
1
–
185
919
34
+4.4% 9,495
1,052 +14.5%
10,373
+9.2%
+149%
–
–
+149%
+129%
+88%
+128%
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
vs 2017
(adj
repres
at cc)
%
+0.8%
+20%
–
–
+20%
+7.1%
-28%
+1.5%
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
2019
£m
3,992
vs 2018
%
+2.7%
vs 2018
(adj at cc)
%
2018
£m
+8.5% 3,886
vs 2017
%
-4.9%
–
1
n/m
n/m
43 +120% +117%
n/m
n/m
44 +119% +116%
n/m
225 +10.2% +13.1%
20
–
–
20
–
205
+9.2% 4,111
n/m
–
4,261
+3.6%
n/m
n/m
n/m
n/m
n/m
-14%
-4.9%
Profit from operations/Operating margin
Profit from operations/Operating margin
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
2018
£m
vs 2017
%
vs 2017
(adj
repres
at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
2018
£m
vs 2017
%
2017
units
166
3
169
–
–
–
–
vs 2017
(adj
repres
at cc)
%
+5.3%
n/m
n/m
n/m
n/m
n/m
+1.0%
+5.6%
vs 2017
(adj
repres
at cc)
%
4,410 +10.1%
+6.4% 4,006
+244% +5.8%
42.5% +30 bps
42.2% +1,420 bps
Profit from
operations
Operating
margin (%)
1,204
-22.0% +10.0% 1,544
-6.3%
+6.5%
28.3% -930 bps
37.6% -60 bps
Profit from
operations
Operating
margin (%)
52
Financial ReviewBAT Annual Report and Form 20-F 2019 EUROPE AND
NORTH AFRICA
ASIA‑PACIFIC AND
MIDDLE EAST
Volume
Volume
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
Vapour (10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
2019
units
230
17
247
108
1.1
1,071
1
vs 2018
%
-6.3%
-7.9%
-6.4%
+44%
+334%
+157%
+8.3%
2018
units
246
18
264
75
–
414
1
vs 2017
%
-5.3%
-8.2%
-5.6%
+26.3%
n/m
+108%
+23.3%
2017
units
260
19
279
59
–
199
1
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
Vapour (10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
2019
units
213
2
215
1
8
3
–
vs 2018
%
-3.7%
+1.5%
-3.7%
n/m
+20.1%
n/m
n/m
2018
units
221
2
223
–
7
–
–
vs 2017
%
-1.3%
+10.4%
-1.2%
n/m
+208%
n/m
n/m
2017
units
224
2
226
–
2
–
–
* Other combustibles includes MYO/RYO
* Other combustibles includes MYO/RYO
Revenue
Revenue
2019
£m
5,544
vs 2018
%
-0.7%
vs 2018
(adj at cc)
%
2018
£m
+3.0% 5,585
vs 2017
%
-3.1%
vs 2017
(adj
repres
at cc)
%
+3.3%
147 +29.2% +30.1%
56 +200% +200%
116 +234% +246%
319 +91.0% +93.6%
29 +33.4% +38.5%
198 -14.2% -14.3%
114
19
34
167
22
230
+5.0% 6,004
6,090
+1.4%
+22%
n/m
+15%
n/m
+139% +146%
+48%
+55%
+58%
+51%
+4.3% -14.1%
+3.5%
-1.7%
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
2019
£m
4,387
vs 2018
%
+3.4%
vs 2018
(adj at cc)
%
2018
£m
+4.4% 4,243
vs 2017
%
-8.9%
vs 2017
(adj
repres
at cc)
%
-1.2%
–
–
4 +906% +902%
545
671 +23.2% +16.8%
–
–
–
545
675 +23.9% +17.5%
–
–
–
-6.9%
-3.5%
94
+5.6% 4,882
+5.6%
–
91
5,153
n/m
n/m
+170% +175%
n/m
+170% +175%
n/m
-20%
-1.8%
-14%
+5.7%
Profit from operations/Operating margin
Profit from operations/Operating margin
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
2018
£m
vs 2017
%
vs 2017
(adj
repres
at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
2018
£m
vs 2017
%
vs 2017
(adj
repres
at cc)
%
Profit from
operations
Operating
margin (%)
1,649
-13.4%
+3.3% 1,905
+12.3%
+0.8%
27.1% -460 bps
31.7% +390 bps
Profit from
operations
Operating
margin (%)
1,753
-5.7%
+7.9% 1,858
-2.3%
+1.2%
34.0% -410 bps
38.1% -20 bps
53
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 REGIONAL REVIEW
CONTINUED
UNITED STATES
COMBUSTIBLES PRICING
DRIVES STRONG
REVENUE GROWTH
Ricardo Oberlander
President and CEO (RAI)
Volume and share
The cigarette industry volume was estimated
to be 5.3% lower than 2018, with 2018 down
4.5% on 2017. In 2019, this was largely due
to the growth of vapour and the timing and
frequency of pricing in the year. In 2018, the
decline was largely driven by the impact of
higher fuel prices on disposable income, the
growth of the vapour category and the full
year effect of the change in excise in 2017
in California.
Total cigarette value share increased 30 bps
(2018: up 25 bps) with volume share from the
strategic cigarette portfolio up 20 bps (2018:
up 10 bps) driven by Newport and Natural
American Spirit (which combined to drive
premium volume share up 50 bps; 2018:
up 30 bps). This was partly offset by Pall
Mall. Total cigarette volume share was down
10 bps as the strategic cigarette portfolio
performance was more than offset by declines
across the remainder of the portfolio.
In 2019, cigarette volume from the US business
was 73 billion sticks, a decline of 6.0% on
2018, largely driven by the market contraction.
In 2018, cigarette volume was 77 billion sticks,
an increase of 118% due to the recognition of a
full year’s volume from RAI. On a representative
basis, this was 5.3% lower than in 2017.
In vapour, the Vuse portfolio performed well
as the category faced a number of challenges
in the US. Alto vapour value share increased
to 15.4% in December 2019. This drove an
increase in the total Vuse value share to 21.2%
in December 2019 (December 2018: 12.5%),
despite a 6.2% decline in consumable
volume, which had grown 36% in 2018 (due
to the impact of a product recall on the Vibe
variant due to an isolated issue with batteries
in 2018).
Value share of Traditional Moist Oral increased
80 bps, largely due to the performance of
Grizzly, with total volume share of moist up 10
bps. Total volume of Traditional Oral declined
1.5% (2018: down 2.3% on a representative
basis). 2018 volume was down on a
representative basis as 2017 benefited from a
competitor’s product recall in 2017.
In the Modern Oral category, Velo was rolled
out to over 100,000 retail outlets, achieving
a category volume share of 10.1% in
December 2019.
54
Revenue
Reported revenue increased 9.2% to
£10,373 million (2018: £9,495 million, an
increase on 2017 of 128%), with growth
across all categories (discussed below)
and a favourable currency tailwind due
to the relative strength of the US dollar
against sterling of approximately 5%.
The 2018 movement was largely due to
the 12-month inclusion of results from RAI,
compared to approximately five months
in 2017.
Excluding the impact of currency on the
reported results, adjusted revenue on a
constant currency basis was up 4.4% on
2018, with 2018 up 1.5% on 2017 on a
constant currency, representative basis.
In 2019, revenue from combustibles grew
8.6% as pricing led to an increase in price/mix
on cigarettes of 10%. This more than offset
a decline in cigarette volume. In 2018, this
was a growth of 128%, due to the full year
effect of the RAI acquisition. On a constant
currency and, in 2018, representative basis,
combustibles grew 3.8% in 2019 and 0.8%
in 2018.
In 2019, revenue from vapour grew by 12.4%
to £207 million, driven by the success of Alto.
In 2018, this was an increase of 149% to
£184 million. On a constant currency and, in
2018, representative basis, vapour revenue
grew 7.4% in 2019 and 20% in 2018.
In 2019, revenue from Traditional Oral grew
14.5% to £1,052 million, or 9.5% on a constant
currency basis, as pricing more than offset
a decline in volume. In 2018, revenue from
Traditional Oral was up 129% on 2017, driven
by the full year effect of the RAI acquisition. On a
constant currency, representative basis, this was
an increase of 7.1%.
In 2019, following the national roll-out of
Velo, revenue from Modern Oral reached
£9 million. There was no equivalent revenue
in 2018 or 2017.
Profit from operations
Reported profit from operations was
£4,410 million, an increase of 10.1% on
2018. This was due to the growth in revenue
and lower MSA charges in the year which
more than offset an increase in marketing
investment behind New Categories.
The performance also benefited from
efficiencies delivered since the acquisition
of RAI, with total annualised savings of
over US$400 million fully realised by the
end of 2019, a year ahead of the Group’s
initial schedule. In 2018, revenue was
£4,006 million, an increase of 244% on 2017,
largely due to the full year’s inclusion in the
Group’s results.
Excluding adjusting items related to litigation
(including Engle), the impairment of certain
acquired brands including VapeWild,
Quantum and the impact of currency on
the Group’s results, adjusted profit from
operations grew 6.4% to £4,798 million on a
constant currency basis. In 2018, this was an
increase, after adjusting for the impact of the
acquisition in 2017, of 5.8%. These increases
reflect the growth in revenue from the
portfolio and cost reductions since the
acquisition of RAI.
Regulatory environment
The Group continues to welcome reasonable
regulation that supports the use of our
products by adults. In December 2019, an
amendment to the Federal Food, Drug,
and Cosmetic Act (as enforced by the FDA)
was signed into law that increased the
federal minimum legal age to purchase
tobacco products from 18 to 21. It is our
understanding that approximately 40% of
industry cigarette volume is sold in states
where the legal age to acquire tobacco
was already over 21 prior to the beginning
of 2019.
On 2 January 2020, the US FDA announced
that all flavoured cartridges/pods (excluding
menthol and tobacco flavours) must be
withdrawn until they have cleared through
the Premarket Tobacco Application (PMTA)
process. A Group subsidiary in the US has
submitted a PMTA covering 15 products.
On 2 November, a letter from the US FDA was
received, accepting the Vuse SOLO PMTAs for
substantive scientific review. The Group believes
it is well positioned to submit applications for the
remaining Vuse portfolio and a range of flavours
by 12 May 2020. It is expected that, as required
by the PMTA process to remain on the market,
these will be shown to be appropriate for the
protection of public health. There is no intention
to submit a PMTA for the VapeWild products.
Financial ReviewBAT Annual Report and Form 20-F 2019 AMERICAS AND
SUB‑SAHARAN AFRICA
Volume and share
In 2019, cigarette value share was up 20 bps,
driven by growth in the strategic cigarette
brands volume share of 465 bps largely driven
by the migrations in Brazil and Colombia.
Excluding migrations, the increase was 50
bps. Total cigarette volume share was down
10 bps, as growth in Colombia (driven by
Lucky Strike and Rothmans), Mexico (driven
by Pall Mall) and Canada (driven by Pall
Mall) was more than offset by Brazil and
South Africa, where growth in Rothmans
and Pall Mall, respectively, was outweighed
by lower volume share in the remainder of
the portfolio.
In 2018, the cigarette volume share decline
was 20 bps despite growth in Kent (migration
from Free) in Brazil, Dunhill in South Africa,
Rothmans in Colombia, Argentina and Brazil
(following the migration from Mustang
and Minister, respectively, to strengthen the
consumer proposition), and from Pall Mall
in Mexico, which were more than offset by
declines in the local portfolio in South Africa
and Brazil (largely due to the growth in illicit
trade during 2018).
In 2019, cigarette volume was 3.1% lower
at 152 billion sticks as higher volume in
South Africa (due to lower illicit trade) was
more than offset by the continued difficult
macroeconomic environment in Venezuela,
continued growth in illicit trade (albeit at
a reduced rate) in Brazil and the impact of
market contraction in Canada.
The annual decline rate moderated versus
2018 (5.4% decline on 2017 to 157 billion
sticks) as 2018 was largely driven by the
growth of illicit trade in Brazil and South
Africa in that year, the termination of a
third-party licence agreement in Mexico and
market contraction in Canada, Colombia and
Venezuela. South African volumes stabilised
in the second half of 2018 after a period
of decline.
In vapour, following a period of value share
decline in Canada as the competition reacted
to the legalisation of the category, Vype
returned to growth and was the fastest
growing vapour brand in the second half of
the year, with value share in December 2019
of 28.2% (34.7% in December 2018).
Twisp, a South African vaping products
company, was acquired by the Group in
2019. Twisp has close to 70 dedicated stores
nationally, nationwide retailer distribution and
a modern e-commerce platform. Modern oral
was launched in Kenya, in Nairobi and other
key cities, with full national expansion planned
in early 2020.
Revenue
In 2019, revenue grew 3.6% to
£4,261million, led by pricing in combustibles
across the region (notably in Canada,
Kenya, Chile, Mexico and Nigeria) and the
growth of revenue from New Categories,
particularly from vapour which was up 120%
to £43 million (2018: £20 million) driven by
Canada and Mexico. These more than offset
the lower total cigarette volume and the
translational foreign exchange headwind of
6%. On a constant currency basis, revenue
grew by 9.2% to £4,491 million.
In 2018, revenue declined 4.9% to
£4,111 million, due to the translational
foreign exchange headwind of approximately
10%. On a constant currency, representative
basis, adjusted revenue grew by 5.6% to
£4,560 million, as pricing across the region
(notably in Mexico, Brazil, Chile and Nigeria)
more than offset the lower total volume
and the negative impact of mix due to the
growth of lower-priced products following
the significant excise-led price increases in
a number of markets.
STRATEGIC CIGARETTE
BRANDS PERFORM
VERY WELL
Luciano Comin
Regional Director
Key markets: Argentina, Brazil,
Canada, Chile, Colombia, Mexico,
Nigeria, South Africa
Profit from Operations
In 2019, reported profit from operations was
down 22% to £1,204 million, mainly due to
the £436 million charge in relation to Quebec
(as described on page 165), charges related
to Quantum and the translational foreign
exchange headwinds. Excluding these effects,
adjusted profit from operations on a constant
currency basis grew 10.0% to £1,912 million,
driven by increases in Brazil, Canada, Chile,
Nigeria and Mexico, despite the investment in
New Categories, specifically related to ePod.
In 2018, profit from operations was down
6.3% to £1,544 million, as the effect of
currency headwinds more than offset growth
across the region. Excluding adjusting items
(mainly related to a £110 million asset
impairment to recoverable value in Venezuela
arising from hyperinflationary accounting
and costs related to the Group’s ongoing
restructuring programme) and the effect of
currency, adjusted profit from operations on
a representative, constant currency basis grew
by 6.5% to £1,922 million, driven by Nigeria,
Mexico and Chile, partly offset by the effect of
the lower duty paid market and down-trading
in South Africa.
@ denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
55
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
REGIONAL REVIEW
CONTINUED
EUROPE AND NORTH AFRICA
Volume and share
In 2019, cigarette value share was marginally
higher with strategic cigarette volume share
up 50 bps. Total cigarette volume share was
up 10 bps as growth in Rothmans (which
outperformed the market in Ukraine and
Russia), Kent (in Ukraine) and higher total
cigarette volume share in Italy, Poland,
Romania and Spain was partially offset
by a reduction in Kazakhstan and the UK.
This compares to 2018 when volume share
was flat against 2017 as increases in Kent (led
by Ukraine, Turkey, Kazakhstan and regaining
premium segment leadership in Russia), and
Rothmans (Ukraine, Russia, Poland, Spain,
Bulgaria and Italy) were offset by both the
continued reduction in Pall Mall (Poland,
Germany and Belgium) and a decline in the
low-price portfolio in Russia.
In 2019, cigarette volume declined 6.3%
to 230 billion sticks as growth in Poland,
Romania, Denmark and Spain was more
than offset by lower volume in Russia (partly
due to a one-off reduction in stock), Ukraine
(largely due to the growth of illicit trade and
competition in the low-price segment) and
Egypt (driven by excise-led price increases in
the low-price segment particularly affecting
Pall Mall).
In 2018, volume declined 4.7% to 246 billion
sticks, which was a reduction of 5.3% on a
representative basis, as volume from assets
acquired (from Bulgartabac and FDS) in 2017
combined with growth in Turkey, Egypt,
Poland and Romania was more than offset by
Russia (partly due to inventory movements
and the growth of illicit trade), Ukraine (due
to market contraction following the excise-led
price increase, leading to an increase in illicit
trade), Italy (partly due to impact of higher
prices) and France (following the excise-led
price increase).
In 2019, THP volume was up over 330%,
with growth in Russia, Ukraine and Kazakhstan
while also developing in the other launch
markets of Romania, Italy, Czech Republic,
Bulgaria and Poland.
Vapour volume was 44% higher in 2019 than
in 2018. Vapour in both years was driven by
the success of Vype (particularly ePen3) in the
UK (where the Group’s portfolio of products
maintained value leadership in 2019 with 38%
vapour value share in December 2019), France
(where ePen3 and ePod combined reached
20% vapour value share in December 2019)
and in Germany (where Vype reached 17%
share of total vapour consumers).
The Group’s Modern Oral portfolio increased
volume by 157% to 1.1 billion pouches in 2019
(2018: 0.4 billion pouches, an increase of 44% on
2017), largely due to higher volume in Denmark
and Norway, reaching 75% and 14% volume
share of the total oral category, respectively.
In Russia, Lyft achieved 27% volume share of
the total oral category (in tracked channels) in
December 2019.
In December 2019 following concerns in
Russia regarding the irresponsible marketing
by our competitors, all sales of modern
oral have been temporarily suspended in
Russia. There is no indication of a concern
regarding the Group’s products or practices
and we expect a regulatory framework will be
implemented in 2020.
In Sweden, the Group’s total oral portfolio
performed well, increasing total volume share
of the oral category to 13.2%. This was driven
by the Traditional Oral brands, up 50 bps
to 10.9%, principally due to the success of
Lundgrens, and the Modern Oral products
(Lyft) which increased to 2.3% volume share
of the total oral category following the launch
in 2018.
Revenue
In 2019, reported revenue increased 1.4%
to £6,090 million (2018: decline of 1.7%
to £6,004 million) as strong combustibles
pricing in 2019 across the region (notably in
Germany, Turkey and Ukraine) and an increase
in revenue from New Categories by 91% (to
£319 million) were partly offset by the end of
a contract manufacturing arrangement (which
led to a short-term increase in revenue due to
the recognition by the Group of excise within
revenue in prior periods), lower regional
volume and translational foreign exchange
headwinds of 1.3% (2018: translational
foreign exchange headwind of 5%).
56
MODERN ORAL AND
VAPOUR PERFORMANCE
DRIVES GROWTH
Johan Vandermeulen
Regional Director
Key markets: Algeria, Belgium, Bulgaria,
Egypt, Czech Republic, Denmark, France,
Germany, Italy, Kazakhstan, Morocco,
Netherlands, Poland, Romania, Russia, Spain,
Sweden, Switzerland, Turkey, Ukraine, UK
Adjusted revenue, at constant rates,
increased 5.0% to £6,118 million in
2019 (2018: up 3.5% on a representative
basis). This was driven by pricing across
the combustible portfolio as noted earlier,
as well as the 94% growth in revenue
from New Categories to £324 million
(2018: £167 million) driven by:
– vapour revenue increasing 30% to
£148 million (2018: £114 million) due to
the performance of Vype in the UK, France
and Germany;
– THP revenue growing 200% driven by
Russia, Ukraine and Kazakhstan; and
– modern oral revenue increasing 246% to
£120 million (2018: £34 million) following
the increase in volume in Norway and
Denmark, and the launch in Russia.
Profit from operations
In 2019, reported profit from operations
fell 13.4% to £1,649 million, as the Group
increased investment behind New Categories,
recognised a charge of £202 million in respect
of the Russian excise dispute as discussed on
page 143, recognised additional impairment
charges of £29 million related to the Group’s
brand consolidation programme to simplify
the New Categories portfolio and incurred
charges in relation to Quantum. Profit from
operations was up in Germany, Turkey,
Romania, Denmark and Poland, which more
than offset declines in Russia and the UK.
Excluding adjusting items (referred to above)
and the impact of the foreign currency
headwind, adjusted profit from operations at
constant rates was up 3.3% at £2,220 million.
In 2018, profit from operations grew 12.3%
to £1,905 million. This was due to an
improvement in the operating performance in
Germany, Romania and Ukraine and a one-off
charge of £69 million in 2017 in relation to a
third party in Croatia that does not repeat in
2018. Excluding adjusting items (related to
the factory closure in Germany, amortisation
of acquired brands, other costs related to the
Group’s ongoing restructuring programme
and the 2017 impairment in Croatia) and the
impact of the foreign currency headwind,
adjusted profit from operations at constant
rates, on a representative basis was up 0.8%,
at £2,217 million.
Financial ReviewBAT Annual Report and Form 20-F 2019 ASIA‑PACIFIC AND
MIDDLE EAST
COMBUSTIBLES AND
THP COMBINE TO
ACCELERATE GROWTH
Guy Meldrum
Regional Director
Key markets: Australia, Bangladesh,
Indonesia, Japan, Malaysia, Middle
East (incl KSA), New Zealand, Pakistan,
South Korea, Taiwan, Vietnam
THP volume increased 20% to 7.9 billion
sticks (2018: 6.5 billion) driven by the
continued growth of glo neo in Japan
following the launch of glo ‘pro’, glo ‘nano’
and glo ‘sens’, with volume share increasing
60 bps to 5.0% in December 2019. ‘glo
pro’ introduced a new induction heating
technology, improving consumer satisfaction
and their sensorial experience. With regards
to ‘glo sens’, after an encouraging launch,
the Group will be reviewing the in-market
execution and seeking to broaden device
penetration and drive increased consumer
uptake in 2020. The Group’s share of nicotine
in Japan increased from 17% (December
2018) to 19% (December 2019).
Revenue
In 2019, reported revenue grew 5.6% to
£5,153 million. This was partly driven by
pricing in a number of markets, including
Saudi Arabia, Japan, Australia, Pakistan and
New Zealand. New Categories revenue
grew by 23.9% driven by the higher THP
volume, notably in Japan, which, combined
with combustibles pricing, more than offset
the impact of lower cigarette volume. On a
constant currency basis, revenue grew 5.6%.
In 2018, revenue declined 1.8% to
£4,882 million, as pricing, higher THP volume
(discussed earlier) and the positive mix effect,
was offset by the impact of lower cigarette
volume, down-trading in Saudi Arabia and by
the foreign exchange headwinds related to
the relative strength of sterling. Excluding the
translational foreign exchange headwind and
at constant currency rates, adjusted revenue
on a representative basis grew 5.7%.
Profit from operations
In 2019, profit from operations decreased
5.7% to £1,753 million. Growth in Japan
(driven by an increase in combustibles
revenue and higher THP volume which more
than offset an increase in marketing related
to the launch of the new THP products) and
Middle East (driven by pricing and volume)
was more than offset by lower volume in
Bangladesh and Malaysia, and the impact
of the impairment to Indonesian goodwill
(£172 million) following the substantial
change in excise which is applicable from
2020 and is anticipated to affect the total
market. Excluding adjusting items, which
primarily relate to Indonesia goodwill,
Quantum, the ongoing factory rationalisation
programme (principally in South East Asia)
and the impact of foreign exchange on
the regional results, adjusted profit from
operations grew 7.9% to £2,102 million,
at constant rates of exchange.
In 2018, profit from operations declined
2.3% to £1,858 million, as the performance
was negatively affected by foreign exchange
headwinds and adjusting items related to the
ongoing costs of the Group’s restructuring
programme. Adjusted profit from operations
on a representative constant currency
basis grew 1.2% to £2,099 million driven
by an improvement in Japan, where the
performance of both combustibles and
THP more than offset the higher marketing
investment, and increases in Australia,
Pakistan and Bangladesh. These were partly
offset by Saudi Arabia which was negatively
impacted by down-trading, described above,
and South Korea.
57
Volume and share
In 2019, cigarette and THP value share
increased 30 bps, driven by the strategic
cigarette and THP portfolio, which increased
volume share by 20 bps. Total cigarette and
THP volume share was up 50 bps (2018: up
90 bps), led by Japan (driven by Kool, Lucky
Strike and glo), Vietnam (driven by Craven A)
and Pakistan (driven by Pall Mall). This more
than offset lower Lucky Strike volume share
in Indonesia and Dunhill volume share in
Malaysia and South Korea.
The movement in 2018 was driven by Japan,
an increase in Dunhill and Lucky Strike in
Indonesia, growth of Pall Mall in Pakistan,
Australia and particularly in Saudi Arabia and
Rothmans in Malaysia. Total market share
increased in Bangladesh. This combined
growth was partially offset by lower volume
share in South Korea, due to a reduction in
Dunhill and a reduction in Taiwan driven by
Dunhill and Pall Mall.
In 2019, cigarette volume declined 3.7%
as growth in Japan (due to the success of
Lucky Strike and Kool), Vietnam (driven by
the growth of Craven A) and the Middle East
(driven by Kent) was more than offset by the
impact of industry contraction (following
excise-led price increases) in Bangladesh
and Pakistan, and macroeconomic pressures
impacting consumer disposable income
in Indonesia.
In 2018, cigarette volume was down 1.3%
at 221 billion sticks as the recovery in the
combustibles volume in Pakistan (following
the revision to the excise structure that
negatively impacted the equivalent period in
2017) was more than offset by lower volume
in the Middle East, largely due to the impact
of a 2017 excise-led price increase in Saudi
Arabia and the difficult trading environment
in a number of countries in the Middle East.
Volume was lower in Bangladesh due to
higher illicit trade following an increase in
excise, with Indonesia lower due to market
contraction. Volume decreases slowed in
Malaysia in 2018 after a period of accelerated
decline following the excise changes in
prior years.
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 PRINCIPAL
GROUP RISKS
Overview
The principal risks that may affect the Group
are set out on the following pages.
Each risk is considered in the context of the
Group’s strategy and business model, as set
out in this Strategic Report on pages 8 to 9,
and 22 to 23. Following a description of each
risk, its potential impact and management by
the Group is summarised. Clear accountability
is attached to each risk through the risk owner.
The Group has identified risks and is actively
monitoring and taking action to manage the
risks. This section focuses on those risks that
the Directors believe to be the most important
after assessment of the likelihood and
potential impact on the business. Not all of
these risks are within the control of the Group
and other risks besides those listed may affect
the Group’s performance. Some risks may be
unknown at present. Other risks, currently
regarded as less material, could become
material in the future.
The risks listed in this section and the activities
being undertaken to manage them should
be considered in the context of the Group’s
internal control framework. This is described
in the section on risk management and
internal control in the corporate governance
statement on pages 87 to 88. This section
should also be read in the context of the
cautionary statement on page 298.
Time frame
Short term
Medium term
Long term
Strategic impact
Growth
Productivity
Winning organisation
Sustainability
Considered in viability statement@
Yes
No
A summary of all the risk factors (including the
principal risks) which are monitored by the
Board through the Group’s risk register is set
out in the Additional disclosures section on
pages 272 to 286.
Assessment of Group risk@
During the year, the Directors have carried
out a robust assessment of the principal risks,
uncertainties and emerging risks facing the
Group, including those that would threaten its
business model, future performance, solvency
or liquidity.
The principal risks facing the Group have
remained broadly unaltered over the past year
with regards to marketplace, excise and tax,
operations, regulation and litigation risks.
The viability statement below provides a
broader assessment of long-term solvency
and liquidity. The Directors have considered
a number of factors that may affect the
resilience of the Group. Except for the risk
‘injury, illness or death in the work place’ the
Directors have also assessed the potential
impact of the principal risks that may impact
the Group’s viability.
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
Viability statement@
The Board has assessed the viability of the Group taking into account the current position and principal risks, in accordance with provision 31
of the 2018 UK Corporate Governance Code. While the Board believes the Group will be viable over a longer period, owing to the inherent
uncertainty arising due to ongoing litigation and regulation, the period over which the Board has formed the reasonable expectation that the
Group will be able to continue in operation and meet its liabilities as they fall due is three years.
In making its assessment of the Group’s prospects, the Board has considered the Group’s continued strong cash generation from operating
activities. This assessment included a robust review of the principal risks that may impact the Group’s viability (as indicated on pages 59
to 62) which are considered, with the mitigating actions, at least once a year. The Board also took account of the Group’s operational and
financial processes, which cover both short-term (1-2 year financial forecasts, 2-3 year capacity plans) and longer-term strategic planning.
The assessment included reverse stress testing core drivers that underpin the specific risks to ensure the business is able to continue in
operation, while not breaching the required gross interest cover of 4.5 times (see page 48). Each impact would, individually, have to be
between 5 times and 10 times worse than a prudent annual forecast, or would all have to arise simultaneously with no mitigating or corrective
actions to affect the Group’s ability to meet the liabilities as they fall due.
Due to the level of borrowings carried on the balance sheet, the Group may be exposed to movements in interest rates. The Board noted
that, as stated in note 22 in the Notes on the Accounts, the Group sets a minimum of 50% of interest rate as fixed on short- to medium-term
borrowings, minimising the risk of interest rate fluctuation impacting viability over the period. At 31 December 2019, the ratio of floating to
fixed rate borrowings was 18:82 (2018: 21:79).
The Board noted that the Group would be able to adjust certain capital requirements, including but not limited to the investment in the
Group’s manufacturing infrastructure in the short term and access the £6 billion credit facility (2019 undrawn), to mitigate the impact of the
effect of the above principal risks, each of which have specific mitigation activities as disclosed on pages 59 to 62.
The Group is subject to inherent uncertainties with regards to regulatory change and litigation, the outcome of which may have a bearing
on the Group’s viability. The Group maintains, as referred to in note 27 in the Notes on the Accounts ‘Contingent Liabilities and Financial
Commitments’, that, while it is impossible to be certain of the outcome of any particular case, the defences of the Group’s companies to all
the various claims are meritorious on both law and the facts. If an adverse judgment is entered against any of the Group’s companies in any
case, an appeal may be made, the duration of which can be reasonably expected to last for a number of years.
58
Business EnvironmentBAT Annual Report and Form 20-F 2019 Risks
Competition from illicit trade
Increased competition from illicit trade – either local duty evaded, smuggled illicit white cigarettes or counterfeits.
Time frame
Long term
Strategic impact
Considered in viability statement@
Growth
Yes
Impact
Erosion of brand equity, with lower volumes and reduced profits.
Reduced ability to take price increases.
Investment in trade marketing and distribution is undermined.
Mitigation activities@
Dedicated Anti-Illicit Trade (AIT) teams operating at global and country
levels; internal cross-functional levels; compliance procedures and best
practice shared.
Active engagement with key external stakeholders.
Cross-industry and multi-sector cooperation on a range of AIT issues.
Global AIT strategy supported by a research programme to further the
understanding of the size and scope of the problem.
AIT Engagement Teams (including a dedicated analytical laboratory)
works with enforcement agencies in pursuit of priority targets.
Tobacco, New Categories and other regulation interrupts growth strategy
The enactment of regulation that significantly impairs the Group’s ability to communicate, differentiate, market or launch its products.
Time frame
Strategic impact
Considered in viability statement@
Medium term
Growth and Sustainability
Yes
Impact
Erosion of brand value through commoditisation, the inability to
launch innovations, differentiate products, maintain or build brand
equity and leverage price.
Mitigation activities@
Engagement and litigation strategy coordinated and aligned across
the Group to drive a balanced global policy framework for the
nicotine category.
Stakeholder mapping and prioritisation, developing robust compelling
advocacy materials (with supporting evidence and data) and regulatory
engagement programmes.
Regulatory risk assessment of marketing plans to ensure
decisions are informed by an understanding of the potential
regulatory environments.
Advocating the application of integrated regulatory proposals to
governments and public health practitioners based on the harm
reduction principles.
Development of an integrated regulatory strategy that spans
conventional combustibles and New Categories.
Regulation in respect of menthol, nicotine levels and New Categories
may adversely impact individual brand portfolios.
Adverse impact on ability to compete within the legitimate tobacco,
nicotine or New Categories industry and with illicit traders.
Reduced consumer acceptability of new product specifications,
leading to consumers seeking alternatives in illicit markets.
Shocks to share price on the announcement or enactment of
restrictive regulation.
Reduced ability to compete in future product categories and make
new market entries.
Increased scope and severity of compliance regimes in new regulation
leading to higher costs, greater complexity and potential reputational
damage or fines for inadvertent breach.
Proposed EU Directive on single-use plastics could result in increased
operational costs and/or a decline in sales volume.
Please refer to pages 287 to 290 for details of tobacco and nicotine regulatory
regimes under which the Group’s businesses operate
Disputed taxes, interest and penalties
The Group may face significant financial penalties, including the payment of interest, in the event of an unfavourable ruling by a tax authority in
a disputed area.
Time frame
Strategic impact
Considered in viability statement@
Short/Medium term
Productivity
Yes
Impact
Significant fines and potential legal penalties.
Mitigation activities@
End market tax committees.
Disruption and loss of focus on the business due to diversion
of management time.
Internal tax function provides dedicated advice and guidance,
and external advice sought where needed.
Impact on profit and dividend.
Engagement with tax authorities at Group, regional and
individual market level.
Please refer to note 27 in the Notes on the Accounts for details
of contingent liabilities applicable to the Group
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
59
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 PRINCIPAL GROUP RISKS
CONTINUED
Risks continued
Inability to develop, commercialise and deliver the New Categories strategy
Risk of not capitalising on the opportunities in developing and commercialising successful, safe and consumer-appealing innovations.
Time frame
Long term
Strategic impact
Considered in viability statement@
Growth and Sustainability
Yes
Impact
Failure to deliver Group strategic imperative and 2024
growth ambition.
Potentially missed opportunities, unrecoverable costs and/or
erosion of brand.
Reputational damage and recall costs may arise in the event of
defective product design or manufacture.
Loss of market share due to non-compliance of product portfolio
with regulatory requirements.
Market size reduction and consumer down‑trading
Mitigation activities@
Focus on product stewardship to ensure high-quality standards
across portfolio.
Collaboration between internal legal, external affairs and R&D
in order to identify current and future regulations and align the
innovation pipeline.
Retail transformation strategy embedded.
Investment on consumer insights and foresight.
The Group is faced with steep excise-led price increases and, due in part to the continuing difficult economic and regulatory
environment in many countries, market contraction and consumer down-trading is a risk.
Time frame
Strategic impact
Considered in viability statement@
Short/Medium term
Growth
Yes
Impact
Volume decline and portfolio mix erosion.
Funds to invest in growth opportunities are reduced.
Mitigation activities@
Geographic spread mitigates impact at Group level.
Close monitoring of portfolio and pricing strategies, ensuring balanced
portfolio of strong brands across key segments.
Overlap with many mitigation activities undertaken for other principal
risks facing the Group, such as competition from illicit tobacco trade
and significant excise increases or structure changes.
New Category growth and multi category approach.
Litigation
Product liability, regulatory or other significant cases may be lost or compromised resulting in a material loss or other consequence.
Time frame
Long term
Strategic impact
Considered in viability statement@
Growth
Yes
Impact
Damages and fines, negative impact on reputation, disruption
and loss of focus on the business.
Mitigation activities@
Consistent litigation and patent management strategy across
the Group.
Consolidated results of operations, cash flows and financial position
could be materially affected, in a particular fiscal quarter or fiscal year,
by region or country, by an unfavourable outcome or settlement of
pending or future litigation.
Expertise and legal talent maintained both within the Group and
external partners.
Ongoing monitoring of key legislative and case law developments
related to our business.
Inability to sell products as a result of patent infringement action
may restrict growth plans and competitiveness.
Delivery with Integrity compliance programme.
Please refer to note 27 in the Notes on the Accounts for details of contingent
liabilities applicable to the Group
60
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
Business EnvironmentBAT Annual Report and Form 20-F 2019
Significant increases or structural changes in tobacco, nicotine and New Categories related taxes
The Group is exposed to unexpected and/or significant increases or structural changes in tobacco, nicotine and New Categories related taxes in
key markets.
Time frame
Long term
Strategic impact
Considered in viability statement@
Growth
Yes
Impact
Consumers reject the Group’s legitimate tax-paid products
for products from illicit sources or cheaper alternatives.
Reduced legal industry volumes.
Reduced sales volume and/or portfolio erosion.
Partial absorption of excise increases.
Mitigation activities@
Requirement for Group companies to have in place formal pricing
and excise strategies, including contingency plans, with annual
risk assessments.
Pricing, excise and trade margin committees in markets,
with regional and global support.
Engagement with local tax, customs authorities, IMF and WHO where
appropriate, in particular in relation to the increased risk to excise
revenues from higher illicit trade.
Portfolio reviews to ensure appropriate balance and coverage
across price segments.
Monitoring of economic indicators, government revenues
and the political situation.
Foreign exchange rate exposures
The Group faces translational and transactional foreign exchange (FX) rate exposure for earnings/cash flows from its global businesses.
Time frame
Strategic impact
Considered in viability statement@
Short/Medium term
Productivity
Yes
Impact
Fluctuations in FX rates of key currencies against sterling introduce
volatility in reported earnings per share (EPS), cash flow and the
balance sheet driven by translation into sterling of our financial
results and these exposures are not normally hedged.
The dividend may be impacted if the payout ratio is not adjusted.
Mitigation activities@
While translational FX exposure is not hedged, its impact is identified in
results presentations and financial disclosures; earnings are re-stated at
constant rates for comparability.
Debt and interest are matched to assets and cash flows to mitigate
volatility where possible and economic to do so.
Differences in translation between earnings and net debt may affect
key ratios used by credit rating agencies.
Hedging strategy for transactional FX and framework is defined
in the treasury policy, a global policy approved by the Board.
Volatility and/or increased costs in our business, due to transactional
FX, may adversely impact financial performance.
Illiquid currencies of many markets where hedging is either not possible
or uneconomic are reviewed on a regular basis.
Geopolitical tensions
Geopolitical tensions, civil unrest, economic policy changes, global health crises, terrorism and organised crime have the potential to disrupt the
Group’s business in multiple markets.
Time frame
Strategic impact
Considered in viability statement@
Medium term
Growth and Productivity
Yes
Impact
Potential loss of life, loss of assets and disruption to supply chains and
normal business processes.
Increased costs due to more complex supply chain arrangements
and/or the cost of building new facilities or maintaining
inefficient facilities.
Lower volumes as a result of not being able to trade in a country.
Higher taxes or other costs of doing business as a foreign company
or the loss of assets as a result of nationalisation.
Mitigation activities@
Physical and procedural security controls are in place, and constantly
reviewed in accordance with our Security Risk Management process,
for all field force and supply chain operations, with an emphasis on the
protection of Group employees.
Globally integrated sourcing strategy and contingency
sourcing arrangements.
Security risk modelling, including external risk assessments
and the monitoring of geopolitical and economic policy
developments worldwide.
Insurance cover and business continuity planning, including scenario
planning and testing, and risk awareness training.
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
61
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
PRINCIPAL GROUP RISKS
CONTINUED
Risks continued
Solvency and liquidity
Liquidity (access to cash and sources of finance) is essential to maintaining the Group as a going concern in the short term (liquidity)
and medium term (solvency).
Time frame
Strategic impact
Considered in viability statement@
Short/Medium term
Productivity and Sustainability
Yes
Impact
Inability to fund the business under the current capital structure
resulting in missed strategic opportunities or inability to respond
to threats.
Decline in our creditworthiness and increased funding costs for
the Group.
Requirement to issue equity or seek new sources of capital.
Reputational risk of failure to manage the financial risk profile
of the business, resulting in an erosion of shareholder value
reflected in an underperforming share price.
Mitigation activities@
Group policies include a set of financing principles and key performance
indicators including the monitoring of credit ratings, interest cover,
solvency and liquidity with regular reporting to the Corporate Finance
Committee and the Board.
The Group targets an average centrally managed debt maturity of
at least five years with no more than 20% of centrally managed debt
maturing in a single rolling year.
The Group holds a two-tranche revolving credit facility of £6 billion
syndicated across a wide banking group, consisting of a 364-day
tranche (with two one-year extension options and a one-year
term-out option) and a £3bn five year tranche (with two one-year
extension options).
Liquidity pooling structures are in place to ensure that there
is maximum mobilisation of cash liquidity within the Group.
Going concern and viability support papers are presented to the Board
on a regular basis.
Injury, illness or death in the work place
The risk of injury, death or ill health to employees and those who work with the business is a fundamental concern of the Group
and can have a significant effect on its operations.
Time frame
Strategic impact
Considered in viability statement@
Short term
Sustainability
No
Impact
Serious injuries, ill health, disability or loss of life suffered by employees
and the people who work with the Group.
Mitigation activities@
Risk control systems in place to ensure equipment and infrastructure are
provided and maintained.
Exposure to civil and criminal liability and the risk of prosecution from
enforcement bodies and the cost of associated fines and/or penalties.
EHS strategy aims to ensure that employees at all levels receive
appropriate EHS training and information.
Interruption of Group operations if issues are not addressed immediately.
High staff turnover or difficulty recruiting employees if perceived
to have a poor Environment, Health and Safety (EHS) record.
Reputational damage to the Group.
Behavioural-based safety programme to drive operations’ safety
performance, culture and closer to zero accidents.
Analysis of incidents undertaken regionally and globally by a dedicated
team to identify increasing incident trends or high potential risks that
require coordinated action.
The Strategic Report was approved by the Board of Directors on 17 March 2020 and signed on its behalf by Paul McCrory, Company Secretary.
62
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
Business EnvironmentBAT Annual Report and Form 20-F 2019
CHAIRMAN’S INTRODUCTION
ON GOVERNANCE
DURING 2019, THE BOARD
OVERSAW THE SUCCESSFUL
TRANSITION TO OUR
NEW EXECUTIVE TEAM
Dear Shareholder
The Group has delivered a strong operational performance in
2019, with volume share and value share and revenue growing on
the back of our combustibles business and continued progress in
New Categories.
During 2019, the Board oversaw the successful transition to our
new executive team, with Jack Bowles taking over from Nicandro
Durante as Chief Executive in April, and Tadeu Marroco succeeding
Ben Stevens as Finance Director in August. Jack’s immediate drive to
embed a stronger, simpler and faster business culture, with revisions
to our governance framework facilitating this, has been endorsed by
the Board.
Our focus on culture and governance this year has also been guided
by the revised UK Corporate Governance Code, with its emphasis on
aligning business culture with purpose, strategy and values. The Board
has carefully considered the revised Code, in letter and spirit. This year
we are reporting to you on our application of its principles and our
compliance with its provisions.
In relation to our strategy, Jack and his management team have
devoted significant attention in 2019 to developing plans to accelerate
progress already made in our New Categories business and the Board
has given its full endorsement to the evolution of our Group strategy
presented in the Strategic Report.
The Board welcomed Jerry Fowden as a new Non-Executive Director in
September. Jerry’s experience with strategic corporate transformations
and FMCG operations in the US will augment the expertise of the
Board in these strategic focus areas.
Promoting diversity in our senior management pipeline has long been
the Board’s aim. I was delighted to see the Group noted as a Diversity
Leader in 2019 by the UK Financial Times in its inaugural Diversity
Leaders report, highlighting progress in promoting diversity broadly
across our organisation. The Board will continue its commitment to
realising our ambitions in this area, in line with our Board Diversity
Policy and Group Employment Principles.
The objectives of our Board Diversity Policy and our progress against
these are set out on page 82.
Culture and values
The Board recognises its role in shaping and overseeing the Group’s
culture and values, and has been proactive in supporting our Chief
Executive to create a stronger, simpler, more agile organisation
through a programme of restructuring and simplification. In 2019, the
Board adopted a revised Group Statement of Delegated Authorities
aimed at empowering people at the right level of our organisation, and
enhancing accountability and ownership. This is discussed further on
page 70.
Stakeholder engagement, and our broader sustainability agenda, has
been to the fore this year. The Board assessed how it engages with,
and understands the views of, our shareholders, our people, and wider
stakeholders to inform our decision-making, strategy development and
risk assessment.
We are equally focused on ensuring that integrity remains paramount.
The revised version of our SoBC, approved by the Board in 2019,
emphasises that every line manager across our business must act as a
role model for high standards of behaviour. You can read more about
our Delivery with Integrity programme on pages 31 to 32.
The Board has also reinforced how our people should approach
external engagement with stakeholders across our business by
adopting a new Lobbying and Engagement Policy. It emphasises our
values of openness and transparency, and comprises part of our revised
Group Standards of Business Conduct (SoBC).
Board composition and succession
Effective succession planning by the Board is essential to our long-term
sustainable success. In our Nominations Committee report on page
79, you can read more about the selection process conducted by
the Committee leading to Tadeu’s appointment as Finance Director.
The Board is pleased at the speed with which both Jack and Tadeu
have taken up the reins in their respective roles.
Having overseen a successful transition of the executive team, the
Nominations Committee has turned its focus to the process for
identifying a successor for my own role as Chairman, mindful of the
provisions of the revised Code. Details of the process for identifying my
successor are set out in the Nominations Committee report on page 80.
Our Board does not tolerate any failure to comply with our legal
obligations or with our SoBC. Through external legal advisers, we are
rigorously investigating allegations of misconduct and we continue to
cooperate with relevant authorities.
Stakeholder engagement
Our Directors understand the importance of effective engagement
with our shareholders, our people and our wider stakeholders. In 2019,
the Board completed a thorough review of how we engage with
all key stakeholders, how the Board is kept informed of stakeholder
perspectives, and the impact of engagement. This review is discussed
on page 72.
One of the outcomes from the review was to establish Non-Executive
Directors’ attendance at our external Sustainability Stakeholder Panel,
which I attended in November, to discuss the Group’s sustainability
initiatives directly with key opinion leaders. Our Sustainability
Stakeholder Panel is discussed further on page 73.
63
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
CHAIRMAN’S INTRODUCTION ON GOVERNANCE
CONTINUED
The Executive Directors and I regularly update the Board on our own
dialogue with shareholders to ensure the whole Board understands
their perspectives. In 2019, key topics raised by shareholders and
discussed by the Board included US regulatory developments, our New
Categories strategy and performance, our leverage and our Quantum
transformation project. Our Remuneration Committee Chairman
also engaged extensively with shareholders on our new Directors’
Remuneration Policy, approved at our 2019 AGM.
My fellow Board members and I look forward to meeting further with
shareholders in the lead up to, and at, our 2020 AGM in April.
Engagement with our people
As reported in our Annual Report and Form 20-F for 2018, from
January 2019 we adopted an enhanced approach to engaging with
our people worldwide to ensure the Board maintains meaningful
and regular dialogue with them, in view of the geographical span,
scale and diversity of our organisation. Our approach builds on the
range of well-established workforce engagement channels already
in place across the Group, augmented by new organisational
reporting structures.
During 2019, the Board reviewed and gave feedback on outcomes
from the Group’s range of workforce engagement channels, including
the 2019 ‘Your Voice’ global employee survey. Our new Executive
Directors presented several global webcasts in the year, including
discussion of strategy, performance and culture with live Q&A.
Our Directors also took the opportunity to engage directly with
employees on market and site visits, and as part of specific events.
You can read more about the Board’s workforce engagement activities
on page 72.
Board effectiveness
Board effectiveness is evaluated in detail annually. This year, the
evaluation of the Board, its Committees and each individual Director
was externally facilitated by Independent Audit Limited.
Having considered the output of this year’s evaluation discussed on
page 78, the Board considers that it continues to function effectively
and its working relationships with its Committees continue to
be sound.
Internal controls
The Group is subject to US compliance obligations under NYSE rules
and US securities laws as the Company is a ‘foreign private issuer’.
In 2019, our Audit Committee played a key role in monitoring the
Group’s compliance with the Sarbanes-Oxley Act of 2002 (SOx) and
had oversight of the management assessment of the effectiveness of
our internal controls over financial reporting.
We explain our internal controls framework and SOx compliance
programme on pages 87 to 88.
Looking ahead
Following the Remuneration Committee’s review of our management
compensation structures in 2019, and to enhance alignment of
management incentive schemes with our strategy and values, the
Board will present scheme rules for a new restricted stock long-term
incentive plan for consideration at our 2020 AGM.
On the external front, increased public awareness of climate
change and its impacts means that our shareholders and wider
stakeholders are understandably keen to know how we as a business
are responding to climate change. The Board has been briefed on
the recommendations of the Taskforce on Climate-related Financial
Disclosures (TCFD) and has endorsed the Group’s full alignment with
those recommendations by 2022.
On behalf of the Board, I confirm that we believe that this
combined Annual Report and Form 20-F presents a fair, balanced
and understandable assessment of the Company’s position and
performance, and its business model and strategy.
Richard Burrows
Chairman
64
Directors’ ReportBAT Annual Report and Form 20-F 2019 page 63
page 66
page 68
page 69
page 70
page 71
page 74
page 76
page 76
page 77
page 78
page 79
page 81
page 81
page 83
page 85
page 87
page 88
GOVERNANCE
Throughout the year ended 31 December 2019, we applied the Principles of the July 2018 version of the UK Corporate Governance Code
(the Code). The Company was compliant with all provisions of the Code during the year.
The Board considers that this Annual Report and Form 20-F, and notably this Governance section, provides the information shareholders
need to evaluate how we have complied with our obligations under the Code.
Board leadership and
Company purpose
page 69
Division of
responsibilities
page 76
Chairman’s introduction on governance
Board of Directors
Management Board
Leadership and purpose
Our culture and values
Board engagement with stakeholders
Board activities in 2019
Division of responsibilities
Non-Executive Directors’ independence
Directors’ commitment
Composition,
succession, evaluation
page 79
Board evaluation
Nominations Committee report
Board balance and diversity
Senior management succession and diversity
Audit, risk,
internal control
page 83
Remuneration
page 90
Audit Committee report
External auditors
Risk management and internal control
Internal audit function
Annual statement on remuneration
Annual report on remuneration
Committee composition, role and responsibility
page 90
page 93
page 111
Disclosure guidance and transparency rules
We comply with the Disclosure Guidance and Transparency Rules
requirements for corporate governance statements by virtue of the
information included in this section, together with the information
contained in the Other Information section.
For ease of reference, we prepare a separate voluntary annual
compliance report by reference to each Principle and Provision
of the Code, available at www.bat.com/governance
US corporate governance
As a result of the listing of the Company’s American Depositary Shares
(ADSs) on the NYSE, the Company is required to meet certain NYSE
requirements relating to corporate governance matters.
Certain exceptions to these requirements apply to the Company as
a foreign private issuer. For a discussion of the significant differences
between the NYSE requirements and the Company’s practices, please
see page 295.
The Code is available at www.frc.org.uk
65
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 BOARD OF DIRECTORS
AS AT 17 MARCH 2020
Richard Burrows
Chairman (74)
Nationality: Irish
Jack Bowles
Chief Executive (56)
Nationality: French
Tadeu Marroco
Finance Director (53)
Nationality: Brazilian
Sue Farr
Non-Executive Director (64)
Nationality: British
Position: Chairman since November
2009; Non-Executive Director since
September 2009.
Position: Chief Executive since 1 April
2019; Executive Director since
1 January 2019.
Skills, experience and contributions:
Richard brings considerable consumer
goods and international business
experience to the Board, having been
Chief Executive of Irish Distillers and
Co-Chief Executive of Pernod Ricard.
Prior to joining the Board, Richard was
Governor of the Bank of Ireland. He is
an experienced non-executive director
and brings a variety of perspectives to
the Board. Richard is a Fellow of the
Institute of Chartered Accountants
of Ireland.
Other appointments: Supervisory
Board member and Chairman of the
Remuneration Committee at
Carlsberg A/S.
Skills, experience and contributions:
Jack brings significant experience in
management, innovation and strategic
leadership to the Board, developed
through his previous roles across many
of the Group’s key geographies and
areas of business. He joined the Group
in 2004 and was appointed as
Chairman of British American Tobacco
France in 2005, before becoming
Managing Director of British American
Tobacco Malaysia in 2007. He joined the
Management Board as Regional
Director for Western Europe in 2009,
becoming Regional Director for the
Americas in 2011, then Regional
Director for Asia-Pacific in 2013.
Jack became Chief Operating Officer
in 2017 and Chief Executive Designate
in November 2018, before being
appointed to the Board in January 2019.
Other appointments: No external
appointments.
Position: Finance Director since
5 August 2019.
Position: Non-Executive Director since
February 2015.
Skills, experience and contributions:
Tadeu brings broad experience gained
in various national, regional and global
finance and general leadership roles,
having joined the Group in Brazil in
1992. These experiences make Tadeu
particularly well-placed to contribute
to the Group’s transformation and
broader strategic agenda. He joined
the Management Board as Director,
Business Development in 2014,
becoming Regional Director, Western
Europe in 2016, then Regional
Director, Europe and North Africa
in January 2018. He was appointed
Director, Group Transformation in
January 2019 and, in addition to this
role, he was appointed Deputy Finance
Director in March 2019, before joining
the Board as Finance Director in
August 2019.
Other appointments: No external
appointments.
Skills, experience and contributions:
Sue contributes considerable expertise
in relation to marketing, branding and
consumer issues, which are key areas of
focus for the Board. Prior to joining the
Chime Group in 2003, where she was
Director, Strategic and Business
Development until 2015, Sue held a
number of senior marketing and
communications positions, including:
Director of Marketing BBC, Corporate
Affairs Director of Thames Television and
Director of Communications of Vauxhall
Motors. Sue is a former Chairwoman of
both the Marketing Society and the
Marketing Group of Great Britain.
Other appointments: Special Adviser,
Chime Group; Non-Executive Director
and Chair of the Remuneration
Committee of Accsys Technologies
PLC; Non-Executive Director of Helical
plc; Non-Executive Director and Chair
of the Remuneration Committee of
DNEG Limited.
Jerry Fowden
Non-Executive Director (63)
Nationality: British
Dr Marion Helmes
Non-Executive Director (54)
Nationality: German
Luc Jobin
Non-Executive Director (60)
Nationality: Canadian
Holly Keller Koeppel
Non-Executive Director (61)
Nationality: American
Position: Non-Executive Director since
1 September 2019.
Position: Non-Executive Director
since August 2016.
Position: Non-Executive Director since
July 2017.
Position: Non-Executive Director since
July 2017.
Skills, experience and contributions:
Jerry brings extensive experience in
leadership and strategic transformation
to the Board and contributes considerable
insight in relation to US operational
issues, an important market for the
Group. He is Chairman of Primo Water
Corporation (‘Primo’) (formerly Cott
Corporation), a US pure-play water
solutions provider, having been CEO
from 2009 until December 2018. Prior
to joining Primo, Jerry held a variety of
executive roles, including: CEO of Auto
Trader Group; a number of roles at AB
InBev, including CEO of Bass Breweries in
the UK, Global Chief Operating Officer
and European President; Executive
Director of The Rank Group; and CEO of
the Beverage Division at the Hero Group.
Other appointments: Chairman of
Primo; Non-Executive Director and Chair
of the Compensation and Human
Resources Committee of Constellation
Brands, Inc.
66
Skills, experience and contributions:
Marion brings significant financial
expertise and operational experience
gained at an international level, having
spent her working life managing
businesses across Europe, the Americas
and Asia. Her extensive career includes
Chief Financial Officer positions at
Celesio, Q-Cells and ThyssenKrupp
Elevator Technology and, more
recently, as a member of a variety of
supervisory boards, which enables
Marion to bring a range of insights to
the Board’s discussions.
Other appointments: Vice
Chairwoman of the Supervisory Board
and Co-Chairwoman of the Presiding
and Nomination Committee of
ProSiebenSat.1 Media SE; Supervisory
Board member and Chairman of the
Audit Committee of Heineken N.V.;
Supervisory Board member of Siemens
Healthineers AG and Uniper SE.
Skills, experience and contributions:
Luc contributes extensive financial and
strategic experience to the Board,
including in the US tobacco sector as an
independent director of RAI from 2008
until the acquisition in 2017. Luc was
President and Chief Executive Officer of
Canadian National Railway Company
from July 2016 until March 2018, having
served as Executive Vice President and
Chief Financial Officer since 2009.
He was Executive Vice President of Power
Corporation of Canada from 2005 to
2009. Luc was Chief Executive Officer of
Imperial Tobacco Canada, a subsidiary of
the Company, from 2003 to 2005 and
Executive Vice President and Chief
Financial Officer from 1998 to 2003.
Other appointments: Independent
Director of Hydro-Quebec and Gildan
Activewear Inc.; Independent Consultant
providing executive leadership advisory
services to corporate clients.
Skills, experience and contributions:
Holly’s extensive international
operational and financial management
experience in a range of industry sectors
enables her to make important
contributions to the Board. Holly served
as an independent director on the Board
of RAI from 2008 until the acquisition in
2017. From 2010 until her retirement in
2017, she was Managing Partner and
Head of Citigroup’s Infrastructure
Investor Fund (CII and its successor,
Gateway Infrastructure) with operations
on three continents. Prior to 2010, she
held a number of global operational
positions with Consolidated Natural Gas
Company and American Electric Power
Company, Inc. (AEP), ultimately serving
as Chief Financial Officer of AEP.
Other appointments: Non-Executive
Director of Vesuvius plc; Director and Chair
of the Governance Committee of AES
Corporation; Director of Arch Coal Inc.
Directors’ ReportBAT Annual Report and Form 20-F 2019 Savio Kwan
Non-Executive Director (72)
Dimitri Panayotopoulos
Non-Executive Director (68)
Nationality: British
Nationality: Greek/British
Position: Non-Executive Director since
January 2014.
Skills, experience and contributions:
Savio brings significant business
leadership experience to the Board,
together with a deep knowledge of
Greater China and Asia, an important
region for the Group. During his
extensive career he has worked broadly
in technology for General Electric, BTR
plc and Alibaba Group, China’s largest
internet business, where he was both
Chief Operating Officer and, later,
a Non-Executive Director.
Other appointments: Co-Founder and
CEO of A&K Consulting Co Ltd, advising
entrepreneurs and their start-up
businesses in China; Member of the
Governing Body of the London Business
School; Non-Executive Director of the
Alibaba Hong Kong Entrepreneur Fund
and Crossborder Innovative Ventures
International Limited; and a Non-
Executive Director and Advisory Board
member of Homaer Financial.
Position: Non-Executive Director
since February 2015. Dimitri will
become Senior Independent Director
at the conclusion of the AGM on
30 April 2020.
Skills, experience and contributions:
Dimitri has extensive general
management and international sales
and brand building expertise, which
enables him to make valuable
contributions to Board discussions on
these important topics. He was Vice
Chairman and Adviser to the Chairman
and CEO of Procter & Gamble (P&G),
where he started his career in 1977.
During his time at P&G, Dimitri led on
significant breakthrough innovations
and continued to focus on this,
speed-to-market and scale across all of
P&G’s businesses while Vice Chairman
of all the Global Business Units.
Other appointments: Senior Adviser
at The Boston Consulting Group;
Advisory Board member of JBS USA;
Board Member of IRI.
Kieran Poynter
Senior Independent Director (69)
Nationality: British
Position: Senior Independent Director
since October 2016; Non-Executive
Director since July 2010. Kieran will
retire at the conclusion of the AGM on
30 April 2020.
Skills, experience and contributions:
Kieran brings a wealth of financial and
international experience to the Board.
He was Chairman and Senior Partner
of PricewaterhouseCoopers from 2000
to his retirement in 2008, having
started as a graduate trainee in 1971,
and is a former Chairman of Nomura
International PLC. Kieran is a
Chartered accountant.
Other appointments: Non-Executive
Director and Chair of the Audit and
Compliance Committee of
International Consolidated Airlines
Group S.A.; Chairman and Chair of the
Nominations, Audit and Compliance
and Risk and Remuneration
Committees of BMO Asset
Management plc (previously called
F&C Asset Management plc).
Attendance at Board meetings in 20191
Name
Richard Burrows
Jack Bowles3(b)
Nicandro Durante3(e)
Tadeu Marroco3(c)
Ben Stevens3(f)
Sue Farr2(a)
Jerry Fowden3(d)
Dr Marion Helmes2(c)
Luc Jobin2(b)
Holly Keller Koeppel
Savio Kwan
Dimitri Panayotopoulos
Kieran Poynter
Director since
2009
2019
2008-2019
2019
2008-2019
2015
2019
2016
2017
2017
2014
2015
2010
Attended/Eligible to attend
Scheduled4
Ad hoc
6/6
6/6
1/1
2/2
4/4
6/6
2/2
6/6
6/6
6/6
6/6
6/6
6/6
2/2
2/2
2/2
0/0
2/2
1/2
0/0
2/2
1/2
2/2
2/2
2/2
2/2
Notes:
1. Number of meetings in 2019: The Board held eight meetings in 2019, two of which were ad hoc and convened at short notice, one to discuss Board
Committee appointments and one to discuss the status of litigation in Quebec province. Part of the October Board meeting was held off-site at the
Group’s R&D facilities in Southampton, UK, to review Group strategy and product portfolios.
2. (a) Sue Farr did not attend the ad hoc Board meeting in January due to prior commitments; (b) Luc Jobin did not attend the ad hoc Board meeting
in January due to prior commitments; and (c) Marion Helmes did not attend the 2019 AGM due to prior commitments.
3. Composition: (a) the Board of Directors is shown as at the date of this Annual Report and Form 20-F; (b) Jack Bowles joined the Board on his appointment
as an Executive Director on 1 January 2019; (c) Tadeu Marroco joined the Board on his appointment as Finance Director on 5 August 2019; (d) Jerry
Fowden joined the Board on his appointment as a Non-Executive Director on 1 September 2019; (e) Nicandro Durante retired from the Board on his
retirement as Chief Executive on 1 April 2019; and (f) Ben Stevens retired from the Board on his retirement as Finance Director on 5 August 2019.
4. Number of meetings in 2020: Six Board meetings are scheduled for 2020.
A Audit Committee
N Nominations Committee
R Remuneration Committee
Committee Chairman
Executive Director
Non-Executive Director
67
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 MANAGEMENT BOARD
AS AT 17 MARCH 2020
Jerome Abelman
Director, Legal & External Affairs
and General Counsel (56)
Marina Bellini
Director, Digital and Information (46)
Luciano Comin
Regional Director, Americas and
Sub-Saharan Africa (51)
Alan Davy
Director, Operations (56)
Nationality: American
Nationality: Italian/Brazillian
Nationality: Italian/Argentinian
Nationality: British
Jerry was appointed Director, Legal
& External Affairs and General
Counsel in May 2015, having joined
the Management Board as Group
Corporate & Regulatory Affairs Director
in January 2015. Jerry was Regional
General Counsel, Asia-Pacific from
2010 to 2014, before becoming
Assistant General Counsel – Corporate
& Commercial. He was a member of
the Board of RAI from February 2016
until July 2017.
Marina joined the Management Board
as Director, Digital and Information in
January 2019. She joined the Group
as Chief Information Officer (CIO)
in 2018, having previously served
as Global CIO and Global Business
Services SVP at Anheuser-Busch
InBev, where she was responsible
for information technology
transformation, including consumer
digital marketing.
Luciano joined the Management Board
as Regional Director, Americas and Sub-
Saharan Africa in January 2019. He joined
the Group in 1992 and has held a wide
range of roles, including Marketing
Director in Venezuela, Marketing Director
in Mexico and General Manager of
BAT Mexico. Luciano was also Regional
Marketing Manager for Western
Europe and then Regional Head of
Marketing, Americas and Sub-Saharan
Africa before his appointment to the
Management Board.
Alan joined the Management Board
as Group Operations Director in
March 2013. He joined the Group
in 1988 and has held various roles
in manufacturing, supply chain and
general management. Alan previously
held the position of Group Head of
Supply Chain.
Hae In Kim
Director, Talent and Culture (46)
Paul Lageweg
Director, New Categories (51)
Guy Meldrum
Regional Director, Asia-Pacific
and Middle East (48)
Dr David O’Reilly
Director, Research and Science (53)
Nationality: Korean
Nationality: Dutch
Nationality: New Zealand
Nationality: British
Hae In joined the Management Board as
Director, Talent and Culture Designate
in January 2019 and became Director,
Talent and Culture in April 2019.
She was previously Group Head of
Talent and Organisational Effectiveness
and has held several other senior HR
roles in the Group, including Regional
HR Director, Asia-Pacific, and HR
Director, Japan and North Asia. Prior to
joining the Group in 2008, she gained
experience at Samsung, IBM Consulting
Services and PricewaterhouseCoopers.
Paul joined the Management Board
as Director, New Categories in
January 2019. He has been with the
Group for 14 years in various senior
roles, including Regional Marketing
Manager, Asia-Pacific and Middle East,
Area Director, East Asia and Global
Head of Marketing Futures.
Guy joined the Management Board
as Regional Director, Asia-Pacific
and Middle East in January 2019.
Previously he was Area Director,
Australasia Area. Guy joined BAT in
1993 and has held several senior roles
in the Group including Area Director,
North Asia Area and Marketing
Director, Russia.
David was appointed Director,
Research and Science in January
2019, having joined the Management
Board as Group Scientific Director
in 2012, leading R&D’s focus on
potentially reduced-risk products.
He has been with the Group for more
than 20 years and was previously
Head of International Public Health
and Scientific Affairs, responsible for
engagement with scientific, medical
and public health communities.
Ricardo Oberlander
President and CEO,
Reynolds American Inc. (56)
Nationality: Brazilian
Johan Vandermeulen
Regional Director, Europe
and North Africa (52)
Nationality: Belgian
Ricardo was appointed President and
CEO of RAI in January 2018, having joined
the Management Board as Regional
Director for the Americas in 2013. He has
held various senior marketing roles in
the Group and was General Manager
in France. He was Chairman of Souza
Cruz S.A. from 2013 until 2016 and a
RAI Board member from 2014 until July
2017. Ricardo is a member of the Chief
Marketing Officer Council North America
Advisory Board and an Advisory Board
member of Coast Capital LLC.
Johan was appointed Regional Director,
Europe and North Africa in January
2019. He joined the Management
Board in 2014 as Regional Director
for Eastern Europe, Middle East and
Africa, then became Regional Director,
Asia-Pacific and Middle East in January
2018. He has been with the Group for
more than 25 years and his previous
roles include General Manager in
Russia, General Manager in Turkey
and Global Brand Director for the
Kent brand.
Kingsley Wheaton
Chief Marketing Officer (47)
Nationality: British
Kingsley was appointed Chief
Marketing Officer in January 2019.
He joined the Group in 1996 and held
various senior marketing positions,
prior to being General Manager in
Russia. He was appointed to the
Management Board as Corporate and
Regulatory Affairs Director in 2012.
In January 2015, he was appointed
Managing Director, Next Generation
Products and then as Regional Director,
Americas and Sub-Saharan Africa in
January 2018.
68
Directors’ ReportBAT Annual Report and Form 20-F 2019 LEADERSHIP
AND PURPOSE
Our Board
Our Board is collectively responsible to our shareholders for the
long-term sustainable success of the Company and for the Group’s
strategic direction, purpose, values and governance. Our Board
provides the leadership necessary for the Group to meet its business
objectives within a robust framework of internal controls.
Board programme and activities
The Board has a comprehensive annual programme of meetings to
monitor and review the Group’s strategy across all the elements of
the Group’s business model. The Chairman sets a carefully structured
agenda for each meeting in consultation with the Chief Executive
and Company Secretary.
Primary Board responsibilities include:
– Group strategy and ensuring resources are in place to
meet objectives
– Setting Group performance objectives and monitoring
performance
– Significant corporate activities
– Group budget
– Risk management and internal control
– Board, Management Board and Company Secretary
appointments and succession
– Periodic financial reporting
– Annual Report & 20-F approval
– Dividend policy
– Corporate governance
– Group policies
– Effective engagement with shareholders, our workforce and
wider stakeholders
– Assessing and monitoring culture and its alignment with Group
purpose, values and strategy
– Ensuring workplace policies and practices align with values
and support sustainable success
– Review of Speak Up channels and reports arising therefrom
The statement of matters reserved for the Board is available
at bat.com/governance
Board Committees
The Board has three principal Board Committees to which it has
delegated certain responsibilities. The roles, memberships and
activities of these Committees are described in their individual
reports in this section.
Board
The key activities of the Board in 2019 are detailed on pages 74
and 75. These activities are discussed under the strategy pillars of
Sustainability, Growth, Productivity and Winning Organisation.
The Board’s strategic priorities for 2019 are identified within the
key performance indicators set out on pages 18 and 19.
During the year, the Board also devotes considerable attention
to Group corporate governance, including internal control and
compliance matters.
The Board considers stakeholder interests in its decision-making on
an ongoing basis. Examples of the Board considering the long-term
consequences of decisions, stakeholder interests, the impact of our
operations on the environment and corporate reputation (amongst
other factors) are discussed on pages 74 and 75.
Collective decision‑making
The Chairman seeks a consensus at Board meetings but, if necessary,
decisions are taken by majority. If any Director has concerns on any
issues that cannot be resolved, such concerns are noted in the Board
minutes. No such concerns arose in 2019.
How our governance framework supports our strategy
As part of our internal controls framework, the Board has delegated
certain authorities to executive management through our Group
Statement of Delegated Authorities to enable effective delivery of
Group strategy. The Board’s approach to delegation of authorities
is discussed further on page 70.
Management Board
The Management Board is responsible for overseeing the
implementation of Group strategy and policies set by the Board, and
creating the framework for Group subsidiaries’ day-to-day operations.
The Management Board is chaired by the Chief Executive and
comprises the Executive Directors and 11 senior Group executives
whose names and roles are described on page 68.
Giovanni Giordano and Naresh Sethi stepped down from the
Management Board with effect from 31 March 2019.
Audit
Committee
Nominations
Committee
Remuneration
Committee
Primary Management Board responsibilities include:
– Developing Group strategy for the Group’s product portfolio for
page 83
page 79
page 90
The Chairman of each Committee provides updates to the Board,
including on decisions made and key matters discussed, following
each Committee meeting. Copies of the minutes of all Committees
are circulated to all Board members to the extent appropriate.
Each Committee has its own terms of reference, available at
bat.com/governance. Committee terms of reference are
regularly reviewed and updated, most recently to align
with the UK Corporate Governance Code 2018.
approval by the Board
– Monitoring Group operating performance
– Ensuring Group, regional and functional strategies and resources
are effective and aligned
– Managing the central functions
– Overseeing the management and development of Group talent
69
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of Directors OUR CULTURE
AND VALUES
Shaping and overseeing culture
Our Board shapes and oversees not just Group strategy, but also its
culture and ethos. Since becoming Chief Executive in April, Jack Bowles
has focused on creating a stronger, simpler, faster business, with a
culture reflecting our ethos, set out on page 11. Our ethos is the
thread that must run through everything we do and how we do it,
and we believe it empowers our people, fosters a vibrant and
rewarding work place, and promotes sustainable long-term value.
Our Board is therefore committed to supporting Jack and our
Management Board to drive our ethos in every area of our business.
The Board leads by example, establishing revised governance
structures across the organisation which took effect in January 2020.
Our revised Group Statement of Delegated Authorities (SoDA) aims
to empower people at the right level of our organisation with an
enhanced degree of accountability and ownership. These changes
support our Quantum transformation project, to reduce management
layers, speed up and enhance decision-making, and create a more
focused Group.
Overseeing the implementation of Group strategy through the SoDA is
one of the ways that the Board promotes good corporate governance,
risk management and internal control across our Group. The SoDA
supports our Board members in managing their responsibility for
promoting the success of the Company, in line with their directors’
duties. Where the Board delegates authority for decision-making
to management, the SoDA mandates regard for the likely long-
term consequences of decisions, the imperative of maintaining
high standards of business conduct, employees’ interests, business
relationships with our wider stakeholders, the impact of our operations
on the environment and communities in which we operate, and other
relevant factors.
Delivery with integrity
How we execute our strategy is as important as its successful delivery,
and our Board is focused on ensuring that in every aspect of our
business we deliver with integrity. In an organisation as diverse as
ours, it is essential to the Group’s continued success that all our people
act with consistently high standards of behaviour. We articulate
this through our Group Standards of Business Conduct (SoBC).
Compliance with our SoBC, in letter and spirit, is mandatory for all our
people worldwide.
We keep our SoBC under regular review to maintain best practice and
to take employee and stakeholder feedback into account. The Board
approved a revised version of our SoBC in 2019, which came into
effect in January 2020, supported by a global awareness campaign.
Our revised SoBC emphasises that every line manager across our
business must act as a role model for high standards of behaviour and
includes a refreshed Speak Up policy, reflecting the range of Speak Up
channels through which any concerns may be raised in confidence
(anonymously if preferred) and without fear of reprisal. Our revised
SoBC includes our Lobbying and Engagement Policy (replacing our
Group Principles for Engagement), reinforcing the requirement for all
our engagement activities with governments, regulators and other
external stakeholders to be conducted with transparency, openness
and integrity.
Our Audit Committee is regularly updated on SoBC incidents.
The Committee reports to the Board to enable Board oversight of
behaviour falling short of our standards and the corrective action
taken, particularly where relevant to culture and values.
Read more about our commitment to delivery with integrity and our Group
Standards of Business Conduct on pages 31 to 32
70
Monitoring culture
Our Board is satisfied that the culture of the Group is aligned with its
purpose, values and strategy and that workplace policies and practices
are consistent with those.
Our Board looks at organisational culture in a variety of contexts
during the year, and examples of this in 2019 are highlighted below.
During 2019, Board oversight and monitoring of culture has been
supported by the introduction of a Group culture dashboard review,
which our Board will now monitor annually. The dashboard draws
together a range of focused insights that can be measured over time,
including employee engagement, leadership stability, employee
retention and turnover, diversity balance across the organisation,
business conduct, Speak Up reporting, and workplace health & safety.
Outside of the boardroom, the Directors regularly participate in market
and site visits during the year, providing them with direct experience of
our organisational culture in context.
Examples of the Board’s focus
on culture in 2019
Board review: Digital strategy
Supporting enhanced engagement with consumers and customers and
developing a digitally literate organisation (‘Digital in our DNA’).
Non-Executive Director visit: Denmark and Sweden
Meeting representatives from regional and local management teams,
visiting local Trade Marketing and Distribution operations in Copenhagen,
and touring factory operations in Malmö.
Board strategy sessions: Culture and talent
In-depth review of Group culture, culture dashboard insights,
alignment of Group workplace policies and practices with Group
purpose, strategy and values; and talent strategy for accelerating
Group transformation, including building diverse talent pipelines.
Board review: Quantum project
Oversight of project objectives, including enhancing employee
empowerment and transformation of organisational ways
of working, with due regard to employee interests in project
design and implementation.
Board review: Standards of Business Conduct
Approving a revised version of the SoBC emphasising line manager
responsibility for role-modelling high standards of behaviour, a
refreshed Speak Up policy, and new Lobbying and Engagement Policy.
Board review: Group workforce engagement
Review of Group workforce engagement channels, feedback from
the 2019 Your Voice global employee survey and other channels, and
considering areas for future focus or action in light of these insights.
Board strategy sessions: Global R&D Centre, UK
Meeting representatives from our New Categories and Research &
Science teams in Southampton, UK to discuss technologies and insights
underpinning pipeline development.
Non-Executive Director visit: Japan
Understanding consumer perspectives on New Categories products,
meeting representatives from the regional and local management teams
and visiting local Trade Marketing and Distribution operations in Tokyo.
Board and Committee evaluations
This review considered management engagement with the Board,
monitoring wider business culture, supporting the executive
team, collaborative ways of working and opportunities to enhance
effectiveness further.
Directors’ ReportBAT Annual Report and Form 20-F 2019 BOARD ENGAGEMENT
WITH STAKEHOLDERS
Our Directors value all engagement with our shareholders and
wider stakeholders to understand their views and inform the Board’s
decision-making, strategy development and risk assessment. Our key
stakeholders are set out on pages 26 to 27, with an overview of why
they are important to our long-term, sustainable success, what matters
to them, and how we engage and respond to their views.
Shareholder and investor engagement
Dialogue with our shareholders
The Board is committed to open and transparent dialogue with
shareholders to ensure their views are understood and considered.
The Chairman and Executive Directors’ annual engagement
programme is discussed below. The Senior Independent Director
and other Non-Executive Directors are also available to meet with
major shareholders on request. Our AGM is an opportunity for
further shareholder engagement and for the Chairman to explain the
Company’s progress and, with other members of the Board, answer
questions. All Directors attend our AGM, unless illness or pressing
commitments prevent them. All Directors attended our AGM in 2019,
except Dr Marion Helmes due to a prior commitment. Details of our
2020 AGM are set out on page 323.
Annual investor relations programme
A global engagement programme is conducted annually with
shareholders, potential investors and analysts. This is led by
the Chairman and the Executive Directors, with our Head of
Investor Relations. The Chairman and the Executive Directors met
with shareholders throughout the year. Prior to his appointment as
Finance Director, Tadeu Marroco also attended shareholder meetings
as Deputy Finance Director.
As part of the investor relations programme in 2019, meetings were
held with institutional shareholders representing the majority of the
Company’s issued share capital, primarily in the UK, US and South
Africa. A wide range of topics were discussed, including Group
strategy, performance, corporate governance and sustainability. In the
past year, over 465 investor engagement activities took place, primarily
through face-to-face meetings and calls. The Executive Directors also
presented regular investor updates, which are published on bat.com
with all results presentations. Results presentations are also available to
all our shareholders by webcast.
The development of the new Directors’ Remuneration Policy was an
area of focus for our investor relations programme in advance of the
Company’s 2019 AGM. The Remuneration Committee Chairman led
engagement on the policy proposals, supported by the Chairman,
including dialogue on the development of policy proposals to take into
account shareholder feedback.
An Investor Day was held in London in March 2019, with the
Management Board in attendance. Jack Bowles led the event, setting
out a comprehensive overview and outlook for the business. The event
featured presentations by a number of Management Board members
and senior leaders. Around 200 delegates attended, representing our
key investors and market analysts. The content covered objectives to
accelerate delivery of our ‘transforming tobacco’ agenda, with clear
targets attached to New Category growth and performance of the
business over the next two to three years.
For debt investors, there is a microsite on bat.com with comprehensive
bondholder information on credit ratings, debt facilities, outstanding
bonds and maturity profiles.
How the Board considers shareholder views
The Chairman and the Executive Directors regularly update the Board
on their dialogue with shareholders. The Board also receives regular
updates from the Head of Investor Relations and our brokers on key
issues raised by shareholders, and on the Company’s share price
performance. Shareholder perspectives considered by the Board during
2019 included, amongst others, regulatory developments in the US
market, the Group’s New Categories strategy and performance, Group
debt and business transformation. The Board discusses key issues
raised and takes shareholder feedback into account in developing
Group strategy.
For disclosures required by paragraph 7.2.6 of the Disclosure Guidance
and Transparency Rules and the Companies Act 2006 see the Other
Information section
Financial calendar 2019
February
Preliminary Results for FY 2018
March
April
Capital Markets Day
Annual General Meeting
465+investor
engagement
activities
in 2019
June
Pre-close trading update
August
Half-year Report
November
Pre-close trading update
Update on 2019 AGM voting results
All resolutions were passed at the Company’s AGM held on 25 April
2019 with the requisite majority of votes. However, we acknowledge
that a significant minority of our shareholders did not support the
resolution to renew the Directors’ authority to allot shares.
This level of authority continues to be supported by the majority of
our shareholders and the level of authority maintained is in line with
prevailing UK market practice. Although there is no present intention
to exercise this authority, the Board considers that this level of
authority is appropriate to maintain flexibility for the Company.
We will maintain dialogue with shareholders for which this authority
continues to present concerns and keep best practice under review.
We appreciate that some shareholders are unable to support an
allotment authority at the level sought, and the reasons why.
During 2019, we engaged with a range of shareholders that voted
against this resolution and the Board considered their views.
The Board fully understands the difference in approach between
prevailing UK market practice (to retain an authority to allot in line
with the UK Investment Association’s share capital management
guidelines) and governance policies maintained by those
shareholders voting against. This includes shareholders in South
Africa, who either do not support a general allotment authority or
only support a general authority at lower levels.
71
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of Directors BOARD ENGAGEMENT WITH STAKEHOLDERS
CONTINUED
Wider stakeholder engagement
Our Board conducted a review of key business stakeholders in 2019.
A broad range of stakeholders are important to the Group at local,
regional and functional levels. Key stakeholders that are essential to
our ability to generate long-term, sustainable value are identified by
applying an established stakeholder engagement framework. This takes
into account Group strategic objectives, risks to the Group and
emerging risks.
The 2019 stakeholder review included how engagement is conducted
across the Group, stakeholders’ primary concerns and how the Board
is kept informed of those where engagement is not conducted at
Board level.
Following the review, the Board decided to establish Non-Executive
Director participation in meetings with our independent Sustainability
Stakeholder Panel to enhance their understanding of evolving issues
for our stakeholders and obtain more detailed insight on how they are
addressed and communicated in our annual Sustainability Report.
Our Board is satisfied that there is effective and well-established
engagement with the Group’s key stakeholders. The Board will
conduct a stakeholder review annually and monitor the continued
effectiveness of engagement.
Day-to-day engagement with our key stakeholders, and other local
stakeholder groups, is conducted at the level and in a format best
suited to the context. This may be locally, regionally or functionally,
or by the Board or senior management, depending on the stakeholder.
Our Group governance framework, including our Group Standards
of Business Conduct and specific frameworks for stakeholder
engagement, mandate openness, transparency and integrity,
and define requirements for appropriate management oversight.
Read more about our key business stakeholders and how we engage
Pages 26 to 27
Where the Board does not engage directly with our stakeholders,
it is kept updated so Directors maintain an effective understanding of
what matters to our stakeholders and can draw on these perspectives
in Board decision-making and strategy development. Examples of how
the Board engaged with wider key stakeholders and maintained its
understanding of their interests during the year include:
Consumers
Our consumers are at the core of everything we do, and over
150 million consumers interact with Group products every day.
The Board is regularly briefed by the Executive Directors and senior
management on how we are developing our product portfolio to
satisfy an increasingly varied set of adult consumer preferences across
our traditional and New Categories businesses.
Through strategy and product portfolio ‘deep dives’ in 2019, the
Board devoted significant time to considering how consumer insights,
product preferences, longer-term trends and the Group’s approach
to product stewardship can help deliver a step-change by offering
innovative products that will recapture consumer moments lost to
shifting trends.
The Board sees this for themselves through their review of evolving
consumer spaces, participation in product ‘look and feel’ exploration
sessions, and by speaking directly to product developers to understand
how they integrate in-depth scientific knowledge with consumer
insights to build a superior product pipeline.
Read more about our approach to engaging with consumers
Page 26
72
Our People
The Board absorbs the views of our workforce through a combination
of engagement methods, across multiple channels at different levels of
our organisation. These include Board market and site visits, town halls,
works councils, global webcasts, and our ‘Your Voice‘ global employee
survey. These are discussed further on pages 41 to 42.
Director market and site visits in 2019*
UK
6Events with
Directors
US
3Director
visits
AmSSA
1Director
visit
ENA
3Director
visits
APME
2Director
visits
* Total visits/events by location in 2019 that one or more Directors attended.
The Board has taken account of the requirements of the UK Corporate
Governance Code in its approach to engagement with the workforce
and has adopted a combination of methods as permitted by the Code.
Given the spread, scale and diversity of the Group’s workforce, the Board
considers it effective to use the established channels referred to above,
and has augmented these from January 2019 by introducing Group-
wide reporting structures to capture feedback from engagement forums
covering all Group company employees and individuals contracted on a
fixed-term basis to undertake permanent roles worldwide.
The Board now reviews these engagement channels and consolidated
feedback from them annually. In 2019, this also included review of insights
from our 2019 Your Voice global employee survey. Focus and action areas
reviewed by the Board are then cascaded to our workforce. Key areas of
feedback from engagement channels reviewed by the Board during 2019
focused on business transformation, product innovation and ways of working,
and the BAT ethos has been developed with significant workforce input.
Directors attended market and site visits, including to Denmark
(Copenhagen), Japan (Tokyo), Sweden (Malmö factory) and UK
(Global R&D facilities in Southampton) to meet local management and
representatives from marketing and operations. Our Executive Directors
presented several global webcasts following their appointments to
the Board which included discussions on strategy, business outlook,
performance, culture and the Quantum transformation project, including
live Q&A. Our Directors take other opportunities to engage directly
with employees to support the Group’s diversity and inclusion. In 2019,
examples include Director participation in our global webcast campaign
#BalanceForBetter on International Women’s Day and our annual event
for ‘B United‘, the Group’s LGBT+ network.
The statement of matters reserved for the Board reflects the Board’s
responsibility to understand the views of our global workforce, and to
keep effectiveness of mechanisms for engagement with the workforce
under review, in accordance with the UK Corporate Governance Code.
Read more about workforce engagement across our Group
Pages 26, 41 and 42
UK Companies Act: Employee engagement
This section summarises the Directors’ approach to engaging with the
Group’s workforce, including employees of UK Group companies, and
how the Directors have regard to their interests. Further information is
provided on pages 26 to 27 and 41 to 42. Information regarding the
effect of that regard is provided on pages 74 and 75.
Directors’ ReportBAT Annual Report and Form 20-F 2019 Suppliers
Governments and wider society
Our relationships with suppliers and farmers are managed day-to-
day by the Group’s Operations function and at local market level.
The Board periodically reviews the Group’s supply chain strategies,
supplier footprint and progress of sustainable agriculture and farmer
livelihoods programmes, in particular the industry-wide Sustainable
Tobacco Programme, and the Group’s THRIVE programme which takes
into account insights from supplier and farmer engagement.
In 2019, updates to the Board included the Group’s combustibles
supply chain strategy and the Group’s approach to building strategic
relationships with research partners to support New Categories
development. The Board also discussed new ways of working to build
relationships with corporate venturing partners to foster innovation
and build capabilities in New Categories.
As part of the Board’s review of our annual Modern Slavery Statement,
it discussed actions being taken by the Group to address the risk of
human rights issues across our business and supply chains. In the
context of the Board’s review of the revised SoBC in 2019, it was
briefed on enhanced alignment of our Human Rights policy with the
ILO Declaration on fundamental principles and rights at work and UK
modern slavery legislation.
Read more about how we engage with our suppliers and farmers
Pages 27, 31 and 39
Customers
Whilst retailer, wholesaler and distributor relationships are managed
at local market and business unit levels, the Board is regularly briefed
on the Group’s retail footprint, route to market strategies and
developments in the global retail environment.
In 2019, this was primarily achieved through regular updates from
the Chief Executive on product roll-out plans and the Board’s annual
product portfolio ‘deep dives’. Focus areas for Board discussions
included US wholesaler and retailer approaches to preventing
youth access to vapour products and the Group’s actions to ensure
responsible partnerships with trade customers. The Audit Committee
also regularly reviews the Group’s Youth Access Prevention activities
and action plans.
Read more about how we engage with our customers
Page 27
At every regular Board meeting, the Board reviews a report from our
Legal & External Affairs Director covering regulatory engagement,
progress in anti-illicit trade initiatives, litigation, compliance and other
legal matters across the Group. The Board is briefed on evolving
product regulation through its annual product portfolio ‘deep dives’
with senior management.
The Audit Committee is regularly updated on the status of
engagement with tax authorities on material Group tax matters.
The Non-Executive Directors regularly attend meetings of the Group’s
Corporate Audit Committee and Regional Audit & CSR Committees,
where societal and community perspectives on various topics at
regional and local levels are discussed further. Feedback from those
Committees is reviewed by the Audit Committee.
The Chairman participates in the Confederation of British Industry, the
Multinational Chairman Group and the Whitehall & Industry Group;
these are all forums enabling engagement with the UK Government
on topics such as global trade, Brexit and cyber security.
The Audit Committee reviews the Group’s sustainability performance
annually, including our investment in community and charitable initiatives
under the Group’s strategic framework for corporate social investment.
The Chairman also participates in the annual meeting of the Global
Leadership Foundation (GLF), a network of government and NGO
stakeholders helping developing countries improve governance.
The Board is briefed on scientific engagement with public health
bodies, scientific communities and the media. In 2019, this included
the launch of the new BAT-science website.
As part of the Board’s review of the Group’s new environmental targets
and environmental reporting, the Board was briefed on stakeholder
expectations in relation to carbon emissions commitments and
alignment to Taskforce on Climate-related Financial Disclosures (TCFD)
recommendations.
Read more about our engagement with governments and wider society
Pages 27 and 32
UK Companies Act: Business relationships
This section summarises how the Directors have regard to the need
to foster business relationships with customers, suppliers and other
external stakeholders. Further information is provided on pages 26
and 27. Information regarding the effect of that regard is provided
on pages 74 and 75.
Sustainability Stakeholder Panel
To enhance its understanding of what matters to our stakeholders,
the Board established Non-Executive Director participation in
meetings with our Sustainability Stakeholder Panel in 2019.
The Panel is formed of key opinion leaders in the areas of harm
reduction, environment, human rights and business ethics. It was
established in 2016 to provide independent and objective feedback
on our sustainability agenda, priorities and our Sustainability Report.
In November 2019, Richard Burrows and Sue Farr, with members
of senior management, met the Panel to review developments in
sustainability initiatives, evolving sustainability issues that could
impact our wider stakeholders, and Group sustainability performance.
Feedback was provided to the Board and Non-Executive Director
participation in meetings with the Panel will continue in 2020.
73
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of Directors BOARD ACTIVITIES
IN 2019
Sustainability
Growth
The Board emphasises the need for our business, strategy and
product portfolio to be sustainable for the long term and meet
stakeholder expectations.
Growth remains our key strategic focus. Continued investment
in, and development of, our strategic focus areas is central to the
Board’s annual agenda.
Activities in 2019
– reviewing the Group Risk
– reviewing the status of
Register, Group risk appetite
in the context of its strategic
objectives, emerging risks
to the Group, and Group
insurance coverage;
– determining Group viability for
reporting purposes taking into
account current position and
principal risks;
– reviewing Group stakeholders,
methods of engagement,
issues that matter to those
stakeholders and how the
Group responds;
– reviewing the Group’s approach
to product stewardship and
the science underpinning
development of New
Category products;
– reviewing Group regulatory
engagement activities
and evolving global
product regulation;
– reviewing New Category
products environment, with
particular focus on the US
vapour environment and
the status of FDA proposals
to regulate flavours in
vapour products;
– approving revised versions of
the International Marketing
Principles and Group Standards
of Business Conduct (including
the Speak Up and Lobbying and
Engagement policies);
litigation proceedings involving
Group companies, including
updates on the class-actions
in Quebec Province against
Group subsidiary Imperial
Tobacco Canada and associated
CCAA filing, the Fox River and
Kalamazoo River proceedings,
and claims brought by RAI
dissenting shareholders
following acquisition of the
remaining shares in RAI;
– reviewing updates on
compliance matters, including
allegations of misconduct,
reports from Speak Up
channels, and progress of the
Group’s ‘Delivery with Integrity’
compliance programme;
– reviewing health and safety
performance for the preceding
year, targets for the coming
year and action plans;
– reviewing performance against
environmental targets set for
the preceding year, approving
revised long-term targets and
endorsing plans for enhanced
climate change reporting; and
– reviewing the Group’s annual
Modern Slavery Act statement
and approving it for adoption
by the Company.
Activities in 2019
– reviewing Group strategy and
its implementation across the
Group’s regions;
– review of the evolution of the
Group’s strategy to accelerate
New Category growth;
– approval of Group budget and
oversight of resource allocation
activities, including for
combustible product portfolios,
to support strategy execution;
– reviewing Group financial
performance against the key
performance metrics, current
outlook throughout the year,
key challenges faced and
opportunities for growth in
each region;
– reviewing Group half-year
results, year-end results and the
Annual Report and Form 20-F;
– reviewing New Category
product portfolios, innovation
pipeline, roll-out plans and
Group strategy for developing
intellectual property;
– reviewing Group product
portfolio performance in the
context of strategic focus areas
and the competitor landscape;
– reviewing the Group’s
information and digital
technology (IDT) strategy,
including progress of the
Group’s digital transformation
agenda, risk management and
cyber security;
– oversight of establishment of
the Group’s corporate venture
capital unit, ‘Better Tomorrow
Ventures’, and approval of
specific delegated authorities
to support the unit in creating
innovative and agile strategic
relationships with venture
capital partners;
– reviewing the Company’s share
price performance, investor and
broker perspectives, and analysis
of factors impacting share
price performance;
– reviewing the impact of
foreign exchange rates on
Group financial performance,
including measures taken
by management to mitigate
foreign exchange risks; and
– reviewing financial performance
of the associates of the
Group periodically.
Examples of how the Board considered stakeholders, the environment, corporate reputation, and the long-term impact of decisions
Environmental targets and
climate change reporting
The Board approved new environmental targets
aimed at significantly reducing the greenhouse
gas emissions of the Group and its supply chain.
The targets were based on the most up-to-date
climate science and were formally endorsed by
the Science-Based Targets initiative, reflecting the
Board’s commitment to reducing the impact of our
operations in the long term and working with external
stakeholders to achieve this. Building on this initiative,
the Board has also endorsed the Group’s alignment
with the TCFD reporting recommendations on the
financial impacts of climate change by 2022.
Key stakeholders
Shareholders/
Bondholders
Consumers
Our people
Suppliers
Customers
Governments
and wider society
Budget and resource allocation
The Board approved the 2020 budget, weighing
the balance between the long-term corporate and
consumer benefits of New Categories investment and
continued portfolio and geographic expansion with our
commitment to significant deleveraging. The budget
reflects our considerable work to better understand
and anticipate evolving consumer preferences at a
transformational time for our sector, and factors in our
commitment to strong product stewardship, research
and collaborative innovation to meet those needs.
Key stakeholders
Shareholders/
Bondholders
Consumers
Our people
Suppliers
Customers
Governments
and wider society
74
Directors’ ReportBAT Annual Report and Form 20-F 2019
Productivity
Winning organisation
The Board pays close attention to the Group’s operational
efficiency and our programmes are aimed at delivering a globally
integrated enterprise with cost and capital effectiveness.
Setting the ‘tone from the top’ is an important part of the
Board’s role, helping to foster a culture centred on our ethos.
Activities in 2019
– reviewing operating
performance on a Group,
regional and key market level
across the product portfolio,
including combustibles and
New Categories;
– reviewing Group cash flow
performance, including
monitoring the progress to
realise opportunities and
optimise the balance sheet,
to ensure the Group can invest
for the future while reducing
the carrying value of debt;
– reviewing the SEC-registered
shelf programme for US debt
issuance, summarised on
page 48, and approving the
transaction documentation to
establish the programme;
– reviewing the Quantum
transformation project
and its objectives, and
approving changes to
the Group’s delegated
authorities to implement
organisational change;
– reviewing Group compliance
with its financing principles,
including in relation to Group
liquidity, capital allocation,
adjusted net debt/EBITDA,
the Group’s revolving credit
facilities, planned refinancing
and other treasury activities;
– reviewing US business
performance following the
acquisition of RAI, progress in
achieving anticipated synergies
discussed further at page 39,
implementation of operational
integration, and outlook for the
US business;
– reviewing Group supply chain
strategy and optimisation
programmes; and
– reviewing other business
transformation programmes
relating to finance, human
resources and global business
services to implement
operational efficiencies.
Activities in 2019
– approving the appointment
of Tadeu Marroco and Jerry
Fowden to the Board and
revising the composition of
Board Committees on the
recommendation of the
Nominations Committee;
– determining the independence
of Non-Executive Directors
prior to proposing them
for re-appointment (or
appointment for the first time)
at the Company’s AGM;
– reviewing feedback from the
Remuneration Committee
on development of the new
Directors’ Remuneration Policy
and shareholder perspectives,
and adopting the new policy for
proposal to shareholders at the
Company’s 2019 AGM;
– monitoring corporate culture
and its alignment with the
Group’s purpose, strategy
and values;
– reviewing the Group’s talent,
diversity and inclusion strategies
and the progress of initiatives
supporting their objectives;
– reviewing the BAT ethos,
an evolution of the Group’s
Guiding Principles, developed
with significant input from
Group company employees;
– considering feedback from the
range of workforce engagement
mechanisms in place across
the Group, including
outcomes from the ‘Your
Voice’ global 2019 employee
survey, discussing plans for
implementing feedback and
attending market and site visits;
– reviewing Speak Up
mechanisms and the reports
arising from them;
– approving changes to the
Group’s existing short-term
and long-term management
incentive schemes (below
Executive Director level) to
enhance alignment with
Group strategy and values,
and adopting rules for a new
employee restricted share
long-term incentive plan for
proposal to shareholders at the
Company’s 2020 AGM;
– reviewing the funding positions
relating to the Group’s
retirement benefit schemes; and
– review and discussion of the
outcomes from the evaluation
of the effectiveness of the Board
and its Committees in 2019.
Business transformation
The Board reviewed the Quantum transformation
project and its objectives and approved changes to
the Group’s governance framework to support project
delivery and realise its benefits. The project, while
creating a leaner organisation, was conceived with due
regard to employee interests and is ultimately designed
to empower our people going forward, promote agility
in their decision-making, and support funding for future
growth. A consumer-centric approach is at the heart
of this, reflecting the Group’s strategy.
Key stakeholders
Shareholders/
Bondholders
Consumers
Our people
Group incentive schemes
The Remuneration Committee reviewed the Group’s
wider reward strategy (below Executive Director level),
leading to a simplified annual salary review process
and revised management incentive scheme structures.
As competition for talented employees intensifies and
we build our capabilities to succeed in New Categories
and growth markets, the Committee endorsed these
changes to better align incentive schemes below
Executive Director level with the Group’s strategy and
values, enhance talent acquisition and retention and
take into account employee feedback.
Key stakeholders
Shareholders/
Bondholders
Consumers
75
Examples of how the Board considered stakeholders, the environment, corporate reputation, and the long-term impact of decisions
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of Directors
DIVISION OF
RESPONSIBILITIES
Introduction
This section sets out the roles, and effective division of responsibilities, between the Chairman, Chief Executive and Non-Executive Directors,
and outlines the support the Directors receive to assist them in meeting their responsibilities under the UK Corporate Governance Code and
discharging their directors’ duties, both individually and collectively.
Leadership
Chairman
– Leadership of the Board
– Ensures Board effectiveness
– Facilitates the productive contribution of the Directors
– Sets the Board agenda
– Interfaces with shareholders
– Ensures effective shareholder engagement
– Representational duties on behalf of the Company
Oversight
Non‑Executive Directors
– Oversee Group strategy
– Scrutinise and hold to account performance against objectives
– Monitor Group performance
– Review management proposals and provide strategic guidance
– Bring external perspective and effective challenge to management
Non‑Executive Director meetings
When required, the Non-Executive Directors, led by the Chairman,
meet prior to or following Board meetings. Regular meetings led
by the Chairman are scheduled in the Board calendar without the
Executive Directors present.
Independence
The Board considers all Non-Executive Directors to be independent,
as they are free from any business or other relationships that could
interfere materially with, or appear to affect, their judgement.
In respect of Luc Jobin and Holly Keller Koeppel, who were originally
appointed to the Board following the acquisition of RAI and pursuant
to the Agreement and Plan of Merger with RAI, the Board determined
each of them to be independent Directors, having taken into account
their respective periods of service on the board of RAI as independent,
non-executive directors.
The Board has also considered the independence requirements
outlined in the NYSE’s listing standards and has determined that these
are met by the Chairman and all the Non-Executive Directors.
Chief Executive
– Overall responsibility for Group performance
– Leadership of the Group
– Enables planning and execution of Group objectives and strategies
– Stewardship of Group assets
– Drives the cultural tone of the organisation
The responsibilities of the Chairman, Chief Executive,
Senior Independent Director are available at www.bat.com
Senior Independent Director (SID)
– Leads review of the Chairman’s performance
– Presides at Board meetings in the Chairman’s absence
– Chairs the Nominations Committee when Chairman
succession considered
– Sounding board for the Chairman
– Intermediary for other Directors
– Available for meet with shareholders
The Executive and the Non-Executive Directors also meet annually,
led by the Senior Independent Director and without the Chairman
present, to discuss the Chairman’s performance.
Directors information and advice
– Directors receive papers for review in good time ahead of each
Board and Committee meeting.
– Papers and presentations to the Board and its Committees include
discussion of specific stakeholder considerations as applicable
– The Company Secretary ensures effective information flow within
and between the Board and its Committees, and between the Non-
Executive Directors and senior management.
– The Company Secretary, in conjunction with external advisers where
appropriate, advises the Board on all governance matters.
– All Directors have access to the advice and services of the Company
Secretary. The appointment and replacement of the Company
Secretary is a matter for the Board.
– A procedure is in place for all Directors to take independent
professional advice at the Company’s expense if required.
– Each of the three principal Committees of the Board may obtain
independent legal or other professional advice, at the Company’s
expense, and secure attendance at meetings of outsiders if needed.
76
Directors’ ReportBAT Annual Report and Form 20-F 2019 Commitment
Before appointing prospective Directors, the Board takes into account
their other commitments and significant time commitments are
disclosed prior to appointment. The letters of appointment for the
Chairman and Non-Executive Directors set out their expected time
commitment to the Company. Any additional external appointments
following appointment to the Board require prior approval by
the Board in accordance with the UK Corporate Governance
Code 2018. The Board assesses the significance of any additional
external appointment notified by a Director, supported by the
Company Secretary.
During 2019, the Board considered and gave approval to the new
external appointments of the Non-Executive Directors. Sue Farr’s
appointment as a non-executive director of Helical plc with effect from
5 June 2019 was considered by the Board to be a significant additional
appointment. Such appointment was, however, not considered to
impair her ability to serve as a Director of the Company in view of
the anticipated time commitment and as Ms Farr ceased to be a
non-executive director of Dairy Crest Group plc on 15 April 2019.
Including the Company, Sue Farr is a non-executive director of a total
of three listed companies.
In 2019, the Board also considered and gave approval to Luc
Jobin’s proposed appointment as an independent director of
Gildan Activewear Inc., effective from 18 February 2020. The
Board considered the appointment to be a significant additional
appointment, however it was not considered to impair Mr Jobin’s
ability to serve as a Director of the Company in view of Mr Jobin’s total
of two listed company mandates which is within the voting guidelines
of leading corporate governance agencies. Following this appointment,
Mr Jobin is a Non-Executive Director of two listed companies, including
the Company.
Conflicts of interests
The Board has formal procedures for managing conflicts of interest.
Directors are required to give advance notice of any conflict issues
to the Company Secretary. These are considered either at the next
Board meeting or, if the timing requires it, at a meeting of the Board’s
Conflicts Committee.
Each year, the Board also considers afresh all previously authorised
situational conflicts. Directors are excluded from the quorum and
vote in respect of any matters in which they have an interest.
Professional development
Non-Executive Directors receive a full programme of briefings annually
across all areas of the Company’s business from the Executive Directors,
members of the Management Board, the Company Secretary and
other senior executives.
Focus areas in 2019 included a recap on directors’ duties under Section
172 of the UK Companies Act 2006, and new corporate reporting
requirements introduced in 2018 associated with the discharge of
those duties. These briefings were provided in the context of the
Board’s review of key business stakeholders. The Board was also
updated on the implementation of revisions to the Group’s governance
framework to align with the UK Corporate Governance Code,
following the Board’s approval of those revisions in 2018.
During the year, the Audit Committee has been updated on the
progress of UK government reviews and consultations in relation
to the UK audit market and proposed reform of the UK Financial
Reporting Council.
Non-Executive Directors regularly attend meetings of the Group’s
Regional Audit and Corporate and Social Responsibility Committees
and Corporate Audit Committee to gain an enhanced understanding
of the Group’s regions and central functions and the risks faced by the
business at market, regional and functional levels.
Non-Executive Directors also attend by rotation an annual meeting
of our Sustainability Stakeholder Panel to enhance their understanding
of wider stakeholder considerations.
The Chairman meets with each Non-Executive Director individually
towards the end of each year, to discuss their individual training and
development plans.
All Directors receive a thorough and personalised induction upon
joining the Board. Individual inductions conducted in 2019 are
highlighted below.
Board induction
On joining the Board, all Directors receive a full induction tailored to their individual requirements
Finance Director induction 2019
Tadeu Marroco completed his Executive Director induction
programme in preparation for his appointment to the Board on
5 August 2019.
Non‑Executive Director induction 2019
Jerry Fowden completed his Non-Executive Director induction
programme in 2019 following his appointment to the Board on
1 September 2019.
Mr Marroco’s induction included in-depth briefings from senior
management, the external auditors and external advisers.
These briefings covered a range of topics, including the Company’s
corporate governance structures, responsibilities as Finance Director
and directors’ duties more generally, Board and Committee processes,
UK and US regulatory frameworks applicable to listed issuers,
shareholder and wider stakeholder engagement programmes and
stakeholder perspectives, external audit procedures and legal matters.
Mr Fowden’s induction included a series of briefings from senior
management, the external auditors and external advisers on the
Group’s strategy, business regions, product portfolios, corporate
governance, directors’ duties, the Group’s shareholder and wider
stakeholder engagement programmes and stakeholder perspectives,
evolving regulation impacting the Group’s business, and treasury,
risk and legal matters.
Mr Fowden also visited our Global R&D Centre in Southampton to
gain insight into the Group’s product innovation pipeline and science
supporting it directly from our scientists and product developers.
77
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of Directors BOARD
EVALUATION
Review process
The performance and effectiveness of the Board, its Committees,
the Executive and Non-Executive Directors and the Chairman were
evaluated externally in 2019, facilitated by Independent Audit Limited
(‘Independent Audit’). Independent Audit has no connections with
the Company or its Directors other than in respect of facilitation of
Board evaluation.
Independent Audit undertook the evaluations through a series of
detailed questionnaires, observation of meetings of the Board and
Audit and Remuneration Committees, and review of Board and
Committee papers for the previous 12 months. The Chairman is
responsible for the overall evaluation process and each Committee
Chair is responsible for the evaluation of the performance and
effectiveness of their Committee.
All Directors (except for Jerry Fowden, who had just joined the
Board) participated in the evaluation process, assessing the Board,
the Committees of which they were a member or regularly attended
in 2019, and each of the Directors individually.
In addition, several members of the Management Board and other
senior management participated in elements of the evaluation.
Anonymised reports specifying the findings of the evaluations were
prepared by Independent Audit for the Board and each Committee.
The Board and Committees then reviewed and discussed their
respective reports and identified action areas for 2020 taking into
account the evaluation findings. Discussions of evaluation findings
were facilitated by Independent Audit.
The Chairman received reports from Independent Audit on the
performance and effectiveness of all Executive and Non-Executive
Directors (other than himself) in 2019 and he provided individual
feedback to each Director.
The Senior Independent Director received a report from Independent
Audit on the Chairman’s performance and effectiveness, and led
a discussion reviewing the Chairman’s effectiveness with the other
Directors (without the Chairman present). The Senior Independent
Director then provided feedback to the Chairman.
2019 evaluation: outcomes and actions
The Board considers that it, and its Committees, continue to function effectively and that the working relationships between the Board
and its Committees continue to be sound.
Leadership and culture
Risk management
Positive feedback was provided on management’s degree of
engagement with the Board, linked with an open dynamic with the
new Chief Executive and Finance Director.
Leveraging the collective knowledge and experience of the Board to
best effect was also discussed, with the openness of the new executive
team’s interaction with the Board and the inclusiveness of the Board’s
strategy sessions cited as positive factors.
Oversight of risk management is viewed to be handled well. Stress-
testing of scenario analysis and crisis preparation, and insight
on management’s response plans and backup systems, were
identified as focus areas. Cyber and IT security risk are areas where
crisis management is felt to be key. Continued engagement with
management and experts was considered essential to the Board’s
understanding and oversight.
Oversight of organisational culture was identified to be an area for
continued focus for the Board, particularly in light of the Quantum
transformation project. Director market and site visits were identified
as a useful means of achieving this, and positive feedback was
provided by Directors on market visits in 2019.
Actions for 2020
– review sources of insight provided to the Board on culture to ensure
this supports Board oversight in the most effective manner
– develop the programme of market and site visits for Non-Executive
Directors to continue to spend time in the business
Strategy
The good start made by the new Chief Executive and Finance
Director in articulating and communicating strategy was noted.
The Non-Executive Directors welcomed their increased level
of involvement in strategic planning. The Board’s approach to
monitoring the organisation’s financial health is well regarded.
The strategic opportunities and risks associated with big trends
driving the industry, including new technology, were areas identified
for focus for the Board, as was continued review of reward strategy by
the Remuneration Committee.
Actions for 2020
– review of industry trends on a macro-level, including technology
– continuing review by the Remuneration Committee of the Group’s
reward strategy in 2020 to ensure ongoing effectiveness
Actions for 2020
– targeted assessment of crisis scenarios and mitigation plans
– Audit Committee deep dive on information, technology and
cyber risks
Dynamics and information
Board and Committee meetings are considered to be chaired
effectively, with effective support from the Company Secretariat.
Opportunities were identified to enhance meeting effectiveness
through more focused presentations. There is also opportunity
to enhance the effectiveness of Board and Committee papers by
including clear linkage to strategy and reducing operational detail.
Actions for 2020
– maintain balance between presentation and discussion in meetings
– additional guidance to management on preparation of Board and
Committee papers to enhance effectiveness of pre-read
Composition and succession
Executive succession was unanimously agreed to be an area of
strength and the Nominations Committee was praised for its handling
of executive transition. Executive talent management was also well
regarded. Areas for refining the Non-Executive Director appointments
process were identified, including continued focus on Board diversity.
Actions for 2020
– develop profile of Non-Executive Directors needed for the future,
for Nominations Committee reference in Board succession planning
Independent Audit has reviewed this section and has confirmed it presents
a fair summary of the review process.
78
Directors’ ReportBAT Annual Report and Form 20-F 2019
NOMINATIONS
COMMITTEE
Role
As set out in the Terms of Reference, the Nominations
Committee is responsible for:
– reviewing the structure, size and composition of the Board and
Management Board on a regular basis to ensure both have
an appropriate balance of skills, expertise, knowledge and
Board independence;
Richard Burrows
Chairman of
the Nominations
Committee
– reviewing the succession plans for appointments to the
Board, the Management Board and Company Secretary to
maintain an appropriate balance of skills and experience and
to ensure progressive refreshing of both the Board and the
Management Board;
Nominations Committee current members
Richard Burrows (Chairman)
Sue Farr
Jerry Fowden
Dr Marion Helmes
Luc Jobin
Holly Keller Koeppel
Savio Kwan
Dimitri Panayotopoulos
Kieran Poynter
Attendance at meetings in 20191(a)
Name
Richard Burrows1(b)
Sue Farr1(c)
Jerry Fowden2(b)
Dr Marion Helmes
Luc Jobin1(d)
Holly Keller Koeppel
Savio Kwan1(e)
Dimitri Panayotopoulos
Kieran Poynter
Attended/Eligible to attend
Member since
Scheduled
Ad hoc
2009
2015
2019
2016
2017
2017
2014
2015
2010
2/2
2/2
0/0
2/2
2/2
2/2
2/2
2/2
2/2
3/3
3/4
2/2
4/4
3/4
4/4
3/4
4/4
4/4
Notes:
1. Number of meetings in 2019: (a) the Committee held six meetings, four of which were ad hoc
and convened at short notice; (b) Richard Burrows was recused from the ad hoc meeting in
November which discussed succession planning for the role of Chairman; (c) Sue Farr did
not attend the ad hoc meeting in January due to prior commitments; (d) Luc Jobin did not
attend the ad hoc meeting in January due to prior commitments; and (e) Savio Kwan did not
attend the ad hoc meeting in November due to prior commitments.
2. Membership: (a) all members of the Committee are independent Non-Executive Directors in
accordance with UK Corporate Governance Code 2018 Provisions 10 and 17, applicable US
federal securities laws and NYSE listing standards; and (b) Jerry Fowden became a member
of the Committee on 1 September 2019 on his appointment as a Non-Executive Director.
3. Other attendees: the Chief Executive, the Director, Talent and Culture, and Group Head
of Talent & Organisation Effectiveness regularly attend meetings by invitation but are
not members.
Nominations Committee terms of reference
Revised Nominations Committee terms of reference have been
adopted by the Board to align with the requirements of the UK
Corporate Governance Code 2018.
For the Committee’s terms of reference
see bat.com/governance
– making recommendations to the Board on suitable candidates
for appointments to the Board, the Management Board and
Company Secretary, and ensuring that the procedure for those
appointments is rigorous, transparent, objective and merit-based
and has regard for diversity;
– assessing the time needed to fulfil the roles of Chairman, Senior
Independent Director and Non-Executive Director, and ensuring
Non-Executive Directors have sufficient time to fulfil their duties;
– overseeing the development of a pipeline of diverse, high-
performing potential Executive Directors, Management Board
members and other senior managers; and
– implementing the Board Diversity Policy and monitoring progress
towards the achievement of its objectives, summarised on page 82.
Key activities in 2019
– Identifying a successor to the Finance Director and recommending
to the Board the appointment of Tadeu Marroco as Deputy Finance
Director from 1 March 2019 and then as Finance Director from
5 August 2019, discussed further on page 80.
– Making recommendations to the Board in respect of Board and
Committee appointments, including to appoint Jerry Fowden
as a Non-Executive Director and to the Audit and Nominations
Committees from 1 September 2019.
– Succession planning for the role of Chairman, discussed further on
page 80.
– Making recommendations to the Board in relation to Directors’
annual appointment and re-election at the AGM, discussed further
on page 80.
– Reviewing the Executive Directors’ and Management Board
members’ annual performance assessments.
– Succession planning for the Board and for the Management Board,
having regard to the Board Diversity Policy.
– Reviewing the Group talent strategy, talent development priorities
and the programmes underpinning the Group’s commitment to
investment in engaging, developing and retaining talent.
– Reviewing the Group’s Diversity & Inclusion strategy, specific
diversity initiatives to further develop a diverse and gender-balanced
work place, and progress made in the development of a diverse
senior management succession pipeline.
– Assessing the progress of development plans for candidates for
Management Board roles.
– Assessing the Committee’s effectiveness in 2019, following the
externally facilitated evaluation of the Committee, discussed further
on page 78.
79
Strategic ReportGovernanceFinancial StatementsOther InformationLeadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOMINATIONS COMMITTEE
CONTINUED
Board appointments
The Committee is responsible for identifying candidates for Board
positions, taking into account the Board Diversity Policy discussed on
page 82. This includes a full evaluation of candidates’ attributes to
ensure the Board maintains an appropriate balance of skills, expertise
and knowledge, and generally involves interviews with several
candidates, supported by independent, specialist external search
firms where applicable, to shortlist appropriate candidates.
The Committee identified the successor to Ben Stevens as Finance
Director, taking into account potential candidates’ skills, experience
and diversity of attributes. The Board approved the Committee’s
recommendation to appoint Tadeu Marroco as Deputy Finance
Director with effect from 1 March 2019 and as Finance Director with
effect from 5 August 2019.
The Committee also led the selection process leading to the
appointment of Jerry Fowden as a Non-Executive Director on
1 September 2019. This selection process was supported by Heidrick &
Struggles (UK) Limited1, an independent executive search consultancy
compliant with the Standard and Enhanced Code of Conduct for
Executive Search Firms. The selection process for this role included
careful consideration of candidates’ skills, expertise, knowledge and
diversity of attributes, and a specific requirement for candidates to have
strong US market experience to enhance the Board’s US expertise.
Terms of appointment to the Board
Details of the Directors’ terms of appointment to the Board and
the Company’s policy on payments for loss of office are contained
in the Directors’ Remuneration Policy, which is set out in full in the
Remuneration Report 2018, contained in the Company’s Annual
Report and Form 20-F for 2018 available at bat.com
The Executive Directors have rolling one-year contracts. The Non-
Executive Directors do not have service contracts with the Company
but instead have letters of appointment for one year, with an expected
time commitment of 25–30 days per year.
Board retirements
Nicandro Durante retired from the Board with effect from 1 April
2019, on his retirement as Chief Executive. Ben Stevens retired from
the Board with effect from 5 August 2019, on his retirement as
Finance Director.
Kieran Poynter will retire from the Board with effect from the
conclusion of the Company’s AGM on 30 April 2020.
Board succession planning
The Board considers the length of service of the members of the Board
as a whole and the need for it to refresh its membership progressively
over time. Non-Executive succession planning remains a priority for the
Committee in 2020.
The Chairman will have served as a Director for just over 10
years at the time of the 2020 AGM. The Committee has given
careful consideration to Director transitions to ensure orderly
Board succession.
During 2018 and 2019, the Nominations Committee prioritised
effective succession planning for the Chief Executive and the Finance
Director. Having overseen the orderly transition for both those roles,
the Nominations Committee has focused on succession planning for
the role of Chairman, mindful of the provisions of the UK Corporate
Governance Code (the Code) and that Richard Burrows has served as a
Director for just over 10 years.
80
While recognising that the Code generally limits the tenure of the
Chairman to nine years from first appointment, the Code permits
extension of the Chairman’s tenure for a limited time to facilitate
effective succession planning. In the context of the recent transitions
for both the Chief Executive and the Finance Director, and to enable
effective succession planning for the Chairman, the Board considers
the interests of the Company’s shareholders to be best served by Mr
Burrows continuing as Chairman for a limited time.
It is intended that Mr Burrows will retire from the Board at or prior to
the AGM in 2021 and that he will continue to lead the Board in the
interim. Accordingly, the Board will be proposing Mr Burrows for
re-election as Chairman at the forthcoming 2020 AGM.
In relation to the role of Senior Independent Director, the Board
accepted the recommendation of the Nominations Committee
to appoint Dimitri Panayotopoulos to succeed Mr Poynter as the
Company’s Senior Independent Director on Mr Poynter’s retirement
from the Board with effect from the conclusion of the Company’s
forthcoming AGM. To ensure an effective transition in the leadership of
succession planning for the role of Chairman, Mr Panayotopoulos has
taken over responsibility from Mr Poynter for leading this process.
Spencer Stuart & Associates Limited2 and Korn Ferry (UK) Limited3
have been engaged to support the succession planning process for the
role of Chairman. Both Spencer Stuart and Korn Ferry are independent
executive search consultancies compliant with the Standard and
Enhanced Code of Conduct for Executive Search Firms. The Senior
Independent Director chairs the Nominations Committee when
dealing with discussions relating to the appointment of a successor
to the Chairman.
The Committee’s approach to succession planning for the Executive
Directors and other members of senior management is set out further
on page 81.
Annual General Meeting 2020
With the exception of Mr Poynter, the Company will be submitting
all eligible Directors for re-election and, in the case of Jerry Fowden,
election for the first time.
Prior to making recommendations to the Board in respect of
Directors’ submissions for election or re-election (as applicable),
the Committee carried out an assessment of each Director, including
their performance, contribution to the long-term sustainable success
of the Company and, in respect of each of the Non-Executive
Directors, their continued independence.
The Chairman’s letter accompanying the AGM Notice confirms that
all Non-Executive Directors being proposed for election or re-election
(as applicable) are effective and that they continue to demonstrate
commitment to their roles as Non-Executive Directors.
Notes:
1. Heidrick & Struggles has no connections with the Company or its Directors other than in
respect of provision of executive search services.
2. Spencer Stuart has no connections with the Company or its Directors other than in respect
of provision of executive search services.
3. Korn Ferry has no connections with the Company or its Directors, other than in respect of the
provision of executive search and other human resources advisory and consulting services.
Directors’ ReportBAT Annual Report and Form 20-F 2019Directors’ Report
Balance and diversity
The Board appreciates the benefits of diversity in all of its forms,
within its own membership and at all levels across the Group.
Our Non-Executive Directors come from broad industry and
professional backgrounds, with varied experience and expertise
aligned to the needs of our business. Short biographies of the
Directors are set out on pages 66 and 67.
The Nominations Committee is responsible for regularly reviewing
the composition of the Board and Management Board to ensure
both boards have an appropriate balance of skills, expertise and
knowledge, and ensuring that all appointments are made on merit
against objective criteria and with due regard for the benefits of
diversity. These principles were applied by the Nominations Committee
in identifying and recommending Tadeu Marroco and Jerry Fowden
for appointment to the Board.
The Hampton-Alexander Review set recommendations aimed at
increasing the number of women in leadership positions in FTSE 350
companies, including a target of 33% representation of women on
FTSE 350 Boards by 2020. Women currently represent 27.3% of our
Board and 15.4% of our Management Board. Our Board Diversity
Policy, discussed on page 82, sets out the Board’s ambition to progress
towards further gender diversity.
The Parker Review Committee published its final report on ethnic
diversity in UK boards in 2017, recommending there be at least one
director from a Black, Asian and Minority Ethnic (BAME) background
on every FTSE 100 company board by 2021.
Applying the Parker Review assessment guidelines, currently one
of our Directors is from a BAME background.
The Nominations Committee reviews the succession plans and
talent pool at short and longer-term time horizons for the Executive
Directors, other Management Board members, and certain other
members of senior management. In 2019, particular emphasis was
placed on the talent pipeline for senior management over the next two
years and the importance of maintaining gender diversity within the
succession pipeline. Progress in 2019 against our objective to develop
a pipeline of diverse, high-performing senior managers is set out on
page 82.
More broadly, and recognising the need for diverse talent to be
developed at all levels across the Group, the Board regularly reviews
the progress of our Group diversity and inclusion initiatives. In 2019,
this included a review of our Women in STEM programme launched
in 2019 (to attract, develop and retain more women in our R&D,
Operations and Information & Digital Technology functions), our
IGNITE initiative planned for 2020 (to support professionals to re-enter
the workforce after career breaks), and an update on the Group’s
recognition as a Diversity Leader by the UK Financial Times in its
inaugural Diversity Leaders report 2019.
Our Strategic Report discusses our Diversity & Inclusion strategy
and Group diversity initiatives further, and provides details of the
representation of women in our total workforce and in our senior
manager population on pages 40 and 41.
Balance at 31 December 2019
Balance of Non‑Executive Directors
and Executive Directors
Length of tenure of
Non‑Executive Directors
Nationality of Directors
Chairman
1
Executive Directors 2
Independent Non-
Executive Directors 8
0–3 years
4–6 years
7+ years
Directors: Ethnicity balance
Directors: Gender balance
White
BAME*
10
1
Male
Female
* Applying the Parker Report guidance.
† Senior Management comprises the Management Board and Company Secretary in accordance with the Code.
4
3
2
8
3
US
Brazilian
French
British
Canadian
German
Greek
Irish
1
1
1
4
1
1
1
1
Senior Management† and their
direct reports: Gender balance
Male
Female
95
27
81
Strategic ReportGovernanceFinancial StatementsOther InformationLeadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
NOMINATIONS COMMITTEE
CONTINUED
Board Diversity Policy
Our commitment to promoting diversity is reflected in our Group
Employment Principles discussed further on pages 41 to 42, and diversity is
taken into consideration in determining the composition of our Board and
Management Board.
We believe that talent is our competitive advantage and diversity is a critical
component of our success. ‘We are diverse‘ is one of the five core values of
the BAT ethos, set out on page 11.
Our Board Diversity Policy is aligned with our Group ethos. Our Board
Diversity Policy expresses how we think of diversity in its widest sense,
as those attributes that make each of us unique. These include our race,
ethnicity, cultural and social backgrounds, geographical origin, gender, age,
any disability, sexual orientation, religion, skills, experience, education and
professional background, perspectives and thinking styles.
Our Board Diversity Policy sets out the Board’s commitment to the
following objectives:
– considering all aspects of diversity when reviewing the composition
of, and succession planning for, the Board and Management Board;
– considering a wide pool of candidates of both genders for
appointment to the Board;
– maintaining at least 30% representation of women on our Board,
with the ambition of progressing towards further gender balance;
– giving preference, where appropriate, to engaging executive search
firms that are accredited under the Standard and Enhanced Codes of
Conduct for Executive Search Firms, which include gender diversity;
and
– oversight of the development of a pipeline of diverse, high-
performing potential Executive Directors, Management Board
members and other senior managers, through the activities of the
Nominations Committee.
Progress against these objectives in 2019 is set out below.
Board Diversity Policy progress update
Objective
Progress in 2019
Considering all aspects of diversity when reviewing the
composition of, and succession planning for, the Board
and Management Board.
– The Nominations Committee has regard to diversity in its broadest sense,
including gender, social and ethnic background, and cognitive and personal
strengths, when undertaking these activities.
Considering a wider pool of candidates of both genders
for appointment to the Board.
– Executive search firms are engaged to support Board and Management Board
succession planning where applicable and are required to provide gender-
balanced shortlists of candidates. Succession planning for Executive Directors and
Management Board members takes into account potential internal candidates
from across the Group and potential external candidates.
Maintaining at least 30% female Board representation,
with the ambition of progressing towards further
gender balance.
– The representation of women on the Board was 27.3% as at 31 December 2019
and remains so currently. Non-Executive Director succession planning has close
regard to the Board’s ambition to progress towards further gender diversity.
Giving preference, where appropriate, to engagement
of executive search firms accredited under the Standard
and Enhanced Code of Conduct for Executive Search
Firms, including on gender diversity.
– Only executive search firms accredited under the Standard and Enhanced Code
of Conduct for Executive Search Firms were engaged to provided executive
search services to support Board and Management Board succession planning
in 2019.
Oversight of the development of a pipeline of diverse,
high-performing potential Executive Directors,
Management Board members and other senior managers.
– The representation of women on the Management Board was 15.4% as at
31 December 2019 and remains so currently.
– Emphasis is placed on building diverse talent pools at all levels of the organisation
through recruiting, developing and retaining high-performing female talent.
– In 2019, 45% of the Group’s external recruits were women, including 24% into
senior leadership roles, helping to bring new skills and capabilities to drive business
transformation. The Women in Leadership programme has been supporting
the development of female employees across the Group for the last six years.
The Group also participates in various external initiatives to support high-potential
female employees.
– Please refer to pages 40 to 41 for further information about the Group’s Diversity &
Inclusion strategy.
82
Directors’ ReportBAT Annual Report and Form 20-F 2019Directors’ Report AUDIT
COMMITTEE
Holly Keller
Koeppel
Chairman of the
Audit Committee
Audit Committee current members
Holly Keller Koeppel (Chairman from 14 January 2019)
Luc Jobin (from 14 January 2019)
Jerry Fowden (from 1 September 2019)
Kieran Poynter (Chairman to 14 January 2019)
Attendance at meetings in 20192
Name
Holly Keller Koeppel1
Jerry Fowden1, 3(b)
Dr Marion Helmes3(c)
Luc Jobin1, 3(d)
Kieran Poynter1
Attended/Eligible to attend
Member since
Scheduled
Ad hoc
2017
2019
2016–2019
2019
2012
5/5
2/2
0/0
5/5
5/5
0/0
0/0
0/0
0/0
0/0
Notes:
1. Holly Keller Koeppel, Luc Jobin and Kieran Poynter each have recent and relevant financial
experience in accordance with the UK Corporate Governance Code 2018. Holly Keller
Koeppel, Luc Jobin and Kieran Poynter are each designated as an audit committee financial
expert in accordance with applicable US federal securities laws and NYSE listing standards.
Each Committee member has been determined to meet the financial literacy requirements
applicable under NYSE listing standards. The members of the Committee as a whole have
competence relevant to the sectors in which the Group operates.
2. Number of meetings in 2019: the Committee held five meetings in 2019.
3. Membership: (a) all members of the Committee are independent Non-Executive Directors in
accordance with the UK Corporate Governance Code 2018 Provisions 10 and 24, applicable
US federal securities laws and NYSE listing standards; (b) Jerry Fowden became a member
of the Committee on 1 September 2019 on his appointment as a Non-Executive Director;
(c) Dr Marion Helmes ceased to be a member of the Committee with effect from 14 January
2019; and (d) Luc Jobin became a member of the Committee on 14 January 2019.
4. The Finance Director attends all meetings of the Committee but is not a member.
Other Directors may attend by invitation. The Director, Legal & External Affairs and General
Counsel, the Group Head of Internal Audit and the external auditors also attend meetings on
a regular basis.
5. The Committee meets alone with the external auditors and, separately, with the Group
Head of Internal Audit at the end of every Committee meeting. The Committee also meets
periodically with management.
Audit Committee terms of reference
Revised Audit Committee terms of reference have been adopted
by the Board to align with the requirements of the UK Corporate
Governance Code 2018.
For the Committee’s terms of reference
see www.bat.com/governance
Introduction
I am pleased to present the 2019 Audit Committee report, setting out
our role and work this year. I took over as Chair in January 2019, and in
September 2019 we welcomed Jerry Fowden to the Committee.
We looked at a number of important topics this year, most significantly
the impact of implementing IFRS 16 (Leases) from January 2019, the
carrying value of goodwill and intangibles particularly in the context of
potential US regulatory changes relating to flavours, the appeal court
judgment in the Quebec Class Action lawsuits against Group subsidiary
Imperial Tobacco Canada and accounting treatment impacts, and
assessment of risks associated with the Group’s New Category product
portfolio and digital strategies.
We robustly reviewed the effectiveness of both our external auditors
and Internal Audit function, the latter being supported by an External
Quality Assurance review.
The Committee has approved the internal audit plan for 2020 and fully
endorses its sharper focus on transformation projects, digital risks and
New Categories. These are areas that will continue to be scrutinised by
the Committee in 2020, and beyond.
You can find more detail on each of these areas, and our other
activities, further below.
Role
As set out in the Terms of Reference, the Audit
Committee monitors and reviews the:
– integrity of the Group’s financial statements and any formal
announcements relating to the Company’s performance,
considering any significant financial reporting issues, significant
judgments and estimates reflected in them, before their submission
to the Board;
– consistency of the Group’s accounting policies;
– effectiveness of, and makes recommendations to the Board on, the
Group’s accounting, internal accounting and other financial controls,
auditing matters and business risk management systems;
– effectiveness of the Group’s internal audit function; and
– independence, performance, effectiveness and objectivity of the
Company’s external auditors, making recommendations as to their
re-appointment (or for a tender of audit services where appropriate),
and approving their terms of engagement and the level of audit,
audit-related and non-audit fees.
Key activities in 2019
Regular work programme – reviewing:
– the Group’s annual results, half-year results, the application of accounting
standards, and the external auditors’ reports where results are audited;
– the Group’s external auditors’ year-end audit, including the key audit
matters, critical audit matters, materiality assessments and the Group’s
control environment, and confirming the independence of the Group’s
external auditors;
– the basis of preparation and accounting judgements;
– adjusting items, applicable accounting treatment and the use
of alternative performance measures;
– the annual assessment of goodwill impairment;
– the accounting applicable to retirement benefits liabilities and assets;
– the Group’s liquidity position, current facilities and financing needs;
– the steps taken to validate the Group’s ‘going concern’ assessment at
half-year and year-end and agreeing on the process and steps taken to
determine the Group’s viability statement at year-end;
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– the Group’s Risk Register, including prioritisation and categorisation
of, and mitigating factors in respect of, Group risks;
– specific risks, and their mitigations, arising from major change
initiatives including those related to IT systems and the Quantum
transformation project;
– the internal processes followed for the preparation of the
Annual Report and Form 20-F and confirming that the processes
appropriately facilitated the preparation of an Annual Report and
Form 20-F that is “fair, balanced and understandable“;
– regular reports from the Group Head of Internal Audit on internal
audits of markets, processes and operations, management responses
to internal audit findings and action plans put in place to address
any issues raised;
– the 2020 internal audit plan and progress against the 2019 plan;
– the Group’s sustainability performance on an annual basis, including
the Group’s Youth Access Prevention activities and the Group’s
corporate social contributions in the focus areas of empowerment,
civic life, and sustainable agriculture and environment, in countries
and communities in which the Group operates;
– periodic reports from the Group’s Corporate Audit Committee and
Regional Audit and Corporate Social Responsibility Committees;
– annual and interim reports on the Group Business Conduct &
Compliance programme, Speak Up channels and compliance with
the Group Standards of Business Conduct (SoBC);
– the annual report from the Group Head of Security on security risks,
losses and fraud arising during the preceding year;
– half-year and year-end reports on political contributions; and
– the Committee’s effectiveness, following the annual evaluation
of the Committee discussed further at page 78.
FRC Review of 2018 Report & Accounts
During the year, as an outcome of the Financial Reporting Council’s
(FRC’s) review of the Group’s 2018 Annual Report and Accounts,
the Group received correspondence related to a number of areas,
including the accounting treatment for interim dividends, the Group’s
assessment of goodwill and intangible values and certain other
observations with regards to disclosures. As discussed in note 18 in the
Notes on the Accounts, Capital and reserves, it was agreed that the
recognition of an accrual at the year-end in respect of the dividend
paid in February 2018 and February 2019 was incorrect. Accordingly,
the Group has changed the accounting treatment. The Group has
also enhanced a number of other disclosures, including those related
to goodwill to provide the users greater insight as to the sensitivities
required prior to impairment of certain investments.
The review conducted by the FRC was based solely on the Group’s
published report and accounts and does not provide any assurance
that the report and accounts are correct in all material respects.
Further specific matters considered by the Committee
in relation to the financial statements:
– impact of implementing IFRS 16 (Leases) to Group accounting with
effect from 1 January 2019: review of the methodology for the Group’s
implementation of IFRS 16 (Leases), the revisions to the Group’s
accounting policies (as shown in note 1 in the Notes on the Accounts),
and the impact on the Group’s financial statements; and
– revenue reporting: disaggregation of revenue by product type
(combustibles; New Categories; Traditional Oral; other) at Group
and regional levels for 2019.
84
Significant accounting judgements considered by the
Committee in relation to the 2019 financial statements:
– the Group’s significant tax exposures: updates on corporate tax
matters and reports from the Group Head of Tax on the status of the
Franked Income Investment Group Litigation Order (FII GLO) and
issues in various markets. These included tax disputes in Brazil, South
Africa, Russia and the Netherlands. The Committee agreed with
management’s assessments and disclosures in respect of these (see
note 27 in the Notes on the Accounts);
– contingent liabilities, provisions and deposits in connection with
ongoing litigation:
Quebec: the Committee concurred with management’s judgement
that no provision is currently required in respect of all other ongoing
tobacco-related litigation to which Group subsidiary Imperial Tobacco
Canada (ITCAN) is a defendant, as it is not possible to reasonably
estimate the amount of any potential settlement (see note 27 in
the Notes on the Accounts) and that, whilst ITCAN is subject to the
Canadian Companies’ Creditors Arrangement Act (‘CCAA’) proceedings,
it remains appropriate to consolidate ITCAN’s financial results in the
Group financial statements;
Fox and Kalamazoo rivers: the Committee reassessed the provision
in respect of the Fox River clean-up costs and related legal expenses
and confirmed that the provision would be retained at the prior year
level (see note 3 in the Notes on the Accounts), although inherent
uncertainties remain (see note 27 in the Notes on the Accounts).
The Committee reviewed the position in respect of the Kalamazoo
River claim and agreed with management’s assessment that no
provision should be recognised on the basis set out at note 27 in the
Notes on the Accounts;
Impact of Russian tax assessment: the Committee considered
the impact of an excise and VAT assessment in relation to Group
operations in Russia during 2015 to 2017 for additional production
volumes that took place prior to local excise tax increases.
The Committee assessed and concurred with management’s
treatment of the assessment as a charge in the 2019 Accounts, to
be treated as an adjusting item (see note 3 in the Notes on the
Accounts); and
RAI group companies: the Committee considered and supported
management’s approach to accounting for the Master Settlement
Agreement, the Engle class-action and progeny cases and claims
brought by RAI dissenting shareholders seeking determination of
‘fair value’ for their shares following acquisition of the remaining
shares in RAI (see note 27 in the Notes on the Accounts);
– foreign exchange: as the Group has operations in certain
jurisdictions with severe currency restrictions where foreign currency
is not readily available, including in Venezuela and Zimbabwe,
the Committee assessed management’s approach to applicable
accounting treatment and confirmed that methodologies used
to determine relevant exchange rates for accounting purposes
were appropriate;
– goodwill and intangibles impairment review: the Committee
reviewed management’s assessment of the carrying value of
intangibles, including goodwill. The Committee specifically
considered potential regulatory changes in the US in relation to
flavours (including flavourings in vapour products and menthol in
cigarettes) and age restrictions, and agreed that the performance
of the US business was sufficient at this time to more than offset
the risks associated with such changes, concluding no impairment
to goodwill or the value of the Newport brand was required.
The Committee also agreed that, despite the ongoing proceedings
(including the CCAA process) in respect of Group subsidiary ITCAN
in Canada, there was no indication of impairment to goodwill at
this time. Finally, the Committee concurred with management’s
assessment regarding the impairment of Indonesia (£172 million)
Directors’ ReportBAT Annual Report and Form 20-F 2019Directors’ Report following a substantial change in excise and the impairment
of acquired brands (including VapeWild) following the Group’s
announcements to rationalise certain brands within New Categories
(see note 3 in the Notes on the Accounts)
– Quantum transformation project: impact of staff redundancies
associated with implementation of the project with a charge of
£264 million recognised in 2019 and treated as an adjusting item
(see note 3 in the Notes on the Accounts; and
– Prior period error in respect of interim dividend accrual: as
discussed on page 84, following a review by the FRC, a prior period
error was identified related to the accrual of interim dividends.
The Committee concurred with the management’s assessment that,
after considering IAS 1 and IAS 8, the impact of the error, while
over the Group’s materiality threshold (£330 million in 2017 and
£420 million in 2018), would not influence the economic decisions
of the users of the financial statements and would be corrected only
on a prospective basis.
Other specific matters considered by the Committee:
– review of the Company’s status as a Foreign Private Issuer for the
purposes of US securities laws;
– progress on the Group’s ‘Delivery with Integrity’ compliance
programme (discussed further on pages 31 to 32) and monitoring
SoBC incident reporting and the effectiveness of ‘Speak Up’
channels, prior to review by the Board; and
– review of the outcomes from the 2019 assessments of key countries
of concern to the Group from a human rights perspective, including
local compliance with Group policies and standards and details of
local measures in place to enhance human rights management.
Risk topics considered by the Committee included:
– oversight of the programme established to ensure ongoing SOx
compliance (discussed further at page 88);
– the judgment of the Quebec Court of Appeal in the Quebec Class
Action lawsuits against Group subsidiary ITCAN and the status of the
Canadian CCAA proceedings under which ITCAN filed for protection
in March 2019 (see note 27 in the Notes on the Accounts);
– assessing current and emerging risks in the context of the Group’s digital
strategy, technology architecture and data management, including the
threat of cyber-attack and the Group’s implementation of enhanced
defence capabilities to protect its information systems and data;
– revisions to the Group’s risk appetite framework as it relates to the
Group’s strategic objectives and regular review of emerging risks to
the Group prior to Board consideration;
External auditors
KPMG LLP (KPMG) were appointed as the Company’s auditors with effect
from 23 March 2015, following a competitive tender process carried
out in 2015. The Committee continually reviews its relationship with the
auditors, including consideration as to when it next intends to complete
a competitive tender process for the Company’s external audit.
The Committee considers the relationship with the auditors to be working
well and remains satisfied with their effectiveness.
In view of this, and having considered the continued independence and
objectivity of the auditors, the Committee does not currently anticipate
that it will conduct an audit tender before it is required to do so, in
accordance with applicable law and regulations, in respect of the 2025
financial year.
The Committee considers this to be in the best interests of the Company’s
shareholders for the reasons outlined above and will continue to monitor
this annually to ensure timing for the audit tender remains appropriate,
taking into account the effectiveness and independence of the auditors.
UK Competition and Markets Authority Audit Order
The Company has complied with the Statutory Audit Services Order
issued by the UK Competition and Markets Authority for the financial
year ended 31 December 2019.
Group Auditor Independence Policy (AIP)
The Group has an established AIP, reflecting the requirements of
applicable laws, to safeguard the independence and objectivity of
the Group’s external auditors and to specify the approval processes
for the engagement of the Group’s external auditors to provide audit,
audit-related and other non-audit services.
The key principle of the AIP is that the Group’s external auditors may
only be engaged to provide services in cases where the provision of
those services does not impair auditor independence and objectivity.
The Committee recognises that using the external auditors to provide
services can be beneficial given their detailed knowledge of our business.
However, the AIP does not permit the Committee to delegate its
responsibilities to the external auditors and the external auditors are
only permitted to provide audit, audit-related and non-audit services
in accordance with the AIP.
The AIP does not permit the external auditors to maintain a financial,
employment or business relationship with any Group company,
or provide services to any Group company, which:
– creates a mutual or conflicting interest with any Group company;
– places the external auditors in the position of auditing their
– the report on the effectiveness of the Company’s risk management system;
own work;
– risks associated with the Group’s New Categories business and the
– results in the external auditors acting as a manager or employee
integration of those risks into the Group Risk Register;
of any Group company; or
– risks associated with increased exposure to interest rate changes on
net finance costs, arising from existing and future refinanced debt;
– periodic reassessment of the risks faced by the Group as a consequence
of the UK’s exit from the EU (‘Brexit‘) in the context of the Group Risk
Register, which include risks relating to increased costs of capital, foreign
exchange rate exposures, supply chain continuity, taxation and changes
in customs duty, and talent acquisition and retention;
– Group anti-bribery and anti-corruption controls and compliance
programme; and
– review of the Group-wide programme established to support
EU General Data Protection Regulation (GDPR) compliance and
oversight of completion of programme implementation.
For further information please refer to the Principal Group risks on
pages 58 to 62 and the Group risk factors on pages 272 to 286
– places the external auditor in the position of advocate for any
Group company.
Audit services are approved in advance by the Committee on the
basis of an annual engagement letter and the scope of audit services
is agreed by the Committee with the external auditors.
Subject to the restrictions specified in the AIP, the external auditors
may also provide certain non-audit services with the prior approval
of the Committee. The requirement for the Committee’s pre-approval
of non-audit services may be waived only if the aggregate amount
of all non-audit services provided is less than 5% of the total amount
paid to the external auditors during the reporting year, where those
services were not recognised to be non-audit services at the time of
engagement, and provided those services are promptly brought to
the attention of the Committee and their provision is approved prior
to completion of the audit in the relevant reporting year.
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External auditor effectiveness
The Committee, on behalf of the Board, is responsible for the relationship
with the external auditors. The Committee carries out an annual
assessment of the Group’s external auditors, covering qualification,
expertise and resources, and objectivity and independence, as well as the
effectiveness of the audit process. This assessment takes into account the
Committee’s interactions with, and observations of, the external auditors
and gives regard to factors including:
– experience and expertise of the external auditors in their direct
communication with, and support to, the Committee;
– their mindset and professional scepticism;
– their effectiveness in completing the agreed external audit plan;
– their approach to handling significant audit and accounting judgements;
– content, quality and robustness of the external auditors’ reports; and
– their provision of non-audit services, as noted above, and other matters that
may impact independence.
The Committee’s assessment is also informed by an external audit
satisfaction survey completed by members of the Group’s senior
management. No material issues were identified during the external
auditor assessment in 2019. The Committee is satisfied with the
qualification, expertise and resources of its external auditors, and that
the objectivity and independence of its external auditors, are not
in any way impaired by the non-audit services which they provide.
The Committee has recommended to the Board the proposed
re-appointment of KPMG at the 2020 AGM.
The Committee Chairman, Finance Director, Director, Legal & External
Affairs and General Counsel, Group Head of Internal Audit and the
Company Secretary all meet with the external auditors regularly
throughout the year to discuss relevant issues as well as the progress
of the external audit. Any significant issues are included on the
Committee’s agenda.
AUDIT COMMITTEE
CONTINUED
The provision of permitted non-audit services must be put to tender if
expected spend exceeds limits specified in the AIP, unless a waiver of
this requirement, in accordance with the terms of the AIP, is agreed by
the Finance Director and notified to the Committee.
The AIP:
– requires Committee pre-approval for all audit, audit-related and
other non-audit services, except in respect of non-audit services
falling within the exceptions described above;
– prohibits the provision of certain types of services by the external
auditors, including those with contingent fee arrangements,
expert services unrelated to audit and other services prohibited
by US securities laws and the Public Company Accounting
Oversight Board;
– prohibits the Chief Executive, Finance Director, Group Financial
Controller and Group Chief Accountant from having been employed
by the external auditors in any capacity in connection with the
Group audit for two years before initiation of an audit;
– specifies requirements in respect of audit partner rotation, including
for both the lead and the concurring external audit partners to
rotate off the Group audit engagement at least every five years, and
not to recommence provision of audit or audit-related services to the
Group for a further five years; and
– provides authority for the Committee to oversee any allegations of
improper influence, coercion, manipulation or purposeful misleading
in connection with any external audit, and to review any issues
arising in the course of engagement with the external auditors.
External audit fees
The Committee reviews a schedule identifying the total fees for
all audit and audit-related services, tax services and other non-
audit services expected to be undertaken by the external auditors
in the following year. Tax services and other non-audit services in
excess of the tender thresholds referred to above must be itemised.
Updated schedules are also submitted to the Committee at mid-year
and year-end, so that it has full visibility of the Group spend on services
provided by the Group’s external auditors.
A breakdown of audit, audit-related, tax and other non-audit fees paid
to KPMG firms and associates in 2019 is provided in note 3(c) in the
Notes on the Accounts and is summarised as follows:
Services provided by KPMG firms and associates 2019
Audit services
Audit of defined benefit schemes
Audit-related assurance services
Total audit and audit-related services
Other assurance services
Tax advisory services
Tax compliance
Other non-audit services
Total non-audit services
2019
£m
15.8
0.4
8.5
24.7
0.5
–
–
–
0.5
2018
£m
15.1
0.4
9.4
24.9
0.3
–
–
–
0.3
Notes: In 2019, non-audit fees paid to KPMG amounted to 2.0% of the audit and audit-related
assurance fees paid to them (2018: 1.2%). All audit and non-audit services provided by the external
auditors in 2019 were pre-approved by the Committee.
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Directors’ ReportBAT Annual Report and Form 20-F 2019Directors’ Report Risk management and internal control
Overview
The Company maintains its system of risk management and internal
control with a view to safeguarding shareholders’ investment and
the Company’s assets. It is designed to identify, evaluate and manage
risks that may impede the Company’s objectives. It cannot, and is not
designed to, eliminate them entirely. The system therefore provides
a reasonable, not absolute, assurance against material misstatement
or loss. A description of the principal risks that may affect the Group’s
business is provided in our Strategic Report on pages 58 to 62.
The main features of the risk management processes and system
of internal control operated within the Group are described below.
These have been in place throughout the year under review and
remain in place to date. These do not cover associates of the Group.
Board oversight
During the year, the Board considered the nature and extent of
the principal risks that the Group is willing to take to achieve its
strategic objectives (its ‘risk appetite’) and for maintaining sound risk
management and internal control systems. Risk appetite is reviewed
annually by the Board to ensure that it is appropriate. Alongside the
principal risks, the Board also considers the emerging risks which
may challenge the Group’s ability to achieve its strategic objectives
in the future. Each emerging risk is assessed by the Board on its
potential impact and relevance and, where applicable, incorporated
into the Group’s Risk Register with appropriate mitigating activities.
Emerging risks are otherwise kept under regular review by the
Committee, prior to Board consideration.
With the support of the Committee, the Board also conducts a review
of the effectiveness of the Group’s risk management and internal
control systems annually. This review covers all material controls
including financial, operational and compliance controls and risk
management systems.
Audit and CSR Committee framework
The Group’s Regional Audit and CSR Committee framework underpins
the Board’s Audit Committee. It provides a flexible channel for the
structured flow of information through the Group, with committees
for each of the three Group regions, for the US business, and for
locally-listed Group entities and specific markets where considered
appropriate. The Regional Audit and CSR Committees are supported
by Risk and Control Committees established at business unit level,
and within certain Group functions where considered appropriate.
This framework ensures that significant financial, social, environmental
and reputational risks faced by the Group are appropriately managed
and that any failings or weaknesses are identified so that remedial
action may be taken.
The Group’s Regional Audit and CSR Committees are all chaired by
a member of the Management Board and regularly attended by one
or more Non-Executive Directors. The Corporate Audit Committee
focuses on the Group’s risks and control environment that fall outside
the regional committees’ remit, for example head office central
functions, global programmes and projects. It comprises members of
the Management Board and is chaired by a Regional Director. One or
more of the Non-Executive Directors also regularly attend meetings of
the Corporate Audit Committee.
External and internal auditors attend meetings of these committees
and regularly have private audiences with members of the committees
after meetings. Additionally, central, regional and individual market
management, along with Internal Audit, support the Board in its role
of ensuring a sound control environment.
Risk management
Risk registers, based on a standardised methodology, are used at
Group, directly-reporting business unit (DRBU), and individual market
levels to identify, assess and monitor the risks (both financial and non-
financial) faced by the business at each level. Information on prevailing
trends, for example if a risk is considered to be increasing or decreasing
over time, is provided in relation to each risk and all identified risks
are assessed and prioritised at three levels by reference to their impact
(high/medium/low) and likelihood (probable/possible/unlikely).
Mitigation plans are required to be in place to manage the risks
identified, and progress against those plans is monitored. The risk
registers are reviewed on a regular basis. DRBU risk registers are
reviewed regularly by the relevant Regional Audit & CSR Committee or
the Corporate Audit Committee, as appropriate.
At the Group level, specific responsibility for managing each identified
risk is allocated to a member of the Management Board. The Group Risk
Register is reviewed regularly by a committee of senior managers, chaired
by the Finance Director. In addition, it is reviewed annually by the Board
and twice yearly by the Committee. The Board and the Committee
review changes in the status of identified risks, assessing the changes in
impact and likelihood. The Committee also conducts ‘deep dives’ into
selected risks, meeting senior managers responsible for managing and
mitigating them, so that it can consider those risks in detail.
The Board noted that the Group’s principal risks remained broadly
unaltered during 2019.
The Board also considered the Group Viability Statement
see page 58 of the Strategic Report@
For more information on risks see the Principal Group risks
on pages 58 to 62 and the Group risk factors on pages 272 to 286
Internal control
Group companies and other business units are annually required to
complete a controls self-assessment, called Control Navigator, of the
key controls that they are expected to have in place. Its purpose is to
enable them to self-assess their internal control environment, assist
them in identifying any controls that may need strengthening and
support them in implementing and monitoring action plans to address
control weaknesses. The Control Navigator assessment is reviewed
annually to ensure that it remains relevant to the business and covers
all applicable key controls. In addition, at each year-end, Group
companies and other business units are required to:
– review their system of internal control, confirm whether it remains
effective and report on any material weaknesses and the action
being taken to address them; and
– review and confirm policies, and procedures to promote compliance
with the SoBC are fully embedded within the Group company or
business unit and identify any material instances of non-compliance.
The results of these reviews are reported to the relevant Regional Audit
and CSR Committees or to the Corporate Audit Committee, and to the
Committee, to ensure that appropriate remedial action has been, or will
be, taken where necessary. They are also considered by the SOx Steering
Committee and the Disclosure Committee in determining management’s
opinion on the internal controls over financial reporting (ICFR).
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Internal Audit function
The Group’s Internal Audit function is responsible for carrying out
risk-based audits of Group companies, other business units, and in
relation to global processes. There is a separate Business Controls Team
which provides advice and guidance to the Group’s businesses on best
practices in controls systems.
The Group’s Internal Audit function maintains a rolling 18-month
audit plan, which is reviewed by the Committee on an annual basis.
The Internal Audit plan is aligned to the Group’s Risk Register and
prioritises principal risk areas in relation to the Group’s business.
In 2019, internal audits covered various markets, Group manufacturing
facilities, functional transformation programmes (including the
Quantum transformation project), IT infrastructure and cyber security
and supply network and retail operations. The Committee considered
internal audit findings and action plans established to address any
issues identified. The Committee has approved the Internal Audit plan
for 2020, which emphasises audits relating to New Categories and
the ways in which Internal Audit will respond, evolve and innovate
to remain effective. It retains thorough coverage of core business
activities, lines of defence and IT controls. The Committee has assessed
the alignment of the Internal Audit plan with the Group’s Risk Register.
The scope of each internal audit is assessed for SOx impact and audit
of applicable SOx controls is included where relevant. Reviews of SOx
controls and their effectiveness are primarily conducted by the Group’s
Business Controls Team and assurance is also undertaken by the
Group’s external auditors, as referred to below.
The Committee reviews the effectiveness of the Group’s internal
audit function annually. In 2019, the Committee did so through an
external quality assessment conducted by PwC LLP. This assessment
was carried out against the Institute of Internal Audit (IIA) standards,
using interviews, analysis and peer benchmarking. It concluded
that the Internal Audit function performs well, is highly regarded by
key stakeholders, and generally meets their expectations to provide
an independent view of the Group’s control environment. It noted
recommendations to ensure that Internal Audit remains relevant and
valuable to BAT, a number of which are already being addressed by
Internal Audit with a plan to address the remaining recommendations.
Financial reporting controls
The Group has in place a series of policies, practices and controls in relation
to the financial reporting and consolidation process, which are designed
to address key financial reporting risks, including risks arising from changes
in the business or accounting standards and to provide assurance of the
completeness and accuracy of the Annual Report and Form 20-F.
A key area of focus is to assess whether the Annual Report and Form
20-F and financial statements are ‘fair, balanced and understandable’
in accordance with regulatory requirements, with particular regard to:
Fair: Consistency of reporting between the financial statements and
narrative reporting of Group performance and coverage of an overall
picture of the Group’s performance;
Balanced: Consistency of narrative reporting of significant accounting
judgements and key matters considered by the Committee with
disclosures of material judgements and uncertainties noted in the
financial statements; appropriate prominence and explanation of
primary and adjusted measures; and
Understandable: Clarity and structure of the Annual Report and Form
20-F and financial statements, appropriate emphasis of key messages,
and use of succinct and focused narrative with strong linkage
throughout the report, to provide shareholders with the information
needed to assess the Group’s business, performance, strategy and
financial position.
88
The Group Manual of Accounting Policies and Procedures sets out the
Group accounting policies, its treatment of transactions and its internal
reporting requirements.
The internal reporting of financial information to prepare the Group’s
half-yearly and year-end financial statements is signed off by the heads
of finance responsible for the Group’s markets and business units.
The heads of finance responsible for the Group’s markets and all senior
managers must also confirm annually that all information relevant
to the Group audit has been provided to the Directors and that
reasonable steps have been taken to ensure full disclosure in response
to requests for information from the external auditors.
The Committee Chairman participated in the 2019 Annual Report
and Form 20-F drafting and review processes, and engaged with
the Finance Director and the Group Head of Internal Audit during
the drafting process.
SOx compliance oversight
Following the registration of Company securities in 2017 under the US
Securities Act of 1933, as amended (the Securities Act), the Company
is subject to certain rules and regulations of US securities laws,
including the US Securities Exchange Act 1934 and SOx. SOx places
specific responsibility on the Chief Executive and the Finance Director
to certify or disclose information applicable to the financial statements,
disclosure controls and procedures (DCP) and ICFR. This includes our
Chief Executive and Finance Director giving attestation in respect of
ICFR effectiveness under §404 of SOx.
The Committee has oversight of processes established to ensure full
and ongoing compliance with applicable US securities laws, including
SOx. Two committees provided assurance during 2019 with regard to
applicable SOx certifications. The Disclosure Committee reviews the
Company’s financial statements for appropriate disclosure and designs
and maintains DCPs and reports to, and is subject to the oversight
of, the Chief Executive and the Finance Director. A sub-committee
of the Disclosure Committee, the SOx Steering Committee, provides
assurance that ICFR have been designed, and are being implemented,
evaluated and disclosed appropriately, in accordance with applicable
requirements and subject to the oversight of the Chief Executive and
Finance Director. The activities of this sub-committee are directly
reported to the Disclosure Committee.
The outputs from the Disclosure Committee and SOx Steering
Committee were presented to and reviewed by the Committee.
No material weaknesses were identified and the Committee was
satisfied that, where areas for improvement were identified, processes
are in place to ensure that remedial action is taken and progress
is monitored.
In 2019, the Committee also reviewed the scope of the external
auditors’ SOx procedures, and received reports on their progress with
their independent assessment of ICFR across the Group.
Code of Ethics for the Chief Executive and Senior
Financial Officers
The Company has adopted a Code of Ethics applicable to the Chief
Executive, the Finance Director, and other senior financial officers, as
required by US securities laws and NYSE listing standards. No waivers
or exceptions to the Code of Ethics were granted in 2019.
Directors’ ReportBAT Annual Report and Form 20-F 2019Directors’ Report Annual review
The Financial Reporting Council’s ‘Guidance on Risk Management and
Internal Control and Related Business Reporting’ provides guidance in
relation to issues of risk and internal control management and related
financial and business reporting.
Political contributions
The Group does not make contributions to UK or European Union (EU)
political organisations or incur UK or EU political expenditure. The total
amount of political contributions made to non-UK and non-EU political
parties in 2019 was £4,466,171 (2018: £3,718,540) as follows:
The processes described above, and the reports that they give rise
to, enable the Board and the Committee to monitor risk and internal
control management on a continuing basis throughout the year and
to review its effectiveness at the year-end. The Board, with advice from
the Committee, has completed its annual review of the effectiveness of
that system for 2019.
RAI Companies reported political contributions totalling £4,466,171
(US$5,703,300) for the full year 2019 to US political organisations
and to non-federal-level political party and candidate committees,
in accordance with their contributions programme. No corporate
contributions were made to federal candidates or party committees
and all contributions were made in accordance with applicable laws.
All political contributions made by RAI Companies are assessed and
approved in accordance with RAI’s policies and procedures to ensure
appropriate oversight and compliance with applicable laws.
In accordance with the US Federal Election Campaign Act, RAI
Companies continue to support an employee-operated Political
Action Committee (PAC), a non-partisan committee registered with
the US Federal Election Commission that facilitates voluntary political
donations by eligible employees of RAI Companies. According to US
federal finance laws, the PAC is a separate segregated fund and is
controlled by a governing board of individual employee-members of
the PAC. In 2019, RAI Companies incurred expenses, as authorised by
US law, in providing administrative support to the PAC.
No other political contributions were reported.
The Board is satisfied that the system of risk and internal control
management accords with the UK Corporate Governance Code
2018 and satisfies the requirements for internal controls over
financial reporting.
Group Standards of Business Conduct
The Committee is responsible for monitoring compliance with
the SoBC, and reports on this to the Board. The SoBC requires all
staff to act with a high degree of business integrity, comply with
applicable laws and regulations, and ensure that standards are never
compromised for the sake of results. Every Group company and all staff
worldwide, including senior management and the Board, are expected
to adhere to the SoBC. The SoBC and the Group’s ‘Delivery with
Integrity’ programme are discussed further on pages 30 to 32.
All Group companies have adopted the SoBC or local equivalent.
Information on compliance with the SoBC is gathered at a regional
and global level and SoBC incidents reports, including details of the
channels through which incidents are reported, are provided on a
regular basis to the Regional Audit and CSR Committees, Corporate
Audit Committee, and to the Committee. A breakdown of SoBC
contacts and SoBC allegations reported across the Group in 2019 is set
out at page 32.
The SoBC and information on the total number of SoBC contacts and
SoBC allegations reported in 2019 (including established breaches) is
available at bat.com/sobc
Speak Up
The Group maintains Speak Up channels which enable concerns
regarding SoBC compliance matters, including concerns about
possible improprieties in financial reporting, to be raised in confidence
(and anonymously should an individual wish) without fear of reprisal.
The SoBC includes the Group’s Speak Up policy, which is
supplemented by local procedures throughout the Group that
provide staff with further guidance on reporting matters and raising
concerns, and the channels through which they can do so. The Board
periodically reviews the Group’s Speak Up policy and reports arising
from Speak Up channels. The Board is satisfied that the Group’s Speak
Up policy and procedures enable proportionate and independent
investigation of matters raised, and ensure that appropriate follow-up
action is taken.
Further information about the Group’s Speak Up channels and Speak Up reports
in 2019 is provided at page 32
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Strategic ReportGovernanceFinancial StatementsOther InformationLeadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 ANNUAL STATEMENT
ON REMUNERATION
Dimitri
Panayotopoulos
Chairman of the
Remuneration
Committee
Index to our Remuneration Report
Policy Report
1. Summary of our Directors’ Remuneration Policy
2. Overview of what our Executive Directors
earned in 2019 and why
3. Executive Directors’ remuneration for the year ended
31 December 2019
93
97
98
4. Executive Directors’ remuneration for the upcoming year
104
5. Chairman and Non-Executive Directors’ remuneration
for the year ended 31 December 2019
6. Directors’ share interests
7. Other disclosures
8. The Remuneration Committee
and shareholder engagement
105
106
110
111
The following Annual Report on Remuneration has been prepared in accordance
with the relevant provisions of the Companies Act 2006 and as prescribed in
The Large and Medium-sized Companies and Group (Accounts and Reports)
(Amendment) Regulations 2013 (the UK Directors’ Remuneration Report
Regulations). @Where required and for the purpose of the audit conducted in
accordance with International Standards on Auditing (ISA) data has been audited
by KPMG and this is indicated appropriately.@
Introduction
I am pleased to present to you the Directors’ Remuneration Report for
the year ended 31 December 2019. The report contains:
– a summary of the current Directors’ Remuneration Policy, approved
at the 2019 AGM; and
– the Annual Remuneration Report, explaining how the policy has
been implemented during 2019, and how it will be implemented
in 2020.
Remuneration and strategy
The Directors’ Remuneration Policy was approved in April 2019
with significant support from our shareholders. The Remuneration
Committee has primarily focused this year on ensuring that the new
policy is fully implemented together with reviewing the links to the
Company’s long-term strategy delivery through our incentive schemes.
Our focus is to ensure that the Directors’ Remuneration Policy enables
the Company to:
– attract and retain top quality talent in the global marketplace;
– reward high levels of sustainable long-term performance in both an
appropriate and competitive manner to the benefit of shareholders
and wider stakeholders;
– create close long-term links between the Company’s senior
management and its shareholders; and
90
– incorporate best practice policy features into the remuneration
strategy while maintaining policy elements which remain
appropriate for the Company.
The Remuneration Committee considers these objectives carefully
when deciding on executive and Group-wide remuneration matters,
to ensure there is an appropriate balance between competitiveness,
fairness, sustainability and pay for performance.
The Remuneration Committee looks to ensure that the performance
metrics within the short and long-term incentive schemes continue to
be aligned to objectives integral to the Company’s long-term strategy.
Performance measures are reviewed every year to ensure the Company
is providing focus, incentivising the right behaviours and creating
value. To that end, the Remuneration Committee has decided to make
some important changes to the performance metrics for the 2020
short-term incentive scheme:
– The introduction of a new metric ‘Deleveraging excluding foreign
exchange’, with a 30% weighting attached to it. This metric will
provide a more holistic approach to cash management and capital
allocation, which underpins the Group’s commitment to drive
performance in this area following the acquisition of RAI in 2017.
Further details are provided on page 50.
– The new metric will replace the ‘adjusted cash generated from
operations’ metric.
– The Group share of key markets metric is retained with the current
weighting of 10%. The ‘adjusted revenue growth from the strategic
portfolio’ metric and the ‘adjusted profit from operations’ metric are
both retained with their current weightings of 30%.
These changes to the performance metrics will apply to the short-term
incentive scheme in operation for the Executive Directors and the
Group’s wider senior management population, covering approximately
1,200 employees. This will ensure the Group has a consistent, aligned
short-term incentive footprint globally to provide focus, alignment
with Group strategy and to promote effective engagement and
collaboration across its global management population. These changes
are set out in full on page 104.
Stakeholder engagement
The Board takes its corporate responsibilities very seriously.
Our programme of shareholder and wider stakeholder engagement
in 2019 helped re-shape our Directors’ Remuneration Policy.
Our Directors’ Remuneration Policy is strongly aligned with shareholder
interests and is reflective of best practice in the marketplace across
key policy areas such as pension alignment with the wider workforce,
shareholding requirements both during employment and post
cessation, malus and clawback provisions in our incentive plans and
the transparency of remuneration disclosures. We have continued our
programme of engagement into 2020 regarding the remuneration of
the Finance Director and I would like to thank our shareholders and
wider stakeholders for their feedback.
We value dialogue and diversity of opinion. This year, the Directors
have engaged our global workforce through a variety of channels
including our global Your Voice survey, which has again provided a
rich body of feedback capturing employees’ opinions on a broad range
of topics including the Company’s performance, strategy, culture and
remuneration. Our approach to workforce engagement is explained in
the Strategic Report, on pages 26 and 41.
We have taken the opportunity to review our Directors’ Remuneration
Report and have restructured and shortened it where possible to
simplify content, which we hope readers will find helpful.
Remuneration ReportBAT Annual Report and Form 20-F 2019 Group performance
Our incentive plans are closely aligned to our strategy and the
performance metrics align with the key performance indicators
stated in the Strategic Report.
The Group has once again delivered an excellent operational
performance in 2019, building on the long-term strategic growth
agenda and surpassing the stretching targets set by the Remuneration
Committee. In 2019, the Group exceeded performance expectations,
with volume share gains in the Asia-Pacific Middle East and Europe
North Africa regions together with increases in adjusted revenue
growth from the Strategic Portfolio, adjusted profit from operations
and adjusted cash generated from operations (at constant rates of
exchange) on a Group basis. In addition, the Group delivered a very
strong set of results with growth in adjusted, diluted EPS, revenue
growth and a strong cash flow conversion rate.
These results are reflected positively in the outcomes for the Group’s
Short-Term Incentive Scheme (STI), the International Executive
Incentive Scheme (IEIS), for which the corporate result across the
four measures (adjusted profit from operations, Group’s share of key
markets, adjusted revenue growth from the Strategic Portfolio and
adjusted cash generated from operations) was 96%.
The 2017 Long-Term Incentive Plan (LTIP) award, based on results
across adjusted diluted EPS, relative TSR, adjusted revenue growth
and the operating cash flow conversion ratio, will vest in March 2020
at 69.3%. The Remuneration Committee has considered the vesting
result and concluded that this is an accurate reflection of the strong,
sustained underlying performance of the Company in challenging
and volatile market conditions. It is also reflective, through the relative
TSR measure, of the movement in the Group’s share price during the
performance period. Consequently, the absolute value attached to the
awards at the close of the three-year performance period is circa 55%
lower than the face value of the 2017 awards at grant.
Following the determination of the outcomes for both the 2019 IEIS
and 2017 LTIP, the Remuneration Committee considered the results
against the underlying performance of the Group, and whether the
movements in the Group’s share price across the preceding three-year
period should be reflected in the IEIS and LTIP outcomes for Directors.
The Remuneration Committee considered that further adjustment to
the IEIS and LTIP outcomes was not appropriate, in recognition of:
– the strong underlying performance of the Group;
– the structure of the LTIP being already designed to ensure that the
value delivered to Directors is affected by share price movements,
through fixing the maximum number of shares at the time of grant;
and
– share price movements are also reflected in the three tranches of
deferred bonus held by each of the Directors.
The performance of our key metrics that delivered the remuneration
outcomes is summarised on page 97.
Executive Director remuneration
For 2020, the Remuneration Committee considered salary increases
for the Executive Directors in the context of their current positions
relative to the market, their development in their roles, their individual
performance and the level of pay increases for UK employees (which
ranged between 0% and 6.5%, based on performance in the prior
year, with an average increase of 2.5%).
At the time of Jack Bowles’ and Tadeu Marroco’s appointments, the
Remuneration Committee set remuneration at a level to reflect the
fact that these were their first Executive Director appointments and
significantly below the levels for previous incumbents in both roles and
in the wider market.
Jack Bowles has now been in his role for a year and in the Board’s view
has made an excellent start. He has led the Group to deliver a very
strong operational performance in 2019, exceeding the stretching
performance expectations set by the Remuneration Committee which
translated into the performance delivery against key financial and
strategic metrics. Further, he has successfully initiated and delivered
a strategic review of the Group’s global operating model and
organisation, re-purposing the business both in terms of its commercial
focus and driving cultural change across the Group while accelerating
the development of new, strategic capabilities for the future. The view
of the Board is that Jack Bowles has established himself successfully and
is already demonstrating a track record of delivering strongly against
his priorities for the business.
In recognition of these points we believe it is the right time to ensure
that this continued development and performance is reflected
appropriately in his remuneration. The Remuneration Committee
has decided that the salary increase for Jack Bowles should be 9.5%.
Whilst this exceeds the top of the range of the salary increases for UK-
based employees, this approach is in line with our approved Policy in
respect of recently appointed Executive Directors. Consequently, with
effect from 1 April 2020 Jack Bowles’ salary will be £1,287,000.
Upon appointment to the role of Finance Director on 5 August
2019, Tadeu Marroco’s salary was set at £750,000. In reviewing the
remuneration for Tadeu Marroco, the Remuneration Committee has
considered both salary and the composition of the total remuneration
package. Tadeu Marroco has now been in his role for eight months
and in the Board’s view has made an immediate and material
contribution to the delivery of Group results and performance against
key financial metrics. In addition, he has played a key role in overseeing
the Group’s transformation agenda while bringing fresh impetus to the
Group’s approach to stakeholder engagement.
Following engagement with shareholders in the first quarter of the
year, the Remuneration Committee has decided to adjust the LTIP
award level for the Finance Director from 350% of annual basic salary
to 400% of annual basic salary, from 2020 onwards. The adjustment
in award level is commensurate with the responsibilities for the
Finance Director role and will enable a more appropriate balance
between the fixed and variable elements of remuneration in the future.
During engagement with shareholders on the Directors’ Remuneration
Policy in 2019 we discussed our intent to maintain an appropriate
level of differentiation with award levels between the Chief Executive
and the Finance Director and this very much remains our intention
and is reflected in the proposed change to the LTIP award level.
The Remuneration Committee is satisfied that the new award level is
set appropriately, in particular relative to the Chief Executive, and does
not intend to review the award level again while the current Directors’
Remuneration Policy is in place.
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CONTINUED
Consequently, the shareholding requirements for the Finance Director
will be increased as follows:
– During service as a Director, the shareholding requirement will be
increased to 400% of salary (from 350% of salary); and
– This requirement will also apply in full after ceasing service as a
Director until the second anniversary of cessation of employment.
In this context, the Remuneration Committee decided that the salary
increase for Tadeu Marroco should be 3%. Consequently, with effect
from 1 April 2020, Tadeu Marroco’s salary will be £772,500.
In its annual appraisal of the remuneration of Executive Directors, the
Remuneration Committee intends to keep their salaries under review,
to ensure they progress in line with development and performance
such that remuneration may be brought more closely into line with
the market over time. The Remuneration Committee may award
increases above the average for UK employees over the next two years,
while remaining within the range of increases available for the wider
UK population, subject to the performance and development of the
Executive Directors in their roles and with consideration of pay matters
among our wider workforce. This approach is consistent with how
the Company reviews the remuneration of all its employees as they
develop and progress in their roles.
Incentive plan awards from 2020
Following the downward adjustment to the 2019 LTIP award, the basis
for awards made under the LTIP in 2020 will return to the Company’s
usual practice where the share price for new awards is an average
of the mid-market price across the three trading days prior to the
award being made. The Remuneration Committee is satisfied that
this return to the Group’s established practice will result in awards
which are in proportion with previous awards made to the Directors.
The Remuneration Committee retains discretion to review the
formulaic LTIP outcome at vesting.
Pay and transparency
The Remuneration Committee is very aware of the continued debate
on executive remuneration and corporate governance, the emphasis
on long-term alignment with shareholder interests and the importance
of considering executive compensation in the broader context of the
Group’s employees.
In March 2020, we will be publishing data relating to UK Gender Pay
in line with the statutory requirements. Upon reviewing the data prior
to publication, the Remuneration Committee noted that while men
and women are rewarded equally for similar roles, the Group does
have a ‘gender pay gap’ as defined by the UK legislation. The pay gap
is largely a reflection of having more men than women in senior roles
and the Group has a comprehensive set of diversity initiatives in place
to drive progress on this issue. These are explained further on pages
41 and 81 and in our Gender Pay Report. As a result of our continued
focus we have seen an increase in the proportion of women in our
upper pay quartile in 2019, from 24% to 27%, contributing towards
reducing our median pay gap from 35% to 33%, and we will continue
our efforts in this area.
This year we are publishing for the first time our CEO to employee
pay ratio for the 2019 financial year. We have adopted calculation
method A which we believe to be the most robust and comprehensive
means of assessment and is also reflective of shareholder preferences.
For the 2019 period, the CEO single figure used in the calculation is
a combination of remuneration data for both Nicandro Durante and
Jack Bowles, recognising the transition in the Group’s leadership which
took place in 2019. Consequently, the Group’s CEO to employee pay
ratio for 2019 was 86:1 at the median level, reflecting the diversity
of our business footprint and employee population across the UK.
Further details can be found on page 103.
92
Other initiatives in 2019
The Remuneration Committee has devoted a considerable amount
of time in 2019 to reviewing the Group’s remuneration strategy
and related policies for its wider workforce. The Remuneration
Committee has focused on ensuring there is an appropriate degree of
alignment between Group workforce remuneration and the Directors’
Remuneration Policy, to make sure the Group’s remuneration agenda,
practices and policies are both relevant across our markets and
supportive of Group strategy and ethos.
An important area of focus has been our competitive position across
key markets. The Company sources talent globally and remuneration
is a critical part of attracting and retaining the best people to lead our
business in an increasingly competitive global marketplace. In this
context, the significant pay differential between the US and the UK
continues to be challenging considering the international mobility of
the senior talent pool. Geographic differences in pay levels present
challenges for the Group as a substantial part of our business is based
in the United States, which we will keep under close review.
The Remuneration Committee has reviewed both the short and Long-
Term Incentive Plan arrangements below the Executive Director level
during 2019. As part of this review, the Remuneration Committee
considered it appropriate to establish a new Restricted Share Plan
which will better align the remuneration strategy with our Group
strategy and ethos and recognises employee feedback in this area.
The Group will put forward a resolution for shareholder approval at
its forthcoming AGM to establish the new Restricted Share Plan for its
senior management population, excluding the Executive Directors.
During 2019, the Remuneration Committee conducted a detailed
review of the Group’s legacy defined benefit pension arrangements in
the UK and the Company is now consulting with employees in the UK
concerning proposals to close defined benefit arrangements to future
accrual during 2020.
In 2019, the Company initiated a competitive tender exercise for
the provision of remuneration advisory services to the Remuneration
Committee. Following the tender process, the Remuneration
Committee has appointed PwC LLP as the adviser to the Remuneration
Committee from 15 January 2020. In addition, Meridian
Compensation Partners LLC will be appointed to provide specific
advice and expertise in relation to the US market.
Our focus in 2020
On behalf of the Remuneration Committee, I acknowledge the scope
of the tasks for the year ahead as we continue to embed our new
Remuneration Policy and we continue our work to ensure the policy
remains strongly aligned with the Company’s long-term strategy and
shareholder interests. We were very pleased to receive a strong vote in
favour of our Directors’ Remuneration Policy last year and this year’s
Annual Remuneration Report will be put forward for your consideration
and approval by an advisory vote at the AGM on 30 April 2020.
The Board places great value on the direct engagement and feedback
from our shareholders and advisory bodies on our remuneration policy
and practices and I look forward to continuing this dialogue in 2020.
Dimitri Panayotopoulos
Chairman, Remuneration Committee
17 March 2020
Remuneration ReportBAT Annual Report and Form 20-F 2019 ANNUAL REPORT
ON REMUNERATION
1 Summary of our Directors’ Remuneration Policy
The Remuneration Policy for the Executive Directors and the Non-Executive Directors was approved by shareholders at the AGM
on 25 April 2019.
The full Directors’ Remuneration Policy is set out in the Remuneration Report 2018 contained in the Annual Report for the year ended
31 December 2018, which is available at bat.com
To assist in reviewing our Annual Report on Remuneration, we have summarised the key elements of the Directors’ Remuneration Policy
as it principally applies to remuneration paid during 2019.
Directors’ Remuneration Policy summary: our remuneration strategy
The Remuneration Committee’s remuneration principles seek to reward the delivery of the Group’s strategy in a simple and straightforward
manner which is aligned to shareholders’ long-term sustainable interests.
The remuneration structure comprises fixed and variable elements. These rewards are structured and designed to be both transparent and
stretching while recognising the skills and experience of the Executive Directors and ensuring rewards are competitive in the global marketplace.
The fixed elements comprise base salary, pension and other benefits. The variable elements are provided via two performance-based incentive
schemes (a single short-term cash and share incentive annual bonus plan (STI), and a single Long-Term Incentive Plan (LTIP)).
In applying these principles, the Remuneration Committee maintains an appropriate balance between fixed pay and the opportunity to earn
performance-related remuneration with the performance-based elements forming, at maximum opportunity, between 80% and 90% of the
Executive Directors’ total remuneration. An annual review is conducted to ensure application and alignment of the Directors’ Remuneration Policy
with the business needs to promote the long-term success of the Group.
Strategic Purpose
Salary
To attract and retain high-calibre individuals
to deliver the Group’s long-term strategy
and to offer market-competitive levels of
guaranteed cash to reflect an individual’s
skills, experience and role within the Group.
Benefits
To provide market-competitive benefits
consistent with the role which:
– attract and retain high calibre individuals
to deliver the Group’s long-term strategic
plans; and
– recognise that such talent is global in source
and that the availability of certain benefits
(e.g. relocation, repatriation, taxation
compliance advice) will from time to time
be necessary to avoid such factors being an
inhibitor to accepting the role.
Pension
To provide competitive post-retirement
benefit arrangements which recognise
the external environment in the context
of attracting and retaining senior high
calibre individuals to deliver the Group’s
long-term strategy.
Key Features
– Normally paid in 12 equal monthly instalments during the year;
– Reviewed annually in February (changes effective from April) or subject to ad-hoc review
on significant change of responsibilities;
– Reviewed taking into account the factors including individual performance and appropriate
market data based on a Pay Comparator Group;
– Annual increases will generally be in the range of the increases in the base pay of other
UK-based employees in the Group and will not exceed 10% per annum; and
– Recently appointed Executive Directors’ base salaries may exceed the top of the range of the
salary increases for UK-based employees where the Remuneration Committee considers it
appropriate to reflect the accrual of experience.
The Company offers the following contractual benefits to Executive Directors:
– A car or car allowance (maximum annual value £20,000);
– Use of a car and driver for personal and business use;
– Employment tax advice (as required but not exceeding £30,000 per annum);
– Tax equalisation payments (where appropriate);
– Private medical insurance, including general practitioner ‘walk in’ medical services;
– Personal life and accident insurance (designed to pay out at a multiple of four and five times
base salary, respectively);
– Housing, education allowances or similar arrangements as appropriate to family circumstances;
and
– Other benefits may include Executive Directors and their partners’ attendance at hospitality or
similar functions, and the provision of benefits which may be treated as benefits for tax
purposes, such as the provision of home security and reimbursement of expenses incurred in
connection with their duties.
– Only base salary is pensionable; and
– Defined contribution benefits – Executive Directors are eligible to receive a pension benefit
equivalent to 15% of base salary as a contribution into the defined contribution section of the
British American Tobacco UK Pension Fund or as a gross cash sum paid in lieu thereof.
The contribution rates are aligned with those available to our wider UK population.
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CONTINUED
Short-term incentives (STI)
– To incentivise the attainment of corporate
targets aligned to the Group’s strategic
objectives on an annual basis, with a
deferred element to ensure alignment with
shareholders’ interests.
– To ensure, overall, a market-competitive
package to attract and retain high calibre
individuals to deliver the Group’s long-
term strategy.
Long-term incentives (LTIP)
To put in place a combination of measures
with appropriately stretching targets around
the long-term plan that provides a balance
relevant to the Company’s business and
market conditions as well as alignment
between Executive Directors’ and
shareholders’ interests. To facilitate the
appointment of senior high calibre individuals
required to deliver the Group’s long-term
strategy, and to promote the long-term
success of the Company.
Shareholding requirements
– To strengthen the alignment between the
interests of the Executive Directors and
those of shareholders by requiring Executive
Directors to build up a high level of personal
shareholding in the Company.
– To ensure long-term alignment between
the interests of the Executive Directors
and those of shareholders through the
operation of post-employment
shareholding requirements.
All-employee share plans
Executive Directors are eligible to participate
in the Company’s all-employee share schemes
which are designed to incentivise employees
by giving them an opportunity to build
shareholdings in the Company.
94
Opportunity
– Chief Executive – Maximum 250%; on-target 125%.
– Finance Director – Maximum 190%; on-target 95%.
Operation
– 50% of the incentive delivered as cash; 50% as deferred shares (DSBS) which vest after three
years. Deferred shares attract a dividend equivalent which is delivered in additional quarterly
interim dividend equivalent shares;
– The Remuneration Committee sets the performance targets each year at the beginning of the
performance period and is able to vary the exact measures and the weighting of them from
year to year;
– Performance measures for 2019 can be found on page 99 and for 2020 on page 104;
– The Remuneration Committee has discretion to adjust outcomes in circumstances where it
considers it is appropriate to do so to reflect the overall performance of the Company;
– In cases of identified poor individual performance, the corporate result may be reduced by
up to 50%; and
– Clawback and malus provisions are in place.
Opportunity
– Maximum annual award of shares of 500% of salary for all Executive Directors.
– Normal annual grants of 500% of salary for the Chief Executive and 400% of salary for the
Finance Director.
Operation
– LTIP awards vest only to the extent that:
– the performance conditions are satisfied at the end of the three-year performance period; and
– an additional vesting period of two years from the third anniversary of the date of grant has
been completed;
– Dividend equivalent shares are awarded at the end of the extended vesting period to the
extent that the awards vest;
– The Remuneration Committee sets the performance targets for the applicable performance
period each year;
– Vesting levels are based on the achievement of appropriately stretching targets against
performance measures aligned to the Group’s long-term strategy;
– Performance measures for the 2017-2019 performance period are detailed on page 100
and for the awards to be granted in 2020 are detailed on page 104;
– The Remuneration Committee has discretion to adjust the level of vesting in circumstances where
it considers it is appropriate to do so to reflect the overall performance of the Company; and
– Clawback and malus provisions are in place.
Executive Directors are required to hold shares in the Company:
– during service as a Director, equal to the value of the same multiple of salary at which LTIP
awards are made to that Director (currently, 500% for the Chief Executive and 400% for the
Finance Director from 2020 onwards); and
– after ceasing service as a Director, equal to the value of 100% of the shareholding requirement
that applied while a Director for a period until the second anniversary of cessation of
employment with the Group.
– All-employee share schemes are the Sharesave Scheme and the Share Incentive Plan (SIP); and
– Executive Directors are subject to the same limits on participation as other employees, as
defined by the applicable statutory provisions.
Remuneration ReportBAT Annual Report and Form 20-F 2019 How the policy addresses the factors set out in the UK Corporate Governance Code 2018:
The summary of our remuneration principles and the key elements of the Directors’ Remuneration Policy align with the UK Corporate
Governance Code 2018 factors as follows:
Clarity and simplicity
Our policy provides an overall remuneration package that is transparent for our Executive Directors and shareholders alike; its simple structure has
a clear and straightforward link to the delivery of the Group’s long-term strategy. Principles driving fixed remuneration (salary, benefits, pension) are
closely aligned with the wider workforce and variable remuneration (STI and LTI) rewards delivery of financial and strategic objectives both in the
short and long-term.
Risk
The combination of performance target setting for the STI and LTI, the inclusion of provisions for discretionary adjustments and malus and
clawback provisions ensure that we reward our Executive Directors in accordance with high standards of governance while mitigating, as far
as possible, reputational and other risks arising from reward packages that are not proportionate to outcomes.
Predictability and proportionality
There is a clear link between the operation of our short and long-term incentive plan awards and the delivery of our strategy and long-term
performance. Variable remuneration at the Company accounts for between 80%-90% of an Executive Director’s total remuneration package,
ensuring that poor performance is not rewarded. Further detail on short and long-term incentive plan awards are detailed on pages 99 and 100.
Alignment to culture
The Remuneration Committee has worked extensively to develop a policy that aligns the Executive Directors closely to the wider workforce and
rewards long-term sustainable performance. The Remuneration Committee continually reviews the Policy, taking into account any feedback
received from engagement with the wider workforce and shareholders, to ensure it is aligned to the Company’s purpose and values, and
promotes the long-term success of the Company.
Summary of all‑employee rewards at BAT: Principles of remuneration for wider workforce
The Group’s remuneration policies and practices are founded on a high degree of alignment and consistency across the organisation.
Accordingly, remuneration for senior management is determined taking into account the remuneration principles that apply to the Executive
Directors, and similar principles also form the basis of the remuneration arrangements for the wider workforce.
The Remuneration Committee is regularly updated on the pay principles and practices in operation across the Group, and considers them in
relation to the implementation of the Directors’ Remuneration Policy, and in ensuring there is an appropriate degree of alignment throughout
the Group. The Board’s approach to engagement with the Group’s workforce worldwide is set out on pages 26 and 41. Engagement methods
available to the Group’s workforce include mechanisms for feedback and dialogue on the Group’s pay policies and practices. The Remuneration
Committee receives updates from management on feedback received during the year where relevant to remuneration matters considered by the
Remuneration Committee, and the Remuneration Committee takes feedback into account as applicable in determining executive remuneration.
The reward strategy for all employees is built around the following four strategic pillars and comprises fixed and variable remuneration elements:
Competitive yet sustainable
– Competitive package, able to attract and retain talent.
Equitably differentiated
– Differentiated on clear and objective criteria – level, performance
– Agility to meet changing generational needs.
– Responsible cost structure to support profit delivery.
Transparent
– Clear policies, openly communicated.
– Individual total reward package statements form part of regular
annual cycle.
and experience.
– Supported by unbiased processes and tools.
Aligned to shareholder interests
– Competitive employment cost base and incentives that align the
interests of employees with those of shareholders.
95
Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 ANNUAL REPORT ON REMUNERATION
CONTINUED
Fixed remuneration
Salary
– Salary is a key element of the total remuneration for all employees.
– Salary ranges for each grade are set by reference to external market data, and individual positioning within the set salary ranges will depend
on level of experience, responsibility and individual performance.
– Annual salary reviews typically take place in April each year.
In several markets Collective Labour Agreements (CLAs) exist covering some employees, therefore, some of the above principles may not apply.
Benefits and recognition
– Benefits provided to employees reflect local market practice and legislative requirements.
– The benefits architecture for the Group includes core benefits (such as medical insurance and life insurance) and local statutory benefits and
may be delivered as a combination of benefits in kind, cash allowance and flexible benefits.
– Additional financial and non-financial rewards can be made for outstanding contributions to the business in exceptional circumstances.
Pension
– Retirement benefits, typically in the form of a pension, are provided to employees based on local market practice.
– Under the UK Defined Contribution arrangements, the Company contributions for all employees is 10% of base salary rising to a maximum
of 15% on a matching basis. The total contribution to the defined contribution section of the British American Tobacco UK Pension Fund is
restricted to £10,000 per annum in line with the Tapered Annual Allowance with the balance of any contributions due above this paid as a
cash allowance or, alternatively, paid into the Defined Contribution Unapproved Unfunded Retirement Benefits Scheme.
Variable remuneration
Short-term incentives
Short-term incentive schemes are designed to reward employees across the business for the delivery of financial, strategic and operational targets.
The Group operates various short-term incentive arrangements, as set out below, with participation dependent on role.
International Executive Incentive Scheme (IEIS) – globally aligned scheme for all managers in senior management roles (c. 1,200 employees),
including Executive Directors.
– Incentive opportunities for IEIS participants are defined globally for each eligible grade.
– A portion of any award receivable is deferred in BAT shares for three years, with the remaining portion paid in cash following year-end.
– Dividend-equivalent payments on all unvested deferred shares are paid quarterly in cash via payroll.
Corporate annual bonus plans – in operation for employees in corporate functions who are not eligible to participate in the IEIS.
– Designed to mirror the basic construct of the IEIS with opportunity levels set locally.
– Performance metrics aligned to those of the IEIS, however, not all are measured on a Group-wide basis but instead linked to the relevant
business unit.
Functional incentive schemes – in operation for non-corporate employees, examples include trade marketing or factory incentive schemes.
– Opportunity levels are set locally and vary by grade.
– Functional performance measures are incorporated into each scheme to ensure line of sight for participants.
Long-term incentives
– Senior managers are eligible to participate in the long-term incentive programme (LTIP), which rewards their contribution to the long-term
global performance of the Company aligned with Executive Directors.
– Opportunity levels are defined globally for each eligible grade.
– Awards are typically granted in March of each year, and vest following the end of a three-year performance period.
– Dividend-equivalent payments are paid on any shares vesting.
All-employee share schemes
– In the UK, all employees are eligible to participate in the Company’s all-employee share schemes – the Sharesave Scheme and the Share
Incentive Plan – both of which are HMRC-approved plans, which are designed to incentivise employees by giving them an opportunity
to build shareholdings in the Company.
96
Remuneration ReportBAT Annual Report and Form 20-F 2019 2 Overview of what our Executive Directors earned in 2019 and why
What our Executive Directors earned in 2019 – audited@
Single figure for
Executive Directors
Salary
£’000
Taxable
benefits
£’000
Short-term
incentives
£’000
Long-term
incentives
£’000
Pension
£’000
Other
emoluments
£’000
Total
£’000
2019
2018
2019
2018
2019
2018
20191
20182
2019
2018
2019
2018
2019
2018
Nicandro Durante3
Jack Bowles4
Ben Stevens5
Tadeu Marroco6
Total
328
1,175
551
301
2,355
1,295
–
916
–
2,211
160
262
107
79
608
295
–
132
–
427
408
2,824
999
560
4,791
3,275
–
1,756
–
5,031
2,059
642
1,206
512
4,419
3,324
–
1,694
–
5,018
197
216
227
46
686
430
–
491
–
921
12
19
17
1
49
32
–
18
–
3,164
5,138
3,107
1,499
50 12,908
8,651
–
5,007
–
13,658
Notes:
1. The 2017 LTIP award is due to vest on 27 March 2022 for Nicandro Durante and Ben Stevens and on 27 March 2020 for Jack Bowles and Tadeu Marroco based on completion of the three-year
performance period on 31 December 2019 and completion of the extended vesting period, as applicable. The value shown is based on the average share price for the three-month period ended
31 December 2019 of 2,920p. Given the share price performance since the date of grant of awards, none of the value shown in the table above is attributable to share price appreciation.
2. Long-term incentives shown for 2018: in accordance with the UK Directors’ Remuneration Report Regulations, estimates for the values of the vesting 2016 LTIP awards were given in the Annual Report
on Remuneration 2018; these amounts have been re-presented to show the actual market value on the date of vesting in 2019.
3. Nicandro Durante retired as an Executive Director on 1 April 2019. The amounts shown in the table above reflect remuneration received while an Executive Director of the Company.
4. Jack Bowles was appointed Chief Executive Designate on 1 November 2018 and was appointed as an Executive Director on 1 January 2019, before being appointed as Chief Executive effective
1 April 2019. The values shown for his LTIP are based on a share award granted prior to his appointment as an Executive Director with no apportionment having been applied to the LTIP value.
5. Ben Stevens ceased to be an Executive Director on 5 August 2019. The amounts shown in the table above reflect remuneration received while an Executive Director of the Company.
6. Tadeu Marroco was appointed Finance Director on 5 August 2019 and was appointed as an Executive Director on the same date. The amounts shown in the table above reflect remuneration received while
an Executive Director of the Company. The values shown for his LTIP are based on a share award granted prior to his appointment as an Executive Director with no apportionment having been applied to
the LTIP value.
Further information in respect of this remuneration can be found in Section 3 on page 98.
How this aligns to performance
Short-term incentives for the performance period ended in 2019
Vesting at:
Chief Executive: corporate performance – 240.3% of salary
Finance Director: corporate performance – 182.6% of salary
Adjusted profit from operations (APFO)
at constant rates of exchange +6.6% growth
Group share of Key Markets
+20 bps growth over 2018
Adjusted revenue growth from the Strategic Portfolio at constant
rates of exchange
+7.3% growth
Adjusted cash generated from operations (Adjusted CGFO)
at constant rates of exchange
Exceeded the maximum performance level set by the Remuneration
Committee (equivalent to 96.2% operating cash flow conversion)
Long-term incentives for the three-year performance period ended in 2019
Vesting at 69.3%
Total shareholder return (TSR)
21 out of 23 in FMCG comparator group 2017–2019
Adjusted diluted earnings per share (EPS) growth
9.4% CAGR at current rates of exchange
Adjusted diluted earnings per share (EPS) growth
10% CAGR at constant rates of exchange
Adjusted revenue growth
4% CAGR at constant rates of exchange
Adjusted operating cash flow conversion ratio
101.8% ratio over the performance period
0% achievement
(0% of award vesting out of possible 20%)
90% achievement
(17.9% of award vesting out of possible 20%)
100% achievement
(20% of award vesting out of possible 20%)
57% achievement
(11.4% of award vesting out of possible 20%)
100% achievement
(20% of award vesting out of possible 20%)
Non‑GAAP measures
Adjusted profit from operations (APFO), adjusted cash generated from operations (Adjusted CGFO), adjusted diluted EPS, adjusted revenue
and operating cash flow conversion ratio are non-GAAP measures used by the Remuneration Committee to assess performance. Please refer
to pages 259 to 268 for definitions of these measures @and a reconciliation of these measures to the most directly comparable IFRS measure
where applicable.@
97
Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 ANNUAL REPORT ON REMUNERATION
CONTINUED
3 Executive Directors’ remuneration for the year ended 31 December 2019
Total remuneration for the year ended 31 December 2019 – audited@
Nicandro Durante1
Jack Bowles2
Ben Stevens3
Tadeu Marroco4
Salary
Taxable benefits5
– car allowance
– health insurance
– tax advice
– use of Company driver
– home and personal security
– relocation
– tax & social security6
– other expenses related to individual and/or accompanied
attendance at Company functions/events
Total taxable benefits
Short-term incentives
STI vesting percentage (% of maximum)
STI: cash – Group performance cash element
STI: DSBS – Group performance deferred element
Total short-term incentives (page 99)
Long-term incentives7,8
LTIP vesting percentage (% of maximum)
LTIP value to vest
Dividend equivalent9
Total long-term incentives (page 100)
2019
£’000
328
2018
£’000
1,295
2019
£’000
1,175
2019
£’000
551
4
2
38
25
–
58
–
33
160
50%
408
–
408
69.3%
1,733
326
2,059
16
7
62
83
121
–
–
6
295
100%
1,637.5
1,637.5
3,275
70.5%
2,813
511
3,324
20
13
30
61
6
–
122
10
262
96%
1,412
1,412
2,824
69.9%
540
102
642
8
9
–
78
4
–
–
8
107
96%
999
–
999
69.3%
1,015
191
1,206
2018
£’000
916
14
10
–
100
6
–
–
2
132
100%
877.8
877.8
1,756
70.5%
1,434
260
1,694
2019
£’000
301
8
5
34
30
–
–
–
2
79
96%
280
280
560
69.9%
431
81
512
Total pension-related benefits (page 101)
197
430
216
227
491
46
Other emoluments
Life insurance
Share Reward Scheme (value of ordinary shares awarded)
Sharesave Scheme (face value of discount on options granted)
Total other emoluments
Total remuneration
8
4
–
12
3,164
29
3
–
32
8,651
15
4
–
19
5,138
13
4
–
17
3,107
15
3
–
18
5,007
1
–
–
1
1,499
Notes:
1. Nicandro Durante retired as an Executive Director on 1 April 2019. The amounts shown in the table above reflect remuneration received while an Executive Director of the Company.
2. Jack Bowles was appointed Chief Executive Designate on 1 November 2018 and was appointed as an Executive Director on 1 January 2019, before being appointed as Chief Executive effective
1 April 2019.
3. Ben Stevens retired as an Executive Director on 5 August 2019. The amounts shown in the table above reflect remuneration received while an Executive Director of the Company.
4. Tadeu Marroco was appointed Finance Director on 5 August 2019 and was appointed as an Executive Director on the same date. The amounts shown in the table above reflect remuneration received while
an Executive Director of the Company.
5. Taxable benefits: the figures shown are gross amounts as, in line with the UK market, it is the normal practice for the Company to pay the tax which may be due on any benefits, with the exception of the car
or car allowance. The numbers presented above for tax advice are inclusive of applicable VAT and income tax.
6. Amount for Jack Bowles relates to tax equalisation and social security payments made during the year ended 31 December 2019.
7. The 2017 LTIP award is due to vest on 27 March 2022 for Nicandro Durante and Ben Stevens and on 27 March 2020 for Jack Bowles and Tadeu Marroco based on completion of the three-year
performance period on 31 December 2019 and completion of the extended vesting period, as applicable. The value shown is based on the average share price for the three-month period ended
31 December 2019 of 2,920p.
8. LTIP award shown for 2018: the values disclosed in the Annual Report on Remuneration for the year ended 31 December 2018 were estimated values as the award had not vested by the date of that report;
these amounts have been re-presented based on the actual market value on the date of vesting of 12 May 2019 of 2,839p.
9. LTIP dividend equivalent payments: the dividend equivalent payment that will attach to the LTIP award that is included in the Single Figure Table is reported. The values for the year ended 31 December
2018 have been restated on this basis.
98
Remuneration ReportBAT Annual Report and Form 20-F 2019 Short‑term incentives for the year ended 31 December 2019
STI performance measures, weightings and results for year ended 31 December 2019 – audited@
STI: performance measure and target 2019
Description of measure 2019
Actual performance 2019
Adjusted profit from operations
(APFO) (growth over prior year)
Weighting: 30%
Threshold: 3.3% growth over 2018
Maximum: 7.1% growth over 2018
Group’s share of Key Markets
(growth over prior year)
Weighting: 10%
Threshold: 5 bps growth over 2018
Maximum: 15 bps growth over 2018
Adjusted revenue growth from the
Strategic Portfolio
(growth over prior year)
Weighting: 30%
Threshold: 2% growth over 2018
Maximum: 6% growth over 2018
Adjusted cash generated from
operations (Adjusted CGFO)
(as against adjusted budget)
Weighting: 30%
Threshold: Equivalent to 91% operating
cash flow conversion
Maximum: Equivalent to 96% operating
cash flow conversion
APFO is the adjusted profit from
operations at constant rates of exchange
for the year ended 31 December 2019.
Please refer to page 262 for the detailed
description of APFO.
The Group’s retail volume share in its
Key Markets accounts for around 80% of
the volumes of the Group’s subsidiaries.
The Group’s share is calculated from
data supplied by retail audit service
providers and is re-based as and when
the Group’s Key Markets change. When
re-basing does occur, the Company will
also restate historical data and provide
fresh comparative data on the markets.
The Strategic Portfolio reflects the focus
of the Group’s investment activity, and
is defined as Strategic Combustibles and
Strategic Traditional Oral products, and
New Category products. This measure is
assessed at constant rates of exchange.
Please refer to page 261 for the detailed
description of the Strategic Portfolio.
Adjusted CGFO is defined as the net
cash generated from operating activities,
before the impact of adjusting items,
dividends paid to non-controlling
interests and received from associates,
net interest paid and net capital
expenditure.
Adjusted CGFO is measured at constant
rates of exchange.
STI outcome for year ended 31 December 2019
APFO growth over the prior year of 6.6%.
Strategic Report: Delivering our strategy
– Productivity
Global volume share in key markets grew by 20 bps.
Strategic Report: Delivering our strategy – Growth
Adjusted revenue from the Strategic Portfolio grew by
7.3%.
Strategic Report: Delivering our strategy – Growth
Adjusted CGFO exceeded the maximum performance
level set by the Remuneration Committee (equivalent
to 96.2% operating cash flow conversion).
Strategic Report: Delivering our strategy
– Productivity
Nicandro Durante1,2
Jack Bowles3
Ben Stevens1,5
Tadeu Marroco1,3
Available STI award as
% of base salary
Group % result
STI award achieved
% of base salary
STI award achieved
£’000
(Value shown in
Single Figure Table)4
250%
250%
190%
190%
50%
96%
96%
96%
125%
240.3%
182.6%
182.6%
408
2,824
999
560
Notes:
1. The STI awards for Nicandro Durante, Ben Stevens and Tadeu Marroco have been calculated on a pro rata basis for their time spent as Executive Directors during 2019.
2. Nicandro Durante retired as an Executive Director on 1 April 2019. In line with our Directors’ Remuneration Policy in operation at the time, his Group result was based on an ‘on-target’ level of performance,
apportioned for the period he was an Executive Director and payment was made fully in cash in April 2019.
3. For Jack Bowles and Tadeu Marroco, 50% of the STI award will be paid in cash and 50% as an award under the DSBS. Awards made under the DSBS are in the form of free ordinary shares in the
Company that normally vest after three years and no further performance conditions apply in that period. In certain circumstances, such as resigning before the end of the three-year period, participants
may forfeit all of the shares.
4. Malus and clawback provisions apply.
5. In line with the current Directors’ Remuneration Policy, the STI payment to Ben Stevens will be made based on actual results, pro-rated and paid fully in cash in March 2020.
99
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CONTINUED
Long‑term incentives (LTIP) for the year ended 31 December 2019
LTIP performance measures, weightings and results for the year ended 31 December 2019 – audited 3@
LTIP: performance measure
Relative TSR1
Relative to a peer group of
international FMCG companies
Weighting: 20%
EPS growth at current exchange rates
Compound annual growth
in adjusted diluted EPS measured
at current rates of exchange
Weighting: 20%
EPS growth at constant exchange rates
Compound annual growth
in adjusted diluted EPS measured
at constant rates of exchange
Weighting: 20%
Adjusted revenue2
Compound annual growth measured
at constant rates of exchange
Weighting: 20%
Adjusted Operating cash flow
conversion ratio
Ratio over the performance period
at current exchange rates
Weighting: 20%
Total vesting level
Description of measure and target for 2017 LTIP
Performance period 1 January 2017 – 31 December 2019
2017–2019 LTIP target
Threshold
Maximum
2017–2019 LTIP target
Threshold
Maximum
2017–2019 LTIP target
Threshold
Maximum
2017–2019 LTIP target
Threshold
Maximum
2017–2019 LTIP target
Threshold
Maximum
At median, 3% vests
At upper quartile, 20% vests
At CAGR of 5%, 3% vests
At CAGR of 10%, 20% vests
At CAGR of 5%, 3% vests
At CAGR of 10%, 20% vests
At CAGR of 3%, 3% vests
At CAGR of 5%, 20% vests
Ratio of 85%, 3% vests
Ratio of 95%, 20% vests
Result achieved
Vesting percentage
Ranked 21
out of 23
0%
(out of maximum
of 20%)
9.4% CAGR
17.9%
(out of maximum
of 20%)
10% CAGR
20%
(out of maximum
of 20%)
4% CAGR
11.4%
(out of maximum
of 20%)
101.8% ratio
20%
(out of maximum
of 20%)
69.3% vesting
Notes:
1. Relative TSR: the constituents of the FMCG peer group are listed on page 104.
2. The underpin for adjusted revenue growth measure: the adjusted revenue growth measure can only vest provided the corresponding three-year CAGR of APFO exceeds the CAGR of the threshold
performance level for APFO as approved annually in the STI and approved by the Board. The underpin was exceeded with reference to the APFO STI outcomes for 2017, 2018 and 2019.
3. The above figures account for the adjustment made in respect of the impact of the acquisition of RAI on the 2017 performance year within the 2017 LTIP awards. Further detail on the adjustment for the
2017 performance year was provided on page 94 of the 2018 Annual Report for the 2016 LTIP awards and the same will apply in respect of the 2017 LTIP awards.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
LTIP outcome for year ended 31 December 2019
Nicandro Durante3
Jack Bowles4
Ben Stevens3
Tadeu Marroco4
Number of ordinary
shares subject to
award
Vesting % achieved
(based on
2017–2019
performance period)
Number of ordinary
shares
to vest
Value of ordinary
shares to vest1
£’000
114,181
26,463
58,232
21,109
69.3%
69.9%
69.3%
69.9%
59,346
18,497
34,750
14,755
1,733
540
1,015
431
Dividend equivalent
payment on
vesting2
£’000
326
102
191
81
Total value to vest
£’000
(Value shown in
Single Figure Table)
2,059
642
1,206
512
The 2017 LTIP awards granted to Nicandro Durante and Ben Stevens are subject to the LTIP extended vesting period and are therefore due to
vest on 27 March 2022, and will become exercisable on that same date. For Jack Bowles and Tadeu Marroco, the 2017 LTIP awards were made
prior to their appointments as Executive Directors, therefore the vesting date is 27 March 2020 and the shares will become exercisable on that
same date.
Notes:
1. The value of ordinary shares to vest shown above is based on the average share price for the three-month period ended 31 December 2019 of 2,920p.
2. The dividend equivalent amount shown above that will become payable on vesting is the value of the dividend equivalents accrued on the proportion of the award that is due to vest.
3. The number of shares to vest for Nicandro Durante and Ben Stevens is calculated on a pro rata basis to reflect their total time as Executive Directors during the performance period of the awards.
4. The number of shares subject to awards made to Jack Bowles and Tadeu Marroco reflect the award opportunities available to them at the time of the award, prior to being appointed
as Executive Directors.
100
Remuneration ReportBAT Annual Report and Form 20-F 2019 Executive Directors’ pension entitlements and accruals for the year ended 31 December 2019 – audited@
Pension values
Nicandro Durante (up to 1 April 2019)
Jack Bowles
Ben Stevens (up to 5 August 2019)
Tadeu Marroco (from 5 August 2019)
Total
Accrued pension
at year-end 31 December 2019 £’000
Total Defined Contribution (DC) fund value as
at year-end 31 December 2019 £’000
Defined Benefits (DB)
Unapproved Unfunded
Retirement Benefit Scheme
(UURBS)
British American Tobacco UK
Pension Fund
Defined Contribution (DC)
Unapproved Unfunded
Retirement Benefit Scheme
(UURBS)1
British American Tobacco UK
Pension Fund
182
n/a
366
n/a
548
–
n/a
102
n/a
102
n/a
669
n/a
502
1,171
n/a
318
n/a
165
683
Note
1. The DC UURBS credit accrued over the year is increased in line with the Company’s Weighted Average Cost of Debt (WACD) over the year. For the year ended 31 December 2019, a provisional WACD of
3.3% has been used but this may be subject to change.
Nicandro Durante
Nicandro Durante’s UURBS pension entitlements are derived as follows:
– effective from 1 March 2006 (being the date of his appointment as a member of the Management Board), an accrual of 0.65% for each year
of service on a basic £ sterling salary comparable to that of a General Manager of Souza Cruz S.A. At retirement the pension will be based on
a 12 month average and will be provided through the UURBS; and
– with effect from 1 January 2011 (being the date of his appointment as Chief Executive Designate), Nicandro Durante commenced an accrual
of 2.5% for each year of service on a basic salary in excess of that stated above. At retirement the pension is based on a 12 month average and
will be provided through the UURBS.
The normal retirement date for Mr Durante was 13 September 2016.
The pension-related benefits disclosed in the single figures for Executive Directors’ remuneration represent Nicandro Durante’s net accrual for
the period, being the differential between his total pension entitlements as at 31 December 2018 (adjusted for inflation) and as at 1 April 2019,
multiplied by 20 in accordance with the UK Directors’ Remuneration Report Regulations.
Nicandro Durante receives a pension in payment from the Fundação Albino Souza Cruz (FASC) from Souza Cruz S.A., a Brazilian registered
wholly-owned subsidiary of the Group. This pension benefit has been in payment since April 2012 and for the period from 1 January 2019
to 31 March 2019 has amounted to approximately £90,169 (after adjusting for currency exchange).
Ben Stevens
Ben Stevens joined the UK Pension Fund after 1989, before the closure of its non-contributory defined benefit section to new members in April
2005. As a result, prior to 6 April 2006, he was subject to the HMRC cap on pensionable earnings (notionally £160,800 for the tax year 2018/19).
In addition, he has an unfunded pension promise from the Company in respect of earnings above the cap on an equivalent basis to the benefits
provided by the UK Pension Fund. This is provided through the UURBS. Further to the changes to the applicable tax regulations, Ben Stevens has
reached his lifetime allowance of £1.8 million and therefore has ceased accrual in the UK Pension Fund with all future benefits being provided
through the UURBS. During the year, there has been no change to the overall pension entitlement of Ben Stevens.
The normal retirement date for Mr Stevens was 27 July 2019.
Total accrued pension is the amount of pension that would be paid annually on retirement based on service to the end of the year.
The pension-related benefits disclosed in the single figures for Executive Directors’ remuneration represent Ben Stevens’ net accrual for the period,
being the differential between his total pension entitlements as at 31 December 2018 (adjusted for inflation) and as at 5 August 2019, multiplied
by 20 in accordance with the UK Directors’ Remuneration Report Regulations.
These commitments are included in note 12 in the Notes on the Accounts. UK Defined Benefit Pension Fund members are entitled to receive
increases in their pensions once in payment, in line with price inflation (as measured by the Retail Prices Index) and up to 6% per annum.
Jack Bowles
Jack Bowles became an Executive Director with effect from 1 January 2019 and is a member of the Company’s Defined Contribution (DC)
arrangements. The total Company contribution to the DC arrangements over the period 1 January to 31 December 2019 was £215,750. Of this,
£7,583 was paid to the funded British American Tobacco UK DC schemes and £208,167 was credited to the DC UURBS. These total amounts are
based on a Company contribution rate of 25% per annum of salary over the period 1 January 2019 to 30 April 2019 reducing to a rate of 15%
per annum of salary over the period 1 May 2019 to 31 December 2019.
Tadeu Marroco
Tadeu Marroco became an Executive Director with effect from 5 August 2019 and is a member of the Company’s Defined Contribution (DC)
arrangements. The total Company contribution paid to the DC arrangements over the period 5 August to 31 December 2019 was £45,882.
Of this, £3,160 was paid to the funded British American Tobacco UK DC schemes and £42,722 was credited to the DC UURBS. These total
amounts are based on a Company contribution rate of 15% per annum of salary over the period 5 August 2019 to 31 December 2019.
Notes:
1. UK Pension Fund: this is non-contributory. Voluntary contributions paid by an Executive Director and resulting benefits are not shown. No excess retirement benefits have been paid to or are receivable by
an Executive Director or past Executive Director.
2. Revised pension arrangements apply from May 2019 for new Executive Directors as detailed in the revised Directors’ Remuneration Policy on page 78 of the 2018 Annual Report.
101
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CONTINUED
Other information relating to Chief Executives’ remuneration for the year ended 31 December 2019
Chief Executives’ pay – comparative figures 2010 to 2019
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Chief Executives’
‘single figure’ of total
remuneration (£’000)
Paul Adams1
(to 28 February 2011)
Nicandro Durante2
(to 1 April 2019)
Jack Bowles3
(from 1 April 2019)
Annual bonus (STI)
paid against maximum
opportunity (%)
Paul Adams1
(to 28 February 2011)
Nicandro Durante2
(to 1 April 2019)
Jack Bowles3
(from 1 April 2019)
Long-term incentive
(LTIP) paid
against maximum
opportunity (%)
Paul Adams1
(to 28 February 2011)
Nicandro Durante2
(to 1 April 2019)
Jack Bowles3
(from 1 April 2019)
8,858
5,961
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
87.0
n/a
n/a
100
n/a
n/a
5,589
6,340
6,674
3,617
4,543
8,313
10,244
8,651
3,164
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
3,512
100
100
n/a
100
100
n/a
n/a
n/a
n/a
85.0
81.3
73.2
n/a
n/a
n/a
n/a
n/a
87.1
49.2
n/a
n/a
n/a
0.0
n/a
n/a
100
n/a
n/a
8.7
n/a
n/a
100
n/a
n/a
97.2
n/a
n/a
100
n/a
n/a
50
96
n/a
n/a
n/a
n/a
46.0
96.1
70.5
69.3
n/a
n/a
n/a
69.9
Notes:
1. Paul Adams retired as Chief Executive on 28 February 2011. Historical data are taken from the Directors’ Remuneration Reports for the relevant years and is recast (as appropriate) on the basis of the
‘single figure’ calculation as prescribed in the UK Directors’ Remuneration Report Regulations.
2. Nicandro Durante retired as Chief Executive on 1 April 2019. Historical data are taken from the Directors’ Remuneration Reports for the relevant years and is recast (as appropriate) on the basis of the
‘single figure’ calculation as prescribed in the UK Directors’ Remuneration Report Regulations. His ‘single figure’ remuneration for the years ended 31 December 2011 and 31 December 2019 have been
time-apportioned to reflect the period he was Chief Executive.
3. Jack Bowles was appointed Chief Executive with effect from 1 April 2019. His ‘single figure’ remuneration for the year ended 31 December 2019 has been time-apportioned to reflect the period
he was Chief Executive.
Total shareholder return (TSR) performance:1 1 January 2010 to 31 December 2019
450
400
350
300
250
200
150
100
50
0
British American Tobacco
FTSE 100
i
l
g
n
d
o
h
0
0
1
£
l
a
c
i
t
e
h
t
o
p
y
h
f
o
e
u
a
V
l
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
Note:
1. Performance and pay chart: this shows the performance of a hypothetical investment of £100 in ordinary shares (as measured by the TSR for the Company) against a broad
equity market index (the FTSE 100 Index) over a period of 10 financial years starting from 1 January 2010 through to 31 December 2019 based on 30-trading-day average values.
A local currency basis is used for the purposes of the TSR calculation making it consistent with the approach to TSR measurement for the LTIP.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
102
Remuneration ReportBAT Annual Report and Form 20-F 2019
Percentage change in the Chief Executive’s remuneration
The following table shows the percentage change in the Chief Executive’s remuneration measured against a comparator group comprising the UK
employee population on UK employment contracts (2019: 2,980 individuals; 2018: 2,097 individuals). This comparator group is considered to be
the most appropriate group as Executive Directors are employed on UK contracts. Using a more widely-drawn group encompassing the worldwide
nature of the Group’s business would also present practical difficulties in collation and a less relevant comparator, given the significant variations in
employee pay across the Group, the differing economic conditions and wide variations in gross domestic product per capita.
2019
£’000
1,209
71
2018
£’000
1,295
75
Base salary
Percentage
change
%
-6.7
-4.6
Taxable benefits
Short-term incentives
2019
£’000
357
7
2018
£’000
295
7
Percentage
change
%
21
-
2019
£’000
2,526
38
2018
£’000
3,275
49
Percentage
change
%
-23
-23.5
Chief Executive
UK-based employees
Notes: UK-based employees:
1. The data for the UK-based employees comparator group are made up as follows as at 31 December 2019: (1) the weighted average base salaries; (2) the average taxable benefits per grade; and (3) the
weighted average bonus result based on that population as at that date.
2. The data for the UK-based employees for 2019 include non-management employees from an acquisition.
3. The data for the UK-based employees for 2018 for taxable benefits and short-term incentives have been restated. Taxable benefits data have been adjusted to reflect a change in calculation of the car
benefit and short-term incentives data have been adjusted to reflect actual results rather than on-target as reported in the 2018 Annual Report.
4. The Chief Executive figures for base salary, taxable benefits and short-term incentives for 2019 are calculated based on Nicandro Durante’s remuneration for the period 1 January to 31 March 2019 and
Jack Bowles’ remuneration for the period 1 April to 31 December 2019.
CEO Pay Ratio Disclosure
In line with the new disclosure requirement, the below table reflects the CEO pay ratio when compared to the employees at the 25th, median
and 75th percentile of the Group’s UK workforce.
Year
2019
Method
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
144:1
86:1
36:1
Notes:
1. Option A has been used to calculate the ratio as this has been viewed to be the most robust and comprehensive means of assessment and is also reflective of shareholder preferences.
2. Total pay and benefits are based on the workforce as at 1 December 2019 and include the annualised income for the earnings period 1 January 2019 to 31 December 2019.
3. Total pay and benefits for the CEO are based on the single figure calculation on page 97. The CEO single figure used in the calculation is a combination of remuneration data for both Nicandro Durante and
Jack Bowles, recognising the transition in the Group’s leadership which took place in 2019.
4. Total pay and benefits for the workforce is calculated as far as possible on the same basis as the CEO single figure calculation. This includes salary, taxable benefits, short-term incentive, long-term
incentive, dividends, pension benefits and any other remuneration receivable. For the purposes of this analysis, the following has been assumed:
– For all employees that are eligible for a car benefit, the applicable car allowance amounts have been used,
– For all employees that participate in the global International Executive Incentive Scheme or equivalent corporate incentive scheme, incentive pay-outs are calculated based on the same metrics; and
– For all employees that participate in the UK DC scheme, Company contributions of 15% of salary have been used.
5. For the calculation of the total pay and benefits for employees, employees on international assignment into and out of the UK have been included; however, assignment benefits, such as housing support,
education support, home leave allowance or relocation costs, have not been included as these are not consistent with the benefits included in the CEO single figure calculation.
6. For hourly paid employees who are not full time, total pay and benefits have been pro-rated based on full-time employee hours.
7. For employees who have joined part way through the year, pro rata income has been used to provide a full year figure.
The table below includes details of the total pay and benefits, as well as the salary component of remuneration for the employees identified
as being P25, P50 and P75.
Salary
Total Remuneration
25th percentile (P25)
Median (P50)
75th percentile (P75)
£31,253
£46,216
£52,235
£77,754
£91,756
£183,179
The Company believes the median pay ratio for 2019 reflects the diversity of our business footprint and employee population across the UK.
The Group’s remuneration policies and practices are founded on a high degree of alignment and consistency, with total remuneration at all levels
providing a competitive package that enables the attraction and retention of talent while also providing equitable differentiated remuneration
based on grade, performance and experience. Further details on all-employee rewards at BAT can be found on pages 95 and 96.
103
Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 ANNUAL REPORT ON REMUNERATION
CONTINUED
4 Executive Directors’ remuneration for the upcoming year
Base salary for 2020
The Remuneration Committee has determined the following salaries for the Executive Directors.
Executive Directors – salaries
Jack Bowles
Tadeu Marroco1
Notes:
1. 2019 Base salary for Tadeu Marroco reflects terms of his appointment as Finance Director effective from 5 August 2019.
Benefits and pension
No changes have been made to the provision of benefits or pension for 2020.
Base salary
from
1 Apr 2020
£
1,287,000
772,500
Percentage
change
%
Base salary
from
1 Apr 2019
£
9.5% 1,175,000
750,000
3%
Short‑term incentives for 2020 onwards
STI opportunity levels for Executive Directors will be in line with those set out in our Directors’ Remuneration Policy. STI metrics and weightings
are as follows:
2020 STI metrics & weightings
Group share of key markets
Adjusted revenue growth from the Strategic Portfolio1
Adjusted profit from operations
Deleveraging excluding foreign exchange2
Total
10%
30%
30%
30%
100%
Notes:
1. The Strategic Portfolio is comprised of Strategic Combustibles, Strategic Traditional Oral products and New Category products. Please refer to page 261 for further details.
2. Description of the metric can be found on page 267.
Further detail is included in the description of the STI measures for the year ended 31 December 2019 on page 99.
Long‑term incentives for 2020 onwards
The Chief Executive and Finance Director will be granted an LTIP award equal to 500% of salary and 400% of salary, respectively.
The performance measures and weightings for the LTIP award to be granted in 2020 will remain unchanged from those for 2019 awards.
The measures and targets for 2020 LTIP awards are set out below.
LTIP measures and performance ranges
Relative TSR
Median performance vs. FMCG peer group to upper quartile.
The current constituents of the FMCG peer group as at the date of this report are:
Mondelez
Altria Group
International
Colgate-Palmolive
Japan Tobacco
% of award
vesting at
maximum
20
% of award
vesting at
threshold
3
Procter & Gamble
Anheuser-Busch InBev
Danone
Johnson & Johnson Nestlé
Reckitt Benckiser
Campbell Soup
Carlsberg
Diageo
Heineken
Kellogg
Kimberly-Clark
PepsiCo
Pernod Ricard
Unilever
Coca-Cola
Imperial Brands
LVMH
Philip Morris
International
EPS growth at current exchange rates
5%–10% compound annual growth in adjusted diluted EPS over the performance period
EPS growth at constant exchange rates
5%–10% compound annual growth in adjusted diluted EPS over the performance period
Adjusted revenue growth
3%–5% compound annual growth over the performance period
Adjusted operating cash flow conversion ratio
Ratio of 85%–95% over the performance period at current exchange rates
Total
20
20
20
20
3
3
3
3
100
15
104
Remuneration ReportBAT Annual Report and Form 20-F 2019 5 Chairman and Non‑Executive Directors’ remuneration for the year ended 31 December 2019 – audited@
The following table shows a single figure of remuneration for the Chairman and Non-Executive Directors in respect of qualifying services
for the year ended 31 December 2019 together with comparative figures for 2018.
Base fee5
£’000
Chair/Committee
membership fees5
£’000
Taxable benefits1
£’000
Total remuneration
2019
2018
2019
2018
2019
2018
2019
Chairman
Richard Burrows
Non-Executive Directors
Sue Farr
Dr Marion Helmes
Jerry Fowden (from 1 September 2019)
Luc Jobin2
Holly Keller Koeppel3
Savio Kwan
Dimitri Panayotopoulos
Kieran Poynter
Retired Non-Executive Directors
Ann Godbehere (to 25 April 2018)
Pedro Malan (to 25 April 2018)
695
680
94
94
32
94
94
94
94
94
–
–
93
93
–
93
93
93
93
93
30
30
–
26
26
9
26
51
26
52
64
–
–
–
24
24
–
24
24
24
50
86
7
7
Lionel Nowell, III (to 12 December 2018)
Total
–
1,385
88
1,479
–
280
23
293
137
4
13
5
77
125
61
24
1
–
–
–
447
£’000
2018
796
119
129
–
158
211
159
160
179
38
52
116
2
12
–
41
94
42
17
–
1
15
832
124
133
46
197
270
181
170
159
–
–
79
419
–
2,112
190
2,191
Notes:
1. Benefits: the Chairman’s benefits in 2019 comprised: health insurance and ‘walk-in’ medical services £15,000 (2018: £15,000); the use of a Company driver £81,000 (2018: £81,000); home and personal
security in the UK and Ireland £14,000 (2018: £4,000); hotel accommodation and related expenses incurred in connection with individual and/or accompanied attendance at certain business functions
and/or corporate events £4,000 (2018: £3,000); and commuting flights to London £23,000 (2018: £13,000). The benefits for the other Non-Executive Directors principally comprised travel-related expenses
incurred in connection with individual and/or accompanied attendance at certain business functions and/or events and ‘walk-in’ medical services. The figures shown are grossed-up amounts (as
appropriate) as, in line with the UK market, it is the normal practice for the Company to pay the tax that may be due on any benefits.
2. Pension: Luc Jobin receives a pension in respect of prior service to Imasco Limited (acquired in 2000 by the Group) and Imperial Tobacco Canada Limited, a subsidiary of BAT. In 2019 this amount was
CAD$150,228.96 (£87,450.72) (2018: CAD$150,228.96 (£86,849.10)).
3. Deferred Compensation Plan for Directors of RAI (DCP): as a former outside director of RAI, Holly Keller Koeppel participated in the DCP under which she elected to defer payment of a portion of her RAI
retainers and meeting attendance fees to an RAI stock account. Following the acquisition of RAI by BAT, amounts deferred to a stock account (Deferred Stock Units or DSUs) mirror the performance of, and
receive dividend equivalents based on, BAT American Depository Shares (ADSs). The DSUs of Holly Keller Koeppel are disclosed as a note to ‘Summary of Directors’ share interests’ below. DSUs deferred
under the DCP will be paid in accordance with the terms of the DCP, section 409A of the US Internal Revenue Code of 1986, as amended, and the Director’s existing deferral elections.
4. Committee memberships: are shown, together with changes during the year, in the reports of the respective committees in the Governance sections of the Directors’ Report.
5. Non-Executive Directors’ fees structure 2019: is set out in the table below.
Base fee
Senior Independent Director – supplement
Audit Committee: Chairman
Audit Committee: Member
Nominations Committee: Chairman
Nominations Committee: Member
Remuneration Committee: Chairman
Remuneration Committee: Member
Fees from
1 May 2019
£
Fees to
30 April 2019
£
94,500
37,800
39,950
13,750
–
12,200
39,950
13,750
92,700
37,100
39,200
13,500
–
12,000
39,200
13,500
Chairman and Non‑Executive Directors’ fees and remuneration for the upcoming year
As described in the Annual Report on Remuneration for the year ended 31 December 2018, the Chairman’s fee was increased from £685,000
to £698,000 from 1 April 2019. In keeping with the level of pay awards granted to UK employees based on a 2.5% increase in budget, the
Remuneration Committee determined the Chairman’s fee will be £718,940 with effect from 1 April 2020 (+3%).
The fees for Non-Executive Directors are scheduled to be reviewed in April 2020 with any changes being effective from 1 May 2020.
105
Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 ANNUAL REPORT ON REMUNERATION
CONTINUED
6 Directors’ share interests
Summary of Directors’ share interests – audited@
Outstanding scheme interests 31 Dec 2019
Ordinary shares
held at
31 Dec 2019
Unvested awards subject to
performance measures and
continued employment
Unvested awards
subject to continued
employment only
(LTIP)
(DSBS)
Unvested
interests
(Sharesave)
Total ordinary
shares subject
to outstanding
scheme interests
Total of all interests in
ordinary shares at
31 Dec 2019
Executive Directors
Jack Bowles1,3
Tadeu Marroco2,3
Chairman
Richard Burrows
Non-Executive Directors
Sue Farr
Jerry Fowden4
Dr Marion Helmes
Luc Jobin4
Holly Keller Koeppel4,5
Savio Kwan3
Dimitri Panayotopoulos
Kieran Poynter
Former Directors6
Nicandro Durante
(retirement date 1 April 2019)
Ben Stevens
(retirement date 5 August 2019)
181,774
39,033
19,000
–
2,000
4,500
45,236
8,416
7,082
3,300
5,000
246,780
85,414
47,253
28,193
–
761
294,033
114,368
475,807
153,401
19,000
–
2,000
4,500
45,236
8,416
7,082
3,300
5,000
367,094
415,213
114,175
912
530,300
897,394
137,208
286,197
61,932
1,038
349,167
486,375
Notes:
1. Jack Bowles: ordinary shares held include 566 held by the trustees of the BAT Share Incentive Plan (SIP).
2. Tadeu Marroco: ordinary shares held include 828 held by the trustees of the SIP.
3. Changes from 31 December 2019: (a) Jack Bowles: acquisition of seven ordinary shares on 6 February 2020 as a result of reinvestment of dividend income under the SIP; acquisition of 1,172 ordinary
shares on 6 February 2020 as a result of reinvestment of dividend income under the Vested Share Account (VSA); and acquisition of 130 ordinary shares on 13 February 2020 as a result of reinvestment
of dividend income under the Deferred Shares Bonus Scheme (DSBS). (b) Tadeu Marroco: purchases of five ordinary shares on 2 January 2020, four ordinary shares on 5 February 2020 and five
ordinary shares on 4 March 2020 under the SIP; acquisition of 12 ordinary shares on 6 February 2020 as a result of reinvestment of dividend income under the SIP; acquisition of 432 ordinary shares
on 6 February 2020 as a result of reinvestment of dividend income under the VSA; and acquisition of 54 ordinary shares on 13 February 2020 as a result of reinvestment of dividend income under the
DSBS. (c) Savio Kwan: acquisition of 103 ordinary shares on 13 February 2020 as a result of reinvestment of dividend income. There were no changes in the interests of the Chairman and the other Non-
Executive Directors.
4. American Depositary Shares (ADSs): each of the interests in ordinary shares held by Jerry Fowden, Luc Jobin and Holly Keller Koeppel consists of an equivalent number of BAT ADSs each of which
represents one ordinary share in the Company.
5. Deferred Stock Units (DSUs): at the date of this report Holly Keller Koeppel, being a former director of RAI and a participant in the Deferred Compensation Plan for Directors of RAI (DCP), holds DSUs
which were granted prior to becoming a Director of BAT. Each DSU entitles the holder to receive a cash payment upon ceasing to be a Director equal to the value of one BAT ADS. The number of DSUs
increases on each dividend date by reference to the value of dividends declared on the ADSs underlying the DSUs. Ms Koeppel currently holds 23,333.51 DSUs (31 December 2019: 22,996.63 DSUs).
6. Former Directors: Nicandro Durante and Ben Stevens retired on 1 April 2019 and 5 August 2019, respectively. Ordinary shares held and outstanding share interests, included in the table above, are as at
their respective date of retirement.
106
Remuneration ReportBAT Annual Report and Form 20-F 2019 Executive Directors’ shareholding guidelines
Executive Directors are encouraged to build up a high level of personal shareholding to ensure a continuing alignment of interests with
shareholders. The shareholding guidelines require Executive Directors to hold ordinary shares equal to the value of a percentage of salary
as set out in the tables below.
As part of last year’s Directors’ Remuneration Policy review, in accordance with the UK Corporate Governance Code 2018, the Remuneration
Committee introduced a new post-employment shareholding policy; Executive Directors are required to hold shares equivalent to 100%
of current shareholding requirements for two full years following the date of their departure. The Directors’ Remuneration Policy came into
effect on 26 April 2019, following approval by shareholders at our AGM, and therefore this new requirement applies to Ben Stevens who
retired after this date.
Jack Bowles
Tadeu Marroco
Nicandro Durante (retirement date 1 April
2019)
Ben Stevens (retirement date 5 August 2019)
No. of eligible
ordinary shares
held at
31 Dec 2019
206,252
53,147
No. of eligible
ordinary shares
held at
retirement date
425,120
195,968
Value of eligible
ordinary shares
held at
31 Dec 20191
£m
Actual
percentage (%)
of base salary at
31 Dec 2019
Shareholding
requirements
(% of base salary
31 Dec 2019)
6.7
1.7
567.2
229.0
500%
350%5
Value of eligible
ordinary shares
held at
retirement date4
£m
Actual
percentage (%)
of base salary at
retirement date
Post-employment
shareholding
requirements
(% of base salary at
retirement date)
13.3
5.8
1,017.4
632.0
N/A6
350%
Compliant with
shareholding
requirement
Yes
See note 5
Compliant with
shareholding
requirement
N/A
Yes
Eligibility of shares: (a) unvested ordinary shares under the DSBS, which represent deferral of earned bonus, are eligible and count towards the
requirement on a net-of-tax basis; (b) unvested ordinary shares under the LTIP are not eligible and do not count towards the requirement during
the performance period, but the estimated notional net number of ordinary shares held during the LTIP Extended Vesting Period are eligible and
will count towards the requirement; and (c) ordinary shares held in trust under the all-employee share ownership plan (SIP) are not eligible and
do not count towards the shareholding requirement.
Non-Executive Directors are not subject to any formal shareholding requirements although they are encouraged to build a small interest
in ordinary shares during the term of their appointment.
Notes:
1. Value of ordinary shares shown above: this is based on the closing mid-market share price on 31 December 2019 of 3,231.5p.
2. Meeting the guidelines: if an Executive Director does not, at any time, meet the requirements of the shareholding guidelines, the individual may, generally, only sell a maximum of up to 50% of any ordinary
shares vesting (after tax) under the Company share plans until the threshold required under the shareholding guidelines has been met.
3. Waiver of compliance with guidelines: this is permitted with the approval of the Remuneration Committee in circumstances where a restriction on a requested share sale could cause undue hardship.
No such applications were received from the Executive Directors during 2019.
4. Value of ordinary shares shown above: this is based on the closing mid-market share price on 1 April 2019 of 3,135p for Nicandro Durante and the closing mid-market share price on 5 August 2019 of
2,980p for Ben Stevens.
5. Tadeu Marroco was appointed as an Executive Director on 5 August 2019, prior to which the shareholding requirement for Mr Marroco was set at a lower percentage of salary with Mr Marroco being
compliant with required percentage. Under the Directors’ Remuneration Policy, Executive Directors may generally sell a maximum of up to 50% of any shares vesting (after tax) under the Company’s share
plans until the threshold for shareholding requirements has been met and Mr Marroco is compliant with this policy requirement. In line with the Directors’ Remuneration Policy, the shareholding requirement
is equal to the value of the same multiple of salary at which LTIP awards are made to that Director, as such the shareholding requirement for Mr Marroco will increase to 400% in 2020.
6. Nicandro Durante is not subject to post-employment shareholding requirements due to his retirement and subsequent departure from the Company taking place prior to the approval of the Directors’
Remuneration Policy, effective 26 April 2019, which introduced the post-employment shareholding requirement.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
107
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CONTINUED
Executive Directors’ outstanding scheme interests – audited@
Nicandro Durante
Jack Bowles
Ben Stevens
Tadeu Marroco
Plan At 1 Jan 2019
Awarded in
2019
LTIP1
LTIP2
LTIP3
DSBS
DSBS
DSBS
DSBS
Sharesave
Sharesave
LTIP1
LTIP2
LTIP3
LTIP3
DSBS
DSBS
DSBS
DSBS
Sharesave
Sharesave
LTIP1
LTIP2
LTIP3
LTIP3
DSBS
DSBS
DSBS
DSBS
Sharesave
Sharesave
LTIP1
LTIP2
LTIP3
LTIP3
DSBS
DSBS
DSBS
DSBS
Sharesave
Sharesave
140,529
114,181
160,503
29,690
28,545
32,517
–
543
369
31,943
26,463
43,785
–
–
–
–
–
–
53,113
–
–
–
–
–
–
176,532
11,473
8,997
12,064
–
–
–
71,669
58,232
80,264
–
–
–
26,192
–
–
–
–
–
–
97,175
19,468
15,805
17,655
–
543
495
21,315
21,109
28,248
–
–
–
28,472
–
–
–
–
–
–
36,057
7,655
7,177
7,783
–
495
266
–
–
–
13,233
–
–
Lapsed in
2019
41,457
–
–
–
–
–
–
50
369
29,690
28,545
32,517
53,113
493
–
9,232
22,711
–
–
–
–
–
–
–
–
–
21,143
–
–
–
–
–
–
–
–
495
–
–
–
11,473
–
–
–
–
–
–
–
–
–
19,468
15,805
17,655
28,472
543
–
6,161
15,154
–
–
–
–
–
–
–
–
–
–
–
–
7,655
–
–
–
–
–
Exercised/
released in
2019
At 31 Dec
2019
Exercise price
(p)
End of
performance
period
Date from which
exercisable or shares
released
-
-
-
99,072
114,181
160,503
– 31 Dec 18
12 May 21
– 31 Dec 19
– 31 Dec 20
– 31 Dec 18
– 31 Dec 19
– 31 Dec 20
– 31 Dec 21
3,091.50
–
–
–
27 Mar 22
26 Mar 23
29 Mar 19
2 Apr 19
2 Apr 19
2 Apr 19
2 Apr 19
–
2,947.00 31 Dec 18
12 May 19
– 31 Dec 19
– 31 Dec 20
– 31 Dec 21
– 31 Dec 18
– 31 Dec 19
– 31 Dec 20
– 31 Dec 21
–
–
–
–
27 Mar 20
26 Mar 21
28 Mar 24
29 Mar 19
27 Mar 20
26 Mar 21
28 Mar 22
–
–
– 31 Dec 18
12 May 21
– 31 Dec 19
– 31 Dec 20
– 31 Dec 21
– 31 Dec 18
– 31 Dec 19
– 31 Dec 20
– 31 Dec 21
–
–
–
–
27 Mar 22
26 Mar 23
28 Mar 24
29 Mar 19
1 Oct 19
1 Oct 19
1 Oct 19
1 Oct 19
–
2,753.75 31 Dec 18
12 May 19
– 31 Dec 19
– 31 Dec 20
– 31 Dec 21
– 31 Dec 18
– 31 Dec 19
– 31 Dec 20
– 31 Dec 21
–
–
1 May 20
1 May 21
27 Mar 20
26 Mar 21
28 Mar 22
29 Mar 19
27 Mar 20
26 Mar 21
28 Mar 22
1 May 20
1 May 21
–
–
–
–
–
–
–
26,463
43,785
176,532
–
8,997
12,064
26,192
–
–
50,526
58,232
80,264
97,175
–
–
–
–
–
–
–
21,109
28,248
36,057
–
7,177
7,783
13,233
495
266
Notes:
1. Details of the performance condition for the LTIP awards granted in 2016 (which vested during 2019), and of achievement against that condition in the period to 31 December 2018,
were set out in the Annual Report on Remuneration for the year ended 31 December 2018.
2. Details of the performance condition attached to 2017 LTIP awards, and of achievement against that condition in the period to 31 December 2019, are set out on page 100.
3. Details of the performance condition attached to 2018 and 2019 LTIP awards are set out on page 109.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
108
Remuneration ReportBAT Annual Report and Form 20-F 2019 Further details in relation to scheme interests granted during the year ended 31 December 2019
Nicandro Durante
Jack Bowles
Ben Stevens3
Tadeu Marroco
Ordinary shares
awarded
Price per
ordinary share
at award1
Face value
of award
£’000
Exercise price
Proportion of
award vesting for
threshold
performance (%)
53,113
176,532
26,192
97,175
28,472
36,057
13,233
3,328p
5,875
3,328p
3,234
3,328p
1,200
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
15
n/a
15
n/a
20
n/a
Plan
DSBS
LTIP2
DSBS
LTIP2
DSBS
LTIP2
DSBS
Performance
period
n/a
2019–2021
n/a
2019–2021
n/a
2019-2021
n/a
Date from which
exercisable or
shares released
2 April 2019
28 Mar 24
28 Mar 22
28 Mar 24
1 Oct 19
28 Mar 22
28 Mar 22
Notes:
1. The 2019 LTIP award was made on the basis of the Group’s closing share price on 25 February 2019, increased by 15%, with a resulting share price of £33.28.
2. Details of the performance condition attached to these LTIP awards are set out below.
3. Any LTIP award vesting for Ben Stevens will be pro rata based on the period he was employed during the three-year performance period.
Further details in relation to performance conditions attaching to outstanding scheme interests
Relative TSR
Ranking against a peer group of international
FMCG companies
EPS growth at current exchange rates
Compound annual growth in adjusted diluted
EPS measured at current rates of exchange
EPS growth at constant exchange rates
Compound annual growth in adjusted diluted
EPS measured at constant rates of exchange
Adjusted revenue growth
Compound annual growth measured at constant
rates of exchange
Adjusted operating cash flow conversion ratio
Measured at current rates of exchange,
as a percentage of APFO
LTIP awards granted in 2018
LTIP awards granted in 2019
1 January 2018–31 December 2020
1 January 2019–31 December 2021
Weighting
Threshold
Maximum
Weighting
Threshold
Maximum
20%
At median,
3% of award
vests
At upper
quartile, 20%
of award vests
20% At 5% CAGR,
3% of award
vests
20% At 5% CAGR,
3% of award
vests
20% At 3% CAGR,
3% of award
vests
20% At 85%, 3%
of award vests
At 10% CAGR,
20% of award
vests
At 10% CAGR,
20% of award
vests
At 5% CAGR,
20% of award
vests
At 95%, 20%
of award vests
20%
At median,
3% of award
vests
At upper
quartile, 20%
of award vests
20% At 5% CAGR,
3% of award
vests
20% At 5% CAGR,
3% of award
vests
20% At 3% CAGR,
3% of award
vests
20% At 85%, 3%
of award vests
At 10% CAGR,
20% of award
vests
At 10% CAGR,
20% of award
vests
At 5% CAGR,
20% of award
vests
At 95%, 20%
of award vests
For LTIP awards granted to Executive Directors from 2016 onwards, an additional vesting period of two years applies from the third anniversary of
the date of grant.
109
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CONTINUED
7 Other disclosures
Retirement of Nicandro Durante and Ben Stevens – audited@
Both Nicandro Durante and Ben Stevens retired as Executive Directors during 2019. The terms and conditions of their retirement were
determined by the Remuneration Committee in accordance with the Company’s shareholder-approved Directors’ Remuneration Policy in place
at the time of their respective retirements. They did not receive any additional payments during their time as Executive Directors outside of the
normal approach to executives who are departing by reason of retirement.
Details of remuneration paid to Nicandro Durante and Ben Stevens in respect of their services as Executive Directors in 2019 are set out in the
single figure table on page 97 and accompanying notes. Further details on their remuneration arrangements on retirement are provided below.
Nicandro Durante
Ben Stevens
Date of retirement
Retired as Chief Executive and from the Board of the
Company with effect from 1 April 2019.
Stepped down as Finance Director and from the Board of
the Company with effect from 5 August 2019. He remained
an employee of the Company until his retirement on
30 September 2019. Accordingly, Ben Stevens’ entitlement
to salary and all other contractual benefits associated with
his employment continued until 30 September 2019.
STI for 2019
LTI for 2019
Treatment of
outstanding DSBS
and LTIP awards
Both Nicandro Durante and Ben Stevens were eligible to participate in the STI for 2019 pro-rated for the period they
were employed during the year. STI outcomes are set out on page 99 relating to the periods as Executive Directors in
2019. The STI outcome for the period during which Mr Stevens remained an employee but was no longer an Executive
Director is £263,500 and will be paid fully in cash in March 2020.
Not eligible to receive an LTIP grant in 2019.
Granted an LTIP award with a face value equal to 350% of salary.
For the purposes of outstanding DSBS and LTIP awards, the Remuneration Committee determined that both Nicandro
Durante and Ben Stevens would be classified ‘good leavers’. They therefore received full and immediate vesting of all
outstanding DSBS awards in line with the Directors’ Remuneration Policy and rules of the DSBS.
– For Nicandro Durante this amounted to 114,175 ordinary shares.
– For Ben Stevens this amounted to 61,932 ordinary shares.
Pension arrangements Following his retirement, Nicandro Durante received a pension
Dividend equivalent
payments
Other emoluments
All-employee
share schemes
Outstanding LTIP awards will only vest following completion of the three-year performance period and the additional two-year
extended vesting period, and will remain subject to the achievement of the relevant performance conditions and any shares vesting
will be time pro-rated based on the number of months worked in each performance period. In Ben Stevens’ Single Figure
information on page 97 the shares vesting from the 2017 LTIP award relate to his period as an Executive Director in the performance
period. The number of shares vesting from the 2017 LTIP award that relate to the period from 5 August 2019 to 30 September
2019, the period during which Mr Stevens remained an employee but was no longer an Executive Director, within the performance
period is 2,242.
Both Nicandro Durante and Ben Stevens remain eligible to receive dividend equivalent payments in respect of any shares
vesting from LTIP awards.
For Nicandro Durante these payments will be made in cash.
For the DSBS awards vesting in 2019, this amounted to a
cash sum of £25,330.
For Ben Stevens these payments will be made in cash for
awards granted prior to 2019 and in shares for awards
granted in 2019. For the DSBS awards vesting in 2019,
this amounted to a cash sum of £9,340 and 132 shares.
Following his retirement, Ben Stevens received a pension in
accordance with the provisions of the BATUKPF and UK
UURBS arrangements. The indicative total pension
entitlement as at the 30 September 2019 is £467,745 per
annum.
in accordance with the provisions of the UK UURBS, which
generates an initial annual pension (before any commutation)
of approximately £181,693. This will increase in future years in
line with the provisions of the UK UURBS.
As set out on page 101, Nicandro Durante will also continue to
receive his pension payment from Fundação Albino Souza Cruz
(FASC) S.A., a Brazilian registered wholly-owned subsidiary.
Eligible to be reimbursed for:
– Reasonable relocation and shipment costs (up to
£200,000) to assist with his move back to Brazil following
his retirement; and
Eligible to be reimbursed for:
– Any tax advice (up to £30,000) received in relation to
his retirement.
– Any tax advice (up to £30,000) received in relation to
There were no actual costs incurred for tax advice.
his retirement.
These costs amounted to a total of £96,000, including
where relevant any tax payable on such reimbursement.
Share interests held under the Company’s all-employee share plans were treated in accordance with the terms of the
plans and the applicable HMRC requirements.
As at 1 April 2019, Nicandro Durante was eligible to receive
all 2,486 shares he held in the SIP and had six months
within which to exercise a maximum of 625 options held
under the Sharesave Scheme.
As at 30 September 2019, Ben Stevens was eligible to
receive all 842 shares he held in the SIP and had six
months within which to exercise a maximum of 1,030
options held under the Sharesave Scheme.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
110
Remuneration ReportBAT Annual Report and Form 20-F 2019 Payments to former Directors and payments for loss of office: All payments made to Nicandro Durante and Ben Stevens were in accordance
with the Directors’ Remuneration Policy and have been reported in the appropriate section of this report.
Relative importance of spend on pay
To illustrate the relative importance of the remuneration of the Directors in the context of the Group’s finances overall, the Remuneration
Committee makes the following disclosure:
Item
Remuneration of Group employees1
Remuneration of Executive Directors
Remuneration of Chairman and Non-Executive Directors
Total dividends2
2019
£m
3,221
13
2
4,598
2018
£m
3,005
14
2
4,347
% change
7.2
-5.5
-3.7
5.8
Notes:
1. Total remuneration of Group employees: this represents the total employee benefit costs for the Group, set out on page 140 within note 3(a) in the Notes on the Accounts.
2. Total dividends: this represents the total dividends paid in 2019. The figure for 2018 has been restated from that reported in the 2018 Directors’ Remuneration Report so that it reflects dividends paid in the
year rather than dividends declared in the year as was reported in the 2018 Directors’ Remuneration Report. For further details please refer to page 47.
Shareholder dilution – options and awards outstanding
Satisfaction of Company share plan awards in accordance with the Investment
Association’s Principles of Remuneration
New ordinary shares issued by the Company during the year ended
31 December 2019
– by the issue of new ordinary shares;
– 104,854 ordinary shares issued by the Company in relation to the
– ordinary shares issued from treasury only up to a maximum of 10%
of the Company’s issued share capital in a rolling 10-year period;
– within this 10% limit, the Company can only issue (as newly issued
ordinary shares or from treasury) 5% of its issued share capital to
satisfy awards under discretionary or executive plans; and
– the rules of the Company’s Deferred Share Bonus Scheme do not
allow for the satisfaction of awards by the issue of new
ordinary shares.
Sharesave Scheme;
– a total of 1,035,438 Sharesave Scheme options over ordinary shares in
the Company were outstanding at 31 December 2019, representing
0.05% of the Company’s issued share capital (excluding shares held in
treasury); and
– options outstanding under the Sharesave Scheme are exercisable
until the end of October 2023 at option prices ranging from 2,600p
to 4,056p.
8 The Remuneration Committee and shareholder engagement
Remuneration Committee current members
Dimitri Panayotopoulos (Chairman)
Sue Farr
Dr Marion Helmes (from 14 January 2019)
Savio Kwan
Role
As set out in the Terms of Reference, the Remuneration Committee is responsible for:
– determining and proposing the Directors’ Remuneration Policy (covering salary, benefits, performance-based variable rewards and retirement
benefits) for shareholder approval;
– determining, within the terms of the approved Directors’ Remuneration Policy, the specific remuneration packages for the Chairman and the
Executive Directors, on appointment, on review and, if appropriate, any compensation payment due on termination of appointment;
– the setting of targets applicable for the Company’s performance-based variable reward scheme and determining achievement against those
targets, exercising discretion where appropriate and as provided by the applicable scheme rules and the Directors’ Remuneration Policy;
– reviewing Group workforce remuneration and related policies, and the alignment of incentives and rewards with Group culture, taking these
into account when setting the policy for Executive Director remuneration. Providing feedback to the Board on workforce reward, incentives
and conditions applicable across the Group and supporting the Board’s monitoring of the Group’s culture and its alignment with the Group’s
purpose, values and strategy;
– setting remuneration for members of the Management Board and the Company Secretary; and
– monitoring and advising the Board on any major changes to the policy on employee benefit structures for the Group.
Remuneration Committee terms of reference
Revised Remuneration Committee terms of reference have been adopted by the Board to reflect revisions to internal governance processes to
align with the requirements of the UK Corporate Governance Code 2018. Further detail on the revisions can be found in the Annual Report on
Remuneration for the year ended 31 December 2018.
For the Remuneration Committee’s terms of reference see:
www.bat.com/governance
111
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ANNUAL REPORT ON REMUNERATION
CONTINUED
Attendance at meetings in 20191
Name
Dimitri Panayotopoulos
Sue Farr
Marion Helmes2(b)
Luc Jobin2(c)
Savio Kwan
Member
since
2015
2016
2019
2017–2019
2016
Attendance/
Eligible to attend
Scheduled
Attendance/
Eligible to attend
Ad Hoc
4/4
4/4
4/4
0/0
4/4
2/2
2/2
2/2
0/0
2/2
Notes:
1. Number of meetings in 2019: the Committee held six meetings in 2019, two of which were ad hoc.
2. Membership: (a) all members of the Committee are independent Non-Executive Directors in accordance with the UK Corporate Governance Code 2018 Provisions 10 and 32 and applicable NYSE
listing standards; (b) Marion Helmes was appointed as a member of the Committee with effect from 14 January 2019; and (c) Luc Jobin ceased to be a member of the Committee with effect from
14 January 2019.
3. Other attendees: the Chairman, the Chief Executive, the Director, Talent and Culture, the Group Head of Reward and other senior management, including the Company Secretary, may be consulted and
provide advice, guidance and assistance to the Remuneration Committee. They may also attend Committee meetings (or parts thereof) by invitation. Neither the Chairman, any Executive Director nor
member of senior management plays any part in determining their own respective remuneration.
4. Deloitte LLP: as the Remuneration Committee’s remuneration consultants during 2019, they attended meetings of the Remuneration Committee in 2019. As a member of the Remuneration Consultants
Group (RCG), Deloitte agrees to the RCG Code of Conduct which seeks to clarify the scope and conduct of the role of executive remuneration consultants when advising UK-listed companies.
Remuneration Committee advisers during 2019
Independent
external advisers
Deloitte LLP
Herbert Smith
Freehills LLP
Services provided to the Remuneration Committee
General advice on remuneration matters including: market
trends and comparator group analysis; policy review and
shareholder engagement perspectives; and independent
measurement of the relative TSR performance conditions.
Advice in respect of share plan regulations is provided to the
Company and is available to the Remuneration Committee.
Ernst & Young LLP Provision of employment tax advice regarding Executive
Directors’ international pension planning.
Fees
2019: £76,000
2018: £136,700
Fees relate to advice
given to the Company.
Fees relate to advice
given to the Company.
KPMG LLP
Specified procedures to assist in the assessment of the
calculations of the STI bonus outcomes and future targets.
2019: £28,000
2018: £18,000
Other services provided
to the Company
Tax, corporate finance and
consulting services to Group
companies worldwide.
General corporate legal
and tax advice principally
in the UK.
Tax, corporate finance and
consulting services to Group
companies worldwide.
Audit and tax services and
other non-audit services.
Regular work programme 2019
The Remuneration Committee:
– reviewed the Chairman’s fee from 1 April 2019 with specific reference to the level of salary increases granted to UK employees;
– reviewed salaries for members of the Management Board and the Company Secretary from 1 April 2019, taking into account market
positioning and the level of salary increases granted to UK employees;
– assessed the achievement against the targets for the 2018 STI award and set the STI targets for 2019;
– assessed the achievement against the performance conditions for the vesting of the LTIP 2016 award, determined the contingent level of LTIP
awards for March 2019 and reviewed the associated performance conditions;
– assessed the achievement against the targets for the 2018 Share Reward Scheme and set the targets for the 2019 award;
– monitored the continued application of the Company’s shareholding guidelines for the Executive Directors and members of the
Management Board;
– reviewed the Annual Statement and the Annual Report on Remuneration for the year ended 31 December 2018 prior to its approval by the
Board and subsequent proposal to shareholders at the Company’s AGM on 25 April 2019;
– analysed the 2019 AGM voting results relating to remuneration resolutions and reviewed market trends in the context of that annual general
meeting season;
– reviewed updates on achievement against the performance measures for the six months ended 30 June 2019 for the STI 2019 and
outstanding LTIP awards; and
– reviewed the Remuneration Committee’s effectiveness following the externally-facilitated evaluation process, discussed further on page 78.
Directors’ Remuneration Policy
Prior to the Company’s AGM on 25 April 2019, the Remuneration Committee concluded its review of the Directors’ Remuneration Policy, taking
into account shareholder feedback and the requirements of the UK Corporate Governance Code 2018, and determined the new Directors’
Remuneration Policy proposed for shareholder approval at the 2019 AGM.
112
Remuneration ReportBAT Annual Report and Form 20-F 2019 Other matters 2019
The Remuneration Committee:
– approved the remuneration package in respect of the appointment of Tadeu Marroco as the Finance Director from 5 August 2019 and
increase in LTIP award level applicable to awards from 1 January 2020. The Remuneration Committee Chairman has led a programme of
shareholder engagement in relation to this matter;
– approved the arrangements applicable to the retirement of Nicandro Durante as Chief Executive from 1 April 2019 and the arrangements
applicable to the retirement of Ben Stevens as Finance Director from 5 August 2019;
– conducted a detailed review of the Group’s legacy defined pension arrangements in the UK. Consultation with impacted employees is now in
progress in respect of proposals to close defined benefit arrangements to future accrual during 2020;
– reviewed the Group’s workforce remuneration strategy and related policies and their alignment with Executive Directors’ remuneration and,
more broadly, their alignment with the Group’s culture. As part of this review, the Remuneration Committee endorsed changes to the Group’s
remuneration strategy and policies for the Group’s management population to enhance alignment with Group strategy and culture, including
proposals to introduce a restricted share plan;
– approved changes to the constituents for the STI volume share metrics, based on market changes and reporting capabilities;
– reviewed the UK gender pay report for 2018 for applicable UK Group companies prior to publication in March 2019;
– reviewed indicative Chief Executive pay ratio analysis prior to inclusion in the Annual Report on Remuneration for the year ended
31 December 2019; and
– conducted a competitive tender exercise to select new remuneration advisers to the Remuneration Committee, prior to the appointment of
PwC LLP from 15 January 2020. In addition, Meridian Compensation Partners LLP will be appointed to provide specific advice and expertise in
relation to the US market.
Voting on the Remuneration Report at the 2019 AGM and engagement with shareholders
At the AGM on 25 April 2019, the shareholders considered and voted on the 2018 Directors’ Remuneration Report as set out on the table below.
The Directors’ Remuneration Policy was approved by shareholders at the AGM on 25 April 2019. A summary of this Policy is on pages 93 to
94. No other resolutions in respect of Directors’ remuneration or incentives were considered at the 2019 AGM. Further information regarding
shareholder engagement in relation to remuneration matters is set out in the Annual Statement on Remuneration on page 90.
Percentage for
Votes for (including discretionary)
Percentage against
Votes against
Total votes cast excluding votes withheld
Votes withheld³
Total votes cast including votes withheld
Approval of Directors’
Remuneration Policy¹
2019
Approval of Directors’
Remuneration Report²
2019
92.63
1,641,331,721
7.37
130,661,885
1,771,993,606
1,820,757
1,773,814,363
87.71
1,554,311,783
12.29
217,722,528
1,772,034,311
1,780,043
1,773,814,354
Notes:
1. Directors’ Remuneration Policy: was approved by shareholders at the AGM on 25 April 2019 and is set out in full in the 2018 Annual Report on Remuneration. A summary of this Policy is on pages 93 to 94
of this Remuneration Report 2019.
2. Directors’ Remuneration Report: does not include the part of the Remuneration Report containing the Remuneration Policy (see note 1 above).
3. Votes withheld: these are not included in the final proxy figures as they are not recognised as a vote in law.
The Directors’ Remuneration Report has been approved by the Board on 17 March 2020 and signed on its behalf by:
Dimitri Panayotopoulos
Chairman, Remuneration Committee
17 March 2020
113
Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of DirectorsStrategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 RESPONSIBILITY
OF DIRECTORS
Statement of Directors’ responsibilities in
respect of the Annual Report and the financial
statements@
The Directors are responsible for preparing the Annual Report and
the Group and Company financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and Parent
Company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements
in accordance with International Financial Reporting Standards as
adopted by the European Union (IFRS as adopted by the EU) and
applicable law and have elected to prepare the Company financial
statements in accordance with UK Accounting Standards, including
FRS 101 Reduced Disclosure Framework. In preparing these Group
financial statements, the Directors have also elected to comply with
IFRS as issued by the International Accounting Standards Board
(IFRS as issued by the IASB).
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and the Company and of their profit
or loss for that period. In preparing each of the Group and Company
financial statements, the Directors are required to:
– select suitable accounting policies and then apply them consistently;
– make judgements and estimates that are reasonable, relevant
and reliable;
– for the Group financial statements, state whether they have been
prepared in accordance with IFRS as adopted by the EU and IFRS
as issued by the IASB;
– for the Company financial statements, state whether applicable
UK Accounting Standards have been followed, subject to any
material departures disclosed and explained in the Company
financial statements;
– assess the Group and Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern;
and
– use the going concern basis of accounting unless the Directors
either intend to liquidate the Group or the Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that its
financial statements comply with the Companies Act 2006. They are
responsible for such internal control as they determine is necessary
to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also responsible
for preparing a Strategic Report, Directors’ Report, Directors’
Remuneration Report and Corporate Governance Statement that
comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of
the Annual Report included on the Company’s website. Legislation
in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
114
Directors’ declaration in relation to relevant
audit information@
Having made appropriate enquiries, each of the Directors who held
office at the date of approval of this Annual Report confirms that:
– to the best of his or her knowledge and belief, there is no
relevant audit information of which the Company’s auditors
are unaware; and
– he or she has taken all steps that a Director might reasonably be
expected to have taken in order to make himself or herself aware
of relevant audit information and to establish that the Company’s
auditors are aware of that information.
Responsibility statement of the Directors
in respect of the annual financial report@
We confirm that to the best of our knowledge:
– the financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole; and
– the Strategic Report and the Directors’ Report include a fair review of
the development and performance of the business and the position
of the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks
and uncertainties that they face.
We consider the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides information necessary
for shareholders to assess the Company’s position and performance,
business model and strategy.
This responsibility statement has been approved and is signed by order
of the Board by:
Richard Burrows
Chairman
17 March 2020
British American Tobacco p.l.c.
Registered in England and Wales No. 3407696
Tadeu Marroco
Finance Director
@ denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F
as filed with the SEC.
GovernanceBAT Annual Report and Form 20-F 2019Leadership and purposeDivision of responsibilitiesComposition, succession, evaluationAudit, risk, internal controlRemunerationResponsibility of Directors
INDEPENDENT AUDITOR’S REPORT
To the members of British American Tobacco p.l.c. only@
1 Our opinion is unmodified
We have audited the financial statements of British American Tobacco p.l.c. (“the Company”) for the year ended 31 December 2019 which
comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group and parent Company Statement of Changes
in Equity, the Group and parent Company Balance Sheets, the Group Cash Flow Statements and the related notes, including accounting policies
in note 1.
In our opinion:
– the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2019 and
of the Group’s profit for the year then ended;
– the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the
European Union (IFRSs as adopted by the EU);
– the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101
Reduced Disclosure Framework; and
– the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Additional opinion in relation to IFRSs as issued by the IASB
As explained in the note to the Group financial statements, the Group, in addition to complying with its legal obligation to apply IFRSs as
adopted by the EU, has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
In our opinion, the Group financial statements have been properly prepared in accordance with IFRSs as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the Audit Committee.
We were first appointed as auditor by the Directors on 23 March 2015. The period of total uninterrupted engagement is for the 5 financial years
ended 31 December 2019. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with,
UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that
standard were provided.
2 Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and
include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had
the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.
We summarise below the key audit matters (unchanged from 2018), in decreasing order of audit significance, in arriving at our audit opinion
above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those
procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of,
our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion. We do not
provide a separate opinion on these matters.
Contingent liabilities arising from litigation in Canada
Refer to page 84 (Audit Committee report), page 135 (accounting policy) and pages 201 to 203 and 210 (financial disclosures). Risk vs 2018:
The risk:
Dispute outcome: The Group is subject to a large number of claims including class actions, which could have a significant impact on the
results if potential exposures were to materialise. For our 2019 audit we believe the most significant risk relates to ongoing litigation in Canada.
Imperial Tobacco Canada Limited (“Imperial”) has received an unfavourable judgement on the smoking and health class actions certified by the
Quebec Superior Court. As a result of this judgement, Imperial Tobacco Canada Limited (“Imperial”) has filed for creditor protection under the
Companies’ Creditors Arrangement Act (the “CCAA”). In seeking protection under the CCAA, Imperial will look to resolve not only the Quebec
case but also all other tobacco litigation in Canada under an efficient and court supervised process, while continuing to trade in the normal
course of business.
The amounts involved are significant, and the Group’s application of accounting standards to determine the amount, if any, to be provided as a
liability or disclosed as a contingent liability, is inherently subjective. Significant judgement was involved in auditing this determination, including
evaluating the Group’s assessment of the relevant law, historical and pending court rulings, and the Group’s ability to estimate the likelihood and
extent of any future economic outflow arising from the ultimate resolution of the litigation.
The effect of these matters is that, as part of our risk assessment, we determined that the potential exposure to litigation has a high degree of
judgement, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many
times that amount.
@ denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
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Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 INDEPENDENT AUDITOR’S REPORT
CONTINUED
Our procedures included:
Control design and operation: Evaluating the processes and controls within the litigation process, including controls over the interpretation
of relevant law and related court rulings and estimation of the likelihood and extent of any future economic outflow arising from the ultimate
resolution of the litigation, by attending regular meetings with in-house legal counsel and review of Board and sub-committee meeting minutes;
Enquiry of lawyers: Reading letters received directly from the Group’s external and internal legal counsel that evaluated the current status of
legal proceedings and quantified the estimate of any economic outflow arising from the ultimate resolution of the litigation. We also inquired of
internal and external legal counsel to evaluate their basis for conclusion in their respective letters; and
Assess local legal precedence: Assessing relevant historical and recent judgements passed by the judicial court authorities in relation to the
Canadian litigation and reading the related Canadian court rulings and challenging the Company’s interpretation of the Canadian legal
proceedings and the related contingent liability disclosures.
Our results:
From the evidence obtained, we found the Group’s treatment of the contingent liabilities and related disclosures arising from litigation in Canada
to be acceptable.
Goodwill and trademarks with indefinite lives impairment analysis – arising from the Reynolds American Inc.
acquisition in 2017.
Refer to pages 84 to 85 (Audit Committee report), page 132 (accounting policy) and pages 152 to 155 (financial disclosures). Risk vs 2018:
The risk:
Subjective assessment: As a result of the acquisition of Reynolds American Inc. (“RAI”) in 2017, the Group, as at 31 December 2019 has goodwill
and trademarks with indefinite lives of £33,761 million and £71,032 million, respectively (2018: goodwill of £35,117 million and trademarks with
indefinite lives of £73,885 million). There is significant judgement with regard to assumptions and estimates involved in the Group’s forecasting
of future cash flows, which form the basis of the assessment of the recoverability of the trademarks with indefinite lives and goodwill. There is
significant auditor judgement involved in: (i) evaluating the short- and medium-term budgeted net revenues forecasted by management (“Key
Revenue Forecast”) in the evaluation of the recoverability of trademarks with indefinite lives and goodwill allocated to the RAI cash-generating
unit; and (ii) evaluating any impact of the potential menthol ban into the cash flow forecast or the discount rate for the Newport indefinite lived
trademark and goodwill allocated to the RAI cash-generating unit.
The effect of these matters is that, as part of our risk assessment, we determined that the value in use calculations of both trademarks with
indefinite lives and goodwill has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our
materiality for the financial statements as a whole. The financial statements (note 8) disclose the sensitivity of the carrying amounts of relevant
trademarks with indefinite lives and goodwill estimated by the Group.
Our procedures included:
Control design and operation: Assessing controls over the impairment process, including controls over the Key Revenue Forecast relating to
indefinite lived trademarks and the RAI cash-generating unit;
Benchmarking and assessing assumptions: Comparing RAI’s Key Revenue Forecast to externally derived publicly and privately available data,
including, broker and analyst reports, industry reports, media reports, macro-economic assumptions, academic and scientific studies and
regulatory changes. In addition, and specifically for the Newport indefinite lived trademark, using elements of this information to critically assess
the Group’s assertion that the potential menthol ban does not significantly impact the cash flow forecast or the discount rate, based on the
likelihood, timing, nature and extent of proposed regulatory changes in the US market;
Historical comparisons: Challenging the reasonableness of the assumptions, particularly forecast revenue, by comparing the historical projected
sales, cash flows and projected brand profitability to actual results to assess the Group’s ability to accurately forecast; and
Sensitivity analysis: Performing sensitivity analysis on the Key Revenue Forecast; and
Assessing transparency: Assessing whether the Group’s disclosures detail the key estimates and judgements with regard to the impairment testing
of trademarks with indefinite lives and the goodwill arising from the RAI acquisition.
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Financial StatementsBAT Annual Report and Form 20-F 2019 Our results:
We found the conclusion that there is no impairment of trademarks with indefinite lives and goodwill arising from the RAI acquisition to be
acceptable (2018: acceptable).
Recoverability of parent Company’s investment in subsidiaries.
Refer to page 249 (accounting policy) and pages 250 (financial disclosures). Risk vs 2018:
Low risk, high value: The carrying amount of the Parent Company’s investments in subsidiaries is £27,908 million (2018: £27,901 million)
which represents 80% (2018: 77%) of the Company’s total assets. Their recoverability is not a high risk of significant misstatement or subject to
significant judgement.
However, due to the materiality of investments in subsidiaries in the context of the Parent Company financial statements, this is considered to be
the area that had the greatest effect on our overall parent Company audit.
Our procedures included:
Tests of detail: Comparing the carrying amount of a sample of the highest value investments, representing 100% (2018: 100%) of the total
investment balance with the relevant subsidiaries’ draft balance sheet to identify whether their net assets, being an approximation of their
minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-
making.
Our results:
We found the conclusion that there is no impairment of the investment in subsidiaries to be acceptable (2018: acceptable).
3 Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £420 million (2018: £420 million), determined with reference to a benchmark
of Group profit before taxation. This represents 4.8% (2018: 4.8%) of the Group’s reported profit before taxation. Materiality for the Parent
Company financial statements as a whole was set at £50 million (2018: £50 million) by reference to component materiality. This is lower than the
materiality we would otherwise have determined by reference to Company net assets.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £20 million (2018: £20 million) in
addition to other identified misstatements that warranted reporting on qualitative grounds.
We evaluate misstatements not only by reference to the above quantitative thresholds but also in combination with the nature of the
misstatement. This is in order to arrive at an evaluation of whether the item could reasonably be expected to influence the economic decisions
of users taken on the basis of these financial statements, as that is the definition of materiality. Accordingly, a misstatement larger than these
amounts could be immaterial, and with respect to the matter referred to in note 18 we found the directors’ judgement that it was immaterial to
be an acceptable judgement.
Scope of our audit
The Group operates three shared service centres (2018: three) in Romania, Malaysia and Costa Rica, the outputs of which are included in
the financial information of the reporting components they service and therefore they are not separate reporting components. Each of the
service centres is subject to specified risk-focused audit procedures, predominantly the testing of transaction processing and review controls.
Additional procedures are performed at certain reporting components to address the audit risks not covered by the work performed over the
shared service centres.
We performed full scope audits for Group reporting purposes of 23 components (2018: 23 components). Audits of these components were
performed using materiality levels assigned by the group audit team, which were lower than the materiality level for the Group as a whole,
ranging from £35 million to £235 million (2018: £35 million to £220 million), and determined by reference to the size and risk profile of
the components.
Audits of one or more account balances were performed in respect of a further 12 components (2018: 14), using a materiality ranging from
£35 million to £70 million (2018: £1 to £50 million) assigned by the Group audit team. Specified audit procedures have been performed at 3
components (2018: 2) using a materiality ranging from £35 million to £50 million. These 15 components for which we performed work other
than full scope audits for group reporting purposes were not individually significant but were included in the scope of our Group reporting work
in order to provide further coverage over the Group’s results. This is consistent with the approach that was adopted in 2018.
The work on 33 of the 38 components (2018: 32 of the 39 components) was performed by component auditors and the rest, including the audit
of the Parent Company, was performed by the Group team.
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Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 INDEPENDENT AUDITOR’S REPORT
CONTINUED
The percentages of the Group’s revenue, the total profits and losses that make up the Group’s revenue, Group’s profit before taxation and the
Group’s total assets represented by the components within the scope of our work and procedures performed at corporate level are as follows:
Group revenue
83%
(82% 2018)
7%
6%
76%
76%
Group profit before tax
Group total assets
96%
(97% 2018)
3% 1%
3%
62%
55%
94%
92%
73%
(78% 2018)
16%
5%
13%
Full scope for Group audit purposes 2019
Full scope for Group audit purposes 2018
Residual components
Audit of one or more account balances 2019
Audit of one or more account balances 2018
Specified risk-focused audit procedures 2019
Specified risk-focused audit procedures 2018
The remaining 17% (2018: 18%) of total group revenue, 27% (2018: 22%) of group profit before tax and 4% (2018: 3%) of total group assets is
represented by 300 (2018: 347) reporting components, none of which individually represented more than 5% (2018: 2%) of any of total group
revenue, group profit before tax or total group assets. For the residual components, we performed analysis at an aggregated group level to re-
examine our assessment that there were no significant risks of material misstatement within these.
The Group team instructed component auditors, and the auditors of the shared service centres, as to the significant areas to be covered,
including the relevant risks detailed above and the information to be reported back.
The Group team visited two (2018: two) component locations in Canada and the United States (2018: Canada and the United States) for the
purpose of performing detailed file reviews. In addition, the Group team visited the shared service centres in Costa Rica, Malaysia and Romania
(2018: Costa Rica, Malaysia and Romania) as well as visiting a further two (2018: three) component locations in Brazil and Mexico (2018:
Bangladesh, South Africa and Italy) for business understanding and risk assessment purposes. In addition, the Group audit team held audit
risk planning and strategy conferences in the United Kingdom and Malaysia which component auditors attended. Further to these visits and
conferences, the Group team also held telephone and/or online meetings as part of the audit planning phase to explain our audit instructions
and discuss the component auditors’ plans as well as performing detailed remote file reviews upon completion of the component auditors’
engagements. The findings reported to the Group audit team were discussed in more detail, and any further work required by the Group team
was then performed by the component auditor.
118
Financial StatementsBAT Annual Report and Form 20-F 2019 4 We have nothing to report on going concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or
to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have
also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for
at least a year from the date of approval of the financial statements (“the going concern period”).
Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going
concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a
material uncertainty in this auditor’s report is not a guarantee that the Group and the Company will continue in operation.
In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model and analysed how
those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the going concern period. The risks
that we considered most likely to adversely affect the Group’s and Company’s available financial resources over this period were:
– The enactment of regulation that significantly impairs the Group’s ability to communicate, differentiate, market or launch its products;
– Product liability, regulatory or other significant cases may be lost or compromised resulting in a material loss or other consequence.
As these were risks that could potentially cast significant doubt on the Group’s and the Company’s ability to continue as a going concern, we considered
sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of reasonably possible (but not
unrealistic) adverse effects that could arise from these risks individually and collectively, and evaluated the achievability of the actions the Directors consider
they would take to improve the position should the risks materialise. We also considered less predictable but realistic second order impacts, such as the
impact of Brexit and COVID-19 and the erosion of customer or supplier confidence, which could result in a rapid reduction of available financial resources.
Based on this work, we are required to report to you if:
– we have anything material to add or draw attention to in relation to the directors’ statement in Note 1 to the financial statements on the use
of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of
that basis for a period of at least twelve months from the date of approval of the financial statements; or
– the related statement under the Listing Rules set out on page 51 is materially inconsistent with our audit knowledge.
We have nothing to report in these respects, and we did not identify going concern as a key audit matter.
5 We have nothing to report on the other information in the Annual Report
The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on
the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we
have not identified material misstatements in the other information.
Strategic report and Directors’ report
Based solely on our work on the other information:
– we have not identified material misstatements in the strategic report and the directors’ report;
– in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
– in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
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Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 INDEPENDENT AUDITOR’S REPORT
CONTINUED
Disclosures of emerging and principal risks and longer‑term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
– the Directors’ confirmation within the viability statement on page 58 that they have carried out a robust assessment of the emerging and
principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
– the Principal Group Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
– the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done
so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the
Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the Principal Group Risks. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were
reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and the
Parent Company’s longer-term viability.
Corporate governance disclosures
We are required to report to you if:
– we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the Directors’
statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
– the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to
the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6 We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
– the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit.
We have nothing to report in these respects.
120
Financial StatementsBAT Annual Report and Form 20-F 2019 7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 114, the directors are responsible for: the preparation of the financial statements
including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and Parent Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless
they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high
level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when
it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our
general commercial and sector experience and through discussion with the Directors and other management (as required by auditing standards),
and from inspection of the Group’s regulatory and legal correspondence and discussed with the Directors and other management the policies
and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team
and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group audit team to
component audit teams of relevant laws and regulations identified at group level.
The potential effect of these laws and regulations on the financial statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including
related companies legislation), distributable profits legislation and taxation legislation and we assessed the extent of compliance with these laws
and regulations as part of our procedures on the related financial statement items.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on
amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Group’s licence to
operate. We identified the following areas as those most likely to have such an effect: impact of laws and regulations related to anti-bribery and
corruption (reflecting the legislative environment of operating with a diverse geographic footprint) and tobacco control and product liability
(reflecting the nature of the operating businesses). Auditing standards limit the required audit procedures to identify non-compliance with
these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any.
Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on the
related financial statements items. Further details in respect of tobacco control and product liability is set out in the key audit matter disclosures in
section 2 of this report.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the
financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the
further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements,
the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained
a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override
of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws
and regulations.
8 The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and terms
of our engagement by the Company. Our audit work has been undertaken so that we might state to the Company’s members those matters we
are required to state to them in an auditor’s report and further matters we are required to state to them in accordance with terms agreed with the
Company, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Mark Baillache (Senior Statutory Auditor)
For and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
17 March 2020
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Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of British American Tobacco p.l.c.>>
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Financial StatementsBAT Annual Report and Form 20-F 2019 This page is intentionally left blank
123
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP INCOME
STATEMENT
Revenue1
Raw materials and consumables used
Changes in inventories of finished goods and work in progress
Employee benefit costs
Depreciation, amortisation and impairment costs
Other operating income
Loss on reclassification from amortised cost to fair value
Other operating expenses
Profit from operations
Net finance costs
Share of post-tax results of associates and joint ventures
Profit before taxation
Taxation on ordinary activities
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
Earnings per share
Basic
Diluted
Notes
2
3(h)
3(a),(e)
3(b),(e),(f),(h)
3(e),(i)
3(c),(d),(e),(g),(h)
2
4
2,5
6
For the years ended 31 December
2019
£m
25,877
(4,599)
162
(3,221)
(1,512)
163
(3)
(7,851)
9,016
(1,602)
498
7,912
(2,063)
5,849
2018
£m
24,492
(4,664)
114
(3,005)
(1,038)
85
(3)
(6,668)
9,313
(1,381)
419
8,351
(2,141)
6,210
2017
£m
19,564
(4,520)
(513)
(2,679)
(902)
144
–
(4,682)
6,412
(1,094)
24,209
29,527
8,129
37,656
5,704
145
5,849
6,032
178
6,210
37,485
171
37,656
7
7
249.7p
249.0p
264.0p
263.2p
1,833.9p
1,827.6p
1. Revenue is net of duty, excise and other taxes of £39,826 million, £38,553 million and £37,780 million for the years ended 31 December 2019, 2018 and 2017, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
124
Financial StatementsBAT Annual Report and Form 20-F 2019 GROUP STATEMENT OF
COMPREHENSIVE INCOME
Profit for the year
Other comprehensive income/(expense)
Items that may be reclassified subsequently to profit or loss:
Differences on exchange
Cash flow hedges
– net fair value losses
– reclassified and reported in profit for the year
– reclassified and reported in total assets
Investments held at fair value
– net fair value losses
Net investment hedges
– net fair value gains/(losses)
– differences on exchange on borrowings
Associates – share of OCI, net of tax
Tax on items that may be reclassified
Items that will not be reclassified subsequently to profit or loss:
Retirement benefit schemes
– net actuarial (losses)/gains
– surplus recognition
Associates – share of OCI, net of tax
Tax on items that will not be reclassified
Total other comprehensive (expense)/income for the year, net of tax
Total comprehensive income for the year, net of tax
Attributable to:
Owners of the parent
Non-controlling interests
The accompanying notes are an integral part of these consolidated financial statements.
Notes
For the years ended 31 December
2019
£m
5,849
2018
£m
2017
£m
6,210
37,656
(3,216)
(2,967)
3,099
3,868
(3,809)
(3,084)
(246)
53
–
(58)
17
–
(264)
109
(16)
–
–
(27)
21
(18)
(115)
56
(507)
(582)
(7)
7
75
(3,723)
2,126
(472)
(236)
(38)
18
115
138
4
6
(33)
3,214
9,424
425
(68)
(918)
34
681
833
(6)
25
(171)
(3,128)
34,528
2,000
126
2,126
9,239
185
9,424
34,361
167
34,528
5
6(f)
11
11
5
6(f)
125
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP STATEMENT OF
CHANGES IN EQUITY
Attributable to owners of the parent
Share
premium,
capital
redemption
and merger
reserves
£m
Share
capital
£m
Notes
Other
reserves
£m
Retained
earnings
£m
Total
attributable
to owners
of parent
£m
Non-
controlling
interests
£m
Total
equity
£m
614
26,606
(333)
38,557
65,444
244
65,688
–
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
(3,190)
–
(3,190)
5,190
5,704
(514)
2,000
5,704
(3,704)
126
145
(19)
2,126
5,849
(3,723)
(32)
–
(32)
115
–
115
3
–
–
–
(32)
115
3
(3,476)
–
(3,476)
–
–
(148)
(3,476)
(148)
–
–
–
614
–
–
–
26,609
–
–
–
(3,555)
(117)
–
(35)
40,234
(117)
–
(35)
63,902
–
36
–
258
(117)
36
(35)
64,160
24
18(c)
23
Balance at 1 January 2019
Total comprehensive (expense)/income
for the year comprising:
Profit for the year
Other comprehensive expense for the year
Other changes in equity
Cash flow hedges reclassified and reported
in total assets
Employee share options
– value of employee services
– proceeds from shares issued
Dividends and other appropriations
– ordinary shares
– to non-controlling interests
Purchase of own shares
– held in employee share ownership trusts
Other movements non-controlling interests
Other movements
Balance at 31 December 2019
The accompanying notes are an integral part of these consolidated financial statements.
Balance at 31 December 2017
Accounting policy change (IFRS 9) (note 30)
Revised balance at 1 January 2018
Total comprehensive income
for the year comprising:
Profit for the year
Other comprehensive income for the year
Other changes in equity
Cash flow hedges reclassified and reported
in total assets
Employee share options
– value of employee services
– proceeds from shares issued
Dividends and other appropriations
– ordinary shares
– to non-controlling interests
Purchase of own shares
– held in employee share ownership trusts
Non-controlling interests – acquisitions
Other movements
Balance at 31 December 2018
Notes
24
18(c)
23
Share
premium,
capital
redemption
and merger
reserves
£m
26,602
–
26,602
Share
capital
£m
614
–
614
–
–
–
–
–
–
–
–
–
–
–
–
–
4
–
–
Attributable to owners of the parent
Total
attributable
to owners
of parent
£m
60,759
(38)
60,721
9,239
6,032
3,207
Retained
earnings
£m
36,935
(29)
36,906
6,149
6,032
117
Other
reserves
£m
(3,392)
(9)
(3,401)
3,090
–
3,090
(22)
–
(22)
121
–
121
4
Non-
controlling
interests
£m
222
–
222
185
178
7
–
–
–
Total
equity
£m
60,981
(38)
60,943
9,424
6,210
3,214
(22)
121
4
(4,463)
–
(4,463)
–
–
(163)
(4,463)
(163)
–
–
–
614
–
–
–
26,606
–
–
–
(333)
(139)
(11)
(6)
38,557
(139)
(11)
(6)
65,444
–
–
–
244
(139)
(11)
(6)
65,688
–
–
–
–
–
–
–
–
The accompanying notes are an integral part of these consolidated financial statements.
126
Financial StatementsBAT Annual Report and Form 20-F 2019 Balance at 1 January 2017
Total comprehensive (expense)/income
for the year comprising:
Profit for the year
Other comprehensive (expense)/income for
the year
Other changes in equity
Employee share options
– value of employee services
– proceeds from shares issued
Dividends and other appropriations
– ordinary shares
– to non-controlling interests
Purchase of own shares
– held in employee share ownership trusts
Shares issued – RAI acquisition
Other movements
Balance at 31 December 2017
Notes
24
18(c)
23
Share
premium,
capital
redemption
and merger
reserves
£m
3,931
Share
capital
£m
507
–
–
–
–
–
–
–
–
–
–
–
5
–
–
Attributable to owners of the parent
Other
reserves
£m
413
Retained
earnings
£m
3,331
Total
attributable
to owners
of parent
£m
8,182
(3,805)
–
38,166
37,485
34,361
37,485
Non-
controlling
interests
£m
224
167
171
Total
equity
£m
8,406
34,528
37,656
(3,805)
681
(3,124)
(4)
(3,128)
–
–
–
–
105
–
105
5
–
–
105
5
(4,465)
–
(4,465)
–
–
(169)
(4,465)
(169)
–
107
–
614
–
22,666
–
26,602
–
–
–
(3,392)
(205)
–
3
36,935
(205)
22,773
3
60,759
–
–
–
222
(205)
22,773
3
60,981
The accompanying notes are an integral part of these consolidated financial statements.
127
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP
BALANCE SHEET
Assets
Intangible assets
Property, plant and equipment
Investments in associates and joint ventures
Retirement benefit assets
Deferred tax assets
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Total non-current assets
Inventories
Income tax receivable
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Cash and cash equivalents
Assets classified as held-for-sale
Total current assets
Total assets
Equity – capital and reserves
Share capital
Share premium, capital redemption and merger reserves
Other reserves
Retained earnings
Owners of the parent
Non-controlling interests
Total equity
Liabilities
Borrowings
Retirement benefit liabilities
Deferred tax liabilities
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total non-current liabilities
Borrowings
Income tax payable
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total current liabilities
Total equity and liabilities
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board
Richard Burrows
Chairman
17 March 2020
128
31 December
2019
£m
2018
£m
Notes
8
9
10
11
12
13
14
15
16
13
14
15
17
118,787
5,518
1,860
430
424
248
12
452
127,731
6,094
122
4,093
123
313
2,526
13,271
3
13,274
141,005
124,013
5,166
1,737
1,147
344
685
39
556
133,687
6,029
74
3,588
178
179
2,602
12,650
5
12,655
146,342
18(a)
18(b)
18(c)
18(c)
18(d)
614
26,609
(3,555)
40,234
63,902
258
64,160
614
26,606
(333)
38,557
65,444
244
65,688
19
11
12
20
21
15
19
20
21
15
37,804
1,459
17,050
388
1,034
287
58,022
7,562
683
670
9,727
181
18,823
141,005
43,284
1,665
17,776
331
1,055
214
64,325
4,225
853
318
10,631
302
16,329
146,342
Financial StatementsBAT Annual Report and Form 20-F 2019 GROUP CASH
FLOW STATEMENT
Profit from operations
Adjustments for
– depreciation, amortisation and impairment costs
– (increase)/decrease in inventories
– (increase)/decrease in trade and other receivables
– decrease/(increase) in receivables related to the charge in respect
of the Quebec Class Actions
– (decrease)/increase in provision for Master Settlement Agreement
– increase/(decrease) in trade and other payables
– decrease in net retirement benefit liabilities
– increase/(decrease) in other provisions for liabilities
– other non-cash items
Cash generated from operating activities
Dividends received from associates
Tax paid
Net cash generated from operating activities
Cash flows from investing activities
Interest received
Purchases of property, plant and equipment
Proceeds on disposal of property, plant and equipment
Purchases of intangibles
Purchases of investments
Proceeds on disposals of investments
Acquisition of Reynolds American Inc. net of cash acquired
Investment in associates and acquisitions of other subsidiaries net of cash acquired
Proceeds on disposal of non-core business net of cash disposed
Net cash used in investing activities
Cash flows from financing activities
Interest paid
Interest element of lease liabilities
Capital element of lease liabilities
Proceeds from increases in and new borrowings
(Outflows)/inflows relating to derivative financial instruments
Purchases of own shares held in employee share ownership trusts
Reductions in and repayments of borrowings
Dividends paid to owners of the parent
Capital injection from/(purchases of) non-controlling interests
Dividends paid to non-controlling interests
Other
Net cash (used in)/generated from financing activities
Net cash flows (used in)/generated from operating, investing and financing activities
Differences on exchange
(Decrease)/increase in net cash and cash equivalents in the year
Net cash and cash equivalents at 1 January
Net cash and cash equivalents at 31 December
The accompanying notes are an integral part of these consolidated financial statements.
For the years ended 31 December
Notes
3(b)
13
3(d)
17
2019
£m
9,016
1,512
(371)
(699)
436
(124)
730
(40)
382
106
10,948
252
(2,204)
8,996
80
(664)
34
(151)
(191)
339
–
(86)
–
(639)
(1,601)
(32)
(154)
4,247
(564)
(117)
(5,640)
(4,598)
20
(157)
3
(8,593)
(236)
(57)
(293)
2,328
2,035
2018
£m
9,313
1,038
(192)
502
–
1,364
123
(100)
(107)
31
11,972
214
(1,891)
10,295
52
(758)
38
(185)
(320)
167
–
(32)
17
(1,021)
(1,557)
(2)
(10)
2,111
49
(139)
(5,586)
(4,347)
(11)
(142)
4
(9,630)
(356)
(138)
(494)
2,822
2,328
2017
£m
6,412
902
1,409
(732)
(130)
(934)
(685)
(131)
(78)
86
6,119
903
(1,675)
5,347
83
(791)
95
(187)
(170)
160
(17,657)
(77)
–
(18,544)
(1,106)
(1)
(7)
40,937
(406)
(205)
(20,827)
(3,465)
–
(167)
6
14,759
1,562
(391)
1,171
1,651
2,822
129
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON
THE ACCOUNTS
1 Accounting policies
Basis of preparation
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board
(“IASB”) and IFRS as adopted by the European Union (“EU”)@, and
in accordance with the provisions of the UK Companies Act 2006
applicable to companies reporting under IFRS@. IFRS as adopted by
the EU differs in certain respects from IFRS as issued by the IASB.
The differences have no impact on the Group’s consolidated financial
statements for the periods presented.
The consolidated financial statements have been prepared on a going
concern basis under the historical cost convention except as described
in the accounting policy below on financial instruments.
With effect from 1 January 2019, the Group has applied IFRS 16 Leases
to contractual arrangements which are, or contain, leases of assets, and
consequently recognises right-of-use assets and lease liabilities at the
commencement of the leasing arrangement, with the assets included
as part of property, plant and equipment in note 9 and the liabilities
included as part of borrowings in note 19. In adopting IFRS 16, the
Group has applied the modified retrospective approach with no
restatement of prior periods, as permitted by the Standard. The impact
on the Group is shown in note 30. Total assets and total equity and
liabilities on 1 January 2019 have both increased by £607 million.
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities, and
the disclosure of contingent liabilities at the date of the financial
statements. The key estimates and assumptions are set out in
the accounting policies below, together with the related notes to
the accounts.
The critical accounting judgements include:
– the identification and quantification of adjusting items, which are
separately disclosed as memorandum information, is explained
below and the impact of these on the calculation of adjusted
earnings per share is described in note 7;
– the determination that an error, identified following a review by the
Financial Reporting Council (“FRC”) and discussed in note 18(e),
was immaterial for restatement of the prior periods as, whilst the
effect was to overstate liabilities and reduce equity by £1.0 billion in
2017 and £1.1 billion in 2018, it did not affect the primary users of
the financial statements as there was no impact to the amount or
timing of the dividends received;
– the determination as to whether to recognise provisions and the
exposures to contingent liabilities related to pending litigation or
other outstanding claims, as well as other contingent liabilities.
The accounting policy on contingent liabilities, which are not
provided for, is set out below and the contingent liabilities of the
Group are explained in note 27. Judgement is necessary to assess the
likelihood that a pending claim is probable (more likely than not to
succeed), possible or remote;
– the determination as to whether control (subsidiaries), joint control
(joint arrangements), or significant influence (associates) exists
in relation to the investments held by the Group. This is assessed
after taking into account the Group’s ability to appoint Directors to
the entity’s Board, its relative shareholding compared with other
shareholders, any significant contracts or arrangements with the entity
or its other shareholders and other relevant facts and circumstances.
The application of these policies to Group subsidiaries in territories
including Canada and Malaysia is explained in note 28; and
@ Denotes phrase, paragraph or similar that does not form part
of BAT’s Annual Report on Form 20-F as filed with the SEC.
130
– the review of applicable exchange rates for transactions with and
translation of entities in territories where there are restrictions on the
free access to foreign currency, or multiple exchange rates.
The critical accounting estimates include:
– the review of asset values, especially indefinite life assets such as
goodwill and certain trademarks and similar intangibles. The key
assumptions used in respect of the impairment testing are the
determination of cash-generating units, the budgeted and forecast
cash flows of these units, the long-term growth rate for cash flow
projections and the rate used to discount the cash flow projections.
These are described in note 8;
– the estimation of and accounting for retirement benefit costs.
The determination of the carrying value of assets and liabilities, as
well as the charge for the year, and amounts recognised in other
comprehensive income, involves judgements made in conjunction
with independent actuaries. These involve estimates about uncertain
future events based on the environment in different countries,
including life expectancy of scheme members, salary and pension
increases, inflation, as well as discount rates and asset values at the
year-end. The assumptions used by the Group and sensitivity analysis
are described in note 11; and
– the estimation of amounts to be recognised in respect of taxation
and legal matters, and the estimation of other provisions for liabilities
and charges are subject to uncertain future events, may extend
over several years and so the amount and/or timing may differ from
current assumptions. The accounting policy for taxation is explained
below. The recognised deferred tax assets and liabilities, together
with a note of unrecognised amounts, are shown in note 12, and
a contingent tax asset is explained in note 6(b). Other provisions
for liabilities and charges are as set out in note 20. Litigation related
deposits are shown in note 13. The application of these accounting
policies to the payments made and credits recognised under
the Master Settlement Agreement by Reynolds American Inc.
(“Reynolds” or “RAI”) is described in note 3(d).
Such estimates and assumptions are based on historical experience
and various other factors that are believed to be reasonable in the
circumstances and constitute management’s best judgement at the
date of the financial statements. In the future, actual experience
may deviate from these estimates and assumptions, which could
affect the financial statements as the original estimates and
assumptions are modified, as appropriate, in the year in which
the circumstances change.
These consolidated financial statements were authorised for issue
by the Board of Directors on 17 March 2020.
Basis of consolidation
The consolidated financial information includes the financial
statements of British American Tobacco p.l.c. and its subsidiary
undertakings, collectively “the Group”, together with the Group’s
share of the results of its associates and joint arrangements.
A subsidiary is an entity controlled by the Group. The Group controls
an entity when the Group is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity.
Associates comprise investments in undertakings, which are not
subsidiary undertakings or joint arrangements, where the Group’s
interest in the equity capital is long term and over whose operating
and financial policies the Group exercises a significant influence.
They are accounted for using the equity method.
Financial StatementsBAT Annual Report and Form 20-F 2019 1 Accounting policies continued
Joint arrangements comprise contractual arrangements where two
or more parties have joint control and where decisions regarding
the relevant activities of the entity require unanimous consent.
Joint operations are jointly-controlled arrangements where the
parties to the arrangement have rights to the underlying assets and
obligations for the underlying liabilities relating to the arrangement.
The Group accounts for its share of the assets, liabilities, income
and expenses of any such arrangement. Joint ventures comprise
arrangements where the parties to the arrangement have rights to
the net assets of the arrangement. They are accounted for using the
equity method.
Foreign currencies and hyperinflationary territories
The functional currency of the Parent Company is sterling and this is
also the presentation currency of the Group. The income and cash flow
statements of Group undertakings expressed in currencies other than
sterling are translated to sterling using exchange rates applicable to
the dates of the underlying transactions. Average rates of exchange in
each year are used where the average rate approximates the relevant
exchange rate at the date of the underlying transactions. Assets and
liabilities of Group undertakings are translated at the applicable rates
of exchange at the end of each year. In territories where there are
restrictions on the free access to foreign currency or multiple exchange
rates, the applicable rates of exchange are regularly reviewed.
The differences between retained profits translated at average and
closing rates of exchange are taken to reserves, as are differences
arising on the retranslation to sterling (using closing rates of exchange)
of overseas net assets at the beginning of the year, and are presented
as a separate component of equity. They are recognised in the income
statement when the gain or loss on disposal of a Group undertaking
is recognised.
Foreign currency transactions are initially recognised in the functional
currency of each entity in the Group using the exchange rate ruling at
the date of the transaction. Foreign exchange gains and losses resulting
from the settlement of such transactions and from the translation of
foreign currency assets and liabilities at year-end rates of exchange are
recognised in the income statement, except when deferred in equity
as qualifying cash flow hedges, on intercompany net investment
loans and qualifying net investment hedges. Foreign exchange gains
or losses recognised in the income statement are included in profit
from operations or net finance costs depending on the underlying
transactions that gave rise to these exchange differences.
In addition, for hyperinflationary countries where the effect on
the Group results would be significant, the financial statements in
local currency are adjusted to reflect the impact of local inflation
prior to translation into sterling, in accordance with IAS 29 Financial
Reporting in Hyperinflationary Economies. Where applicable, IAS 29
requires all transactions to be indexed by an inflationary factor to the
balance sheet date, potentially leading to a monetary gain or loss on
indexation. In addition, the Group assesses the carrying value of fixed
assets after indexation and applies IAS 36 Impairment of Assets, where
appropriate, to ensure that the carrying value correctly reflects the
economic value of such assets.
The results and balance sheets of operations in hyperinflationary
territories are translated at the period end rate. In the case of
Venezuela, the Group uses an estimated exchange rate calculated by
reflecting the development of the general price index since the Group
last achieved meaningful repatriation of dividends.
Revenue
Revenue principally comprises sales of cigarettes, other tobacco
products, and nicotine products, to external customers.
Revenue excludes duty, excise and other taxes related to sales in the
period and is stated after deducting rebates, returns and other similar
discounts and payments to direct and indirect customers. Revenue is
recognised when control of the goods is transferred to a customer; this
is usually evidenced by a transfer of the significant risks and rewards of
ownership upon delivery to the customer, which in terms of timing is
not materially different to the date of shipping.
Retirement benefit costs
The Group operates both defined benefit and defined contribution
schemes including post-retirement healthcare schemes. For defined
benefit schemes, the actuarial cost charged to profit from operations
consists of current service cost, net interest on the net defined benefit
liability or asset, past service cost and the impact of any settlements.
The net deficit or surplus for each defined benefit pension scheme
is calculated in accordance with IAS 19 Employee Benefits based on
the present value of the defined benefit obligation at the balance
sheet date less the fair value of the scheme assets adjusted, where
appropriate, for any surplus restrictions or the effect of minimum
funding requirements.
Some benefits are provided through defined contribution schemes
and payments to these are charged as an expense as they fall due.
Share‑based payments
The Group has equity-settled and cash-settled share-based
compensation plans.
Equity-settled share-based payments are measured at fair value at
the date of grant. The fair value determined at the grant date of the
equity-settled share-based payments is expensed over the vesting
period, based on the Group’s estimate of awards that will eventually
vest. For plans where vesting conditions are based on total shareholder
returns, the fair value at date of grant reflects these conditions, whereas
earnings per share vesting conditions are reflected in the calculation
of awards that will eventually vest over the vesting period. For cash-
settled share-based payments, a liability equal to the portion of the
services received is recognised at its current fair value determined at
each balance sheet date. Fair value is measured by the use of the Black-
Scholes option pricing model, except where vesting is dependent
on market conditions when the Monte-Carlo option pricing model is
used. The expected life used in the models has been adjusted, based
on management’s best estimate, for the effects of non-transferability,
exercise restrictions and behavioural considerations.
Research and development
Research expenditure is charged to income in the year in which it is
incurred. Development expenditure is charged to income in the year
it is incurred, unless it meets the recognition criteria of IAS 38 Intangible
Assets to be capitalised as an intangible asset.
Taxation
Taxation is chargeable on the profits for the period, together with
deferred taxation.
The current income tax charge is calculated on the basis of tax
laws enacted or substantively enacted at the balance sheet date in
the countries where the Group’s subsidiaries, associates and joint
arrangements operate and generate taxable income.
Deferred taxation is provided in full using the liability method for
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amount used for
taxation purposes. A deferred tax asset is recognised only to the extent
that it is probable that future taxable profits will be available against
which the asset can be utilised.
131
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
1 Accounting policies continued
Deferred tax is determined using the tax rates that have been enacted
or substantively enacted by the balance sheet date and are expected
to apply when the related deferred tax asset is realised or deferred tax
liability is settled.
Tax is recognised in the income statement except to the extent that it
relates to items recognised in other comprehensive income or directly
in equity, in which case it is recognised in the statement of other
comprehensive income or the statement of changes in equity.
The Group has exposures in respect of the payment or recovery
of a number of taxes. With effect from 1 January 2019, the Group
has adopted the requirements of IFRIC 23 Uncertainty over Income
Tax Treatments which clarifies how to apply the recognition and
measurement requirements in IAS 12 Income Taxes. The interpretation
requires that, where there is uncertainty as to whether a particular
tax treatment will be accepted by the relevant taxation authority, the
financial statements reflect the probable outcome. Where it is not
considered probable that a particular tax treatment will be accepted
by the relevant taxation authority, estimated amounts are determined
based on the most likely amount or expected value, depending
on which method is expected to better predict the resolution of
the uncertainty. The impact on the Group’s profit and equity from
the adoption of IFRIC 23 was not material. Prior to 1 January 2019,
liabilities or assets for these payments or recoveries were recognised
at such time as an outcome became probable and when the amount
could reasonably be estimated.
Goodwill
Goodwill arising on acquisitions is capitalised and any impairment of
goodwill is recognised immediately in the income statement and is not
subsequently reversed.
Goodwill in respect of subsidiaries is included in intangible assets.
In respect of associates and joint ventures, goodwill is included in the
carrying value of the investment in the associated company or joint
venture. On disposal of a subsidiary, associate or joint venture, the
attributable amount of goodwill is included in the determination of the
profit or loss on disposal.
Intangible assets other than goodwill
The intangible assets shown on the Group balance sheet consist mainly
of trademarks and similar intangibles, including certain intellectual
property, acquired by the Group’s subsidiary undertakings and
computer software.
Acquired trademarks and similar assets are carried at cost less
accumulated amortisation and impairment. Trademarks with indefinite
lives are not amortised but are reviewed annually for impairment.
Other trademarks and similar assets are amortised on a straight-line
basis over their remaining useful lives, consistent with the pattern of
economic benefits expected to be received, which do not exceed 20
years. Any impairments of trademarks are recognised in the income
statement but increases in trademark values are not recognised.
Computer software is carried at cost less accumulated amortisation and
impairment, and, with the exception of global software solutions, is
amortised on a straight-line basis over periods ranging from three years
to five years. Global software solutions are software assets designed
to be implemented on a global basis and used as a standard solution
by all of the operating companies in the Group. These assets are
amortised on a straight-line basis over periods not exceeding 10 years.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and impairment. Depreciation is calculated on a straight-
line basis to write off the assets over their useful economic life.
No depreciation is provided on freehold land or assets classified as
held-for-sale. Freehold and leasehold property are depreciated at rates
between 2.5% and 4% per annum, and plant and equipment at rates
between 3% and 25% per annum.
With effect from 1 January 2018, the Group has changed certain
estimates of useful economic lives for cigarette-making machinery
across the Group, harmonising depreciation rates used by the historical
BAT Group and by Reynolds American Inc. from 14 years and 30 years,
respectively, to a standard 20-year life (5% per annum).
Capitalised interest
Borrowing costs which are directly attributable to the acquisition,
construction or production of intangible assets or property, plant and
equipment that takes a substantial period of time to get ready for its
intended use or sale, are capitalised as part of the cost of the asset.
Leased assets
With effect from 1 January 2019, the Group has applied IFRS 16 Leases
to contractual arrangements which are, or contain, leases of assets, and
consequently recognises right-of-use assets and lease liabilities at the
commencement of the leasing arrangement, with the assets included
as part of property, plant and equipment in note 9 and the liabilities
included as part of borrowings in note 19.
In adopting IFRS 16, the Group has applied the modified retrospective
approach with no restatement of prior periods, as permitted by
the Standard. The impact on the Group of implementing the new
Standard is shown in note 30.
The Group has taken advantage of certain practical expedients
available under the Standard, including “grandfathering” previously
recognised lease arrangements such that contracts were not reassessed
at the implementation date as to whether they were, or contained,
a lease, and leases previously classified as finance leases under IAS 17
Leases remained capitalised on the adoption of IFRS 16. In addition, as
part of the implementation, the Group has applied a single discount
rate to portfolios of leases with reasonably similar characteristics,
has assessed whether individual leases are onerous prior to applying
the Standard, has applied hindsight in determining the lease term if
the contract contains options to extend or terminate the lease, and
has not applied the capitalisation requirements of the Standard to
leases for which the lease term ends within 12 months of the date of
initial application.
For leasing arrangements entered into after 1 January 2019, the
Group has also adopted several practical expedients available under
the Standard including not applying the requirements of IFRS 16 to
leases of intangible assets, applying the portfolio approach where
appropriate to do so, not applying the recognition and measurement
requirements of IFRS 16 to short-term leases (leases of less than
12 months maximum duration) and to leases of low-value assets.
Except for property-related leases, non-lease components have not
been separated from lease components.
The Group will continue to report recognised assets and liabilities
under leases within property, plant and equipment and borrowings
respectively rather than show these as separate line items on the face
of the balance sheet.
132
Financial StatementsBAT Annual Report and Form 20-F 2019 1 Accounting policies continued
Lease liabilities are initially recognised at an amount equal to the
present value of estimated contractual lease payments at the inception
of the lease, after taking into account any options to extend the term
of the lease. Lease commitments are discounted to present value using
the interest rate implicit in the lease if this can be readily determined,
or the applicable incremental rate of borrowing, as appropriate. Right-
of-use lease assets are initially recognised at an amount equal to the
lease liability, adjusted for initial direct costs in relation to the assets,
then depreciated over the shorter of the lease term and their estimated
useful lives.
Prior to 1 January 2019, the Group applied IAS 17 Leases.
Arrangements where the Group had substantially all the risks and
rewards of ownership of the leased asset were classified as finance
leases and were included as part of property, plant and equipment.
Finance lease assets were initially recognised at an amount equal to
the lower of their fair value and the present value of the minimum
lease payments at the inception of the lease, then depreciated
over the shorter of the lease term and their estimated useful lives.
Lease payments due were shown as a liability within borrowings.
Lease payments were shown within financing activities in the cash
flow statement and consisted of capital and finance charge elements,
with the finance element charged to the income statement. Under IAS
17, leases which were not classified as finance leases were classified
as operating leases and such arrangements were not capitalised.
Rental payments under operating leases were charged to operating
profit on a straight-line basis over the lease term.
Impairment of non‑financial assets
Assets are reviewed for impairment whenever events indicate that the
carrying amount of a cash-generating unit may not be recoverable.
In addition, assets that have indefinite useful lives are tested annually
for impairment. An impairment loss is recognised to the extent that the
carrying value exceeds the higher of the asset’s fair value less costs to
sell and its value-in-use.
A cash-generating unit is the smallest identifiable group of assets
that generates cash flows which are largely independent of the cash
flows from other assets or groups of assets. At the acquisition date,
any goodwill acquired is allocated to the relevant cash-generating
unit or group of cash-generating units expected to benefit from the
acquisition for the purpose of impairment testing of goodwill.
Impairment of financial assets held at amortised cost
With effect from 1 January 2018, loss allowances for expected
credit losses on financial assets which are held at amortised cost are
recognised on initial recognition of the underlying asset. As permitted
by IFRS 9 Financial Instruments, loss allowances on trade receivables
arising from the recognition of revenue under IFRS 15 Revenue from
Contracts with Customers are initially measured at an amount equal
to lifetime expected losses. Allowances in respect of loans and other
receivables are initially recognised at an amount equal to 12-month
expected credit losses. Allowances are measured at an amount equal
to the lifetime expected credit losses where the credit risk on the
receivables increases significantly after initial recognition.
Prior to 1 January 2018, financial assets were reviewed for impairment
at each balance sheet date, or whenever events indicated that the
carrying amount might not be recoverable.
Inventories
Inventories are stated at the lower of cost and net realisable value.
Cost is based on the weighted average cost incurred in acquiring
inventories and bringing them to their existing location and condition,
which will include raw materials, direct labour and overheads, where
appropriate. Net realisable value is the estimated selling price less costs
to completion and sale. Tobacco inventories which have an operating
cycle that exceeds 12 months are classified as current assets, consistent
with recognised industry practice.
Financial instruments
The Group’s business model for managing financial assets is set
out in the Group Treasury Manual which notes that the primary
objective with regard to the management of cash and investments is
to protect against the loss of principal. Additionally, the Group aims:
to maximise Group liquidity by concentrating cash at the Centre;
to align the maturity profile of external investments with that of the
forecast liquidity profile; to wherever practicable, match the interest
rate profile of external investments to that of debt maturities or fixings;
and to optimise the investment yield within the Group’s investment
parameters. The majority of financial assets are held in order to collect
contractual cash flows (typically cash and cash equivalents and loans
and other receivables) but some assets (typically investments) are held
for investment potential.
Financial assets and financial liabilities are recognised when the
Group becomes a party to the contractual provisions of the relevant
instrument and derecognised when it ceases to be a party to such
provisions. Such assets and liabilities are classified as current if they are
expected to be realised or settled within 12 months after the balance
sheet date. If not, they are classified as non-current. In addition,
current liabilities include amounts where the entity does not have an
unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date.
With effect from 1 January 2018, the Group adopted IFRS 9 Financial
Instruments with no revision of prior periods, as permitted by
the Standard. The cumulative impact of adopting the Standard,
including the effect of tax entries, was recognised as a restatement
of opening reserves in 2018. IFRS 9 changed the classification and
measurement of financial assets. The category of ‘available-for-sale
investments’ was replaced with ‘financial assets at Fair Value through
Profit and Loss’ (for most investments) and ‘financial assets at Fair
Value through Other Comprehensive Income’ (for qualifying equity
investments). Certain loans and receivables which did not meet the
tests for amortised cost classification under IFRS 9 were reclassified as
financial assets at Fair Value through Profit and Loss at the same date.
The Group uses the term ‘investments held at fair value’ to refer to all
of these financial assets both pre- and post- the adoption of IFRS 9.
In addition, with effect from 1 January 2019, the Group has
early adopted the Amendments to IFRS 9 and IFRS 7 Financial
Instruments: Disclosures with regard to Interest Rate Benchmark
Reform. The Amendment provides an exemption for certain hedging
relationships directly affected by changes in interest rate benchmarks
where the reform gives rise to uncertainties regarding the interest rate
designated as a hedged risk, or the timing or amount of interest rate
cashflows of either the hedged item or of the hedging instrument,
such that without the exemption the relationship might not qualify for
hedge accounting. The impact on the Group’s profit was not material.
133
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
1 Accounting policies continued
Non-derivative financial assets are classified on initial recognition in
accordance with the Group’s business model as investments, loans and
receivables, or cash and cash equivalents and accounted for as follows:
– Investments: These are non-derivative financial assets that cannot be
classified as loans and other receivables or cash and cash equivalents.
Dividend and interest income on these investments are included
within finance income when the Group’s right to receive payments
is established. This category includes financial assets at fair value
through profit and loss, financial assets at fair value through other
comprehensive income and, prior to 1 January 2018, available-for-
sale investments as previously defined by IAS 39.
– Loans and other receivables: These are non-derivative financial assets
with fixed or determinable payments that are solely payments
of principal and interest on the principal amount outstanding,
that are primarily held in order to collect contractual cash flows.
These balances include trade and other receivables and are
measured at amortised cost, using the effective interest rate
method, and stated net of allowances for credit losses. In addition,
as explained in note 13, certain litigation related deposits are
recognised as assets within loans and other receivables where
management has determined that these payments represent
a resource controlled by the entity as a result of past events.
These deposits are held at the fair value of consideration transferred
less impairment, if applicable, and have not been discounted.
– Cash and cash equivalents: Cash and cash equivalents include cash
in hand and deposits held on call, together with other short-term
highly liquid investments including investments in certain money
market funds. Cash equivalents normally comprise instruments with
maturities of three months or less at their date of acquisition. In the
cash flow statement, cash and cash equivalents are shown net of
bank overdrafts, which are included as current borrowings in the
liabilities section on the balance sheet.
Fair values for quoted investments are based on observable market
prices. If there is no active market for a financial asset, the fair value
is established by using valuation techniques principally involving
discounted cash flow analysis.
Non-derivative financial liabilities, including borrowings and trade
payables, are stated at amortised cost using the effective interest
method. For borrowings, their carrying value includes accrued interest
payable, as well as unamortised issue costs. As shown in note 19,
certain borrowings are subject to fair value hedges, as defined below.
Derivative financial assets and liabilities are initially recognised, and
subsequently measured, at fair value, which includes accrued interest
receivable and payable where relevant. Changes in their fair values are
recognised as follows:
– for derivatives that are designated as cash flow hedges, the changes
in their fair values are recognised directly in other comprehensive
income, to the extent that they are effective, with the ineffective
portion being recognised in the income statement. Where the
hedged item results in a non-financial asset, the accumulated
gains and losses, previously recognised in other comprehensive
income, are included in the initial carrying value of the asset (basis
adjustment) and recognised in the income statement in the same
periods as the hedged item. Where the underlying transaction
does not result in such an asset, the accumulated gains and losses
are reclassified to the income statement in the same periods as the
hedged item;
– for derivatives that are designated as fair value hedges, the carrying
value of the hedged item is adjusted for the fair value changes
attributable to the risk being hedged, with the corresponding entry
being made in the income statement. The changes in fair value of
these derivatives are also recognised in the income statement;
– for derivatives that are designated as hedges of net investments in
foreign operations, the changes in their fair values are recognised
directly in other comprehensive income, to the extent that they
are effective, with the ineffective portion being recognised in the
income statement. Where non-derivatives such as foreign currency
borrowings are designated as net investment hedges, the relevant
exchange differences are similarly recognised. The accumulated
gains and losses are reclassified to the income statement when the
foreign operation is disposed of; and
– for derivatives that do not qualify for hedge accounting or are not
designated as hedges, the changes in their fair values are recognised
in the income statement in the period in which they arise. These are
referred to as ‘held-for-trading’.
In order to qualify for hedge accounting, the Group is required to
document prospectively the economic relationship between the item
being hedged and the hedging instrument. The Group is also required
to demonstrate an assessment of the economic relationship between
the hedged item and the hedging instrument, which shows that the
hedge will be highly effective on an ongoing basis. This effectiveness
testing is re-performed periodically to ensure that the hedge has
remained, and is expected to remain, highly effective.
Hedge accounting is discontinued when a hedging instrument is
derecognised (e.g. through expiry or disposal), or no longer qualifies
for hedge accounting. Where the hedged item is a highly probable
forecast transaction, the related gains and losses remain in equity
until the transaction takes place, when they are reclassified to the
income statement in the same manner as for cash flow hedges as
described above. When a hedged future transaction is no longer
expected to occur, any related gains and losses, previously recognised
in other comprehensive income, are immediately reclassified to the
income statement.
Derivative fair value changes recognised in the income statement are
either reflected in arriving at profit from operations (if the hedged item
is similarly reflected) or in finance costs.
The Group’s accounting policies for financial instruments prior to
the adoption of IFRS 9 on 1 January 2018, were as set out above,
except for the following: non-derivative financial assets were classified
on initial recognition as available-for-sale investments, loans and
receivables or cash and cash equivalents. Available-for-sale investments
were non-derivative financial assets that could not be classified
as loans and receivables or cash and cash equivalents. Apart from
available-for-sale investments, non-derivative financial assets were
stated at amortised cost using the effective interest method, subject
to reduction for allowances for estimated irrecoverable amounts.
These estimates for irrecoverable amounts were recognised when there
was objective evidence that the full amount receivable would not be
collected according to the original terms of the asset. Available-for-
sale investments were stated at fair value, with changes in fair value
being recognised directly in other comprehensive income. When such
investments were derecognised (e.g. through disposal) or became
impaired, the accumulated gains and losses, previously recognised
in other comprehensive income, were reclassified to the income
statement within ‘finance income’. Dividend and interest income on
available-for-sale investments were included within ‘finance income’
when the Group’s right to receive payments was established.
134
Financial StatementsBAT Annual Report and Form 20-F 2019 Provisions
Provisions are recognised when either a legal or constructive obligation
as a result of a past event exists at the balance sheet date, it is probable
that an outflow of economic resources will be required to settle the
obligation and a reasonable estimate can be made of the amount of
the obligation.
Contingent liabilities and contingent assets
Subsidiaries and associate companies are defendants in tobacco-related
and other litigation. Provision for this litigation (including legal costs)
is made at such time as an unfavourable outcome becomes probable
and the amount can be reasonably estimated.
Contingent assets are possible assets whose existence will only be
confirmed by future events not wholly within the control of the entity
and are not recognised as assets until the realisation of income is
virtually certain.
Where a provision has not been recognised, the Group records its
external legal fees and other external defence costs for tobacco-related
and other litigation as these costs are incurred.
As explained in note 13, certain litigation-related deposits are
recognised as assets within loans and other receivables where
management has determined that these payments represent a
resource controlled by the entity. These deposits are held at the fair
value of consideration transferred less impairment, if applicable, and
have not been discounted.
Repurchase of share capital
When share capital is repurchased the amount of consideration paid,
including directly attributable costs, is recognised as a deduction
from equity. Repurchased shares which are not cancelled, or shares
purchased for the employee share ownership trusts, are classified as
treasury shares and presented as a deduction from total equity.
Future changes to accounting policies
Certain changes to IFRS will be applicable to the Group
financial statements in future years, but will not have a material
effect on reported profit or equity or on the disclosures in the
financial statements.
1 Accounting policies continued
Dividends
In 2017 and 2018, dividend distributions to the Company’s
shareholders were recognised as a liability on the Group’s financial
statements in the period in which they were approved by shareholders
(final dividends) or confirmed by the Directors (interim dividends).
With effect from 1 January 2018, the Company has moved to four
interim quarterly dividend payments. As referred to in note 18(e), from
2019 the Company recognises the interim dividend in the period in
which it is paid. This change has no impact to the timing of when
shareholders will receive the dividend.
Segmental analysis
The Group is organised and managed on the basis of its geographic
regions. These are the reportable segments for the Group as they
form the focus of the Group’s internal reporting systems and are
the basis used by the chief operating decision maker, identified
as the Management Board, for assessing performance and
allocating resources.
The Group is primarily a single product business providing cigarettes
and other tobacco products. While the Group has clearly differentiated
brands, global segmentation between a wide portfolio of brands is not
part of the regular internally reported financial information. The results
of New Category products are reported as part of the results of each
geographic region, and are not currently material to the Group.
The prices agreed between Group companies for intra-group sales of
materials, manufactured goods, charges for royalties, commissions,
services and fees, are based on normal commercial practices which
would apply between independent businesses. Royalty income, less
related expenditure, is included in the region in which the licensor
is based.
Adjusting items
Adjusting items are significant items of income or expense in
revenue, profit from operations, net finance costs, taxation and
the Group’s share of the post-tax results of associates and joint
ventures which individually or, if of a similar type, in aggregate, are
relevant to an understanding of the Group’s underlying financial
performance because of their size, nature or incidence. In identifying
and quantifying adjusting items, the Group consistently applies a
policy that defines criteria that are required to be met for an item to
be classified as adjusting. These items are separately disclosed in the
segmental analyses or in the notes to the accounts as appropriate.
The Group believes that these items are useful to users of the Group
financial statements in helping them to understand the underlying
business performance and are used to derive the Group’s principal
non-GAAP measures of adjusted revenue, adjusted profit from
operations, adjusted diluted earnings per share, @operating cash
flow conversion ratio and adjusted cash generated from operations@,
all of which are before the impact of adjusting items and which are
reconciled from revenue, profit from operations, diluted earnings
per share, @cash conversion ratio and net cash generated from
operating activities@.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F
as filed with the SEC.
135
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
2 Segmental analyses
As the chief operating decision maker, the Management Board reviews external adjusted revenues and adjusted profit from operations to evaluate
segment performance and allocate resources to the overall business. The results of New Categories (comprising Tobacco Heating Products,
Vapour products and Modern Oral products) are reported to the Management Board as part of the results of each geographic region. However,
additional information has been provided based on product category. Interest income, interest expense and taxation are centrally managed and
accordingly such items are not presented by segment as they are excluded from the measure of segment profitability.
The four geographic regions are the reportable segments for the Group as they form the focus of the Group’s internal reporting systems and
are the basis used by the Management Board for assessing performance and allocating resources. The Management Board reviews current and
prior year adjusted segmental revenue, adjusted profit from operations of subsidiaries and joint operations, and adjusted post-tax results of
associates and joint ventures at constant rates of exchange. The constant rate comparison provided for reporting segment information is based
on a retranslation, at prior year exchange rates, of the current year results of the Group, including intercompany royalties payable in foreign
currency to UK entities. However, the Group does not adjust for the normal transactional gains and losses in operations which are generated by
movements in exchange rates.
In respect of the United States region, all financial statements and financial information provided by or with respect to the US business or
RAI (and/or RAI and its subsidiaries (collectively, the “RAI Group”)) are prepared on the basis of US GAAP and constitute the primary financial
statements or financial information of the US business or RAI (and/or the RAI Group). Solely for the purpose of consolidation within the results
of BAT p.l.c. and the BAT Group, this financial information is then converted to IFRS as issued by the IASB and adopted by the EU. To the extent
any such financial information provided in these financial statements relates to the US business or RAI (and/or the RAI Group), it is provided as an
explanation of the US business’s or RAI’s (and/or the RAI Group’s) primary US GAAP based financial statements and information.
The following table shows 2019 revenue and adjusted revenue at current rates, and 2019 adjusted revenue translated using 2018 rates of
exchange. The 2018 figures are stated at the 2018 rates of exchange.
Adjusted
Revenue
Constant
rates
£m
9,917
5,157
4,491
6,118
25,683
Translation
exchange
£m
456
(4)
(230)
(78)
144
Adjusted
Revenue
Current
rates
£m
10,373
5,153
4,261
6,040
25,827
Adjusting
items
Current
rates
£m
–
–
–
50
50
2019
Revenue
Current
rates
£m
10,373
5,153
4,261
6,090
25,877
Adjusted
Revenue
£m
9,495
4,882
4,111
5,824
24,312
Adjusting
items
£m
–
–
–
180
180
2018
Revenue
£m
9,495
4,882
4,111
6,004
24,492
United States
APME
AMSSA
ENA
Revenue
Note: adjusting items in revenue are in respect of excise included in goods acquired from a third party under short-term arrangements and then passed on to customers. This is deemed as adjusting due to
the distorting nature to revenue and operating margin.
The following table shows 2018 revenue and adjusted revenue at current rates, and 2018 adjusted revenue translated using 2017 rates of
exchange. The 2017 figures are stated at the 2017 rates of exchange.
Adjusted
Revenue
Constant
rates
£m
9,838
5,250
4,560
6,112
25,760
Translation
exchange
£m
(343)
(368)
(449)
(288)
(1,448)
Adjusted
Revenue
Current
rates
£m
9,495
4,882
4,111
5,824
24,312
Adjusting
items
Current
rates
£m
–
–
–
180
180
2018
Revenue
Current
rates
£m
9,495
4,882
4,111
6,004
24,492
Adjusted
Revenue
£m
4,160
4,973
4,323
5,850
19,306
Adjusting
items
£m
–
–
–
258
258
2017
Revenue
£m
4,160
4,973
4,323
6,108
19,564
United States
APME
AMSSA
ENA
Revenue
Note: adjusting items in revenue are in respect of excise included in goods acquired from a third party under short-term arrangements and then passed on to customers. This is deemed as adjusting due to
the distorting nature to revenue and operating margin.
136
Financial StatementsBAT Annual Report and Form 20-F 2019 2 Segmental analyses continued
The following table shows 2019 profit from operations and adjusted profit from operations at current rates, and 2019 adjusted profit from
operations translated using 2018 rates of exchange. The 2018 figures are stated at the 2018 rates of exchange.
Adjusted*
segment
result
Constant
rates
£m
4,798
2,102
1,912
2,220
11,032
(1,466)
463
3
466
10,032
Translation
exchange
£m
238
(43)
(70)
(27)
98
(56)
7
–
7
49
Adjusted*
segment
result
Current
rates
£m
5,036
2,059
1,842
2,193
11,130
(1,522)
470
3
473
10,081
Adjusting*
items
£m
(626)
(306)
(638)
(544)
(2,114)
(80)
25
–
25
(2,169)
(2,498)
(3)
(2,501)
438
2019
Segment
result
Current
rates
£m
4,410
1,753
1,204
1,649
9,016
(1,602)
495
3
498
7,912
(2,063)
5,849
2018
Adjusted*
segment
result
£m
4,511
1,948
1,738
2,150
10,347
(1,385)
384
3
Adjusting*
items
£m
Segment
result
£m
(505)
(90)
(194)
(245)
(1,034)
4
32
–
4,006
1,858
1,544
1,905
9,313
(1,381)
416
3
387
9,349
32
(998)
419
8,351
(2,364)
223
(2,141)
6,210
United States
APME
AMSSA
ENA
Profit from operations
Net finance costs
APME
ENA
Share of post-tax results of associates
and joint ventures
Profit/(loss) before taxation
Taxation (charge)/credit
on ordinary activities
Profit for the year
* The adjustments to profit from operations, net finance costs, the Group’s share of the post-tax results of associates and joint ventures and taxation are explained in notes 3(e) to 3(h), note 4(b), note 5(a),
and note 6(b), 6(d) and 6(e), respectively.
The following table shows 2018 profit from operations and adjusted profit from operations at current rates, and 2018 adjusted profit from
operations translated using 2017 rates of exchange. The 2017 figures are stated at the 2017 rates.
Adjusted*
segment
result
Constant
rates
£m
4,686
2,099
1,922
2,217
10,924
(1,415)
–
417
3
420
9,929
Translation
exchange
£m
(175)
(151)
(184)
(67)
(577)
30
–
(33)
–
(33)
(580)
Adjusted*
segment
result
Current
rates
£m
4,511
1,948
1,738
2,150
10,347
(1,385)
–
384
3
387
9,349
2018
Segment
result
Current
rates
£m
4,006
1,858
1,544
1,905
9,313
(1,381)
–
416
3
Adjusting*
items
£m
(505)
(90)
(194)
(245)
(1,034)
4
–
32
–
32
(998)
419
8,351
Adjusted*
segment
result
£m
Adjusting*
items
£m
1,928
2,049
1,782
2,170
7,929
(889)
624
384
4
1,012
8,052
(763)
(147)
(134)
(473)
(1,517)
(205)
23,195
29
(27)
23,197
21,475
(2,508)
144
(2,364)
223
(2,141)
6,210
(2,091)
10,220
2017
Segment
result
£m
1,165
1,902
1,648
1,697
6,412
(1,094)
23,819
413
(23)
24,209
29,527
8,129
37,656
United States
APME
AMSSA
ENA
Profit from operations
Net finance costs
United States
APME
ENA
Share of post-tax results of associates
and joint ventures
Profit/(loss) before taxation
Taxation (charge)/credit
on ordinary activities
Profit for the year
* The adjustments to profit from operations, net finance costs, the Group’s share of the post-tax results of associates and joint ventures and taxation are explained in notes 3(e) to 3(h), note 4(b), note 5(a),
and note 6(b), 6(d) and 6(e), respectively.
137
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
2 Segmental analyses continued
Adjusted profit from operations at constant rates of £11,032 million (2018: £10,924 million; 2017: £7,605 million) excludes certain depreciation,
amortisation and impairment charges as explained in notes 3(e), 3(f) and 3(h). These are excluded from segmental profit from operations at
constant rates as follows:
2019
2018
Adjusted
depreciation,
amortisation
and
impairment
Constant
rates
£m
Adjusted
depreciation,
amortisation
and
impairment
Current rates
£m
Translation
exchange
£m
Depreciation,
amortisation
and
impairment
Current rates
£m
Adjusted
depreciation,
amortisation
and
impairment
£m
Adjusting
items
£m
Depreciation,
amortisation
and
impairment
£m
Adjusting
items
£m
249
162
140
218
769
9
1
(3)
(2)
5
258
163
137
216
774
391
182
35
130
738
649
345
172
346
1,512
2018
154
105
101
143
503
289
22
115
109
535
443
127
216
252
1,038
2017
Adjusted
depreciation,
amortisation
and
impairment
Constant rates
£m
158
111
100
148
517
Adjusted
depreciation,
amortisation
and
impairment
Current rates
£m
154
105
101
143
503
Translation
exchange
£m
(4)
(6)
1
(5)
(14)
Depreciation,
amortisation
and
impairment
Current rates
£m
Adjusted
depreciation,
amortisation
and
impairment
£m
Adjusting
items
£m
Depreciation,
amortisation
and
impairment
£m
Adjusting
items
£m
289
22
115
109
535
443
127
216
252
1,038
59
111
102
162
434
116
24
32
296
468
175
135
134
458
902
United States
APME
AMSSA
ENA
United States
APME
AMSSA
ENA
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Financial StatementsBAT Annual Report and Form 20-F 2019 2 Segmental analyses continued
Additional information by product category
Although the Group’s operations are managed on a Regional basis, additional information for revenue is provided based on product category
as follows:
Adjusted
Revenue
Constant
rates
£m
22,892
1,214
392
693
129
1,036
541
25,683
Adjusted
Revenue
Constant
rates
£m
23,251
937
325
576
36
975
597
25,760
Translation
exchange
£m
59
41
9
35
(3)
45
(1)
144
Translation
exchange
£m
(1,359)
(20)
(7)
(11)
(2)
(34)
(35)
(1,448)
Adjusted
Revenue
Current
rates
£m
22,951
1,255
401
728
126
1,081
540
25,827
Adjusted
Revenue
Current
rates
£m
21,892
917
318
565
34
941
562
24,312
Adjusting
items
Current
rates
£m
50
–
–
–
–
–
–
50
Adjusting
items
Current
rates
£m
180
–
–
–
–
–
–
180
2019
Revenue
Current
rates
£m
23,001
1,255
401
728
126
1,081
540
25,877
2018
Revenue
Current
rates
£m
22,072
917
318
565
34
941
562
24,492
Adjusted
Revenue
£m
21,892
917
318
565
34
941
562
24,312
Adjusted
Revenue
£m
17,913
385
168
202
15
415
593
19,306
Adjusting
items
£m
180
–
–
–
–
–
–
180
Adjusting
items
£m
258
–
–
–
–
–
–
258
2018
Revenue
£m
22,072
917
318
565
34
941
562
24,492
2017
Revenue
£m
18,171
385
168
202
15
415
593
19,564
Combustibles
New Categories
Vapour
THP
Modern Oral
Traditional Oral
Other
Revenue
Combustibles
New Categories
Vapour
THP
Modern Oral
Traditional Oral
Other
Revenue
External revenue and non-current assets other than financial instruments, deferred tax assets and retirement benefit assets are analysed between
the UK and all foreign countries at current rates of exchange as follows:
United Kingdom
All foreign countries
Revenue is based
on location of sale
External revenue
2019
£m
178
2018
£m
184
2017
£m
203
Intangible assets
Property, plant and equipment
Investments in associates and joint ventures
2019
£m
2018
£m
2017
£m
2019
£m
2018
£m
25,699
24,308
19,361
25,877
24,492
19,564
United Kingdom
All foreign countries
2019
£m
492
333
8
2018
£m
529
404
–
2019
£m
118,295
5,185
1,852
2018
£m
123,484
4,762
1,737
2019
£m
118,787
5,518
1,860
Group
2018
£m
124,013
5,166
1,737
Group
2017
£m
The consolidated results of RAI companies operating in the United States met the criteria for separate disclosure under the requirements of
IFRS 8 Operating Segments. Revenue arising from the operations of RAI, inclusive of the sales made to fellow Group companies, in 2019, 2018 and
in 2017 since the date of acquisition was £10,417 million, £9,506 million and £4,160 million, respectively. Non-current assets attributable to the
operations of RAI were £109,186 million (2018: £113,935 million).
The main acquisitions comprising the goodwill balance of £44,316 million (2018: £46,163 million), included in intangible assets, are provided
in note 8. Included in investments in associates and joint ventures are amounts of £1,794 million (2018: £1,682 million) attributable to the
investment in ITC Ltd. Further information is provided in notes 5 and 10.
139
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
3 Profit from operations
Enumerated below are movements in costs that have impacted profit from operations in 2019, 2018 and 2017. These include changes in our
underlying business performance, as well as the impact of adjusting items, as defined in note 1, in profit from operations (note 3(e) to 3(h)).
(a) Employee benefit costs
Wages and salaries
Social security costs
Other pension and retirement benefit costs (note 11)
Share-based payments – equity and cash-settled (note 24)
(b) Depreciation, amortisation and impairment costs
Intangibles
– amortisation and impairment of trademarks and similar intangibles
– amortisation and impairment of other intangibles
– impairment of goodwill (note 3(h))
Property, plant and equipment – depreciation and impairment
2019
£m
2,651
223
227
120
3,221
2019
£m
508
108
194
702
1,512
2018
£m
2,463
207
212
123
3,005
2018
£m
377
111
–
550
1,038
2017
£m
2,131
216
215
117
2,679
2017
£m
383
140
–
379
902
Intangibles – amortisation and impairment
The acquisition of businesses has resulted in the capitalisation of certain trademarks and similar intangibles. The amortisation and impairment of
these acquired trademarks and similar intangibles are charged to the income statement as adjusting, as explained in note 3(f).
Property, plant and equipment – depreciation and impairment
Included in depreciation and impairment of property, plant and equipment are:
– Depreciation and impairment of right-of-use assets of £178 million (2018: £6 million; 2017: £5 million); and
– Gains and losses recognised on the sale of property, plant and equipment.
Included in impairment of property, plant and equipment are impairment costs for obsolete machines in relation to downsizing and factory
rationalisation mentioned in note 3(e). In 2018, the Group recognised an impairment charge of £110 million in respect of the operations in
Venezuela mentioned in note 3(h).
With effect from 1 January 2018, cigarette making machinery within property, plant and equipment is depreciated at 5% per annum (previously, between
3% and 7% per annum). The impact of this change in accounting estimate is a net reduction in depreciation expense for 2018 of £53 million.
140
Financial StatementsBAT Annual Report and Form 20-F 2019 3 Profit from operations continued
(c) Other operating expenses include:
Research and development expenses (excluding employee benefit costs and depreciation)
Exchange differences
Hedge ineffectiveness within operating profit
Expense relating to short-team leases
Expenses relating to leases of low-value assets
Rent of plant and equipment (operating leases) – minimum lease payments
Rent of property (operating leases) – minimum lease payments
Auditor’s remuneration
Total expense for audit services pursuant to legislation:
– fees to KPMG LLP for Parent Company and Group audit
– fees to KPMG LLP firms and associates for local statutory and Group reporting audits
Total audit fees expense – KPMG LLP firms and associates
Audit fees expense to other firms
Total audit fees expense
Fees to KPMG LLP firms and associates for other services:
– audit-related assurance services
– other assurance services
– tax advisory services
– tax compliance
– audit of defined benefit schemes of the Company
– other non-audit services
2019
£m
126
22
(5)
16
1
–
–
6.8
9.0
15.8
0.1
15.9
8.5
0.5
–
–
0.4
–
9.4
2018
£m
105
(15)
(8)
–
–
61
110
6.3
8.8
15.1
0.2
15.3
9.4
0.3
–
–
0.4
–
10.1
2017
£m
80
(6)
–
–
–
41
85
6.3
11.3
17.6
0.2
17.8
8.0
4.1
–
0.2
–
–
12.3
The total auditor’s remuneration to KPMG firms and associates included above are £25.2 million (2018: £25.2 million; 2017: £29.9 million).
During 2019, the Group incurred expenditure of £4.4 million (2018: £8.7 million; 2017: £nil million) within audit-related assurance services
associated with the controls attestation of the Group’s compliance with Sarbanes-Oxley Section 404.
During 2017, the Group incurred additional expenditure with the Group’s auditor, as part of the acquisition of the remaining shares in RAI not
previously owned. This was due to the Securities and Exchange Commission (SEC) registration requirements to re-audit 2015 and 2016 under
Public Company Accounting Oversight Board (“PCAOB”) standards, to audit the purchase price allocation, to provide assurance services on the
registration documents and to provide, amongst other things, assurance services with regards to the planned 2018 implementation of Sarbanes-
Oxley Section 404. Accordingly, the following costs, related to the acquisition of RAI and treated as an adjusting item, were incurred within the
respective categories: audit-related assurance service of £7.7 million and other assurance services of £3.5 million.
Under SEC regulations, the remuneration to KPMG firms and associates of £25.1 million in 2019 (2018: £25.2 million; 2017: £30.1 million)
is required to be presented as follows: audit fees £24.7 million (2018: £24.7 million; 2017: £29.2 million), audit-related fees £0.4 million
(2018: £0.4 million; 2017: £0.5 million), tax fees £nil million (2018: £nil million; 2017: £0.2 million) and all other fees £0.1 million
(2018: £0.1 million; 2017: £0.2 million).
Total research and development costs including employee benefit costs and depreciation are £376 million (2018: £258 million;
2017: £191 million). Included in the 2019 research and development costs is £65 million of costs primarily related to packages in respect of
employee benefit reductions as part of the Group’s 2019 restructuring initiative (Quantum), as discussed in note 3(e).
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CONTINUED
3 Profit from operations continued
(d) Master Settlement Agreement
In 1998, the major US cigarette manufacturers (including the R.J. Reynolds Tobacco Company, Lorillard and Brown & Williamson, businesses
which are now part of the RAI Group) entered into the Master Settlement Agreement (MSA) with attorneys general representing most US states
and territories. The MSA imposes a perpetual stream of future payment obligations on the major US cigarette manufacturers. The amounts of
money that the participating manufacturers are required to annually contribute are based upon, amongst other things, the volume of cigarettes
sold and market share (based on cigarette shipments in that year).
During 2012, R.J. Reynolds Tobacco Company, Santa Fe Natural Tobacco Company (SFNTC), various other tobacco manufacturers, 17 states, the
District of Columbia and Puerto Rico reached an agreement related to the Non-Participating Manufacturer (NPM) adjustment under the MSA
and three more states joined the agreement in 2013. Under this agreement, R.J. Reynolds Tobacco Company has received credits of more than
US$1 billion, in respect of its Non-Participating Manufacturer (NPM) Adjustment claims related to the period from 2003 to 2012. These credits
have been applied against the companies’ MSA payments over a period of five years from 2013, subject to, and dependent upon, meeting the
various ongoing performance obligations. During 2014, two additional states agreed to settle NPM disputes related to claims for the period 2003
to 2012. R.J. Reynolds Tobacco Company has received US$170 million in credits, which has been applied over a five-year period from 2014.
During 2015, another state agreed to settle NPM disputes related to claims for the period 2004 to 2014. R.J. Reynolds Tobacco Company has
received US$285 million in credits, which will be applied over a four-year period from 2016. During 2016, no additional states agreed to settle
NPM disputes. During 2017, two more states agreed to settle NPM disputes related to claims for the period 2004 to 2014. It is estimated that
R.J. Reynolds Tobacco Company will receive US$61 million in credits, which will be applied over a five-year period from 2017. During 2018,
nine more states agreed to settle NPM disputes related to claims for the period 2004 to 2019, with an option through 2022, subject to certain
conditions. It is estimated that R.J. Reynolds Tobacco Company will receive US$182 million in credits for settled periods through 2017, which
will be applied over a five-year period from 2018. Also, in 2018, one additional state agreed to settle NPM disputes related to claims for the
period 2004 to 2024, subject to certain conditions. It is estimated that R.J. Reynolds Tobacco Company will receive US$205 million in credits for
settled periods through 2017, which will be applied over a five-year period from 2019. Credits in respect of future years’ payments and the NPM
Adjustment claims would be accounted for in the applicable year and will not be treated as adjusting items. Only credits in respect of prior year
payments are included as adjusting items.
The BAT Group is subject to substantial payment obligations under the MSA and the state settlement agreements with the states of Mississippi,
Florida, Texas and Minnesota (such settlement agreements, collectively State Settlement Agreements). RAl’s operating subsidiaries’ expenses
and payments under the MSA and the State Settlement Agreements for 2019 amounted to US$2,762 million (2018: US$2,741 million; 2017:
US$2,856 million) in respect of settlement expenses and US$2,918 million (2018: US$917 million; 2017: US$4,612 million) in respect of
settlement cash payments.
(e) Restructuring and integration costs
Restructuring costs reflect the costs incurred as a result of initiatives to improve the effectiveness and the efficiency of the Group as a globally
integrated enterprise, including the relevant operating costs of implementing the operating model. These costs represent additional expenses
incurred, which are not related to the normal business and day-to-day activities.
The operating model includes revised organisation structures, standardised processes and shared back office services underpinned by a global
single instance of SAP. These initiatives also include a review of the Group’s manufacturing operations, supply chain, overheads and indirect costs,
organisational structure and systems and software used.
The costs of the Group’s initiatives together with the costs of integrating acquired businesses into existing operations, including acquisition costs,
are included in profit from operations under the following headings:
Employee benefit costs
Depreciation, amortisation and impairment costs
Other operating expenses
Other operating income
2019
£m
364
63
145
(7)
565
2018
£m
176
48
145
(6)
363
2017
£m
193
85
330
(8)
600
The adjusting charge in 2019 relates to the ongoing restructuring costs associated with the implementation of revisions to the Group’s operating
model. These costs are mainly in relation to a programme, known as Quantum, to simplify the business and create a more efficient, agile and
focused company. This includes the cost of packages in respect of permanent headcount reduction and permanent employee benefit reductions
in the Group. The costs also cover the downsizing and factory rationalisation activities in Germany, Russia and APME. Included in other operating
income are amounts related to cash and reversal of deferred consideration associated with the acquisition of TDR d.o.o. (TDR) (note 23).
Restructuring and integration costs in 2018 include integration costs associated with the acquisition of RAI and ongoing costs of implementing
the revisions to the Group’s operating model. This includes the cost of packages in respect of permanent headcount reductions and permanent
employee benefit reductions in the Group. The costs also cover downsizing activities in Russia, Germany and APME. Included in other operating
income are gains from the sale of land and buildings in the Netherlands.
Restructuring and integration costs in 2017 include adviser fees and costs incurred related to the acquisition of the remaining shares in RAI not
already owned by the Group, that completed on 25 July 2017 (note 23). It also includes the implementation of a new operating model and the
cost of redundancy packages in respect of permanent headcount reductions and permanent employee benefit reductions in the Group. The costs
also cover integration costs incurred as a result of the RAI acquisition, factory closure and downsizing activities in Germany and Malaysia, certain
exit costs and asset write-offs related to the withdrawal from the Philippines. Included in other operating income are gains from the sale of land
and buildings in Brazil.
142
Financial StatementsBAT Annual Report and Form 20-F 2019 3 Profit from operations continued
(f) Amortisation and impairment of trademarks and similar intangibles
Acquisitions including RAI, TDR d.o.o. (TDR) and Skandinavisk Tobakskompagni (ST) in previous years, have resulted in the capitalisation of
trademarks and similar intangibles which are amortised over their expected useful lives, which do not exceed 20 years. The amortisation and
impairment charge of £481 million (2018: £377 million; 2017: £383 million) is charged as adjusting and included in depreciation, amortisation
and impairment costs in the income statement. In 2019, the Group incurred an impairment charge of £129 million, primarily related to a partial
impairment of the Kodiak brand, as explained in note 8(c).
(g) Fox River
As explained in note 27, a Group subsidiary has certain liabilities in respect of indemnities given on the purchase and disposal of former businesses
in the United States and, in 2011, the subsidiary provided £274 million in respect of claims in relation to environmental clean-up costs of the
Fox River.
On 30 September 2014, a Group subsidiary, NCR, Appvion and Windward Prospects entered into a Funding Agreement with regard to the costs
for the clean-up of Fox River.
In January 2017, NCR and Appvion entered into a consent decree with the US Government to resolve how the remaining clean-up will be
funded and to resolve further outstanding claims between them. The Consent Decree was approved by a US District Judge in August 2017.
The US Government enforcement action against NCR was terminated as a result of that order and contribution claims from the Potentially
Responsible Parties (“PRPs”) against NCR were dismissed. On 4 January 2019, the US Government, P. H. Glatfelter and Georgia-Pacific (the
remaining Fox River PRPs) sought approval for a separate Consent Decree to bring an end to all litigation concerning the Fox River clean-up.
This Consent Decree was approved by the District Court of the Eastern District of Wisconsin on 14 March 2019 and concludes all existing
litigation on the Fox River.
In July 2016, the High Court ruled in a Group subsidiary’s favour that a dividend of €135 million paid by Windward to Sequana in May 2009
was a transaction made with the intention of putting assets beyond the reach of the Group subsidiary and of negatively impacting its interests.
On 10 February 2017, further to a hearing in January 2017 to determine the relief due, the Court found in the Group subsidiary’s favour, ordering
that Sequana must pay an amount up to the full value of the dividend plus interest which equates to around US$185 million, related to past and
future clean-up costs. The Court granted all parties leave to appeal and Sequana a stay in respect of the above payments. In June 2018, the Court
of Appeal heard arguments in the Sequana Claims Appeal (as defined in note 27). On 6 February 2019, the Court of Appeal gave judgment
upholding the High Court’s findings, with one immaterial change to the method of calculating the damages awarded. Sequana therefore remains
liable to pay the above mentioned dividend. Due to the uncertain outcome of the case no asset has been recognised in relation to this ruling.
In February 2017, Sequana entered into a process in France seeking court protection (the “Sauvegarde”), exiting the Sauvegarde in June 2017.
On 7 March 2019, Sequana announced that it was unable to pay its debts and that it had applied to convert the Sauvegarde into “redressement
judiciaire”, a form of insolvent receivership. On 15 May 2019, the Nanterre Commercial Court made an order placing Sequana into formal
liquidation proceedings (“liquidation judiciaire”). No payments have been received.
The provision is £73 million at 31 December 2019 (2018: £108 million). Based on the Funding Agreement, £35 million has been paid in
2019, which includes legal costs of £3 million (2018: £30 million, including legal costs of £5 million; 2017: £25 million, including legal costs of
£7 million).
(h) Other adjusting items
Included within ‘other operating expenses’
In 2019, the Group incurred £874 million (2018: £294 million; 2017: £69 million) of other adjusting items which have been adjusted within
‘other operating expenses’. The charge in 2019 includes £436 million in respect of the Quebec class actions as explained in note 27.
On 12 August 2019, the Russian tax authority issued a final audit report to JSC British American Tobacco-SPb (BAT SpB) related to the application
of legislation introduced in 2017 that prospectively limited the amount of production that could take place prior to excise tax increases,
without being subject to higher excise tax rates. The Final audit report seeks to retrospectively apply the legislation to the years 2015 to 2017.
On 13 September 2019, BAT SpB submitted an appeal to the Federal Tax Services (FTS) objecting to the findings which was discussed in October
2019. The FTS accepted some of BAT SpB’s arguments and, on 27 January 2020, a final claim was issued by the FTS. As a consequence, the
Group recognised a charge of £202 million included in other adjusting items. The Group also recognised an interest charge of £50 million (note
4(b)).
Also included in 2019 are £236 million (2018: £178 million) of litigation costs which includes the Engle progeny litigation.
In 2017, the Group impaired £69 million of certain assets related to a third-party distributor (Agrokor) in Croatia. This has been adjusted within
‘other operating expenses’.
Included within ‘Changes in inventories of finished goods and work in progress’
In 2017, the release of the fair value acquisition accounting adjustments to finished goods inventories of £465 million on the RAI acquisition has
been adjusted within ‘Changes in inventories of finished goods and work in progress’.
Included within ‘depreciation, amortisation and impairment’
During 2019, the Group impaired the goodwill arising from the Bentoel acquisition, amounting to £172 million, goodwill arising from the
VapeWild acquisition of £12 million and goodwill arising from the Highendsmoke acquisition of £10 million as explained in note 8.
143
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
3 Profit from operations continued
In 2018, the European Securities and Markets Authority (ESMA) recognised the specific issues related to Venezuela and proposed that companies
with exposure to Venezuela use an ‘estimated’ exchange rate rather than the official exchange rate, as otherwise required under IAS 21.
Accordingly, the Group has used an exchange rate calculated with reference to the estimated inflation since the latest dividend payment in
2010. In addition, the net assets of the Group’s Venezuelan operations are subject to accounting adjustments IAS 29 Financial Reporting in
Hyperinflationary Economies, as they are revalued, for accounting purposes, from their acquisition date to the balance sheet date. However,
management believes that such a revaluation is not reflective of the recoverable value of those assets and have incurred an impairment charge
of £110 million. This charge has been treated as an adjusting item as it does not reflect the underlying performance of the Group. The Group
has also recognised a gain of £45 million within net finance costs (note 4(b)), being the partial counter-party to the above non-monetary asset
movement, generating a monetary gain due to hyperinflation accounting under IAS 29.
(i) Other operating income
Other operating income comprises income that is associated with the Group’s normal activities, but which falls outside the definition of turnover
and includes one-off capital profits on property sales and one-off disposals of fixed assets.
In 2019, as explained in note 27, the Group recognised £86 million in respect of a tax case in Brazil. In addition, as discussed in note 3(e) above,
certain items of operating income have been incurred as part of the Group’s restructuring and integration activities.
4 Net finance costs
(a) Net finance costs/(income)
Interest expense
Interest expense on lease liabilities
Facility fees
Interest related to adjusting tax payables (note 4(b))
Acquisition of RAI (note 4(b))
Fair value changes on derivative financial instruments and hedged items
Hedge ineffectiveness (note 4(b))
Venezuela hyperinflation (note 4(b))
Exchange differences on financial liabilities
Finance costs
Interest under the effective interest method
Dividend income
Exchange differences on financial assets
Finance income
Net finance costs
2019
£m
1,676
32
10
80
–
367
–
–
(353)
1,812
(84)
–
(126)
(210)
1,602
2018
£m
1,592
1
13
41
–
(154)
–
(45)
36
1,484
(68)
–
(35)
(103)
1,381
2017
£m
1,079
2
13
43
153
(149)
9
–
47
1,197
(83)
(1)
(19)
(103)
1,094
The Group manages foreign exchange gains and losses and fair value changes on a net basis excluding adjusting items, which are explained in
note 4(b). The derivatives that generate the fair value changes are explained in note 15.
Facility fees principally relate to the Group’s central banking facilities.
(b) Adjusting items included in net finance costs
Adjusting items are significant items in net finance costs which individually or, if of a similar type, in aggregate, are relevant to an understanding
of the Group’s underlying financial performance.
In 2019, the Group incurred interest on adjusting tax payables of £80 million (2018: £41 million; 2017: £43 million). This included interest of
£28 million (2018: £25 million; 2017: £25 million) in relation to the Franked Investment Income Group Litigation Order (FII GLO) (note 6(b)) and
interest of £50 million (2018: £nil; 2017: £nil) in respect of the Russia excise dispute (note 3(h)).
In 2018, the Group recognised a monetary gain of £45 million related to the application of hyperinflationary accounting in Venezuela (note 3(h)).
In 2017, the Group incurred pre-financing costs related to the acquisition of RAI of £153 million.
Also in 2017, the Group realised a £9 million charge in relation to the reversal of a gain recognised in 2016, related to hedge ineffectiveness
on external swaps following the referendum regarding ‘Brexit’. These amounts were deemed to be adjusting as it is not representative of the
underlying performance of the business.
144
Financial StatementsBAT Annual Report and Form 20-F 2019 5 Associates and joint ventures
Revenue
Profit from operations*
Net finance costs
Profit on ordinary activities before taxation
Taxation on ordinary activities
Profit on ordinary activities after taxation
Non-controlling interests
Post-tax results of associates and joint ventures
The post-tax results above include:
– issue of shares and change in shareholding
– gain on deemed divestment of RAI
– other
2019
Group’s
share
£m
2,158
704
(2)
702
(196)
506
(8)
498
25
–
–
Total
£m
7,581
2,386
(7)
2,379
(666)
1,713
(27)
1,686
86
–
–
2018
Group’s
share
£m
2,058
630
(3)
627
(201)
426
(7)
419
2017
Group’s
share
£m
4,794
24,854
(116)
24,738
(522)
24,216
(7)
24,209
Total
£m
14,085
4,342
(279)
4,063
(1,441)
2,622
(22)
2,600
22
–
10
98
–
(283)
29
23,288
(120)
Total
£m
7,235
2,128
(8)
2,120
(678)
1,442
(24)
1,418
75
–
35
* The gain on deemed divestment of RAI is recognised in the Group’s share of associates profit from operations.
Enumerated below are movements that have impacted the post-tax results of associates and joint ventures in 2019, 2018 and 2017.
(a) Adjusting items
In 2019, the Group’s interest in ITC Ltd. (ITC) decreased from 29.57% to 29.46% (2018: 29.71% to 29.57%; 2017: 29.89% to 29.71%) as a
result of ITC issuing ordinary shares under the ITC Employee Share Option Scheme. The issue of these shares and change in the Group’s share
of ITC resulted in a gain of £25 million (2018: £22 million; 2017: £29 million), which is treated as a deemed partial disposal and included in the
income statement.
In 2018, ITC has also recognised an adjusting gain in respect of the release of certain provisions related to a tax claim, the Group’s share of which
was £10 million.
On 25 July 2017, the Group announced the completion of the acquisition of the 57.8% of RAI the Group did not already own. As at this date RAI
ceased to be reported as an associate and has become a fully owned subsidiary. Accordingly, as at that date, the Group was deemed to divest
its investment in RAI as an associate and consolidated RAI in accordance with IFRS 10 Consolidated Financial Statements. This resulted in a gain of
£23,288 million that has been reported in the Group’s share of post-tax results of associates and joint ventures.
In 2017, due to a deterioration in the financial performance of Tisak d.d. (Tisak), linked to the financial difficulties associated with a third-party
distributor (Agrokor) in Croatia, the Group impaired the carrying value of this investment. This resulted in a charge of £27 million to the income
statement that has been reported as an ‘other’ adjusting item.
In 2017, RAI recognised, prior to acquisition by the Group, the following amounts in ‘other’: transaction costs associated with the acquisition
by the Group of US$125 million, the Group’s share of which is £33 million (net of tax), deferred tax charges in respect of temporary differences
on trademarks of US$51 million, the Group’s share of which is £18 million, restructuring charges of US$79 million, the Group’s share of which
is £14 million (net of tax) and costs in respect of a number of Engle progeny lawsuits and other tobacco litigation charges that amounted
to US$162 million, the Group’s share of which is £32 million (net of tax). Additionally, there is income of US$17 million related to the Non-
Participating Manufacturer (NPM) Adjustment claims of the states no longer challenging the findings of non-diligence entered against them by
an Arbitration Panel, the Group’s share of which is £4 million (net of tax).
145
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
5 Associates and joint ventures continued
(b) Master Settlement Agreement
For information on the Master Settlement Agreement applicable to RAI as an associate for the period up to and including 24 July 2017 (note 3(d)).
(c) Other financial information
The Group’s share of the results of associates and joint ventures is shown in the table below.
Profit on ordinary activities after taxation
– attributable to owners of the Parent
Other comprehensive income:
Items that may be reclassified to profit & loss
Items that will not be reclassified to profit & loss
Total comprehensive income
Summarised financial information of the Group’s associates and joint ventures is shown below.
Revenue
Profit on ordinary activities before taxation
Post-tax results of associates and joint ventures
Other comprehensive income
Total comprehensive income
Revenue
Profit on ordinary activities before taxation
Post-tax results of associates and joint ventures
Other comprehensive income
Total comprehensive income
Revenue
Profit on ordinary activities before taxation
Post-tax results of associates and joint ventures
Other comprehensive income
Total comprehensive income
* The information presented above for RAI is for the period from 1 January 2017 up to and including 24 July 2017 (see note 23).
2019
Group’s
share
£m
2018
Group’s
share
£m
2017
Group’s
share
£m
498
419
24,209
(115)
7
390
(38)
6
387
(918)
25
23,316
ITC
£m
5,556
2,322
1,646
(365)
1,281
ITC
£m
5,072
2,059
1,373
(110)
1,263
ITC
£m
6,607
2,054
1,362
(135)
1,227
2019
Total
£m
7,581
2,379
1,686
(365)
1,321
2018
Total
£m
7,235
2,120
1,418
(110)
1,308
2017
Total
£m
14,085
4,063
2,600
(738)
1,862
Others
£m
2,025
57
40
–
40
Others
£m
2,163
61
45
–
45
Others
£m
1,953
(8)
(23)
(8)
(31)
RAI*
£m
5,525
2,017
1,261
(595)
666
146
Financial StatementsBAT Annual Report and Form 20-F 2019 6 Taxation on ordinary activities
(a) Summary of taxation on ordinary activities
UK corporation tax
Comprising:
– current year tax expense
– adjustments in respect of prior periods
Overseas tax
Comprising:
– current year tax expense
– adjustments in respect of prior periods
Total current tax
Deferred tax
Comprising:
– deferred tax relating to origination and reversal of temporary differences
– deferred tax relating to changes in tax rates
2019
£m
8
41
(33)
2,047
2,074
(27)
2,055
8
55
(47)
2,063
2018
£m
60
66
(6)
2,455
2,460
(5)
2,515
(374)
(304)
(70)
2,141
2017
£m
26
26
–
1,617
1,615
2
1,643
(9,772)
(152)
(9,620)
(8,129)
(b) Franked Investment Income Group Litigation Order
The Group is the principal test claimant in an action in the United Kingdom against HM Revenue and Customs (HMRC) in the Franked
Investment Income Group Litigation Order (FII GLO). There are 25 corporate groups in the FII GLO. The case concerns the treatment for UK
corporate tax purposes of profits earned overseas and distributed to the UK.
The original claim was filed in 2003. The trial of the claim was split broadly into issues of liability and quantification. The main liability issues were
heard by the High Court, Court of Appeal and Supreme Court in the UK and the European Court of Justice in the period to November 2012.
The detailed technical issues of the quantification mechanics of the claim were heard by the High Court during May and June 2014 and the
judgment handed down on 18 December 2014. The High Court determined that in respect of issues concerning the calculation of unlawfully
charged corporation tax and advance corporation tax, the law of restitution including the defence on change of position and questions
concerning the calculation of overpaid interest, the approach of the Group was broadly preferred. The conclusion reached by the High Court
would, if upheld, produce an estimated receivable of £1.2 billion for the Group. Appeals on a majority of the issues were made to the Court
of Appeal, which heard the arguments in June 2016. The Court of Appeal determined in November 2016 on the majority of issues that the
conclusion reached by the High Court should be upheld. The Supreme Court has notified the parties in the FII GLO that the outstanding appeal
issues will be heard in two separate trials in 2020. In July 2018, the Supreme Court handed down its judgment in the Prudential Assurance
Company Ltd case, which is closely related to the FII GLO. Applying the Prudential judgment reduces the value of the FII claim to approximately
£0.6 billion, mainly as the result of the application of simple interest.
During 2015, HMRC paid to the Group a gross amount of £1,224 million in two separate payments. The payments made by HMRC have been
made without any admission of liability and are subject to refund were HMRC to succeed on appeal. The second payment in November 2015
followed the introduction of a new 45% tax on the interest component of restitution claims against HMRC. HMRC held back £261 million
from the second payment contending that it represents the new 45% tax on that payment, leading to total cash received by the Group of
£963 million. Actions challenging the legality of the withholding of the 45% tax have been lodged by the Group. The First Tier Tribunal found in
favour of HMRC in July 2017 and the Group’s appeal to the Upper Tribunal was heard in July 2018 and judgment has not yet been handed down.
Due to the uncertainty of the amounts and eventual outcome the Group has not recognised any impact in the Income Statement in the current
or prior period. The receipt, net of the deduction by HMRC, is held as deferred income as disclosed in note 21. Any future recognition as
income will be treated as an adjusting item, due to the size of the amount, with interest of £28 million for the 12 months to 31 December 2019
(2018: £25 million; 2017: £25 million) accruing on the balance, which was also treated as an adjusting item.
147
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
6 Taxation on ordinary activities continued
(c) Factors affecting the taxation charge
The taxation charge differs from the standard 19% (2018: 19%; 2017: 19%) rate of corporation tax in the UK. The major causes of this difference
are listed below:
Profit before tax
Less: share of post-tax results of associates and joint ventures (see note 5)
Tax at 19% (2018 and 2017: 19%) on the above
Factors affecting the tax rate:
Tax at standard rates other than UK corporation tax rate
Other national tax charges
Permanent differences
Overseas tax on distributions
Overseas withholding taxes
Double taxation relief on UK profits
Unutilised/(utilised) tax losses
Adjustments in respect of prior periods
Deferred tax relating to changes in tax rates
Deemed US repatriation tax
Release of deferred tax on unremitted earnings of associates
Additional net deferred tax charges/(credits)
£m
7,912
(498)
7,414
2019
%
£m
8,351
(419)
7,932
2018
%
£m
29,527
(24,209)
5,318
2017
%
1,409
19.0
1,507
19.0
1,010
19.0
353
147
122
–
106
(29)
16
(60)
(47)
–
–
46
2,063
4.8
2.0
1.6
–
1.4
(0.4)
0.2
(0.8)
(0.6)
–
–
0.6
27.8
384
204
7
–
155
(35)
5
(11)
(70)
–
–
(5)
2,141
4.8
2.6
0.1
–
1.9
(0.4)
0.1
(0.1)
(0.9)
–
–
(0.1)
27.0
389
119
40
25
191
(29)
(38)
2
(9,620)
34
(180)
(72)
(8,129)
7.3
2.2
0.8
0.5
3.6
(0.5)
(0.7)
0.0
(180.9)
0.6
(3.4)
(1.4)
(152.9)
(d) Adjusting items included in taxation
In 2019, adjusting items in taxation total a credit of £65 million relating primarily to changes in US state tax rates, relating to the revaluation of
deferred tax liabilities arising on trademarks recognised in the RAI acquisition in 2017.
In 2018, adjusting items in taxation relate to a £79 million credit due to changes in US state tax rates in the period, relating to the revaluation of
deferred tax liabilities arising on trademarks recognised in the RAI acquisition in 2017, and a £55 million charge related to retrospective guidance
issued by a tax authority in the ENA region regarding the application of withholding tax (WHT) between 2015 and 2017.
On 22 December 2017, the United States Government enacted comprehensive tax legislation which, among other things, changed the Federal
tax rate to 21% from 1 January 2018. This revised rate has been used to revalue net deferred tax liabilities in the United States, leading to a
credit to the income statement of £9,620 million. The net deferred tax liabilities largely relate to the difference in tax value versus the fair market
value of trademarks accounted for under IFRS as part of the RAI acquisition. The legislation also imposed a one-time deemed repatriation tax on
accumulated foreign earnings. The impact of the repatriation tax, less foreign tax credits, was £34 million. IFRS also requires entities to provide
deferred taxation on the undistributed earnings of associates and joint ventures. From the date of the acquisition of the remaining shares in RAI
not already owned by the Group, the Group has consolidated the results of RAI as a wholly-owned subsidiary and as such the deferred tax liability
of £180 million on unremitted earnings of RAI as an associate was released to the income statement in 2017.
(e) Tax on adjusting items
In addition, the tax on adjusting items, separated between the different categories, as per note 7, amounted to £373 million (2018: £199 million;
2017: £454 million). The adjustment to the adjusted earnings per share (note 7) also includes £17 million (2018: £6 million; 2017: £4 million) in
respect of the non-controlling interests’ share of the adjusting items net of tax.
(f) Tax on items recognised directly in other comprehensive income
Current tax
Deferred tax
Credited/(charged) to other comprehensive income
The tax relating to each component of other comprehensive income is disclosed in note 18.
2019
£m
(7)
138
131
2018
£m
(8)
(7)
(15)
2017
£m
(4)
(133)
(137)
148
Financial StatementsBAT Annual Report and Form 20-F 2019
7 Earnings per share
Basic earnings per share
(ordinary shares of 25p each)
Share options
Diluted earnings per share
Weighted
average
number of
shares
m
2019
Earnings
per share
pence
2,284
7
2,291
249.7
(0.7)
249.0
Earnings
£m
5,704
–
5,704
Weighted
average
number of
shares
m
2018
Earnings
per share
pence
2,285
7
2,292
264.0
(0.8)
263.2
Earnings
£m
6,032
–
6,032
Weighted
average
number of
shares
m
2017
Earnings
per share
pence
2,044
7
2,051
1,833.9
(6.3)
1,827.6
Earnings
£m
37,485
–
37,485
Adjusted earnings per share calculation
Earnings have been affected by a number of adjusting items, which are described in notes 3 to 6. Adjusting items are significant items in the
profit from operations, net finance costs, taxation and the Group’s share of the post-tax results of associates and joint ventures which individually
or, if of a similar type, in aggregate, are relevant to an understanding of the Group’s underlying financial performance. The Group believes that
these items are useful to users of the Group financial statements in helping them to understand the underlying business performance. To illustrate
the impact of these items, an adjusted earnings per share calculation is shown below.
Basic earnings per share
Effect of restructuring and integration costs
Tax and non-controlling interests on restructuring
and integration costs
Effect of amortisation and impairment of goodwill,
trademarks and similar intangibles
Tax and non-controlling interests on amortisation
and impairment of goodwill, trademarks and
similar intangibles
Effect of associates’ adjusting items net of tax
Effect of Quebec class action
Tax on Quebec class action
Effect of Russia excise dispute
Tax on Russia excise dispute
Effect of hyperinflation on Venezuela retained earnings
Other adjusting items
Tax effect on other adjusting items
Deferred tax relating to changes in tax rates
Release of deferred tax on unremitted earnings
from associates
Effect of interest on FII GLO settlement and other
Effect of retrospective guidance on WHT
Effect of adjusting finance costs in relation
to acquisition of RAI
Tax effect of adjusting finance costs in relation
to acquisition of RAI
Effect of hedge ineffectiveness
Tax effect on hedge ineffectiveness
Adjusted earnings per share (basic)
Notes
3(e)
Earnings
£m
5,704
565
2019
Earnings
per share
pence
249.7
24.7
2018
Earnings
per share
pence
264.0
15.9
Earnings
£m
6,032
363
Earnings
£m
37,485
600
Basic
2017
Earnings
per share
pence
1,833.9
29.4
(101)
(4.4)
(83)
(3.6)
(133)
(6.5)
3(f), (h)
675
29.6
377
16.5
383
18.7
5(a)
3(h)
3(h)
3(h),4(b)
3(h)
6
6(d)
4(b)
6(d)
4(b)
4(b)
(115)
(25)
436
(124)
202
(16)
–
236
(50)
(49)
–
80
–
–
–
–
–
7,418
(5.0)
(1.1)
19.1
(5.4)
8.9
(0.7)
–
10.3
(2.2)
(2.2)
–
3.5
–
–
(78)
(32)
–
–
–
–
65
184
(44)
(79)
–
41
55
–
(3.4)
(1.4)
–
–
–
–
2.8
8.0
(1.9)
(3.5)
–
1.8
2.4
–
–
–
–
324.8
–
–
–
6,801
–
–
–
297.6
(90)
(23,197)
–
–
–
–
–
534
(184)
(9,586)
(180)
43
–
153
(49)
9
(2)
5,786
(4.4)
(1,134.9)
–
–
–
–
–
26.1
(8.9)
(469.0)
(8.8)
2.1
–
7.5
(2.4)
0.4
(0.1)
283.1
149
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
7 Earnings per share continued
Diluted earnings per share
Effect of restructuring and integration costs
Tax and non-controlling interests on restructuring
and integration costs
Effect of amortisation and impairment of goodwill,
trademarks and similar intangibles
Tax and non-controlling interests on amortisation
and impairment of goodwill, trademarks and
similar intangibles
Effect of associates’ adjusting items net of tax
Effect of Quebec class action
Tax on Quebec class action
Effect of Russia excise dispute
Tax on Russia excise dispute
Effect of hyperinflation on Venezuela retained earnings
Other adjusting items
Tax effect on other adjusting items
Deferred tax relating to changes in tax rates
Release of deferred tax on unremitted earnings
from associates
Effect of interest on FII GLO settlement and other
Effect of retrospective guidance on WHT
Effect of adjusting finance costs in relation
to acquisition of RAI
Tax effect of adjusting finance costs in relation
to acquisition of RAI
Effect of hedge ineffectiveness
Tax effect on hedge ineffectiveness
Adjusted earnings per share (diluted)
Notes
3(e)
Earnings
£m
5,704
565
2019
Earnings
per share
pence
249.0
24.7
2018
Earnings
per share
pence
263.2
15.8
Earnings
£m
6,032
363
Earnings
£m
37,485
600
Diluted
2017
Earnings
per share
pence
1,827.6
29.3
(101)
(4.4)
(83)
(3.6)
(133)
(6.5)
3(f), (h)
675
29.5
377
16.4
383
18.7
5(a)
3(h)
3(h)
3(h), 4(b)
3(h)
6
6(d)
4(b)
6(d)
4(b)
4(b)
(115)
(25)
436
(124)
202
(16)
–
236
(50)
(49)
–
80
–
–
–
–
–
7,418
(5.0)
(1.1)
19.0
(5.4)
8.8
(0.7)
–
10.3
(2.2)
(2.2)
–
3.5
–
–
(78)
(32)
–
–
–
–
65
184
(44)
(79)
–
41
55
–
(3.4)
(1.4)
–
–
–
–
2.8
8.0
(1.9)
(3.4)
–
1.8
2.4
–
–
–
–
323.8
–
–
–
6,801
–
–
–
296.7
(90)
(23,197)
–
–
–
–
–
(4.4)
(1,131.0)
–
–
–
–
–
534
(184)
(9,586)
26.0
(8.9)
(467.4)
(180)
43
–
153
(49)
9
(2)
5,786
(8.8)
2.1
–
7.5
(2.4)
0.4
(0.1)
282.1
150
Financial StatementsBAT Annual Report and Form 20-F 2019 7 Earnings per share continued
Headline earnings per share as required by the JSE Limited
The presentation of headline earnings per share, as an alternative measure of earnings per share, is mandated under the JSE Listing Requirements.
It is calculated in accordance with Circular 1/2019 ‘Headline Earnings’, as issued by the South African Institute of Chartered Accountants.
Basic earnings per share
Effect of impairment of intangibles, property, plant and equipment
and assets held-for-sale
Tax and non-controlling interests on impairment of intangibles
and property, plant and equipment
Effect of losses/(gains) on disposal of property, plant and equipment
and held-for-sale assets
Tax and non-controlling interests on disposal of property, plant
and equipment and held-for-sale assets
Effect of gains on disposal of businesses, non-current investments
and brands
Tax on gains on disposal of businesses, non-current investments
and brands
Gain on deemed disposal of RAI associate
Write-off of investment in associate
Issue of shares and change in shareholding in associate
Headline earnings per share (basic)
Diluted earnings per share
Effect of impairment of intangibles, property, plant and equipment
and assets held-for-sale
Tax and non-controlling interests on impairment of intangibles
and property, plant and equipment
Effect of losses/(gains) on disposal of property, plant and equipment
and held-for-sale assets
Tax and non-controlling interests on disposal of property, plant
and equipment and held-for-sale assets
Effect of gains on disposal of businesses, non-current investments
and brands
Tax on gains on disposal of businesses, non-current investments
and brands
Gain on deemed disposal of RAI associate
Write-off of investment in associate
Issue of shares and change in shareholding in associate
Headline earnings per share (diluted)
2019
Earnings
per share
pence
249.7
Earnings
£m
5,704
Earnings
£m
6,032
2018
Earnings
per share
pence
Earnings
£m
Basic
2017
Earnings
per share
pence
264.0
37,485
1,833.9
518
22.7
238
10.3
179
(79)
(3.5)
7
(1)
–
–
–
–
(25)
6,124
0.3
–
–
–
–
–
(1.1)
268.1
(65)
(11)
4
(2.8)
(0.5)
0.2
(10)
(0.4)
(35)
(48)
13
–
2
–
–
(22)
6,168
0.1
–
–
(1.0)
269.9
–
(23,288)
27
(29)
14,304
–
(1,139.3)
1.3
(1.4)
699.8
2019
Earnings
per share
pence
249.0
Earnings
£m
5,704
Earnings
£m
6,032
2018
Earnings
per share
pence
Earnings
£m
Diluted
2017
Earnings
per share
pence
263.2
37,485
1,827.6
518
22.5
238
10.3
179
8.7
(1.7)
(2.3)
0.6
–
8.6
(1.7)
(2.3)
0.6
–
(79)
(3.4)
7
(1)
–
–
–
–
(25)
6,124
0.3
–
–
–
–
–
(1.1)
267.3
(65)
(11)
4
(2.8)
(0.5)
0.2
(10)
(0.4)
(35)
(48)
13
–
2
–
–
(22)
6,168
0.1
–
–
(1.0)
269.1
–
(23,288)
27
(29)
14,304
–
(1,135.4)
1.3
(1.4)
697.3
151
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
8 Intangible assets
(a) Overview of intangible assets
1 January
Cost
Accumulated amortisation and impairment
Net book value at 1 January
Differences on exchange
Additions
– internal development
– acquisitions (note 23)
– separately acquired
Reallocations
Amortisation charge
Impairment
31 December
Cost
Accumulated amortisation and impairment
Net book value at 31 December
1 January
Cost
Accumulated amortisation and impairment
Net book value at 1 January
Differences on exchange
Additions
– internal development
– acquisitions (note 23)
– separately acquired
Reallocations
Amortisation charge
Impairment
31 December
Cost
Accumulated amortisation and impairment
Net book value at 31 December
Goodwill
£m
Computer
software
£m
Trademarks
and
similar
intangibles
£m
Assets in
the course of
development
£m
2019
Total
£m
46,163
46,163
(1,676)
–
23
–
–
–
(194)
1,101
(698)
403
(2)
–
–
–
134
(105)
(3)
78,736
(1,414)
77,322
(2,976)
–
54
7
30
(361)
(147)
125
125
–
148
–
6
(164)
–
–
126,125
(2,112)
124,013
(4,654)
148
77
13
–
(466)
(344)
44,316
44,316
1,207
(780)
427
75,726
(1,797)
73,929
115
115
121,364
(2,577)
118,787
Trademarks
and
similar
intangibles
£m
Assets in
the course of
development
£m
Computer
software
£m
Goodwill
£m
44,147
44,147
2,024
–
14
–
(22)
–
–
1,119
(672)
447
–
–
–
–
58
(102)
–
74,136
(1,016)
73,120
4,483
–
13
62
30
(342)
(44)
46,163
46,163
1,101
(698)
403
78,736
(1,414)
77,322
2018
Total
£m
119,473
(1,688)
117,785
6,507
120
27
62
–
(444)
(44)
126,125
(2,112)
124,013
71
71
–
120
–
–
(66)
–
–
125
125
(b) Goodwill
Goodwill of £44,316 million (2018: £46,163 million) is included in intangible assets in the balance sheet of which the following are the
significant acquisitions: RAI £33,761 million (2018: £35,117 million); Rothmans Group £4,704 million (2018: £4,856 million); Imperial Tobacco
Canada £2,335 million (2018: £2,307 million); ETI (Italy) £1,396 million (2018: £1,478 million) and ST (principally Scandinavia) £1,048 million
(2018: £1,111 million). The principal allocations of goodwill in the Rothmans’ acquisition are to the cash-generating units of Europe and South
Africa, with the remainder mainly relating to operations in the domestic and export markets in the United Kingdom and operations in APME.
152
Financial StatementsBAT Annual Report and Form 20-F 2019 8 Intangible assets continued
During 2019, the Group recognised a goodwill impairment charge of £194 million as explained in note 8(e)(iv) below.
(c) Trademarks and similar intangibles
Trademarks and similar intangibles with indefinite lives
Included in the net book value of trademarks and similar intangibles are trademarks relating to the acquisition of RAI with indefinite lives
amounting to £71,032 million (2018: £73,885 million). These trademarks, including Newport, Camel, Natural American Spirit, Grizzly and Pall
Mall, all of which are part of the Group’s Strategic Portfolio of key brands, form the core focus of the US business and receive significant support
in the form of dedicated internal resources, forecasting and, where appropriate, marketing investment. These trademarks have significant market
share and positive cash flow growth expectations. There are no regulatory or contractual restrictions on the use of the trademarks, and there are
no plans by management to significantly redirect resources elsewhere. Consequently, in the view of management, these trademarks do not have
a foreseeable and definite end to their ability to generate future cash flows and hence are not amortised.
Trademarks and similar intangibles with definite lives
Included in the net book value of trademarks and similar intangibles are trademarks relating to the acquisition of RAI £2,590 million
(2018: £3,013 million), Skandinavisk Tobakskompagni (ST) £175 million (2018: £209 million) and TDR d.o.o. £17 million (2018: £40 million).
In 2019, as a result of declining volumes, the Group recognised a partial impairment of the Kodiak brand of £63 million. In addition, as a result
of the regulatory uncertainty in the US vaping market, the Group will not submit Premarket Tobacco Applications (PMTA) for the vaping e-liquids
purchased as part of the VapeWild acquisition (note 23). As a consequence, the Group recognised an impairment charge of £37 million in respect
of the brands acquired as part of the acquisition. The Group will withdraw the VapeWild products from the market in May 2020. Also in 2019, the
Group announced that it was simplifying its New Category product portfolio, with vapour products to be branded VUSE, modern oral products
to be branded VELO and tobacco heating products continuing to be branded glo. As a result, the carrying values of trademarks and similar
intangible assets acquired as part of the Chic, Must Have Limited and Quantus/Highendsmoke business combinations (see note 23), amounting
to £29 million in total, have been fully impaired, as the acquired trademarks will no longer generate future economic benefits.
During 2018, a purchase price allocation adjustment was recognised in respect of the provisional goodwill recognised as a result of the Group
acquiring certain tobacco assets, including a distribution company, from Bulgartabac Holdings AD in Bulgaria. The provisional goodwill of
£22 million was reclassified to trademarks and similar intangibles with definite lives.
(d) Computer software and assets in the course of development
Included in computer software and assets in the course of development are internally developed assets with a carrying value of £516 million
(2018: £523 million). The costs of internally developed assets include capitalised expenses of employees working full time on software
development projects, third-party consultants, and software licence fees from third-party suppliers.
The Group has £4 million of future contractual commitments (2018: £6 million) related to intangible assets.
(e) Impairment testing
(i) Estimation uncertainty
As described in note 1, the critical accounting estimates used in the preparation of the consolidated financial statements include the review of
asset values, especially indefinite life assets such as goodwill and certain trademarks and similar intangibles.
There is significant judgement with regard to assumptions and estimates involved in the forecasting of future cash flows, which form the basis
of the assessment of the recoverability of these assets, with the effect that the value-in-use of calculations incorporate estimation uncertainty,
particularly for certain assets held in relation to the Canada and US markets.
(ii) Impairment testing – Trademarks and similar intangibles with indefinite lives (‘brands’)
The trademarks and similar intangibles have been tested for impairment in line with the following methodology. The recoverable amounts of
trademarks and similar intangibles with indefinite lives have been determined on a value-in-use basis. The value-in-use calculations use cash flows
based on detailed brand budgets prepared by management using projected sales volumes, revenues and projected brand profitability covering a
five-year to 10-year horizon depending on the brand and, thereafter, grown into perpetuity. Corporate costs are allocated to the brand budgets
based on either specific allocations, where appropriate, or based on volumes. The pre-tax discount rates, ranging between 8.32% and 9.02%,
and long-term growth rates, ranging between 0.75% and 1.0%, applied to the brand value-in-use calculations have been determined by local
management based on experience, specific market and brand trends and pricing and cost expectations. Following the application of a reasonable
range of sensitivities, there was no indication of impairment.
Refer to note 8(e)(v) for further information on the Newport brand impairment testing. As the trademarks and similar intangibles with indefinite
lives relate to the acquisition of RAI, the brand budgets used in the value-in-use calculations have been incorporated into the budget information
used in the impairment testing of the RAI goodwill.
(iii) Cash-generating units and information on goodwill impairment testing
In 2019, goodwill was allocated for impairment testing purposes to 21 (2018: 19) individual cash-generating units – two in the United States
(2018: one), five in APME (2018: five), seven in AMSSA (2018: six) and seven in ENA (2018: seven).
153
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
8 Intangible assets continued
Cash-generating unit
RAI
Canada
Europe
South Africa
Australia
Singapore
Malaysia
Other
Total
2019
2018
Carrying
amount
£m
Pre-tax
discount rate
%
Carrying
amount
£m
Pre-tax
discount rate
%
33,761
2,335
4,809
598
711
599
435
1,068
44,316
7.3
19.1
6.2
9.3
6.7
6.4
7.5
6.8
35,117
2,307
5,069
605
740
615
448
1,262
46,163
7.7
7.5
7.5
10.6
7.9
6.6
8.2
7.9
For CGU Other the weighted average pre-tax discount rate has been used.
The recoverable amounts of all cash-generating units have been determined on a value-in-use basis. The key assumptions for the recoverable
amounts of all units are the budgeted volumes, revenues, operating margins and long-term growth rates, which directly impact the cash
flows, and the discount rates used in the calculation. The long-term growth rate is used purely for the impairment testing of goodwill under
IAS 36 Impairment of Assets and does not reflect long-term planning assumptions used by the Group for investment proposals or for any
other assessments.
Pre-tax discount rates, as shown above, were used in the impairment testing, based on the Group’s weighted average cost of capital, taking
into account the cost of capital and borrowings, to which specific market-related premium adjustments are made. These adjustments are
derived from external sources and are based on the spread between bonds (or credit default swaps, or similar indicators) issued by the US or
comparable governments and by the relevant local government, adjusted for the Group’s own credit market risk. For ease of use and consistency
in application, these results are periodically calibrated into bands based on internationally recognised credit ratings. The long-term growth rates
and discount rates have been applied to the budgeted cash flows of each cash-generating unit. These cash flows have been determined by local
management based on experience, specific market and brand trends as well as pricing and cost expectations. These have been endorsed by
Group management as part of the consolidated Group’s budget.
(iv) Impairment testing – Goodwill (excluding RAI and Canada)
The value-in-use calculations use cash flows based on detailed financial budgets prepared by management covering a one-year period
extrapolated over a 10-year horizon with growth of 4% in years 2 to 10, including 2% inflation (2018: 2% inflation), after which a total growth
rate of 2 % (2018: 2%) has been assumed as the long-term volume decline is more than offset by pricing to drive revenue growth. A 10-year
horizon is considered appropriate based on the Group’s history of profit and cash growth, its well-balanced portfolio of brands and the industry
in which it operates. In some instances, such as recent acquisitions, start-up ventures or in specific cases, the forecast is expanded to reflect the
medium-term plan of the country or market management spanning five years or beyond. Following the application of a reasonable range of
sensitivities to all the cash-generating units, and after reflecting the impairments below, there was no indication of any further impairment.
In 2009, the Group acquired Bentoel and the goodwill arising from this acquisition was assigned to the Indonesia cash-generating unit.
During 2019, the Indonesian government announced a significant increase in excise effective 1 January 2020. The recoverable amount of the
Indonesia cash-generating unit has been determined on a value-in-use basis using a 10-year forecast with cash flows after year 10 extrapolated as
described above. The 10-year forecast has been prepared to take into account the expected decline in revenue and the impact this will have on
net revenue, operating profit and cash flows. The extent of the significant increase in excise is such that the forecast cash flows do not support
the carrying value of goodwill and therefore the goodwill of £172 million has been fully impaired. The other assets held by the Indonesian cash-
generating unit were assessed for impairment and based on the recoverable amounts, no impairment charges were recognised.
As explained in note 8(c) above, in addition to the impairment of trademarks and similar intangibles, the goodwill associated with the acquisitions
of VapeWild and Quantus/Highendsmoke (note 23) have been impaired in full amounting to £12 million and £10 million, respectively.
(v) Impairment testing – RAI
Goodwill relating to RAI and the Newport trademark
On 15 November 2018, the US Food and Drug Administration (FDA) announced an intention to ban flavoured vaping products and menthol
cigarette. Management recognises that the FDA announcement in 2018 does not itself constitute a ban on menthol in cigarettes, and any
proposed regulation of menthol in cigarettes would need to be introduced through the established US comprehensive rule-making process, the
timetable and outcome for which was, and remains, uncertain. In addition, it is unclear how any such potential US regulation might affect the
manufacture and marketing of Group combustible brands containing menthol.
Having considered the combination of the risk of implementation and impact of any change in regulations, the Group has not recognised any
impairment in 2019 or 2018 on either the Newport brand or RAI goodwill, as management concluded that there would not be a significant
impact to the value-in-use. The base case scenario used in the impairment model therefore does not include any potential impact of changes in
regulation in relation to menthol flavourings in combustibles.
154
Financial StatementsBAT Annual Report and Form 20-F 2019 8 Intangible assets continued
The carrying amounts for RAI goodwill and Newport were £33,761 million and £30,179 million respectively (2018: £35,117 million and
£31,391 million). The value-in-use calculations for brands, as described in note 8(e)(ii) above, have been incorporated in the base case scenario
used in the RAI goodwill model. The value-in-use calculations have been prepared based on a five-year cash flow forecast, which assumes long-
term volume decline of cigarettes. This decline is more than offset by pricing. After this forecast period a growth rate of 2% has been assumed for
RAI goodwill and 1% for Newport and a pre-tax discount rate of 7.3% (2018: 7.7%) and 8.6% (2018: 8.7%), respectively.
The excess of value-in-use earnings over the carrying values (“headroom”) of the RAI goodwill and Newport brand would be reduced to nil if the
following individual changes, none of which are considered reasonably possible by management, were made to the key assumptions used in the
impairment model. For RAI goodwill, the change in revenue assumption is based on combustibles revenue in the five-year forecast reducing by
13.4% in each year and assumes that other assumptions are not changed. For Newport, the change in revenue assumption is based on Newport
revenue in the five-year forecast reducing by 11.9% in each year and assumes that other assumptions are not changed.
Assumptions
Decrease in revenue by
Increase in pre-tax discount rate by
RAI goodwill
%
Newport
%
13.4
1.4
11.9
0.6
(vi) Impairment testing – Canada
Goodwill relating to Imperial Tobacco Canada Ltd (ITCAN)
In March 2019, ITCAN obtained an Initial Order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors
Arrangement Act (“CCAA”). If the CCAA bankruptcy protection were to end, significant liabilities might crystallise. As a consequence, to reflect
the risk to future operating cash flows, the value-in-use calculations have been prepared based on a five-year cash flow forecast, after which a
growth rate of -1.8% and a pre-tax discount rate of 19.1% (2018: 7.5%) have been assumed. Further information on the Quebec Class Actions
and CCAA can be found in note 27.
In addition to the increase in discount rate, a reasonable range of sensitivities was applied to the value-in-use calculation and there was no
indication of impairment.
The excess of value-in-use earnings over the carrying values (“headroom”) of the ITCAN goodwill would be reduced to nil if the following
individual changes, none of which are considered reasonably possible by management, were made to the key assumptions used in the
impairment model. The change in revenue assumption is based on combustibles revenue in the five-year forecast reducing by 19% in each year
and assumes that other assumptions are not changed.
Assumptions
Decrease in revenue by
Increase in pre-tax discount rate by
Canada
goodwill
%
19.0
10.3
The £2,335 million of goodwill relating to ITCAN on the Group’s balance sheet at 31 December 2019 will continue to be reviewed on a regular
basis. Any future impairment charge would result in a non-cash charge to the income statement that will be treated as an adjusting item.
155
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
9 Property, plant and equipment
Overview of property, plant and equipment, including right-of-use assets
Freehold
property
£m
Leasehold
property
£m
Plant,
equipment
and other
owned
£m
Plant,
equipment
and other
leased
£m
Assets in the
course of
construction
£m
31 December
Cost
Accumulated depreciation and impairment
Net book value at 31 December
Accounting policy change (IFRS 16) (note 30)
Net book value at 1 January
Differences on exchange
Additions
– right-of-use assets
– separately acquired
– acquisition of subsidiaries (note 23)
Reallocations
Depreciation
Impairment
Right-of-use assets – reassessments, modifications and terminations
Disposals
Net reclassifications as held-for-sale
31 December
Cost
Accumulated depreciation and impairment
Net book value at 31 December
1,515
(411)
1,104
1,104
(56)
–
3
–
73
(37)
(6)
–
(5)
–
1,503
(427)
1,076
268
(129)
139
470
609
(30)
85
1
4
12
(114)
(2)
(9)
–
–
785
(229)
556
5,730
(2,931)
2,799
2,799
(136)
–
46
2
610
(308)
(159)
–
(27)
(6)
5,795
(2,974)
2,821
33
(17)
16
140
156
(9)
77
–
–
–
(62)
–
(18)
–
–
215
(71)
144
1,108
1,108
1,108
(51)
566
–
(695)
(7)
921
–
921
9,219
(3,701)
5,518
Freehold
property
£m
Leasehold
property
£m
Plant,
equipment
and other
£m
Assets in the
course of
construction
£m
1 January
Cost
Accumulated depreciation and impairment
Net book value at 1 January
Differences on exchange
Additions
– separately acquired
Reallocations
Depreciation
Impairment
Disposals
31 December
Cost
Accumulated depreciation and impairment
Net book value at 31 December
1,455
(369)
1,086
76
5
58
(34)
(74)
(13)
1,515
(411)
1,104
267
(124)
143
4
1
2
(11)
–
–
268
(129)
139
917
917
(5)
722
(526)
5,552
(2,816)
2,736
27
41
466
(318)
(120)
(17)
5,763
(2,948)
2,815
1,108
1,108
8,654
(3,488)
5,166
In 2018, the differences on exchange include £149 million of indexation in respect of the operations in Venezuela. However, management
believes that such a revaluation is not reflective of the fair value of assets in Venezuela and an impairment charge of £110 million has been
recognised, as explained in note 3(h).
Also in 2018, the closing balance of ‘plant, equipment and other’ includes £16 million of leased assets (£33 million of cost and £17 million of
accumulated depreciation). Upon adoption of IFRS 16 Leases prospectively from 1 January 2019, the right-of-use assets have been reported in a
separate asset class, ‘plant, equipment and other leased’, as explained in note 30.
156
2019
Total
£m
8,654
(3,488)
5,166
610
5,776
(282)
162
616
6
–
(521)
(174)
(27)
(32)
(6)
2018
Total
£m
8,191
(3,309)
4,882
102
769
–
(363)
(194)
(30)
Financial StatementsBAT Annual Report and Form 20-F 2019 9 Property, plant and equipment continued
Right‑of‑use assets
The Group’s leasehold property arrangements relate mostly to office, retail space and warehouse facilities occupied by Group subsidiaries
worldwide, whereas the ‘plant, equipment and other’ leasing arrangements relate principally to the lease of the distribution fleet, industrial
equipment as well as tobacco vending machines by the Group’s subsidiaries. Upon adoption of IFRS 16 Leases, £610 million worth of right-of-
use assets have been capitalised as at 1 January 2019. During 2019, further additions of £135 million (net of reassessments, modifications and
terminations) were made to the Group assets portfolio.
As explained in note 11, contributions to the British American Tobacco UK Pension Fund are secured by a charge over the Group’s Head Office
(Globe House). Globe House is included in freehold property above with a carrying value of £184 million (2018: £185 million).
Cost of freehold land within freehold property on which no depreciation is provided
Leasehold land and property comprises
– net book value of long leasehold
– net book value of short leasehold
Contracts placed for future expenditure
10 Investments in associates and joint ventures
1 January
Total comprehensive income (note 5)
Dividends
Additions (note 23)
Other equity movements
31 December
Non-current assets
Current assets
Non-current liabilities
Current liabilities
ITC Ltd. (Group’s share of the market value is £9,099 million (2018: £11,465 million))
Other listed associates (Group’s share of the market value is £221 million (2018: £183 million))
Unlisted associates
2019
£m
261
83
473
556
133
2019
£m
1,737
390
(239)
8
(36)
1,860
1,237
1,085
(74)
(388)
1,860
1,794
22
44
1,860
2018
£m
255
100
46
146
141
2018
£m
1,577
387
(211)
–
(16)
1,737
1,225
953
(71)
(370)
1,737
1,682
20
35
1,737
The Group’s investment in Tisak d.d. (Tisak) was acquired as part of the TDR transaction (note 23). During 2016, the Group entered into an
agreement with Tisak’s parent Agrokor d.d. (Agrokor) to convert certain outstanding trading balances into long-term loans and an additional
shareholding in Tisak. As part of the agreement, Agrokor had the right to reacquire the additional shareholding in Tisak. As a consequence of this,
while the Group had legal ownership of the additional shareholding, it did not consider that the shares provided any additional equity interest
and continued to account for 26% of the equity of Tisak. In 2017, due to the financial difficulties of Agrokor and Tisak, the Group fully impaired
this investment. This resulted in a charge of £27 million to the income statement that has been reported as an adjusting item in note 5. In July
2018, Agrokor’s creditors approved a settlement plan proposed by Agrokor’s administrators. The settlement plan has not returned any value to
the Group and Tisak is expected to be liquidated in 2020.
Included within the dividends amount of £239 million (2018: £211 million) are £231 million (2018: £204 million) attributable to dividends
declared by ITC.
The principal associate undertaking of the Group is ITC Ltd. (“ITC”) as shown under associates undertakings and joint ventures.
157
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
10 Investments in associates and joint ventures continued
ITC Ltd.
ITC is an Indian conglomerate based in Kolkata and maintains a presence in cigarettes, hotels, paper and packaging, agri-business and other fast-
moving goods (e.g. confectionery, branded apparel, personal care, stationery and safety matches). BAT’s interest in ITC is 29.46%.
ITC prepares accounts on a quarterly basis with a 31 March year-end. As permitted by IAS 28, results up to 30 September 2019 have been used
in applying the equity method. This is driven by the availability of information at the half-year, to be consistent with the treatment in the Group’s
interim accounts. Any further information available after the date used for reporting purposes is reviewed and any material items adjusted for in
the final results. The latest published information available is at 31 December 2019.
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Group’s share of ITC Ltd. (2019: 29.46%; 2018: 29.57%)
2019
£m
4,124
3,234
(237)
(1,031)
6,090
2018
£m
4,106
2,823
(238)
(1,002)
5,689
1,794
1,682
11 Retirement benefit schemes
The Group’s subsidiary undertakings operate over 190 retirement benefit arrangements worldwide including arrangements required by local
employment laws. The majority of scheme members (including deferred and retired members) belong to defined benefit schemes. The majority
of defined benefit schemes are funded externally, and many are closed to new entrants. The Group also operates a number of defined
contribution schemes, and the majority of employees actively accruing retirement benefits do so as members of these arrangements.
The liabilities arising in the defined benefit schemes are determined in accordance with the advice of independent, professionally qualified
actuaries, using the projected unit credit method. It is Group policy that all schemes are formally valued at least every three years.
The principal schemes are in the US, UK, Germany, Canada, Netherlands and Switzerland. Together, schemes in these territories account for
around 95% of the total obligations of the Group’s defined benefit pension arrangements. These obligations consist mainly of final salary pension
schemes which provide benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends
on members’ length of service and their salary in the final years leading up to retirement. In addition, the Group operates several healthcare
benefit schemes, of which the most significant are in the US and Canada. The liabilities in respect of healthcare benefits are also assessed by
qualified independent actuaries, applying the projected unit credit method.
All of these arrangements, including funded schemes where formal trusts or equivalents are required, have been developed and are operated in
accordance with local practices and regulations where applicable in the countries concerned. For example, in the US, the main funded pension
schemes are the Reynolds American Retirement Plan and the Retirement Income Plan for Certain RAI Affiliates, and the main funded healthcare
scheme is the Brown & Williamson Tobacco Corporation Welfare & Fringe Benefit Plan, all of which are established with corporate trustees that are
required to run the schemes in accordance with the Plan’s rules and to comply with all relevant legislation, including the Employee Retirement
Income Security Act 1974. Similarly, in the UK, the main pension scheme is the British American Tobacco UK Pension Fund (“UK Fund”), which is
established under trust law and has a corporate trustee that is required to run the scheme in accordance with the Fund’s Trust Deed and Rules
and to comply with the Pension Scheme Act 1993, Pensions Act 1995, Pensions Act 2004 and all other relevant legislation.
Responsibility for the governance of the schemes across the Group, including investment decisions and contribution schedules, generally lies
with the trustees. The trustees for each arrangement will usually consist of representatives appointed by both the sponsoring company and the
beneficiaries. In the US, the corporate trustees act as custodians with a committee of local management acting in a fiduciary capacity with regard
to investment decisions, risk mitigation and administration of the arrangements.
The majority of schemes are subject to local regulations regarding funding requirements. Contributions to defined benefit schemes are
determined after consultation with the respective trustees and actuaries of the individual externally funded schemes, and after taking into account
regulatory requirements in each territory. The Group’s contributions to funded retirement benefit schemes in 2020 in total are expected to be
£80 million compared to £82 million in 2019.
Contributions to the various funded schemes in the US are agreed with the relevant corporate Trustee, the named fiduciary, scheme actuaries and
the committee of local management after taking account of statutory requirements including the Pensions Protection Act of 2006, as amended.
Through its US subsidiaries, the Group intends to make significant regular contributions, when required, with the aim of maintaining a funding
status of at least 90% and becoming fully funded long-term. During 2019, the Group did not contribute to its funded pension and post-
retirement plans in the US and does not expect to do so in 2020.
158
Financial StatementsBAT Annual Report and Form 20-F 2019 11 Retirement benefit schemes continued
With effect from July 2018, contributions to the UK Fund, as agreed with the Trustee to meet the cost of future benefit accrual, were £18 million
per annum. Additional annual contributions to cover funding shortfalls are payable as required until the Fund is valued to 110% on a Technical
Provisions basis. These were £12 million in 2019 and 2018 and are expected to be the same in 2020, subject to review as part of the next formal
triennial valuation effective March 2020. Total contributions payable to the UK Fund are secured by a charge over the Group’s Head Office
(Globe House) up to a maximum of £150 million. The charge would be triggered in the event that the Group defaults on agreed contributions
due to the Fund or if an insolvency event occurs with respect to the UK entity responsible for making the payments. The charge is due to be
released in 2039 but may be released earlier by negotiation or if the Fund is valued to 115% on a Technical Provisions basis. Under the rules of
the scheme, any future surplus would be returnable to the Group by refund at the end of the life of the scheme. The funding commitment is
therefore not considered onerous, and in accordance with IFRIC 14 no additional liabilities or surplus restriction have been recognised in respect
of these commitments.
Payments made to pensioners by the operating companies in Germany, net of income on scheme assets, are deemed to be company
contributions to the Contractual Trust Arrangements and are anticipated to be around £17 million in 2020 and around £30 million per annum
for the four years after that. Contributions to pension schemes in Canada, Netherlands and Switzerland in total are anticipated to be around
£24 million in 2020 and then around £10 million per annum for the four years after that.
The majority of benefit payments are from trustee administered funds, however, there are also a number of unfunded schemes where the
sponsoring company meets the benefit payment obligation as it falls due, including Defined Benefit and Defined Contribution Unapproved
Unfunded Retirement Benefit Schemes (DB UURBS and DC UURBS respectively). The DC UURBS credits accrued in the year are increased in line
with the Company’s Weighted Average Cost of Debt and the scheme is therefore treated as a defined benefit scheme under IAS 19. For unfunded
schemes in the US, UK and Canada, 40% of the liabilities reported at year-end are expected to be settled by the Group within 10 years, 28%
between 10 and 20 years, 18% between 20 and 30 years, and 14% thereafter.
The funded arrangements in the Group have policies on investment management, including strategies over a preferred long-term investment
profile, and schemes in certain territories including Canada and Netherlands manage their bond portfolios to match the weighted average
duration of scheme liabilities.
For funded schemes in the US, the Group employs a risk mitigation strategy which seeks to balance pension plan returns with a reasonable
level of funded status volatility. Based on this framework, the asset allocation has two primary components. The first component is the hedging
portfolio, which uses extended duration fixed income holdings (typically US Government and investment grade corporate bonds) and, to a lesser
extent, derivatives to match a portion of the interest rate risk associated with the benefit obligations, thereby reducing expected funded status
volatility. The second component is the return-seeking portfolio, which is designed to enhance portfolio returns. The return-seeking portfolio is
broadly diversified across asset classes.
On 31 May 2019, the Trustee of the UK Fund entered into an agreement with Pension Insurance Corporation plc (“PIC”) to acquire an insurance
policy that operates as a UK Fund investment asset, with the intent of matching a specific part of the UK Fund’s future cash flow arising from the
accrued pension liabilities of retired and deferred members. Such an arrangement is commonly termed as a “buy-in”. The buy-in reduces the
UK Fund’s value at risk in relation to key risks associated with improved longevity, inflation and interest rate movements whilst improving the
security to the UK Fund and its members. The Group consequently benefits from the buy-in as it reduces the UK Fund’s reliance on the Group for
future cash funding requirements. The buy-in transaction involved the transfer of £3.4 billion of assets held by the UK Fund to PIC and, as such,
had no cash effect to the Group. On an IAS 19 basis, the fair value of the insurance policy will match the present value of the liabilities being
insured. On completion of the transaction, a loss of £691 million was recognised through the statement of other comprehensive income on the
revaluation of the insurance asset with no impact to the income statement. For the residual assets in the UK Fund, the strategy is broadly split
70% risk reducing assets and 30% return seeking assets. The return seeking portfolio is invested in illiquid assets and the corresponding strategy
is to allow these assets to naturally wind down over time, with their value being realised as the investments mature. This is consistent with the
Trustee’s ultimate target which is to be 100% invested in risk reducing assets.
Through its defined benefit pension schemes and healthcare schemes, the Group is exposed to a number of risks, including:
Asset volatility:
The plan liabilities are calculated using discount rates set by reference to bond yields. If plan assets underperform this yield, e.g. due to stock
market volatility, this will create a deficit. However, most schemes hold a proportion of assets which are expected to outperform bonds in the long
term, and the majority of schemes by value are subject to local regulation regarding funding deficits.
Changes in bond yields:
A decrease in corporate bond yields will increase scheme liabilities, although this will be partially offset by an increase in the value of the schemes’
bond holdings or other hedging instruments.
Inflation risk:
Some of the Group’s pension obligations are linked to inflation and higher inflation will lead to higher liabilities, although in most cases, caps on
the level of inflationary increases are in place in the scheme rules, while some assets and derivatives provide specific inflation protection.
Life expectancy:
The majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase
in the plans’ liabilities. Assumptions regarding mortality and mortality improvements are regularly reviewed in line with actuarial tables and
scheme specific experience.
159
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
11 Retirement benefit schemes continued
The amounts recognised in the balance sheet are determined as follows:
Pension schemes
Healthcare schemes
Present value of funded scheme liabilities
Fair value of funded scheme assets
Unrecognised funded scheme surpluses
Present value of unfunded scheme liabilities
2019
£m
(11,454)
11,682
228
(28)
200
(578)
(378)
2018
£m
(11,031)
11,747
716
(20)
696
(531)
165
The above net (liability)/asset is recognised in the balance sheet as follows:
– retirement benefit scheme liabilities
– retirement benefit scheme assets
(807)
429
(378)
(982)
1,147
165
The net liabilities of funded pension schemes by territory are as follows:
2019
£m
(272)
178
(94)
–
(94)
(557)
(651)
(652)
1
(651)
– US
– UK
– Germany
– Canada
– Netherlands
– Switzerland
– Rest of Group
Funded schemes
2019
£m
(4,945)
(3,214)
(958)
(738)
(778)
(333)
(488)
(11,454)
Liabilities
2018
£m
(4,835)
(2,962)
(949)
(694)
(782)
(326)
(483)
(11,031)
2019
£m
4,818
3,533
928
747
814
294
548
11,682
2018
£m
(286)
178
(108)
–
(108)
(575)
(683)
(683)
–
(683)
Assets
2018
£m
4,464
4,016
948
708
793
283
535
11,747
2019
£m
(11,726)
11,860
134
(28)
106
(1,135)
(1,029)
Total
2018
£m
(11,317)
11,925
608
(20)
588
(1,106)
(518)
(1,459)
430
(1,029)
(1,665)
1,147
(518)
2019
£m
(127)
319
(30)
9
36
(39)
60
228
Total
2018
£m
(371)
1,054
(1)
14
11
(43)
52
716
Of the Group’s unfunded pension schemes 50% (2018: 48%) relate to arrangements in the UK and 32% (2018: 32%) relate to arrangements in
the US, while 86% (2018: 87%) of the Group’s unfunded healthcare arrangements relate to arrangements in the US.
The amounts recognised in the income statement are as follows:
Defined benefit schemes
Service cost
– current service cost
– past service cost/(credit), curtailments and settlements
Net interest on the net defined benefit liability
– interest on scheme liabilities
– interest on scheme assets
– interest on unrecognised funded scheme surpluses
Defined contribution schemes
Total amount recognised in the income statement (note 3(a))
Pension schemes
Healthcare schemes
2019
£m
2018
£m
2019
£m
2018
£m
2019
£m
92
7
95
–
391
(388)
–
102
97
199
364
(362)
2
99
87
186
2
34
(8)
28
–
28
2
(1)
33
(8)
–
26
–
26
94
7
425
(396)
–
130
97
227
Total
2018
£m
97
(1)
397
(370)
2
125
87
212
The above charges are recognised within employee benefit costs in note 3(a) and include a charge of £16 million in 2019 (2018: £3 million) in
respect of settlements, past service costs and defined contribution costs reported as part of the restructuring costs charged in arriving at profit
from operations (note 3(e)). Included in current service cost in 2019 is £21 million (2018: £16 million) of administration costs. Current service
cost is stated after netting employee contributions, where applicable.
160
Financial StatementsBAT Annual Report and Form 20-F 2019 11 Retirement benefit schemes continued
The movements in scheme liabilities are as follows:
Present value at 1 January
Differences on exchange
Current service cost
Past service cost/(credit) & settlements
Interest on scheme liabilities
Contributions by scheme members
Benefits paid
Actuarial (gains)/losses
– arising from changes in demographic assumptions
– arising from changes in financial assumptions
Experience gains
Present value at 31 December
Pension schemes
Healthcare schemes
2019
£m
11,562
(343)
94
7
391
–
(743)
(84)
1,105
43
12,032
2018
£m
12,077
295
95
(10)
364
2
(694)
(12)
(547)
(8)
11,562
2019
£m
861
(30)
2
–
34
–
(63)
(10)
70
(35)
829
2018
£m
948
43
2
(1)
33
–
(62)
(4)
(49)
(49)
861
2019
£m
12,423
(373)
96
7
425
–
(806)
(94)
1,175
8
12,861
Changes in financial assumptions principally relate to discount rate movements in both years.
Scheme liabilities by scheme membership:
Active members
Deferred members
Retired members
Present value at 31 December
Pension schemes
Healthcare schemes
2019
£m
1,895
1,308
8,829
12,032
2018
£m
1,785
1,259
8,518
11,562
2019
£m
59
2
768
829
2018
£m
55
2
804
861
2019
£m
1,954
1,310
9,597
12,861
Approximately 95% of scheme liabilities in both years relate to guaranteed benefits.
The movements in funded scheme assets are as follows:
Fair value of scheme assets at 1 January
Differences on exchange
Settlements
Interest on scheme assets
Company contributions
Contributions by scheme members
Benefits paid
Actuarial gains/(losses)
Fair value of scheme assets at 31 December
Equities – listed
Equities – unlisted
Bonds – listed
Bonds – unlisted
Other assets – listed
Other assets – unlisted
Fair value of scheme assets at 31 December
Pension schemes
Healthcare schemes
2019
£m
11,747
(326)
–
388
82
3
(704)
492
11,682
2018
£m
12,157
262
(10)
362
176
–
(684)
(516)
11,747
2019
£m
178
(6)
–
8
–
–
(17)
15
178
2018
£m
193
8
–
8
45
–
(61)
(15)
178
Pension schemes
Healthcare schemes
2019
£m
1,221
1,025
2,739
2,417
549
3,731
11,682
2018
£m
1,133
930
5,925
1,672
618
1,469
11,747
2019
£m
7
68
7
74
13
9
178
2018
£m
5
59
11
84
10
9
178
2019
£m
11,925
(332)
–
396
82
3
(721)
507
11,860
2019
£m
1,228
1,093
2,746
2,491
562
3,740
11,860
Total
2018
£m
13,025
338
97
(11)
397
2
(756)
(16)
(596)
(57)
12,423
Total
2018
£m
1,840
1,261
9,322
12,423
Total
2018
£m
12,350
270
(10)
370
221
–
(745)
(531)
11,925
Total
2018
£m
1,138
989
5,936
1,756
628
1,478
11,925
Scheme assets have been diversified into equities, bonds and other assets and are typically invested via fund investment managers into both
pooled and segregated mandates of listed and unlisted equities and bonds.
161
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
11 Retirement benefit schemes continued
In the above analysis investments via equity-based investment funds are shown under listed equities, and investments via bond-based investment
funds are shown under listed bonds. Other assets include insurance contracts, cash and other deposits, derivatives and other hedges, recoverable
taxes, infrastructure investments and investment property.
In the US, pension plan assets are invested using active investment strategies and multiple investment management firms. Managers within each
asset class cover a range of investment styles and approaches. Allowable investment types include global equity, fixed income, real assets, private
equity and absolute return. The range of allowable investment types utilised for pension assets provides enhanced returns and more widely
diversifies the plan.
The UK Fund historically has diversified a portion of the assets held by investing in equities listed on non-UK stock exchanges via investment
funds, and by making use of liability driven investment funds and inflation opportunity funds as part of its investment portfolio. As noted above,
during 2019 the Trustee acquired an insurance policy that operates as a UK Fund investment asset in a “buy-in” transaction. The residual assets
now predominantly consist of liability driven investments and absolute return funds as well as a proportion of illiquid investments, such as private
equity and infrastructure investments.
The actuarial gains and losses in both years principally relate to movements in the fair values of scheme assets and actual returns are stated net of
applicable taxes and fund management fees. The fair values of listed scheme assets were derived from observable data including quoted market
prices and other market data, including market values of individual segregated investments and of pooled investment funds where quoted.
The fair values of unlisted assets were derived from cash flow projections of estimated future income after taking into account the estimated
recoverable value of these assets.
The movements in the unrecognised scheme surpluses, recognised in other comprehensive income, are as follows:
Unrecognised funded scheme
surpluses at 1 January
Differences on exchange
Interest on unrecognised funded
scheme surpluses
Movement in year (note 18)
Unrecognised funded scheme
surpluses at 31 December
Pension schemes
2019
£m
2018
£m
2017
£m
2019
£m
Healthcare schemes
2018
£m
2017
£m
(20)
(1)
–
(7)
(23)
1
(2)
4
(18)
3
(2)
(6)
(28)
(20)
(23)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2019
£m
2018
£m
(20)
(1)
–
(7)
(23)
1
(2)
4
Total
2017
£m
(18)
3
(2)
(6)
(28)
(20)
(23)
The principal actuarial assumptions (weighted to reflect individual scheme differences) used in the following territories are shown below. In both
years, discount rates are determined by reference to normal yields on high quality corporate bonds at the balance sheet date.
2019
2018
US
3.4
UK Germany Canada Netherlands Switzerland
UK Germany Canada Netherlands Switzerland
3.0
0.6
3.0
1.3
3.2
1.7
3.0
US
3.9
Rate of increase in salaries (%)
Rate of increase in pensions
in payment (%)
Rate of increase in deferred
pensions (%)
Discount rate (%)
General inflation (%)
2.5
3.0
0.4
Nil
–
3.3
2.5
2.2
2.0
3.0
0.4
0.3
0.4
Nil
3.0
2.0
2.1
0.9
0.9
1.1
2.0
Nil
2.5
3.2
1.1
Nil
–
4.3
2.5
2.2
2.9
3.2
1.1
1.3
1.1
Nil
3.8
2.0
–
0.1
1.1
2019
2.1
1.1
1.1
1.8
2.0
1.3
Nil
–
0.9
1.1
2018
Weighted average duration
of liabilities (years)
11.4 16.1
14.0
11.0
17.8
13.9 10.8 16.0
8.2
10.5
17.5
12.8
US
UK Germany Canada Netherlands Switzerland
US
UK Germany Canada Netherlands Switzerland
For healthcare inflation in the US, the assumption is 6.5% for both years and in Canada, the assumption is 5.0% for both years.
162
Financial StatementsBAT Annual Report and Form 20-F 2019 11 Retirement benefit schemes continued
Mortality assumptions are subject to regular review. The principal schemes used the following tables:
US
UK
Germany
Canada
Netherlands
Switzerland
PRI-2012 mortality tables without collar or amount, projected with MP-2019 generational projection
(2018: RP-2018 and MP-2018)
S2PA (YOB) with the CMI (2018) improvement model with a 1.25% long term improvement rate (2018: CMI (2017))
RT Heubeck 2018 G (both years)
CPM-2014 Private Table (both years)
AG Prognosetafel 2018 (both years)
LPP/BVG 2015 base table with CMI projection factors for mortality improvements with a 1.5% long-term improvement
rate (both years)
Based on the above, the weighted average life expectancy, in years, for mortality tables used to determine benefit obligations is as follows:
31 December 2019
Member age 65
(current life expectancy)
Member age 45
(life expectancy at age 65)
31 December 2018
Member age 65
(current life expectancy)
Member age 45
(life expectancy at age 65)
US
UK
Germany
Canada
Netherlands
Switzerland
Male
Female
Male
Female
Male
Female
Male
Female
Male
Female
Male
Female
20.6
22.6
22.4
23.9
20.2
23.7
21.6
23.9
21.0
24.3
21.8
23.8
22.2
24.1
24.0
25.2
23.0
25.9
22.6
24.9
23.4
26.3
23.7
25.7
20.7
22.7
22.6
24.1
17.0
20.6
21.5
23.9
20.8
24.5
21.8
23.8
22.3
24.2
24.2
25.4
19.8
22.8
22.5
24.8
23.1
26.5
23.6
25.6
For the remaining territories, typical assumptions are that real salary increases will be from 0% to 5.0% (2018: 0.5% to 6.3%) per annum and
discount rates will be from 0% to 11.7% (2018: 0.6% to 7.6%) above inflation. Pension increases, where allowed for, are generally assumed to be
in line with inflation. Assumptions of life expectancy are in line with best practice in each territory. For countries where there is not a deep market
in such corporate bonds, the yield on government bonds is used.
The valuation of retirement benefit schemes involves judgements about uncertain future events. Sensitivities in respect of the key assumptions
used to measure the principal pension schemes as at 31 December 2019 are set out below. These sensitivities show the hypothetical impact
of a change in each of the listed assumptions in isolation, with the exception of the sensitivity to inflation which incorporates the impact of
certain correlating assumptions such as salary increases. While each of these sensitivities holds all other assumptions constant, in practice such
assumptions rarely change in isolation, while asset values also change, and the impacts may offset to some extent.
Average life expectancy – increase/(decrease) of scheme liabilities
Rate of inflation – increase/(decrease) of scheme liabilities
Discount rate – (decrease)/increase of scheme liabilities
1 year
increase
£m
387
1 year
decrease
£m
(385)
0.25
percentage
point
increase
£m
0.25
percentage
point
decrease
£m
173
(350)
(163)
367
A one percentage point increase in healthcare inflation would increase healthcare scheme liabilities by £42 million, and a one percentage point
decrease would decrease liabilities by £36 million. The income statement effect of this change in assumption is not material.
163
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
12 Deferred tax
Net deferred tax (liabilities)/assets comprise:
1 January 2019
Differences on exchange
Subsidiaries acquired (note 23)
Credited/(charged) to the income
statement
(Charged)/credited relating to changes
in tax rates
Credited to other comprehensive income
31 December 2019
31 December 2017
Accounting policy change
(IFRS 9) (note 30)
Revised 1 January 2018
Differences on exchange
Subsidiaries acquired (note 23)
Credited/(charged) to the
income statement
Credited/(charged) relating to changes
in tax rates
(Charged)/credited to other
comprehensive income
31 December 2018
Excess of
capital
allowances
over
depreciation
£m
Stock
relief
£m
(70)
4
–
21
–
–
(45)
(91)
–
(91)
(7)
–
27
1
–
(70)
(210)
11
–
(9)
–
–
(208)
(174)
–
(174)
(10)
–
(16)
(10)
–
(210)
Tax
losses
£m
105
(2)
–
(24)
–
–
79
113
–
113
4
–
(11)
(1)
–
105
Other
temporary
differences
£m
Total
£m
1,048
(40)
–
(17,432)
680
(4)
Trademarks
£m
(18,246)
701
(4)
Undistributed
earnings of
associates
and
subsidiaries
£m
Retirement
benefits
£m
(281)
15
–
(52)
–
–
(318)
(241)
–
(241)
6
–
222
(9)
–
(15)
(1)
82
279
264
–
264
15
–
92
49
–
(17,408)
(17,323)
–
(17,323)
(1,066)
(3)
(68)
(1)
56
995
656
7
663
47
4
319
(3)
(55)
47
138
(16,626)
(16,796)
7
(16,789)
(1,011)
1
304
70
(46)
(36)
–
4
67
79
–
(281)
(25)
222
–
(18,246)
18
1,048
(7)
(17,432)
The net deferred tax liabilities are reflected in the Group balance sheet as follows: deferred tax asset of £424 million and deferred tax liability of
£17,050 million (2018: deferred tax asset of £344 million and deferred tax liability of £17,776 million), after offsetting assets and liabilities where
there is a legally enforceable right to offset current tax assets and liabilities and where the deferred income taxes relate to the same fiscal authority.
At the balance sheet date, the Group has not recognised a deferred tax asset in respect of unused tax losses of £342 million (2018: £308 million)
which have no expiry date and unused tax losses of £208 million (2018: £502 million) which will expire within the next 10 years.
In 2019 and 2018 the Group has not recognised any deferred tax asset in respect of deductible temporary differences which have no expiry
date and has not recognised £92 million (2018: £184 million) in respect of deductible temporary differences which will expire within the next
10 years.
At the balance sheet date, the Group has unused tax credits of £80 million (2018: £80 million) which have no expiry date. No amount of
deferred tax has been recognised in respect of these unused tax credits.
At the balance sheet date, the aggregate amount of undistributed earnings of subsidiaries which would be subject to dividend withholding tax
and for which no withholding tax liability has been recognised was £0.6 billion (2018: £0.7 billion).
13 Trade and other receivables
Trade receivables
Loans and other receivables
Prepayments and accrued income
Current
Non-current
2019
£m
3,369
629
343
4,341
4,093
248
4,341
2018
£m
2,868
1,082
323
4,273
3,588
685
4,273
The majority of receivables are held in order to collect contractual cash flows, in accordance with the Group’s business model for managing
financial assets, and hence are measured at amortised cost. In certain countries, however, the Group has entered into factoring arrangements
and periodically sells certain trade receivables to banks and other financial institutions, without recourse, for cash. These trade receivables have
been derecognised from the statement of financial position to reflect the transfer by the Group of substantially all of the risks and rewards
of the receivables, including credit risk. Consequently, the cash inflows have been recognised within operating cash flows. Typically in these
164
Financial StatementsBAT Annual Report and Form 20-F 2019 13 Trade and other receivables continued
arrangements, the Group also acts as a collection agent for the bank. At 31 December, the value of trade receivables derecognised through the
factoring arrangements where the Group acts as a collection agent was £572 million (2018: £428 million) and where the Group does not act as
a collection agent was £26 million (2018: £40 million). Included in trade receivables above is £295 million (2018: £270 million) of trade debtor
balances which were available for factoring under these arrangements.
Included in loans and other receivables are £110 million of litigation related deposits (2018: £553 million). Management has determined that
these payments represent a resource controlled by the entity as a result of past events and from which future economic benefits are expected
to flow to the entity either by being recoverable on conclusion of ongoing appeal processes or by reducing amounts payable on recognition of
liabilities which have yet to be determined should the appeal process fail. These deposits are held at the fair value of consideration transferred less
impairment, if applicable, and have not been discounted.
Prepayments and accrued income include £5 million (2018: £6 million) of accrued income in relation to rebates.
On 1 March 2019, the Quebec Court of Appeal in Montreal upheld the Superior Court’s decision of May 2015 (reducing ITCAN’s share of the
judgment due to a change in interest computation to a maximum of CAD$9.2 billion). The Court of Appeal also upheld the previously stated
requirements for the defendants to deposit CAD$1.1 billion into an escrow account. The Board of Directors of ITCAN reassessed the recoverability
of the litigation related deposit and, accordingly, the Group recognised a charge against the income statement of £436 million in the period,
reflecting the amount of the judgment that is considered to be probable and estimable in line with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. Consequently, the deposit which was shown as receivable at 31 December 2018 has been utilised against management’s best
estimate of the liability. Further details are provided in note 27.
Amounts receivable from related parties including associated undertakings are shown in note 26.
Trade and other receivables have been reported in the balance sheet net of allowances as follows:
Trade receivables – gross
Trade receivables – allowance
Loans and other receivables – gross
Loans and other receivables – allowance
Prepayments and accrued income
Net trade and other receivables per balance sheet
The movements in the allowance account are as follows:
1 January
Accounting policy change (IFRS 9) (notes 1 and 30)
Revised 1 January
Differences on exchange
Provided in the year
Released
31 December
2019
£m
3,396
(27)
639
(10)
343
4,341
Trade
receivables
£m
Loans and
other
receivables
£m
30
–
30
(2)
24
(25)
27
10
–
10
10
2019
Total
£m
40
–
40
(2)
24
(25)
37
Trade
receivables
£m
Loans and
other
receivables
£m
39
37
76
2
16
(64)
30
46
8
54
–
10
(54)
10
2018
£m
2,898
(30)
1,092
(10)
323
4,273
2018
Total
£m
85
45
130
2
26
(118)
40
As permitted by IFRS 9, the loss allowance on trade receivables arising from the recognition of revenue under IFRS 15 is initially measured at an
amount equal to lifetime expected losses. Allowances in respect of loans and other receivables are initially recognised at an amount equal to
12-month expected credit losses. Allowances are measured at an amount equal to the lifetime expected credit losses where the credit risk on the
receivables increases significantly after initial recognition.
Prior to the adoption of IFRS 9 on 1 January 2018, loans and receivables were stated net of allowances for estimated irrecoverable amounts due to
the identification of a loss event (the incurred loss method).
The Group holds bank guarantees, other guarantees and credit insurance in respect of some of the past due debtor balances.
Trade and other receivables are predominantly denominated in the functional currencies of subsidiary undertakings apart from the following: US
dollar: 4.2% (2018: 3.5%), UK sterling: 0.2% (2018: 4.2%), Euro: 1.1% (2018: 1.6%) and other currencies: 11.2% (2018: 6.6%).
There is no material difference between the above amounts for trade and other receivables and their fair value due to the short-term duration of
the majority of trade and other receivables as determined using discounted cash flow analysis. There is no concentration of credit risk with respect
to trade receivables as the Group has a large number of internationally dispersed customers.
165
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
14 Investments held at fair value
Investments
Fair value through P&L
Fair value through OCI
Current
Non-current
Investments held at fair value through OCI relate to the Group’s strategic investments in China Materialia Fund II.
Functional currency
US dollar
Euro
Other currency
2019
£m
127
8
135
123
12
135
2019
£m
131
4
–
–
135
2018
£m
213
4
217
178
39
217
2018
£m
212
–
–
5
217
The classification of these investments under the IFRS 13 fair value hierarchy is given in note 22.
There is no material difference between the investments held at fair value and their gross contractual values.
15 Derivative financial instruments
The fair values of derivatives are determined based on market data (primarily yield curves, implied volatilities and exchange rates) to calculate the
present value of all estimated flows associated with each derivative at the balance sheet date. In the absence of sufficient market data, fair values
would be based on the quoted market price of similar derivatives. The classification of these derivative assets and liabilities under the IFRS 13 fair
value hierarchy is given in note 22.
Fair value hedges
– interest rate swaps
– cross-currency swaps
Cash flow hedges
– interest rate swaps
– cross-currency swaps
– forward foreign currency contracts
Net investment hedges
– forward foreign currency contracts
Held-for-trading*
– interest rate swaps
– forward foreign currency contracts
Total
Current
Non-current
Derivatives
– in respect of net debt
– other
2019
Assets
£m
Liabilities
£m
Assets
£m
2018
Liabilities
£m
177
191
–
114
57
178
3
45
765
313
452
765
527
238
765
62
–
187
84
50
19
6
60
468
181
287
468
384
84
468
181
282
–
149
61
10
6
46
735
179
556
735
647
88
735
83
–
98
56
42
174
–
63
516
302
214
516
269
247
516
* Derivatives which do not meet the tests for hedge accounting under IFRS 9 or which are not designated as hedging instruments are referred to as “held-for-trading”. These derivatives principally consist
of forward foreign currency contracts which have not been designated as hedges due to their value changes offsetting with other components of net finance costs relating to financial assets and financial
liabilities. The Group does not use derivatives for speculative purposes. All derivatives are undertaken for risk management purposes.
166
Financial StatementsBAT Annual Report and Form 20-F 2019 15 Derivative financial instruments continued
For cash flow hedges, the timing of expected cash flows is as follows: assets of £171 million (2018: £210 million) of which £51 million
(2018: £59 million) is expected within one year and £114 million (2018: £149 million) beyond five years and liabilities of £321 million
(2018: £196 million) of which £75 million (2018: £39 million) is expected within one year and £163 million (2018: £113 million) beyond five years.
The Group’s cash flow hedges are principally in respect of sales or purchases of inventory and certain debt instruments. A certain number of forward
foreign currency contracts were used to manage the currency profile of external borrowings and are reflected in the currency table in note 19.
Interest rate swaps have been used to manage the interest rate profile of external borrowings and are reflected in the re-pricing table in note 19.
The tables below set out the maturities of the Group’s derivative financial instruments on an undiscounted contractual basis, based on spot rates.
The maturity dates of all gross-settled derivative financial instruments are as follows:
Within one year
– forward foreign currency contracts
– cross-currency swaps
Between one and two years
– forward foreign currency contracts
– cross-currency swaps
Between two and three years
– cross-currency swaps
Between three and four years
– cross-currency swaps
Between four and five years
– cross-currency swaps
Beyond five years
– cross-currency swaps
Assets
Outflow
£m
Inflow
£m
10,168
35
(9,367)
(38)
548
811
15
(524)
(765)
(23)
2019
Liabilities
Outflow
£m
(8,069)
(62)
(263)
(1,012)
(36)
Inflow
£m
8,534
18
278
969
17
725
(590)
683
(679)
Assets
Outflow
£m
(6,526)
(54)
(330)
(43)
2018
Liabilities
Outflow
£m
(9,749)
(92)
(441)
(73)
Inflow
£m
9,876
33
449
20
(771)
1,008
(1,075)
(26)
17
(38)
Inflow
£m
7,081
55
332
36
830
15
9
(15)
10
(15)
733
(592)
690
(730)
762
13,073
(609)
(11,931)
460
10,969
(435)
(10,571)
754
9,836
(625)
(8,967)
469
12,562
(490)
(12,688)
The maturity dates of net-settled derivative financial instruments, which primarily relate to interest rate swaps, are as follows:
Within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Beyond five years
2019
Liabilities
Outflow
£m
44
39
39
21
63
263
469
Assets
Inflow
£m
44
25
25
10
43
182
329
2018
Liabilities
Outflow
£m
40
19
15
13
15
23
125
Assets
Inflow
£m
53
48
45
26
23
15
210
167
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS
CONTINUED
15 Derivative financial instruments continued
The items designated as hedging instruments are as follows:
2019
Changes in
fair value
used for
calculating
hedge
ineffectiveness
£m
2018
Changes in
fair value
used for
calculating
hedge
ineffectiveness
£m
Nominal
amount of
hedging
instrument
£m
Nominal
amount of
hedging
instrument
£m
Interest rate risk exposure:
Fair value hedges
– interest rate swaps
– cross-currency swaps
Cash flow hedges
– interest rate swaps
– cross-currency swaps
Foreign currency risk exposure:
Cash flow hedges
– forward foreign currency contracts
Net investment hedges (derivative related)
– forward foreign currency contracts
Net investment hedges (non-derivative related)
– debt (carrying value) in borrowings designated as net investment hedges of net assets
3,065
1,436
4,068
2,695
3,827
5,274
372
16 Inventories
Raw materials and consumables
Finished goods and work in progress
Goods purchased for resale
73
(72)
(103)
(61)
4,470
1,561
2,715
2,856
11
19
(98)
(91)
(3)
3,574
(4)
161
5,291
(166)
22
4,647
(226)
2019
£m
2,750
3,258
86
6,094
2018
£m
3,049
2,877
103
6,029
Inventories pledged as security for liabilities amount to £7 million (2018: £7 million). Write-offs taken to other operating expenses in the
Group income statement were £255 million (2018: £148 million; 2017: £114 million), including amounts relating to restructuring costs.
Goods purchased for resale include Group brands produced under third party contract manufacturing arrangements.
168
Financial StatementsBAT Annual Report and Form 20-F 2019 17 Cash and cash equivalents
Cash and bank balances
Cash equivalents
2019
£m
2,256
270
2,526
The carrying value of cash and cash equivalents approximates their fair value.
Cash and cash equivalents are denominated in the functional currency of the subsidiary undertaking or other currencies as shown below:
Functional currency
US dollar
Euro
Other currencies
2019
£m
2,199
127
64
136
2,526
2018
£m
2,069
533
2,602
2018
£m
2,144
158
174
126
2,602
In the Group cash flow statement, net cash and cash equivalents are shown after deducting bank overdrafts and accrued interest where
applicable, as follows:
Cash and cash equivalents as above
Less overdrafts and accrued interest
Net cash and cash equivalents
2019
£m
2,526
(491)
2,035
2018
£m
2,602
(274)
2,328
Cash and cash equivalents include restricted amounts of £627 million (2018: £170 million), principally due to exchange control regulations in
certain countries and subsidiaries in CCAA protection (note 28).
Cash and cash equivalents also include £14 million (2018: £125 million) of cash that is held as a hedging instrument.
169
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 18 Capital and reserves
(a) Share capital
Allotted and fully paid
1 January 2019
Changes during the year
– share option schemes
31 December 2019
Allotted and fully paid
1 January 2018
Changes during the year
– share option schemes
31 December 2018
Allotted and fully paid
1 January 2017
Changes during the year
– share option schemes
– Issue of shares RAI acquisition
31 December 2017
Ordinary
shares of 25p each
Number of shares
£m
2,456,415,884
614.09
104,854
0.03
2,456,520,738
614.12
2,456,278,414
614.06
137,470
0.03
2,456,415,884
614.09
2,027,019,508
506.75
213,144
429,045,762
0.05
107.26
2,456,278,414
614.06
(b) Share premium account, capital redemption reserves and merger reserves comprise:
31 December 2019
31 December 2018
31 December 2017
Share
premium
account
£m
Capital
redemption
reserves
£m
94
91
87
101
101
101
Merger
reserves
£m
26,414
26,414
26,414
Total
£m
26,609
26,606
26,602
Share premium account
The share premium account includes the difference between the value of shares issued and their nominal value. The increase of £3 million
(2018: £4 million; 2017: £5 million) relates solely to ordinary shares issued under the Company’s share option schemes.
Capital redemption account
On the purchase of own shares as part of the share buy-back programme for shares which are cancelled, a transfer is made from retained
earnings to the capital redemption reserve equivalent to the nominal value of shares purchased. Purchased shares which are not cancelled are
classified as treasury shares and presented as a deduction from total equity.
Merger reserve account
The merger reserve comprises:
a.
In 1999, shares were issued for the acquisition of the Rothmans International B.V. Group and the difference between the fair value of shares
issued and their nominal value of £3,748 million was credited to merger reserves; and
b. On 25 July 2017, the Group announced the completion of the acquisition of the remaining 57.8% of RAI not already owned by the Group.
Shares were issued for the acquisition and the difference between the fair value of shares issued and their nominal value of £22,666 million
was credited to merger reserves.
170
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 18 Capital and reserves continued
(c) Equity attributed to owners of the parent – movements in other reserves and retained earnings (which are after
deducting treasury shares) shown above comprise:
Translation
reserve
(i)
£m
Hedging
reserve
(ii)
£m
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
Retained earnings
Other
(v)
£m
573
Total other
reserves
£m
Treasury
shares
(vi)
£m
Other
£m
(333)
(5,242)
43,799
1 January 2019
Comprehensive income and expense
Profit for the year
Differences on exchange
Cash flow hedges
– net fair value losses
– reclassified and reported in profit
for the year
Net investment hedges
– net fair value gains
– differences on exchange on borrowings
Associates – share of OCI, net of tax (note 5)
Tax on items recognised directly in other
comprehensive income that may be
reclassified subsequently to profit or loss
(note 6(f))
Retirement benefit schemes
– net actuarial losses (note 11)
– surplus recognition (note 11)
Associates – share of OCI, net of tax (note 5)
Tax on items recognised directly in other
comprehensive income that will not be
reclassified subsequently to profit or loss
(note 6(f))
Other changes in equity
Cash flow hedges reclassified and
reported in total assets
Employee share options
– value of employee services
Dividends and other appropriations
– ordinary shares
Purchase of own shares
– held in employee share ownership trusts
Other movements
31 December 2019
(914)
(177)
–
(2,948)
–
–
21
(18)
(115)
–
–
–
–
–
–
–
–
–
–
(3,974)
–
–
(246)
53
–
–
–
56
–
–
–
–
(32)
–
–
–
–
(346)
6
–
–
–
–
–
–
–
–
–
–
7
–
–
–
–
179
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,948)
(246)
53
21
(18)
(115)
56
–
–
7
–
(32)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13
–
–
179
–
–
573
–
–
(3,555)
(117)
98
(5,261)
5,704
–
–
–
–
–
–
–
(582)
(7)
–
75
–
115
(3,476)
–
(133)
45,495
171
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 18 Capital and reserves continued
Retained earnings
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
Other
(v)
£m
573
–
573
Total other
reserves
£m
(3,392)
(9)
(3,401)
Treasury
shares
(vi)
£m
(5,195)
–
(5,195)
Other
£m
42,130
(29)
42,101
6,032
–
–
–
8
–
–
–
–
138
4
–
(33)
–
121
(4,463)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,861
(58)
17
(8)
(472)
(236)
(38)
18
–
–
6
–
(22)
–
–
–
(139)
–
–
–
179
–
–
573
–
–
(333)
–
92
(5,242)
(11)
(98)
43,799
179
–
179
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
17
(9)
8
–
–
–
–
(8)
–
–
–
–
–
–
6
–
–
–
–
–
–
–
6
31 December 2017
Accounting policy change (IFRS 9) (note 30)
1 January 2018
Comprehensive income and expense
Profit for the year
Differences on exchange
Cash flow hedges
– net fair value losses
– reclassified and reported in profit
for the year
Investments held at fair value
– reclassified and reported in retained
earnings
Net investment hedges
– net fair value losses
– differences on exchange on borrowings
Associates – share of OCI, net of tax (note 5)
Tax on items recognised directly in other
comprehensive income that may be
reclassified subsequently to profit or loss
(note 6(f))
Retirement benefit schemes
– net actuarial gains (note 11)
– surplus recognition (note 11)
Associates – share of OCI, net of tax (note 5)
Tax on items recognised directly in other
comprehensive income that will not be
reclassified subsequently to profit or loss
(note 6(f))
Other changes in equity
Cash flow hedges reclassified and reported
in total assets
Employee share options
– value of employee services
Dividends and other appropriations
– ordinary shares
Purchase of own shares
– held in employee share ownership trusts
Non-controlling interests – acquisitions
(note 23(c))
Other movements
31 December 2018
Translation
reserve
(i)
£m
(4,029)
–
(4,029)
–
3,861
–
–
–
(472)
(236)
(38)
–
–
–
–
–
–
–
–
–
Hedging
reserve
(ii)
£m
(132)
–
(132)
–
–
(58)
17
–
–
–
–
18
–
–
–
–
(22)
–
–
–
–
–
(914)
–
–
(177)
172
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 18 Capital and reserves continued
Retained earnings
1 January 2017
Comprehensive income and expense
Profit for the year
Differences on exchange
Cash flow hedges
– net fair value losses
– reclassified and reported in profit
for the year
– reclassified and reported in total assets
Investments held at fair value
– net fair value losses
Net investment hedges
– net fair value gains
– differences on exchange on borrowings
Associates – share of OCI, net of tax (note 5)
Tax on items recognised directly in other
comprehensive income that may be
reclassified subsequently to profit or loss
(note 6(f))
Retirement benefit schemes
– net actuarial gains (note 11)
– surplus recognition (note 11)
Associates – share of OCI, net of tax (note 5)
Tax on items recognised directly in other
comprehensive income that will not be
reclassified subsequently to profit or loss
(note 6(f))
Other changes in equity
Employee share options
– value of employee services
Dividends and other appropriations
– ordinary shares
Purchase of own shares
– held in employee share ownership trusts
Other movements
31 December 2017
Translation
reserve
(i)
£m
(382)
–
(3,082)
–
–
–
–
425
(67)
(923)
–
–
–
–
–
–
–
Hedging
reserve
(ii)
£m
4
–
–
(263)
109
(16)
–
–
–
–
34
–
–
–
–
–
–
Available-
for-sale
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
39
179
Other
(v)
£m
573
Total other
reserves
£m
Treasury
shares
(vi)
£m
413
(5,053)
–
–
–
–
–
(27)
–
–
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,082)
(263)
109
(16)
(27)
425
(67)
(918)
34
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4,029)
–
–
(132)
–
–
17
–
–
179
–
–
573
–
–
(3,392)
(205)
63
(5,195)
Other
£m
8,384
37,485
–
–
–
–
–
–
–
–
–
832
(5)
25
(171)
105
(4,465)
–
(60)
42,130
i. Translation reserve:
The translation reserve is explained in the accounting policy on foreign currencies in note 1.
In 2018, within the translation reserve differences on exchange, a gain of £107 million has been recognised in relation to the application of
hyperinflationary accounting in Venezuela as explained in note 3(h).
In 2017, included within the £923 million of differences on exchange in respect of associates is a debit of £545 million in respect of foreign
exchange recycled from reserves as a result of the divestment of the RAI associate. This has been reported in the Group’s share of post-tax results
of associates and joint ventures.
ii. Hedging reserve:
The hedging reserve is explained in the accounting policy on financial instruments in note 1.
Of the amounts reclassified from the hedging reserve and reported in profit for the year, a gain of £12 million (2018: £15 million gain;
2017: £52 million gain) and a gain of £3 million (2018: £23 million gain; 2017: £27 million loss) were reported within revenue and raw materials
and consumables, respectively, together with a gain of £11 million (2018: £7 million loss; 2017: £4 million gain) reported in other operating
expenses and a gain of £27 million (2018: £14 million loss; 2017: £80 million gain) reported within net finance costs.
173
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 18 Capital and reserves continued
The Group hedges certain foreign currency denominated borrowings with cross-currency interest rate swaps. As permitted by IFRS 9 Financial
Instruments, the foreign currency basis spreads have been separated from the hedging instrument and are recognised in reserves as a “cost
of hedging” and are reclassified to the income statement in the same period in which profit and loss is affected by the hedged expected
cashflows as a component of the associated interest expense. The basis spreads are disclosed within hedging reserves as they are not material.
Included within the balance of hedging reserves at 31 December 2019 is an accumulated gain of £14 million (2018: £20 million gain) in respect
of the cost of hedging.
iii. Fair value reserve (available-for-sale reserve, prior to 1 January 2018):
The fair value reserve (available-for-sale reserve, prior to 1 January 2018) is explained in the accounting policy on financial instruments in note 1.
Fair value gains and losses arising from investments held at fair value through other comprehensive income are recognised in this reserve.
iv. Revaluation reserve:
The revaluation reserve relates to the acquisition of the cigarette and snus business of ST in 2008.
v. Other reserves:
Other reserves comprise:
(a) £483 million which arose in 1998 from merger accounting in a Scheme of Arrangement and Reconstruction whereby British American
Tobacco p.l.c. acquired the entire share capital of B.A.T Industries p.l.c. and the share capital of that company’s principal financial services
subsidiaries was distributed, so effectively demerging them; and
(b) In the 1999 Rothmans transaction, convertible redeemable preference shares were issued as part of the consideration. The discount on
these shares was amortised by crediting other reserves and charging retained earnings. The £90 million balance in other reserves comprises the
accumulated balance in respect of the preference shares converted during 2004.
vi. Treasury shares:
Total equity attributable to owners of the parent is stated after deducting the cost of treasury shares which include £4,845 million
(2018: £4,845 million; 2017: £4,845 million) for shares repurchased and not cancelled and £416 million (2018: £397 million; 2017: £350 million)
in respect of the cost of own shares held in employee share ownership trusts.
The share buy-back programme was suspended from 30 July 2014. As at 31 December 2019, treasury shares include 8,275,677
(2018: 7,536,408; 2017: 6,750,597) of shares held in trust and 162,645,590 (2018: 162,645,590; 2017: 162,645,590) of shares repurchased
and not cancelled as part of the Company’s share buy-back programme.
Taxation in equity
The tax attributable to components of other comprehensive income is as follows:
Hedging reserve
Cash flow hedges – net fair value losses
Retained earnings
– actuarial losses/(gains) in respect of subsidiaries
Owners of the parent
Non-controlling interests
Total tax recognised in other comprehensive income for the year (note 6(f))
2019
£m
56
56
75
75
131
–
131
2018
£m
18
18
(33)
(33)
(15)
–
(15)
2017
£m
34
34
(171)
(171)
(137)
–
(137)
(d) Non‑controlling interests
Movements in non-controlling interests primarily relate to profit for the year and dividends (reported as a movement in retained earnings) and
differences on exchange arising from the translation into sterling (reported as a movement in other reserves). Information on subsidiaries with
material non-controlling interests is provided in note 28.
(e) Dividends and other appropriations
With effect from 1 January 2018, the Company pays dividends on a quarterly basis. The interim quarterly dividend payment for the year ended
31 December 2018 of 203.0p per ordinary share (prior year: 195.2p per ordinary share) was payable in four equal instalments: amounts payable
in May 2019 of £1,157 million (May 2018: £1,117 million), August 2019 of £1,159 million (August 2018: £1,112 million), November 2019 of
£1,160 million (November 2018: £1,115 million) and £1,161 million in February 2020 (February 2019: £1,119 million) respectively. The total
dividends recognised as an appropriation from reserves in 2019 was £3,476 million (2018: £4,463 million).
Prior to 2018, the Group paid a final dividend of 118.1p per share in May 2017 amounting to £2,181 million and an interim dividend of 56.5p
per share in September 2017 amounting to £1,284 million. As part of the transition to interim dividends, and to ensure shareholders received
the equivalent amount of total cash payments in 2018 as they would have under the previous payment policy, an additional interim dividend of
43.6p per share amounting to £1,000 million was paid in February 2018. The total dividends appropriated from reserves in respect of 2017 were
£4,465 million.
174
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 18 Capital and reserves continued
During the year, as an outcome of the Financial Reporting Council’s (FRC’S) review of the Group’s 2018 Report and Accounts, the Group received
correspondence related to a number of areas, including the accounting treatment for interim dividends. It was agreed that the recognition of
an accrual at 31 December 2017 (in respect of the dividend paid in February 2018) and 31 December 2018 (in respect of the dividend paid in
February 2019) was incorrect. The error was identified by reference to the ICAEW Technical Release 02/17BL regarding ‘Guidance on Realised
and Distributable Profits under the Companies Act 2006’. This translated into an overstatement of liabilities and understatement of equity by
£1,000 million in 2017 and £1,116 million in 2018. Accordingly, the Group has revised the treatment with respect to dividends, to recognise
interim dividends in the period in which they are paid. The review conducted by the FRC was based solely on the Group’s published report and
accounts and does not provide any assurance that the report and accounts are correct in all material respects.
After considering the requirements of IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors, the Directors determined that the impact of the error, whilst over the Group’s materiality (£330 million in 2017 and £420 million in 2018),
would not influence the economic decisions of the users of the financial statements with the share price trading “ex-dividend” at the balance
sheet date. The Directors also determined that there was no impact to the amount or timing of the cash received by shareholders, no impact
to the Group’s Income Statement in those periods and had no impact to the Group’s performance metrics on an actual or forecast basis.
Accordingly, the Directors concluded that the error was not material and that prior years would not be restated.
From 2019, the Group will recognise interim dividends in the Group’s financial statements in the period in which they are paid. This does not
constitute any change in the Group’s approach to dividend distribution to shareholders which remains being the declaration of the dividend by
the Directors in February following the balance sheet date, payable over 4 equal quarterly instalments.
In addition, on 27 February 2020, the Board declared an interim dividend of 210.4p per ordinary share of 25p, for the year ended 31 December
2019, payable in four equal quarterly instalments of 52.6p per ordinary share in May 2020, August 2020, November 2020 and February 2021.
These payments will be recognised as appropriations from reserves in 2020 and 2021. The total amount payable is estimated to be £4,826 million
based on the number of shares outstanding at the date of these accounts.
19 Borrowings
Eurobonds
Currency
Maturity dates
Interest rates
Euro
Euro
UK sterling
US dollar
Swiss franc
3m EURIBOR +50bps
2020 to 2045 0.9% to 4.9%
2021
2021 to 2055 1.8% to 7.3%
2019
2021 to 2026 0.6% to 1.4%
1.6%
2019
£m
7,591
931
4,161
–
510
2018
£m
8,717
986
4,671
512
523
Bonds issued pursuant to Rules under
the U.S. Securities Act (as amended)
US dollar
2020 to 2049 2.8% to 8.1%
23,805
25,428
Bonds and notes
Commercial paper
Other loans
Bank loans
Bank overdrafts
Lease liabilities
US dollar
2020 to 2022
USD 3m LIBOR +
59bps to 88bps
1,325
38,323
1,056
4,624
293
491
579
45,366
1,381
42,218
536
3,859
608
274
14
47,509
The interest on the commercial paper referred to in the table above is based on USD LIBOR plus a margin ranging between 22 and 63 basis
points and EURIBOR plus a margin ranging between 10 and 24 basis points (2018: USD LIBOR plus a margin ranging between 22 and 65 basis
points and EURIBOR plus a margin ranging between 8 and 15 basis points).
Other loans primarily comprise of £745 million (2018: £nil) relating to bilateral facilities maturing in 2020 and £3,859 million
(2018: £3,859 million) relating to two £1,929 million term loans maturing in 2020 and 2022.
Current borrowings per the balance sheet include interest payable of £474 million at 31 December 2019 (2018: £470 million). Included within
borrowings are £5,136 million (2018: £6,245 million) of borrowings subject to fair value hedges where their amortised cost has been increased
by £210 million (2018: £179 million) in the table above.
The fair value of borrowings is estimated to be £45,674 million (2018: £44,457 million) of which £38,631 million (2018: £39,169 million) has
been calculated using quoted market prices and is within level 1 of the fair value hierarchy and £7,043 million (2018: £5,288 million) has been
calculated based on discounted cash flow analysis and is within level 3 of the fair value hierarchy.
Amounts secured on Group assets including property, plant and equipment, inventory and receivables as at 31 December 2019 are £88 million
(2018: £75 million). The majority of lease liabilities are also secured against the associated assets.
175
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 19 Borrowings continued
Borrowings are repayable as follows:
Within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Beyond five years
Per balance sheet
Contractual gross maturities
2019
£m
7,562
2,947
6,992
2,505
3,173
22,187
45,366
2018
£m
4,225
7,261
2,958
7,095
2,580
23,390
47,509
2019
£m
8,926
4,181
8,215
3,529
3,871
32,176
60,898
2018
£m
5,636
8,471
4,086
8,131
3,462
32,712
62,498
The contractual gross maturities in each year include the borrowings maturing in that year together with forecast interest payments on all
borrowings which are outstanding for all or part of that year.
Borrowings are denominated in the functional currency of the subsidiary undertaking or other currencies as shown below:
31 December 2019
Total borrowings
Effect of derivative financial instruments
– cross-currency swaps
– forward foreign currency contracts
31 December 2018
Total borrowings
Effect of derivative financial instruments
– cross-currency swaps
– forward foreign currency contracts
Functional
currency
£m
US
dollar
£m
UK
sterling
£m
Euro
£m
Canadian
dollar
£m
Other
currencies
£m
Total
£m
32,536
2,772
451
8,919
3,946
(610)
35,872
–
(213)
2,559
(450)
–
1
(3,432)
440
5,927
32,612
3,803
450
10,089
4,029
(1,905)
34,736
17
1,961
5,781
(450)
–
–
(3,653)
(389)
6,047
10
–
–
10
–
–
–
–
678
45,366
(249)
372
801
(185)
(11)
45,170
555
47,509
(256)
321
620
(313)
(12)
47,184
The exposure to interest rate changes when borrowings are re-priced is as follows:
31 December 2019
Total borrowings
Effect of derivative financial instruments
– interest rate swaps
– cross-currency swaps
31 December 2018
Total borrowings
Effect of derivative financial instruments
– interest rate swaps
– cross-currency swaps
Within
1 year
£m
Between
1-2 years
£m
Between
2-3 years
£m
Between
3-4 years
£m
Between
4-5 years
£m
Beyond
5 years
£m
Total
£m
11,145
1,888
4,432
2,451
3,161
22,289
45,366
1,794
1,335
14,274
(508)
(758)
622
(226)
–
4,206
–
(649)
1,802
–
–
3,161
(1,060)
(115)
21,114
–
(187)
45,179
10,384
4,540
1,967
4,577
2,585
23,456
47,509
3,069
1,318
14,771
(589)
–
3,951
(539)
(793)
635
(236)
–
4,341
–
(700)
1,885
(1,705)
(138)
21,613
–
(313)
47,196
176
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 19 Borrowings continued
Lease liabilities are repayable as follows:
Within one year
Between one and two years
Between two and three years
Between three and four years
Between four and five years
Beyond five years
Per balance sheet
Contractual gross maturities
2019
£m
154
120
92
64
43
106
579
2018
£m
7
5
2
–
–
–
14
2019
£m
178
138
100
72
51
135
674
2018
£m
7
5
2
–
–
–
14
The Group’s undrawn committed borrowing facilities (note 22) total £6,000 million (2018: £6,000 million) with £3,000 million maturing within
one year (2018: £3,000 million maturing within one year) and with £3,000 million maturing between one and two years (2018: £3,000 million
maturing between two and three years).
The Group defines net debt as follows:
Borrowings*
Lease liabilities
Derivatives in respect of net debt:
– assets (note 15)
– liabilities (note 15)
Cash and cash equivalents (note 17)
Current investments held at fair value (note 14)
2019
£m
44,787
579
(527)
384
(2,526)
(123)
42,574
* Borrowings as at 31 December 2019 include £848 million (2018: £944 million) in respect of the purchase price adjustments relating to the acquisition of Reynolds.
The movements in net debt are presented below along with a reconciliation to the financing activities in the Group Cash Flow Statement:
Borrowings
Lease liabilities
Derivatives in respect of net debt:
– assets (note 15)
– liabilities (note 15)
Cash and cash equivalents (note 17)
Current investments held at fair value (note 14)
Accounting
policy change
(IFRS 16)
(note 30)
Subsidiaries
acquired
–
607
–
–
–
–
607
–
3
–
–
–
–
3
Opening
balance
47,495
14
(647)
269
(2,602)
(178)
44,351
Cash flow
(1,176)
(154)
(2)
(389)
17
95
(1,609)
Foreign
exchange
(1,536)
(30)
107
491
57
38
(873)
Fair value,
accrued
interest and
other
4
139
15
13
2
(78)
95
2018
£m
47,495
14
(647)
269
(2,602)
(178)
44,351
2019
£m
Closing
balance
44,787
579
(527)
384
(2,526)
(123)
42,574
Other movements in lease liabilities in 2019 mainly comprise additions of £135 million (net of reassessments, modifications and terminations), see
note 9. The £78 million increase in current investments held at fair value represents the fair value gains for these investments.
177
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 19 Borrowings continued
Borrowings
Derivatives in respect of net debt:
– assets (note 15)
– liabilities (note 15)
Cash and cash equivalents (note 17)
Current investments held at fair value
(note 14)
Accounting
policy change
(IFRS 9) (note
30)
–
–
–
–
Revised
opening
balance
49,450
(640)
117
(3,291)
(144)
(144)
(209)
45,427
Opening
balance
49,450
(640)
117
(3,291)
(65)
45,571
Subsidiaries
acquired
Cash flow
Foreign
exchange
2018
£m
Closing
balance
Fair value,
accrued
interest and
other
–
(3,671)
1,826
(96)
47,509
–
–
(1)
–
(1)
109
(6)
563
(55)
132
100
(61)
26
27
(647)
269
(2,602)
9
(2,996)
53
2,056
(31)
(135)
(178)
44,351
Cash flows per net debt statement
Non-financing cash flows included in net debt
Interest paid
Interest element of lease liabilities
Remaining cash flows relating to derivative financial instruments
Purchases of own shares held in employee share ownership trusts
Dividends paid to owners of the parent
Capital injection from/(purchases) of non-controlling interests
Dividends paid to non-controlling interests
Other
Net cash used in financing activities per cash flow statement
2019
£m
(1,609)
(329)
(1,601)
(32)
(173)
(117)
(4,598)
20
(157)
3
(8,593)
2018
£m
(2,996)
(386)
(1,557)
(2)
(54)
(139)
(4,347)
(11)
(142)
4
(9,630)
178
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 20 Provisions for liabilities
1 January 2019
Differences on exchange
Provided in respect of the year
– in respect of Quebec Class Action
– in respect of excise dispute in Russia
– in respect of other
Utilised during the year
– in respect of Quebec Class Action
– in respect of other
31 December 2019
Analysed on the balance sheet as
– current
– non-current
1 January 2018
Differences on exchange
Provided in respect of the year
Utilised during the year
31 December 2018
Analysed on the balance sheet as
– current
– non-current
Restructuring
of existing
businesses
£m
Employee-
related
benefits
£m
Fox River
£m
Other
provisions
£m
127
(11)
235
–
–
235
(53)
–
(53)
298
203
95
298
33
(1)
9
–
–
9
(13)
–
(13)
28
14
14
28
108
–
–
–
–
–
(35)
–
(35)
73
6
67
73
Total
£m
649
(29)
1,037
436
252
349
(599)
(436)
(163)
1,058
381
(17)
793
436
252
105
(498)
(436)
(62)
659
447
212
659
670
388
1,058
Restructuring
of existing
businesses
£m
Employee-
related
benefits
£m
Fox River
£m
Other
provisions
£m
158
–
41
(72)
127
74
53
127
40
(3)
10
(14)
33
17
16
33
138
–
–
(30)
108
19
89
108
417
(15)
50
(71)
381
208
173
381
Total
£m
753
(18)
101
(187)
649
318
331
649
The restructuring provisions relate to the restructuring and integration costs incurred and are reported as adjusting items. The principal restructuring
activities in 2019 and 2018 are as described in note 3(e). While some elements of the non-current provisions of £95 million will unwind over several years,
as termination payments are made over extended periods in some countries, it is estimated that approximately 29% will unwind within five years.
Employee-related benefits mainly relate to employee benefits other than post-employment benefits. The principal components of these provisions are
gratuity and termination awards, and ‘jubilee’ payments due after a certain service period. It is estimated that approximately 28% of the non-current
provisions of £14 million will unwind within five years.
A provision of £274 million was made in 2011 for a potential claim under a 1998 settlement agreement entered into by a Group subsidiary in respect of
the clean-up of sediment in the Fox River. On 30 September 2014, the Group, NCR, Appvion and Windward Prospects entered into a funding agreement;
the details of this agreement are explained in note 27. This agreement led to payments of £32 million in 2019 (2018: £25 million). In addition, the Group
incurred legal costs of £3 million (2018: £5 million), which were also charged against the provision. It is expected that the non-current provision will
unwind within five years.
On 10 February 2017, a decision was delivered on the further hearing related to a payment of dividends by Windward to Sequana in May 2009.
Further details are provided in note 27.
Other provisions comprise balances set up in the ordinary course of general business that cannot be classified within the other categories, such as sales
returns and onerous contracts, together with amounts in respect of supplier, excise and other disputes. The nature of the amounts provided in respect of
disputes is such that the extent and timing of cash flows are difficult to estimate and the ultimate liability may vary from the amounts provided.
In 2019, following the Quebec Class Action judgment on 1 March 2019, the Group recognised a provision of CAD$758 million (£436 million) representing
the expected liability associated with the claim. As explained in note 13, the Group has utilised the litigation related deposit against the current estimate of the
liability and consequently both the provision and litigation related deposit (note 13) have reduced. Further details are provided in note 27.
As explained in note 3(h), in 2019, the Group recognised a provision of £252 million in relation to the Russia excise dispute.
Amounts provided above are shown net of reversals of unused provisions which include reversals of £18 million (2018: £12 million) for
restructuring of existing businesses, £3 million (2018: £4 million) for employee benefits and £97 million (2018: £111 million) for other provisions,
of which £10 million (2018: £56 million) was reclassified to trade and other payables.
179
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 21 Trade and other payables
Trade payables
Duty, excise and other taxes
Accrued charges and deferred income
FII GLO deferred income (note 6(b))
Social security and other taxation
Sundry payables
Current
Non-current
2019
£m
3,453
3,852
2,037
963
51
405
10,761
9,727
1,034
10,761
2018
£m
3,557
3,519
2,038
963
55
1,554
11,686
10,631
1,055
11,686
The movement in sundry payables relates to the correction for the accounting for dividends, as explained in note 18(e).
As explained in note 13, the Group acts as a collection agent for banks and other financial institutions in certain debt factoring arrangements.
The cash collected in respect of these arrangements that has not yet been remitted amounts to £115 million (2018: £118 million) and is included
in sundry payables.
In addition, the Group has certain Supply Chain Financing (SCF) or ‘reverse factoring’ arrangements in place. The principal purpose of these
arrangements is to provide the supplier with the option to access liquidity earlier through the sale of its receivables due from the Group to a
bank or other financial institution prior to their due date. Management has determined that the Group’s payables to these suppliers have neither
been extinguished nor have the liabilities been significantly modified by these arrangements. The value of amounts payable, invoice due dates
and other terms and conditions applicable, from the Group’s perspective, remain unaltered, with only the ultimate payee being changed.
At 31 December 2019, the value of amounts payable under the SCF programmes was £71 million (2018: £45 million). The cash outflows in
respect of these arrangements have been recognised within operating cash flows.
Accrued charges and deferred income include £4 million of deferred income (2018: £5 million) and £61 million (2018: £51 million) in respect of
interest payable mainly related to tax matters. FII GLO deferred income of £963 million relates to receipts in 2015, in respect of the Franked Investment
Income Government Litigation Order (note 6(b)). Amounts payable to related parties including associated undertakings are shown in note 26.
There is no material difference between the above amounts for trade and other payables and their fair value due to the short-term duration of the
majority of trade and other payables, as determined using discounted cash flow analysis.
Trade and other payables are predominantly denominated in the functional currencies of subsidiary undertakings with less than 6% in other
currencies (2018: less than 5% in other currencies).
22 Financial instruments and risk management
Management of financial risks
One of the principal responsibilities of Treasury is to manage the financial risks arising from the Group’s underlying operations. Specifically,
Treasury manages, within an overall policy framework set by the Group’s Main Board and Corporate Finance Committee (CFC), the Group’s
exposure to funding and liquidity, interest rate, foreign exchange and counterparty risks. The Group’s treasury position is monitored by the CFC
which meets regularly throughout the year and is chaired by the Group Finance Director. The approach is one of risk reduction within an overall
framework of delivering total shareholder return.
The Group defines capital as net debt (note 19) and equity (note 18). The only externally imposed capital requirement for the Group is interest
cover as described under interest rate risk below. The Group assesses its financial capacity by reference to cash flow, net debt and interest cover.
Group policies include a set of financing principles and key performance indicators including the monitoring of credit ratings, interest cover
and liquidity. These provide a framework within which the Group’s capital base is managed and, in particular, the policies on dividends (as a
percentage of long-term sustainable earnings) and share buy-back are decided. The key objective of the financing principles is to appropriately
balance the interests of equity and debt holders in driving an efficient financing mix for the Group. The Group’s average cost of debt in 2019 is
3.3 % (2018: 3.0%).
The Group manages its financial risks in line with the classification of its financial assets and liabilities in the Group’s balance sheet and related
notes. The Group’s management of specific risks is dealt with as follows:
Liquidity risk
It is the policy of the Group to maximise financial flexibility and minimise refinancing risk by issuing debt with a range of maturities, generally
matching the projected cash flows of the Group and obtaining this financing from a wide range of sources. The Group has a target average
centrally managed debt maturity of at least five years with no more than 20% of centrally managed debt maturing in a single rolling year.
As at 31 December 2019, the average centrally managed debt maturity was 9.1 years (2018: 8.8 years) and the highest proportion of centrally
managed debt maturing in a single rolling year was 18.6% (2018: 18.4%).
It is Group policy that short-term sources of funds (including drawings under both the Group US$4 billion US commercial paper (US CP)
programme and the Group £3 billion euro commercial paper (ECP) programme are backed by undrawn committed lines of credit and cash.
Commercial paper is issued by B.A.T. International Finance p.l.c. and B.A.T Capital Corporation and guaranteed by British American Tobacco
p.l.c.. At 31 December 2019, commercial paper of £1,056 million was outstanding (2018: £536 million).
180
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 22 Financial instruments and risk management continued
The Group utilises cash pooling and zero balancing bank account
structures in addition to intercompany loans and borrowings to
mobilise cash efficiently within the Group. The key objectives of
Treasury in respect of cash and cash equivalents are to protect their
principal value, to concentrate cash at the centre, to minimise the
required debt issuance and to optimise the yield earned. The amount
of debt issued by the Group is determined by forecasting the net debt
requirement after the mobilisation of cash.
The Group continues to target a solid investment-grade credit rating.
Following the announcement of the agreement to acquire the
remaining 57.8% of Reynolds American Inc. not already owned by
the Group, in January 2017, Moody’s and S&P revised the Group’s
rating to Baa2 and BBB+ with stable outlook, respectively. The Group’s
strategy is to continue deleveraging and is seeking to recover to Baa1/
BBB+ in the medium term. The Group is confident of its continued
ability to successfully access the debt capital markets.
As part of its short-term cash management, the Group invests in a
range of cash and cash equivalents, including money market funds,
which are regarded as highly liquid and are not exposed to significant
changes in fair value. These are kept under continuous review as
described in the credit risk section below. At 31 December 2019, cash
and cash equivalents include £nil invested in money market funds
(2018: £25 million).
As part of its working capital management, in certain countries, the
Group has entered into factoring arrangements and supply chain
financing arrangements. These are explained in further detail in note
13 and note 21.
Subsidiary companies are funded by share capital and retained
earnings, loans from the central finance companies on commercial
terms, or through local borrowings by the subsidiaries in appropriate
currencies to predominantly fund short-to-medium term working
capital requirements. All contractual borrowing covenants have been
met and none of them is expected to inhibit the Group’s operations or
funding plans.
In March and June 2019, the Group repaid €820 million and
US$750 million bonds at maturity, respectively.
In July 2019, the Group extended the £3 billion tranche of its £6 billion
revolving credit facility for a further 364 days with a one-year term-out
option. At 31 December 2019, the facility was undrawn (2018: the
facility was undrawn). On 12 March 2020, the Group refinanced the
existing two-tranche £6 billion revolving credit facility with a new two-
tranche £6 billion revolving credit facility. This consists of a £3 billion
364-day tranche (with two one-year extension options and a one-year
term-out option), and a £3 billion five-year tranche (with two one-year
extension options).
In July 2019, the Group also arranged short term bilateral facilities with
some of its core banks for a total amount of £745 million.
Additionally, the Group filed its inaugural SEC shelf programme in July
2019. The SEC shelf programme together with the EMTN programme,
will be the basis for future normal issuances in the capital markets.
The Group accessed the US dollar bond market through the SEC shelf
programme in September 2019, successfully raising US$3.5 billion
across 4 tranches.
In September 2019, the Group repaid a US$650 million bond
at maturity.
As part of the liquidity management strategy, the Group has redeemed
prior to their maturity a US$2.25 billion bond in September 2019 and
a US$1.25 billion bond in November 2019, that would have otherwise
matured in 2020.
In December 2019, the Group repaid a £500 million bond at maturity.
In January 2018, the Group repaid the £600 million that was drawn
under the 364-day £3 billion Group revolving credit facility. The facility
had a one-year extension option which was utilised in July 2018.
In March and June 2018, the Group repaid €400 million and
US$2,500 million bonds at maturity, respectively.
Currency risk
The Group is subject to exposure on the translation of the net assets
of foreign currency subsidiaries and associates into its reporting
currency, sterling. The Group’s primary balance sheet translation
exposures are to the US dollar, Canadian dollar, euro, Danish krone,
Swiss franc, South African rand, Russian rouble, Brazilian real, Australian
dollar, Malaysian ringgit, Singaporean dollar and Indian rupee.
These exposures are kept under continuous review. The Group’s
policy on borrowings is to broadly match the currency of these
borrowings with the currency of cash flows arising from the Group’s
underlying operations. Within this overall policy, the Group aims to
minimise all balance sheet translation exposure where it is practicable
and cost-effective to do so through matching currency assets with
currency borrowings. The main objective of these policies is to protect
shareholder value by increasing certainty and minimising volatility in
earnings per share. At 31 December 2019, the currency profile of the
Group’s gross debt, after taking into account derivative contracts, was
59% US dollar (2018: 65%), 13% euro (2018: 13%), 21% sterling
(2018: 16%) and 7% other currencies (2018: 6% other currencies).
The Group faces currency exposures arising from the translation
of profits earned in foreign currency subsidiaries and associates
and joint arrangements; these exposures are not normally hedged.
Exposures also arise from:
(i) foreign currency denominated trading transactions undertaken by
subsidiaries. These exposures comprise committed and highly probable
forecast sales and purchases, which are offset wherever possible.
The remaining exposures are hedged within the Treasury policies and
procedures with forward foreign exchange contracts and options,
which are designated as hedges of the foreign exchange risk of the
identified future transactions; and
(ii) forecast dividend flows from subsidiaries to the centre. To ensure
cash flow certainty, the Group enters into forward foreign exchange
contracts which are designated as net investment hedges of the
foreign exchange risk arising from the investments in these subsidiaries.
IFRS 7 requires a sensitivity analysis that shows the impact on
the income statement and on items recognised directly in other
comprehensive income of hypothetical changes of exchange rates in
respect of non-functional currency financial assets and liabilities held
across the Group. All other variables are held constant although, in
practice, market rates rarely change in isolation. Financial assets and
liabilities held in the functional currency of the Group’s subsidiaries, as
well as non-financial assets and liabilities and translation risk, are not
included in the analysis. The Group considers a 10% strengthening
or weakening of the functional currency against the non-functional
currency of its subsidiaries as a reasonably possible change. The impact
is calculated with reference to the financial asset or liability held as
at the year-end, unless this is unrepresentative of the position during
the year.
A 10% strengthening of functional currencies against non-functional
currencies would result in pre-tax profit being £16 million lower
(2018: £33 million higher; 2017: £14 million lower) and items
recognised directly in other comprehensive income being £22 million
lower (2018: £384 million higher; 2017: £148 million higher).
A 10% weakening of functional currencies against non-functional
currencies would result in pre-tax profit being £20 million higher
(2018: £41 million lower; 2017: £4 million higher) and items
recognised directly in other comprehensive income being £27 million
higher (2018: £469 million lower; 2017: £148 million lower).
181
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 In relation to the Group’s floating rate borrowings and hedge
instruments, there is exposure to uncertainty arising from changes in
the USD LIBOR, EURIBOR and GBP LIBOR benchmarks. The Group
believes that its contracts with interest rates based on these
benchmarks adequately provide for alternate calculations of interest
in the event that they are unavailable. The Group believes that any
resulting ineffectiveness consequent to the Interest Rate Benchmark
Reform is likely to be immaterial. Although these calculations may
cause an administrative burden, the Group does not believe that these
would materially adversely affect the Group or its ability to manage its
interest rate risk.
Credit risk
The Group has no significant concentrations of customer credit
risk. Subsidiaries have policies in place requiring appropriate
credit checks on potential customers before sales commence.
The process for monitoring and managing credit risk once sales to
customers have been made varies depending on local practice in the
countries concerned.
Certain territories have bank guarantees, other guarantees or credit
insurance provided in the Group’s favour in respect of Group trade
receivables, the issuance and terms of which are dependent on local
practices in the countries concerned. All derivatives are subject to ISDA
agreements or equivalent documentation.
Cash deposits and other financial instruments give rise to credit risk
on the amounts due from the related counterparties. Generally, the
Group aims to transact with counterparties with strong investment
grade credit ratings. However, the Group recognises that due to the
need to operate over a large geographic footprint, this will not always
be possible. Counterparty credit risk is managed on a global basis by
limiting the aggregate amount and duration of exposure to any one
counterparty, taking into account its credit rating. The credit ratings of
all counterparties are reviewed regularly.
The Group ensures that it has sufficient counterparty credit capacity of
requisite quality to undertake all anticipated transactions throughout its
geographic footprint, while at the same time ensuring that there is no
geographic concentration in the location of counterparties.
With the following exceptions, the maximum exposure to the credit
risk of financial assets at the balance sheet date is reflected by the
carrying values included in the Group’s balance sheet. In 2014,
the Group entered into a guarantee arrangement in respect of the
borrowings of the non-controlling interest in relation to the capital
injection made to the Group’s Algerian business. The Group no
longer has this credit exposure as it was repaid in 2018. In addition,
the Group has entered into short-term risk participation agreements
in relation to certain leaf supply arrangements and the maximum
exposure under these would be £54 million (2018: £102 million).
In 2017, the Group entered into a guarantee arrangement to support
a short-term credit facility with a distributor. The maximum exposure
under the arrangement would be £54 million (2018: £102 million).
Price risk
The Group is exposed to price risk on investments held by the
Group, which are included in investments held at fair value on the
consolidated balance sheet, but the quantum of such is not material.
22 Financial instruments and risk management continued
The exchange sensitivities on items recognised directly in other
comprehensive income relate to hedging of certain net asset currency
positions in the Group, as well as on cash flow hedges in respect
of future transactions, but do not include sensitivities in respect of
exchange on non-financial assets or liabilities.
Interest rate risk
The objectives of the Group’s interest rate risk management policy
are to lessen the impact of adverse interest rate movements on
the earnings, cash flow and economic value of the Group and to
safeguard against any possible breach of its financial covenants.
Additional objectives are to minimise the cost of hedging and the
associated counterparty risk.
The Group targets an interest cover ratio, as calculated under its key
central banking facilities, of greater than 5 and for 2019 it is 7.1 times
(2018: 7.2 times; 2017: 7.8 times). The only externally imposed capital
requirement the Group has is in respect of its centrally managed
banking facilities, which require a gross interest cover of at least
4.5 times.
In order to manage its interest rate risk, the Group maintains both
floating rate and fixed rate debt. The Group sets targets (within overall
guidelines) for the desired ratio of floating to fixed rate debt on a
net basis (at least 50% fixed on a net basis in the short to medium
term) as a result of regular reviews of market conditions and strategy
by the Corporate Finance Committee and the board of the main
central finance company. At 31 December 2019, the relevant ratios of
floating to fixed rate borrowings were 18:82 (2018: 21:79) on a net
basis. Underlying borrowings are arranged on both a fixed rate and a
floating rate basis and, where appropriate, the Group uses derivatives,
primarily interest rate swaps to vary the fixed and floating mix, or
forward starting swaps to manage the refinancing risk. The interest
rate profile of liquid assets is taken into account in determining the net
interest rate exposure.
IFRS 7 requires a sensitivity analysis that shows the impact on
the income statement and on items recognised directly in other
comprehensive income of hypothetical changes of interest rates in
respect of financial assets and liabilities of the Group. All other variables
are held constant although, in practice, market rates rarely change in
isolation. For the purposes of this sensitivity analysis, financial assets
and liabilities with fixed interest rates are not included. The Group
considers a 100 basis point change in interest rates a reasonably
possible change except where rates are less than 100 basis points.
In these instances it is assumed that the interest rates increase by
100 basis points and decrease to zero for the purpose of performing
the sensitivity analysis. The impact is calculated with reference to
the financial asset or liability held as at the year-end, unless this is
unrepresentative of the position during the year.
A 100 basis point increase in interest rates would result in pre-tax profit
being £143 million lower (2018: £90 million lower; 2017: £108 million
lower). A 100 basis point decrease in interest rates, or less where
applicable, would result in pre-tax profit being £108 million higher
(2018: £74 million higher; 2017: £77 million higher). The effect of
these interest rate changes on items recognised directly in other
comprehensive income is not material in either year.
The Group has early adopted the Amendments to IFRS9 Financial
Instruments in respect of the Interest Rate Benchmark Reform as a result
of the UK Financial Conduct Authority’s announcement on 27 July
2017. Considering the relevant hedge relationships impacted by these
amendments, as at 31 December 2019, the Group has floating rate
borrowings with nominal value of £1,929 million and US$750 million
(£566 million) that are due to mature in January 2022 and August
2022 respectively.
182
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 22 Financial instruments and risk management continued
Hedge accounting
In order to qualify for hedge accounting, the Group is required to document prospectively the economic relationship between the item being
hedged and the hedging instrument. The Group is also required to demonstrate an assessment of the economic relationship between the hedged
item and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is repeated
periodically to ensure that the hedge has remained, and is expected to remain, highly effective. The prospective effectiveness testing determines
that an economic relationship between the hedged item and the hedging instrument exists.
In accordance with the Group Treasury Manual, the exact hedge ratios and profile of a hedge relationship will depend on several factors,
including the desired degree of certainty and reduced volatility of net interest costs and market conditions, trends and expectations in the
relevant markets. The sources of ineffectiveness include spot and forward differences, impact of time value and timing differences between
periods in the hedged item and hedging instrument.
The Group’s risk management strategy has been explained in further detail under the interest rate risk and currency risk sections of this note.
Fair value estimation
The fair values of financial assets and liabilities with maturities of less than one year, other than derivatives, are assumed to approximate their book
values. For other financial instruments which are measured at fair value in the balance sheet, the basis for fair values is described below.
Fair value hierarchy
The following table presents the Group’s financial assets and liabilities that are measured at fair value in accordance with IFRS 13
classification hierarchy:
Assets at fair value
Investment held at fair value (note 14)
Derivatives relating to
– interest rate swaps (note 15)
– cross-currency swaps (note 15)
– forward foreign currency contracts (note 15)
Assets at fair value
Liabilities at fair value
Derivatives relating to
– interest rate swaps (note 15)
– cross-currency swaps (note 15)
– forward foreign currency contracts (note 15)
Liabilities at fair value
Level 1
£m
Level 2
£m
Level 3
£m
78
–
–
–
78
–
–
–
–
–
180
305
280
765
255
84
129
468
57
–
–
–
57
–
–
–
–
2019
Total
£m
135
180
305
280
900
255
84
129
468
Level 1
£m
Level 2
£m
Level 3
£m
141
–
–
–
141
–
–
–
–
–
187
431
117
735
181
56
279
516
76
–
–
–
76
–
–
–
–
2018
Total
£m
217
187
431
117
952
181
56
279
516
Level 2 financial instruments are not traded in an active market, but the fair values are based on quoted market prices, broker/dealer quotations,
or alternative pricing sources with reasonable levels of price transparency. The Group’s level 2 financial instruments include OTC derivatives.
Netting arrangements of derivative financial instruments
The gross fair value of derivative financial instruments as presented in the Group balance sheet, together with the Group’s rights of offset
associated with recognised financial assets and recognised financial liabilities subject to enforceable master netting arrangements and similar
agreements, is summarised as follows:
2019
2018
Amount
presented
in the
Group
balance
sheet*
£m
Related
amounts not
offset in the
Group
balance
sheet
£m
Amount
presented
in the
Group
balance
sheet*
£m
Related
amounts not
offset in the
Group
balance
sheet
£m
Net
amount
£m
Net
amount
£m
765
(291)
474
735
(295)
440
(468)
297
291
–
(177)
297
(516)
219
295
–
(221)
219
Financial assets
– Derivative financial instruments (note 15)
Financial liabilities
– Derivative financial instruments (note 15)
* No financial instruments have been offset in the Group balance sheet.
The Group is subject to master netting arrangements in force with financial counterparties with whom the Group trades derivatives.
183
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 22 Financial instruments and risk management continued
The master netting arrangements determine the proceedings should either party default on their obligations. In case of any event of default: the
non-defaulting party will calculate the sum of the replacement cost of outstanding transactions and amounts owed to it by the defaulting party.
If that sum exceeds the amounts owed to the defaulting party, the defaulting party will pay the balance to the non-defaulting party. If the sum is
less than the amounts owed to the defaulting party, the non-defaulting party will pay the balance to the defaulting party.
The hedged items by risk category are presented below:
2019
Accumulated
amount of fair
value hedge
adjustments on
the hedged item
included in the
carrying amount
of the hedged
item
£m
Line item
in the
statement of
financial
position where
the hedged
item is
included
£m
Carrying amount
of the hedged
item
£m
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Cash flow
hedge
reserve
£m
5,136
210 Borrowings
(9)
4,013
2
(49)
Borrowings
Derivative
financial
instruments
Derivative
financial
instruments
163
(308)
–
1
–
(1)
Fair value hedges
Interest rate risk
– borrowings (liabilities)
Cash flow hedges
Interest rate risk
– borrowings (liabilities)
– derivative financial instruments (assets)*
– derivative financial instruments (liabilities)*
* The carrying value reported for derivative financial instruments represents the aggregated exposure as at the balance sheet date. For assets, the gross nominal value amounts to £226 million (2018: £nil)
and for liabilities, the gross nominal value amounts to £932 million (2018: £nil).
2018
Accumulated
amount of fair
value hedge
adjustments on
the hedged item
included in the
carrying amount
of the hedged
item
£m
Line item
in the statement
of financial
position where
the hedged
item is
included
£m
Carrying amount
of the hedged
item
£m
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Cash flow
hedge
reserve
£m
6,424
179
Borrowings
(32)
2,819
Borrowings
189
(146)
Fair value hedges
Interest rate risk
– borrowings (liabilities)
Cash flow hedges
Interest rate risk
– borrowings (liabilities)
£372 million (2018: £4,647 million) of the Group’s borrowings are designated as net investment hedge instruments of the Group’s net
investments in foreign operations. In line with the Group’s risk management policies, the net investment hedge relationships are reviewed
periodically. Consequently, a number of these relationships have matured in 2019. The change in the value used for calculating hedge
ineffectiveness for hedged items designated under net investment hedge relationships is £22 million (2018: £226 million).
As at 31 December 2019, the total balance of the cash flow hedge reserve was a loss of £346 million (2018: loss of £177 million) including a
loss of £309 million (2018: loss of £146 million) in relation to interest rate exposure and foreign currency exposure arising from borrowings
held by the Group, a loss of £160 million (2018: loss of £98 million) in relation to interest rate exposure on forecasted borrowings, and a gain of
£105 million (2018: gain of £48 million) in relation to deferred tax arising from cash flow hedges. The remainder related to the Group’s foreign
currency exposure on forecasted transactions, and cost of hedging (note 18(c)(ii)).
184
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 23 Business combinations, disposals and other changes in the Group
(a) Reynolds American Inc. (“RAI”)
On 25 July 2017, the Group announced the completion of the
acquisition of the remaining 57.8% of RAI not already owned by the
Group for a consideration of £41.8 billion. RAI ceased to be reported as
an associate and has been consolidated as a wholly owned subsidiary
from the acquisition date. RAI shareholders received, for each share of
RAI common stock, US$29.44 in cash, without interest, and 0.5260
BAT ordinary shares represented by BAT American Depositary Shares
listed on the New York Stock Exchange. The fair value of consideration
paid to RAI shareholders was £41,770 million. Included in the fair value
of consideration paid to RAI shareholders is £22,828 million of non-
cash consideration of which £22,773 million arises from the issue of
BAT ordinary shares (note 18).
On 22 November 2018, the Group completed the acquisition of
Quantus Beteiligungs-und Beratungsgesellschaft mbH, Germany’s
leading vapour retail chain trading as ‘Highendsmoke’, from a private
shareholder. The fair value of consideration payable was £21 million.
Goodwill of £11 million, representing a strategic premium to enter the
German vapour retail market, and trademarks and similar intangibles of
£13 million were recognised on acquisition.
On 26 September 2018, as part of an agreement to acquire an
additional 44% stake in the Myanmar business, the Group acquired the
business and individual assets of a local distributor, Star Way Limited,
from IMU Enterprises Limited for £6 million. Goodwill of £3 million,
representing anticipated synergies, was recognised on acquisition.
In accordance with IFRS 3, the step-acquisition of RAI has been
accounted for as if the Group has contributed its previously held
equity interest in RAI at fair value as part of the consideration for
acquiring 100% of the net assets of RAI. The value attributable to
BAT’s shareholding was £30,145 million, making the total acquisition
price £71,915 million. In 2017, the difference between the fair value
and the carrying value of the previously held equity interest has been
recognised as a gain in the income statement.
The goodwill of £34,280 million and brands and similar intangibles
of £75,482 million were recognised in the transaction. Goodwill on
the acquisition of the business represents a strategic premium to enter
the United States market as well as synergies and cost savings that are
anticipated to be realised post-acquisition.
(b) Other acquisitions
The Group acquired certain businesses and other tobacco assets as
noted below. The financial impact of these transactions to the Group
were immaterial individually and in aggregate. Except as noted, there
were no material differences between the fair value and book values of
net assets acquired in business combinations.
On 21 December 2017, the Group signed an agreement to acquire
100% of the share capital of Twisp Proprietary Limited, a South
African e-cigarette/nicotine vapour company with a market share of
circa 70% within South Africa and a leading presence in shopping
malls via its branded kiosks outlets.
Completion of the proposed acquisition was conditional upon South
African anti-trust clearance, which was given in the second half of
2019 and BAT acquired control on 30 September 2019 for a purchase
price of £25 million of which £6 million is deferred and contingent
upon future performance in the market. Goodwill of £12 million,
representing a strategic premium to enter this segment of the South
African vapour market, and trademarks and similar intangibles of
£15 million were recognised on acquisition.
On 8 April 2019, the Group via its US subsidiary R.J. Reynolds Vapor
Company (“RJR Vapor”), acquired a 45% stake in VapeWild Holdings
LLC, a vertically integrated vapour manufacturer and retailer with 13
branded vape shops and an e-commerce platform focused on its own
branded liquids, for US$40 million. This was followed by a further
acquisition of 15% on 24 June 2019 for US$8 million, giving the
Group a 60% interest in the target for US$48 million (£36 million).
The Group has accounted for these investments as a single transaction
and has consolidated VapeWild as a subsidiary from the date of the first
investment. Goodwill of £11 million, representing a strategic premium
to enter this segment of the US vapour market, and trademarks and
similar intangibles of £39 million were recognised on acquisition.
Following the announcements with regards to flavours in vapour
in the US, goodwill was impaired in full in 2019.
On 1 August 2017, the Group acquired certain tobacco assets,
including a distribution company, Tobacco Press d.o.o. Mostar,
from Fabrika Duhana Sarajevo d.d in Bosnia-Herzegovina. The assets
acquired, including goodwill of £2 million, brands and other
intangibles of £39 million, and other assets, were purchased for a total
consideration of £39 million.
On 5 May 2017, the Group acquired certain tobacco assets, including
a distribution company, Express Logistic and Distribution EOOD
(“ELD”), from Bulgartabac Holding AD in Bulgaria. The assets
acquired, including brands and other intangibles of £117 million,
were purchased for a total consideration of £110 million, of which
£28 million was contingent upon future performance in the market.
£14 million of this was paid during 2018 and £13 million of this was
paid during 2019. Subsequently, ELD was disposed of in 2019 at
carrying value.
On 5 April 2017, the Group acquired the business and certain assets
of Must Have Limited (trading as ViP Electronic Cigarette (“ViP”)), a
company in administration. ViP is one the largest e-cigarette retailers
in the UK with a large point of sale network. The assets acquired,
including goodwill of £1 million, intellectual property and other
intangibles of £9 million, and other assets, were purchased for a total
consideration of £12 million.
On 4 January 2017, the Group completed the acquisition of 100% of
Winnington Holding AB, a Swedish manufacturer of ‘white’ snus, for
a purchase price of £31 million. Goodwill of £8 million and brands and
similar intangibles of £28 million were recognised. £8 million of the
consideration was contingent on post-acquisition targets being met
and was substantially settled in January 2019.
On 30 December 2015, the Group acquired 100% of the CHIC Group
from private shareholders. The fair value of the consideration payable
was £82 million, of which £30 million was contingent on achievement
of certain post-acquisition targets. £6 million of this was paid during
2016, £13 million during 2017 and a £1 million in final settlement
in 2018.
185
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 23 Business combinations, disposals and
other changes in the Group continued
On 17 November 2015, the Group acquired 100% of Blue Nile
Cigarette Company Limited from a private shareholder. The fair
value of the consideration payable was £45 million of which £8 million
was contingent on achievement of certain post-acquisition targets.
Subsequent payments in respect of this were £1 million in 2016,
£5 million in 2017, £1 million in 2018 and £1 million in 2019.
On 30 September 2015, the Group acquired TDR and other tobacco
and retail assets from Adris Grupa d.d. (“Adris”) for a total enterprise
value of €550 million. Part of the consideration was contingent upon
certain targets being met post-acquisition, and £5 million of this was
paid in January 2017. In 2019, the Group reached an agreement with
Adris regarding the level of contingent consideration such that any
remaining amounts would not be paid by the Group and the Group
received €3 million in full and final settlement of all claims between
Adris and the Group. Consequently, €9 million of cash and deferred
consideration has been recognised as other income (note 3(e)).
(c) Non‑controlling interests
In 2019, the Group made a capital contribution to Brascuba
Cigarrillos S.A. at a cost of £20 million. This contribution was in
proportion to a capital contribution made by the non-controlling
interest to the Group company and as such, the Group’s shareholding
remains unchanged.
In 2018, included in the acquisition of non-controlling interests are
the purchases of the remaining shares in British American Tobacco
Vranje a.d. in Serbia and an additional 44% stake in British American
Tobacco Myanmar Limited. The financial impact of these transactions
to the Group is immaterial individually and in aggregate.
During 2017, the Group acquired the remaining 49% interest in
IPRESS d.o.o.
During 2015, the Group acquired a further 0.2% interest in BAT
Chile Operaciones S.A. at a cost of £1 million. This increased the
Group’s shareholding to 99%. A further 0.01% interest was acquired
during 2017.
(d) Other transactions
On 10 January 2019, the Group acquired a minority stake in
AYR Limited, a vapour technology company based in the UK,
for £8 million, with the potential to increase this in the future.
The investment terms also provide for the Group and AYR to agree a
commercial collaboration agreement under which the Group and AYR
will jointly develop future vaping products.
24 Share‑based payments
The Group operates a number of share-based payment arrangements
of which the two principal ones are:
Long‑Term Incentive Plan (LTIP)
Nil-cost options exercisable after three years from date of grant
with a contractual life of 10 years. Payout is subject to performance
conditions based on earnings per share (40% of grant), operating cash
flow (20% of grant), total shareholder return (20% of grant) and net
turnover (20% of grant) in 2019, 2018 and 2017. Total shareholder
return combines the share price and dividend performance of the
Company by reference to one comparator group. Participants are
not entitled to dividends prior to the exercise of the options. A cash
equivalent dividend accrues through the vesting period and is paid on
vesting. Both equity and cash-settled LTIP awards are granted in March
each year.
Following the acquisition of RAI on 25 July 2017, underlying RAI shares
for LTIPs were replaced with BAT American Depositary Shares (ADS).
LTIP awards for ADSs are measured against the performance conditions
of RAI at the maximum of 150% at the vesting date. Equity-settled
LTIPs were granted by RAI in March each year with options exercisable
after three years from the date of grant with the payment made no
later than 90 days from date of vesting. Participants are not entitled to
dividends prior to exercise of the options.
Deferred Share Bonus Scheme (DSBS)
Free ordinary shares released three years from date of grant and may
be subject to forfeit if a participant leaves employment before the
end of the three-year holding period. Participants receive a separate
payment equivalent to a proportion of the dividend payment during
the holding period. Both equity and cash-settled deferred shares are
granted in March each year.
The Group also has a number of other arrangements which are not
material for the Group and these are as follows:
Sharesave Scheme (SAYE)
Options granted in March each year from 2011 onwards (previously
November until 2009 and no options were granted during 2010)
by invitation at a 20% discount to the market price. Options to this
equity-settled scheme are exercisable at the end of a three-year or five-
year savings contract. Participants are not entitled to dividends prior to
the exercise of the options. The maximum amount that can be saved
by a participant in this way is £6,000 in any tax year.
Share Reward Scheme (SRS) and International Share
Reward Scheme (ISRS)
Free shares granted in April each year (maximum £3,600 in any year)
under the equity-settled schemes are subject to a three-year holding
period. Participants receive dividends during the holding period which
are reinvested to buy further shares.
Partnership Share Scheme
Open to all eligible employees, where employees can allocate part
of their pre-tax salary to purchase shares in British American Tobacco
p.l.c.. The maximum amount that can be allocated in this way to any
individual is £1,800 in any tax year. The shares purchased are held in
a UK-based trust and are normally capable of transfer to participants
tax-free after a five-year holding period.
186
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 24 Share‑based payments continued
Share‑based payment expense
The amounts recognised in the income statement in respect of share-based payments were as follows:
LTIP (note (a))
DSBS (note (b))
Other schemes
Total recognised in the income statement (note 3(a))
Equity-
settled
£m
58
50
7
115
2019
Cash-
settled
£m
1
4
–
5
Equity-
settled
£m
70
44
7
121
2018
Cash-
settled
£m
–
2
–
2
Equity-
settled
£m
56
42
7
105
2017
Cash-
settled
£m
3
9
–
12
Share‑based payment liability
The Group issues to certain employees cash-settled share-based payments that require the Group to pay the intrinsic value of these share-based
payments to the employee at the date of exercise. The Group has recorded liabilities in respect of vested and unvested grants at the end of 2019
and 2018:
LTIP
DSBS
Total liability
2019
2018
Vested
£m
Unvested
£m
Vested
£m
Unvested
£m
0.5
0.3
0.8
2.8
6.2
9.0
0.5
0.2
0.7
2.6
6.1
8.7
(a) Long-Term incentive Plan
Details of the movements for the equity- and cash-settled LTIP scheme during the years ended 31 December 2019 and 31 December 2018, were
as follows:
Outstanding at start of year
Granted during the period
Exercised during the period
Forfeited during the period
Outstanding at end of year
Exercisable at end of year
2019
2018
Equity-
settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
Equity-settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
6,908
4,552
(1,045)
(1,222)
9,193
739
306
202
(129)
(61)
318
25
6,030
3,067
(1,739)
(450)
6,908
676
378
66
(102)
(36)
306
22
As at 31 December 2019, the Group has 9,193,000 shares (2018: 6,908,000 shares) outstanding which includes 2,479,057 shares
(2018: 1,208,129 shares) which are related to RAI LTIP awards from which 43,924 shares (2018: 72,033 shares) are exercisable at the end of
the year.
The weighted average British American Tobacco p.l.c. share price at the date of exercise for share options exercised during the period was £28.31
(2018: £38.90; 2017: £51.95) for equity-settled and £30.87 (2018: £40.62; 2017: £52.08) for cash-settled options.
The weighted average British American Tobacco p.l.c. share price for ADS on the New York Stock Exchange at the date of exercise for share
options exercised during the period relating to equity-settled RAI LTIP awards was US$36.35 (2018: US$51.43).
The outstanding shares for the year ended 31 December 2019 had a weighted average remaining contractual life of 8.2 years (2018: 8.1 years;
2017: 8.1 years) for the equity-settled scheme, 1.93 years for RAI equity-settled (2018: 1.91 years scheme; 2017: 2.17 years) and 8.3 years
(2018: 8.1 years; 2017: 8.3 years) for the cash-settled share-based payment arrangements.
187
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 24 Share‑based payments continued
(b) Deferred Share Bonus Scheme
Details of the movements for the equity- and cash-settled DSBS scheme during the years ended 31 December 2019 and 31 December 2018,
were as follows:
Outstanding at start of year
Granted during the period
Exercised during the period
Forfeited during the period
Outstanding at end of year
Exercisable at end of year
2019
2018
Equity-
settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
Equity-settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
3,248
2,097
(1,500)
(97)
3,748
90
281
202
(184)
(17)
282
6
2,962
1,262
(940)
(36)
3,248
79
382
66
(145)
(22)
281
5
The weighted average British American Tobacco p.l.c. share price at the date of exercise for share options exercised during the financial year was
£28.40 (2018: £40.00; 2017: £52.52) for equity-settled and £30.06 (2018: £40.51; 2017: £52.50) for cash-settled options.
The outstanding shares for the year ended 31 December 2019 had a weighted average remaining contractual life of 1.5 years (2018: 1.3 years;
2017: 1.3 years) for the equity-settled scheme and 1.5 years (2018: 1.1 years; 2017: 1.2 years) for the cash-settled scheme.
Valuation assumptions
Assumptions used in the Black-Scholes models to determine the fair value of share options at grant date were as follows:
Expected volatility (%)
Average expected term to exercise (years)
Risk-free rate (%)
Expected dividend yield (%)
Expected dividend yield (%) – Management Board
Share price at date of grant (£)
Share price at date of grant (£) – Management Board
Fair value at grant date (£)
Fair value at grant date (£) – Management Board
LTIP
22.0
3.5
0.7
6.5
6.0
30.83
33.28
21.93
24.03
2019
DSBS
22.0
3.0
0.7
6.5
6.0
30.83
33.28
25.35
25.35
LTIP
18.0
3.5
1.0
5.0
5.0
38.94
38.94
29.39
29.39
2018
DSBS
18.0
3.0
1.0
5.0
5.0
38.94
38.94
33.50
33.50
Market condition features were incorporated into the Monte-Carlo models for the total shareholder return elements of the LTIP, in determining
fair value at grant date. Assumptions used in these models were as follows:
Average share price volatility FMCG comparator group (%)
Average correlation FMCG comparator group (%)
2019
LTIP
18
28
2018
LTIP
18
31
Fair values determined from the Black-Scholes and Monte-Carlo models use assumptions revised at the end of each reporting period for cash-
settled share-based payment arrangements.
The expected British American Tobacco p.l.c. share price volatility was determined taking account of the return index (the share price index plus
the dividend reinvested) over a five-year period. The FMCG share price volatility and correlation was also determined over the same periods.
The average expected term to exercise used in the models has been adjusted, based on management’s best estimate, for the effects of non-
transferability, exercise restrictions and behavioural conditions, forfeiture and historical experience.
The risk-free rate has been determined from market yield curves for government gilts with outstanding terms equal to the average expected term
to exercise for each relevant grant. The expected dividend yield was determined by calculating the yield from the last two declared dividends
divided by the grant share price.
In addition to these valuation assumptions, LTIP awards contain earnings per share performance conditions. As these are non-market performance
conditions they are not included in the determination of fair value of share options at the grant date, however they are used to estimate the
number of awards expected to vest. This pay-out calculation is based on expectations published in analysts’ forecasts.
188
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 25 Group employees
The average number of persons employed by the Group and its associates during the year, including Directors, was 94,846 (2018: 95,239).
United States
APME
AMSSA
ENA
Subsidiary undertakings
Associates
2019
Number
5,046
14,910
18,638
25,505
64,099
30,747
94,846
2018
Number
5,066
15,074
19,351
26,102
65,593
29,646
95,239
Included within the employee numbers for ENA are certain employees in the UK in respect of central functions. Some of the costs of these
employees are allocated or charged to the various regions and markets in the Group.
26 Related party disclosures
The Group has a number of transactions and relationships with related parties, as defined in IAS 24 Related Party Disclosures, all of which are
undertaken in the normal course of business. Transactions with CTBAT International Limited (a joint operation) are not included in these
disclosures as the results are immaterial to the Group.
Transactions and balances with associates relate mainly to the sale and purchase of cigarettes and tobacco leaf. The Group’s share of dividends
from associates, included in other net income in the table below, was £239 million (2018: £211 million; 2017: £688 million).
Transactions
– revenue
– purchases
– other net income
Amounts receivable at 31 December
Amounts payable at 31 December
2019
£m
511
(79)
248
42
(2)
2018
£m
473
(101)
216
26
(1)
2017
£m
366
(218)
699
40
(1)
As explained in note 23, in 2017, the Group completed the acquisition of the remaining 57.8% of RAI not already owned. This transaction has
not been included in the table above.
On 17 December 2012, a wholly-owned subsidiary of the Group, BATUS Japan Inc. (BATUSJ), entered into an Amendment and Extension
Agreement (referred to as the Amendment) with a wholly-owned subsidiary of RAI, R.J. Reynolds Tobacco Company (referred to as RJRTC).
The Amendment modifies the American-blend Cigarette Manufacturing Agreement (referred to as the 2010 Agreement), effective as of
1 January 2010.
Prior to the Amendment, the term of the 2010 Agreement was scheduled to expire on 31 December 2014, subject to early termination and
extension provisions. Pursuant to the Amendment, the Manufacturing Agreement would remain in effect beyond 31 December 2014, provided
that either RJRTC or BATUSJ may terminate the Manufacturing Agreement by furnishing three years’ notice to the other party. Such notice was
given in January 2016. As a result of early termination of this agreement the Group agreed to a compensation payment of US$90 million of which
US$7 million was paid to RJRTC on 22 September 2016, with the Group recognising the full expense of US$90 million as required by IFRS in
2016. The balance was paid in March 2017.
During 2019, the Group acquired 60% of VapeWild Holdings LLC and a minority stake in AYR Limited. The Group also made a capital injection in
Brascuba Cigarillos S.A..
During 2018, the Group acquired a further 44% interest in British American Tobacco Myanmar Limited and a further 11% interest in British
American Tobacco Vranje.
During 2017, the Group acquired the remaining 49% interest in IPRESS d.o.o. and a further 0.01% interest in British American Tobacco Chile
Operaciones S.A. The combined costs are less than £1 million.
As explained in note 11, contributions to the British American Tobacco UK Pension Fund are secured by a charge over the Group’s Head Office
(Globe House) up to a maximum of £150 million.
The key management personnel of British American Tobacco consist of the members of the Board of Directors of British American Tobacco
p.l.c. and the members of the Management Board. No such person had any material interest during the year in a contract of significance (other
than a service contract) with the Company or any subsidiary company. The term key management personnel in this context includes their close
family members.
189
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 2019
£m
2018
£m
2017
£m
26
4
23
53
21
4
18
43
24
5
16
45
Total
2017
£’000
26 Related party disclosures continued
The total compensation for key management personnel, including Directors, was:
– salaries and other short-term employee benefits
– post-employment benefits
– share-based payments
The following table, which is not part of IAS 24 disclosures, shows the aggregate emoluments of the Directors of the Company.
Executive Directors
Chairman
Non-Executive Directors
2019
£’000
2018
£’000
2017
£’000
2019
£’000
2018
£’000
2017
£’000
2019
£’000
2018
£’000
2017
£’000
2019
£’000
2018
£’000
Salary; fees; benefits; incentives
– salary
– fees
– taxable benefits
– short-term incentives
– long-term incentives
Sub-total
Pension; other emoluments
– pension
– other emoluments
Sub-total
Total emoluments
2,356
2,211
2,122
608
4,791
4,420
427
385
4,689
5,031
5,300 10,192
12,175 12,969 17,388
695
137
680
116
660
129
969
310
1,092
303
832
796
789
1,279
1,395
1,042
195
2,356
1,664
1,055
4,791
4,420
2,211
2,122
1,772
1,702
846
709
4,689
5,031
5,300 10,192
1,237 14,286 15,160 19,414
686
47
733
612
50
662
12,908 13,940 18,050
921
50
971
832
796
789
1,279
1,395
612
50
662
1,237 15,019 16,131 20,076
686
47
733
921
50
971
Aggregate gains on LTIP shares exercised in the year
Jack Bowles
Tadeu Marroco
LTIP – Value of awards 2016
Jack Bowles
Tadeu Marroco
1 For information only as awards are made as nil-cost options.
Sharesave – Aggregate Gains 2019
Nicandro Durante
Ben Stevens
Sharesave – Value of award 2014
Nicandro Durante
Ben Stevens
Award
12 May 2016
12 May 2016
Exercised
LTIP shares
22,711
15,154
Exercise date
20 May 2019
21 June 2019
Price per share
Aggregate gain
(£)
29.72
27.97
(£)
674,971
423,857
Shares
31,943
21,315
Price per share
(£)1
Face value
(£)
42.34
42.34
1,352,467
902,477
Award date
Shares
Exercise date
Price per share
(£)
Aggregate gain
(£)
26 August 2014
26 August 2014
493
02 April 2019
543 01 October 2019
31.79
29.87
1,930
1,083
Shares
493
543
Price per share
(£)
27.87
27.87
Face value
(£)
13,740
15,133
In 2019, no Sharesave options were exercised by current Executive Directors.
190
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments
1. The Group is subject to contingencies pursuant to requirements
that it complies with relevant laws, regulations and standards.
2. Failure to comply could result in restrictions in operations,
damages, fines, increased tax, increased cost of compliance,
interest charges, reputational damage or other sanctions.
These matters are inherently difficult to quantify. In cases where
the Group has an obligation as a result of a past event existing
at the balance sheet date, if it is probable that an outflow of
economic resources will be required to settle the obligation
and if the amount of the obligation can be reliably estimated,
a provision will be recognised based on best estimates and
management’s judgement.
3. There are, however, contingent liabilities in respect of litigation,
taxes in some countries and guarantees for which no provisions
have been made.
General Litigation Overview
4. There are a number of legal and regulatory actions, proceedings
and claims against Group companies related to tobacco and new
category products that are pending in a number of jurisdictions.
These proceedings include, among other things, claims for
personal injury (both individual claims and class actions) and
claims for economic loss arising from the treatment of smoking
and health-related diseases (such as medical recoupment claims
brought by local governments).
5. The plaintiffs in these cases seek recovery on a variety of legal
theories, including negligence, strict liability in tort, design defect,
failure to warn, fraud, misrepresentation, violations of unfair and
deceptive trade practices statutes, conspiracy, medical monitoring
and violations of competition and antitrust laws. The plaintiffs
seek various forms of relief, including compensatory and, where
available, punitive damages, treble or multiple damages and
statutory damages and penalties, creation of medical monitoring
and smoking cessation funds, disgorgement of profits, attorneys’
fees, and injunctive and other equitable relief.
6. Although alleged damages often are not determinable from a
complaint, and the law governing the pleading and calculation of
damages varies from jurisdiction to jurisdiction, compensatory and
punitive damages have been specifically pleaded in a number of
cases, sometimes in amounts ranging into the hundreds of millions
and even hundreds of billions of sterling.
7. With the exception of the Engle progeny cases described below, the
Group continues to win the majority of tobacco-related litigation
claims that reach trial, and a very high percentage of the tobacco-
related litigation claims brought against them, including Engle
progeny cases, continue to be dismissed at or before trial. Based on
their experience in tobacco-related litigation and the strength
of the defences available to them in such litigation, the Group’s
companies believe that their successful defence of tobacco-related
litigation in the past will continue in the future.
8. Group companies generally do not settle claims. However, Group
companies may enter into settlement discussions in some cases,
if they believe it is in their best interests to do so. Exceptions to
this general approach include, but are not limited to, actions
taken pursuant to ‘offer of judgment’ statutes and Filter Cases,
as defined below. An ‘offer of judgment,’ if rejected by the
plaintiff, preserves the Group’s right to recover attorneys’ fees
under certain statutes in the event of a verdict favourable to the
Group. Such offers are sometimes made through court-ordered
mediations. Other settlements by Group companies include the
State Settlement Agreements (described below), the funding by
various tobacco companies of a US$5.2 billion (approximately
£3.9 billion) trust fund contemplated by the Master Settlement
Agreement to benefit tobacco growers, the original Broin flight
attendant case, and most of the Engle progeny cases pending in US
federal court, after the initial docket of over 4,000 such cases was
reduced to approximately 400 cases. The Group believes that the
circumstances surrounding these claims are readily distinguishable
from the current categories of tobacco-related litigation claims
involving Group companies.
9. Although the Group intends to defend all pending cases vigorously,
and believes that the Group’s companies have valid bases for
appeals of adverse verdicts and valid defences to all actions, and
that an outflow of resources related to any individual case is not
considered probable, litigation is subject to many uncertainties,
and, generally, it is not possible to predict the outcome of any
particular litigation pending against Group companies, or to
reasonably estimate the amount or range of any possible loss.
Furthermore, a number of political, legislative, regulatory and
other developments relating to the tobacco industry and cigarette
smoking have received wide media attention. These developments
may negatively affect the outcomes of tobacco-related legal actions
and encourage the commencement of additional similar litigation.
Therefore, the Group does not provide estimates of the financial
effect of the contingent liabilities represented by such litigation, as
such estimates are not practicable.
10. The following table lists the categories of the tobacco-related
actions pending against Group companies as of 31 December
2019 and the increase or decrease from the number of cases
pending against Group companies as of 31 December 2018.
Details of the quantum of past judgments awarded against Group
companies, the majority of which are under appeal, are also
identified along with any settlements reached during the relevant
period. Given the volume and more active nature of the Engle
progeny cases and the Filter Cases in the US described below, and
the fluctuation in the number of such cases and amounts awarded
from year to year, the Group presents judgment or settlement
figures for these cases on a three-year basis. Where no quantum is
identified, either no judgment has been awarded against a Group
company, or where a verdict has been reached no quantification
of damages has been given, or no settlement has been entered
into. Further details on the judgments, damages quantification and
settlements are included within the case narratives below. For a
discussion of the non-tobacco related litigation pending against
the Group, see note 27, paragraph 85, et seq.
191
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
Case Type
US tobacco-related actions
Medical reimbursement cases (note 2)
Class actions (note 3)
Individual smoking and health cases (note 4)
Engle Progeny Cases (note 5)
Broin II Cases (note 6)
Filter Cases (note 7)
State Settlement Agreements – Enforcement and Validity (note 8)
Non-US tobacco-related actions
Medical reimbursement cases
Class actions (note 9)
Individual smoking and health cases (note 10)
Case Numbers as at
31 December 2019
Case Numbers as at
31 December 2018 (note 1)
Change in Number
Increase/(Decrease)
2
19
135
1,773
1,228
51
4
18
13
81
2
20
111
2,268
1,406
58
2
19
13
107
No change
(1)
24
(495)
(178)
(7)
2
(1)
No change
(26)
(Note 1) This includes cases to which the Reynolds American Inc. (“RAI”) group companies were a party at such date.
(Note 2) This category of cases includes the Department of Justice action. See note 27, paragraphs 20-24 and the list of Closed Litigation Matters.
(Note 3) See note 27, paragraphs 25-38.
(Note 4) This category of cases includes smoking and health cases alleging personal injuries caused by tobacco use or exposure brought by
or on behalf of individual plaintiffs based on theories of negligence, strict liability, breach of express or implied warranty and violations of state
deceptive trade practices or consumer protection statutes. The plaintiffs seek to recover compensatory damages, attorneys’ fees and costs and
punitive damages. Out of the 135 active individual smoking and health cases, six judgments have been returned in the plaintiffs’ favour, awarding
damages totalling approximately US$192 million (approximately £145 million), which are pending post-trial in trial courts or on appeal. For a
further description of these cases, see note 27, paragraph 40.
(Note 5) In July 1998, trial began in Engle v R.J. Reynolds Tobacco Co., a then-certified class action filed in Circuit Court, Miami-Dade County,
Florida, against US cigarette manufacturers, including R. J. Reynolds Tobacco Co. (“RJRT”) (individually, and as successor by merger to Lorillard
Tobacco Company (“Lorillard Tobacco”)) and Brown & Williamson Holdings, Inc. (formerly Brown & Williamson Tobacco Corporation) (“B&W”).
In July 2000, the jury in Phase II awarded the class a total of approximately US$145 billion (approximately £109.5 billion) in punitive damages,
apportioned US$36.3 billion (approximately £27.4 billion) to RJRT, US$17.6 billion (approximately £13.3 billion) to B&W, and US$16.3 billion
(approximately £12.3 billion) to Lorillard Tobacco. This decision was appealed and ultimately resulted in the Florida Supreme Court in December
2006 decertifying the class and allowing judgments entered for only two of the three Engle class representatives to stand and setting aside the
punitive damages award. Putative Engle class members were permitted to file individual lawsuits, deemed ‘Engle progeny cases’, against the Engle
defendants, within one year of the Supreme Court’s decision (subsequently extended to 11 January 2008). Between the period 1 January 2017
and 31 December 2019, 40 judgments have been returned in the plaintiffs’ favour, awarding damages totalling approximately US$354 million
(approximately £267 million). Certain of these judgments have been appealed by RJRT and in certain other cases, RJRT still had time to appeal, as
of 31 December 2019. For a further description of the Engle progeny cases, see note 27, paragraphs 29-38.
(Note 6) Broin v Philip Morris, Inc. was a class action filed in Circuit Court in Miami-Dade County, Florida in 1991 and brought on behalf of
flight attendants alleged to have suffered from diseases or ailments caused by exposure to Environmental Tobacco Smoke (“ETS”) in airplane
cabins. Group companies and other cigarette manufacturer defendants settled Broin, agreeing to pay a total of US$300 million (approximately
£226 million) to fund research on the detection and cure of tobacco-related diseases and US$49 million (approximately £37 million) in plaintiffs’
counsel’s fees and expenses. Group companies’ share of these payments totalled US$174 million (approximately £131 million). Broin II cases refer
to individual cases by class members. There have been no Broin II trials since 2007. For a further description of the Broin II cases, see note 16 to
paragraph 40.
(Note 7) Includes claims brought against Lorillard Tobacco and Lorillard Inc. by individuals who seek damages resulting from their alleged
exposure to asbestos fibres that were incorporated into filter material used in one brand of cigarettes manufactured by a predecessor to Lorillard
Tobacco for a limited period of time ending more than 50 years ago. Since 1 January 2017, Lorillard Tobacco and RJRT have paid, or have
reached agreement to pay, a total of approximately US$31 million (approximately £23 million) in settlements to resolve 138 Filter Cases. See note
17 to paragraph 40.
(Note 8) Group companies’ expenses and payments under the State Settlement Agreements for 2019 amounted to approximately US$2.8 billion
(approximately £2.1 billion) in respect of settlement expenses and US$2.9 billion (approximately £2.2 billion) in respect of settlement cash
payments. See note 27, paragraph 43. The pending cases referred to above relate to the enforcement, validity or interpretation of the State
Settlement Agreements in which RJRT, B&W or Lorillard Tobacco is a party. See note 27, paragraphs 41-53.
192
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
(Note 9) Outside the United States, there are 13 class actions
being brought against Group companies as of 31 December
2019. These include class actions in the following jurisdictions:
Brazil (1), Canada (11) and Venezuela (1). For a description of the
Group companies’ class actions, see note 27, paragraphs 70-83.
Pursuant to the judgment in 2015 in the two Quebec class actions,
the plaintiffs were awarded damages and interest in the amount of
CAD$15.6 billion, most of which were on a joint and several basis
(approximately £9.1 billion), of which the Group companies’ share
was CAD$10.4 billion (approximately £6 billion). On 1 March 2019,
the Quebec Court of Appeal handed down a judgment which
largely upheld and endorsed the lower court’s previous decision in
the Quebec Class Actions, as further described below. The share of
the judgment for Imperial Tobacco Canada Limited (“Imperial”), the
Group’s operating company in Canada, was reduced to approximately
CAD$9.2 billion (approximately £5.4 billion). For a further description
of the Quebec Class Actions, see paragraph 78. All of the class
actions in Canada are currently stayed pursuant to a court order.
See paragraph 58.
(Note 10) As at 31 December 2019, the jurisdictions with the most
active individual cases against Group companies were, in descending
order: Brazil (37), Italy (18), Chile (9), Canada (6), Argentina (5) and
Ireland (2). There were a further four jurisdictions with one active
case only. Out of these 81 cases, in 2019, two judgments have been
returned in the plaintiffs’ favour as of 31 December 2019, one case in
Argentina awarding damages totalling ARS$2,850,000 (approximately
£36,000) with post-judgment interest totalling approximately
£380,000, and one case in Turkey which gave no finding on
liability and remitted the case back to the court of first instance for
reconsideration, both of which are currently on appeal.
11. Certain terms and phrases used in this note 27 may require
some explanation.
a. “Judgment” or “final judgment” refers to the final decision of
the court resolving the dispute and determining the rights and
obligations of the parties. At the trial court level, for example,
a final judgment generally is entered by the court after a jury
verdict and after post-verdict motions have been decided.
In most cases, the losing party can appeal a verdict only after
a final judgment has been entered by the trial court.
b. “Damages” refers to the amount of money sought by a
plaintiff in a complaint, or awarded to a party by a jury or,
in some cases, by a judge. “Compensatory damages” are
awarded to compensate the prevailing party for actual losses
suffered, if liability is proved. In cases in which there is a finding
that a defendant has acted wilfully, maliciously or fraudulently,
generally based on a higher burden of proof than is required
for a finding of liability for compensatory damages, a plaintiff
also may be awarded “punitive damages”. Although damages
may be awarded at the trial court stage, a losing party may
be protected from paying any damages until all appellate
avenues have been exhausted by posting a supersedeas
bond. The amount of such a bond is governed by the law of
the relevant jurisdiction and generally is set at the amount of
damages plus some measure of statutory interest, modified at
the discretion of the appropriate court or subject to limits set
by a court or statute.
c. “Settlement” refers to certain types of cases in which cigarette
manufacturers, including RJRT, B&W and Lorillard Tobacco,
have agreed to resolve disputes with certain plaintiffs without
resolving the cases through trial.
d. All sums set out in note 27 have been converted to GBP and
US$ using the following end closing rates as at 31 December
2019: GBP 1 to US$ 1.32475, GBP 1 to CAD$ 1.71787, GBP
1 to EURO 1.1801777, GBP 1 to BRL 5.32907, GBP 1 to
AOA 638.83022, GBP 1 to NGN 480.77827, GBP 1 to KRW
1532.01, GBP 1 to HRK 8.78177and GBP 1 to JPY 143.96721.
US Tobacco Litigation
12. Group companies, notably RJRT (individually and as successor
by merger to Lorillard Tobacco) and B&W as well as other
leading cigarette manufacturers, are defendants in a number of
product liability cases. In a number of these cases, the amounts of
compensatory and punitive damages sought are significant.
13. The total number of US tobacco product liability cases pending
at 31 December 2019 involving RJRT, B&W and/or Lorillard
Tobacco was approximately 3,241. As at 31 December 2019,
British American Tobacco (Investments) Limited (“Investments”)
has been served as a co-defendant in one of those cases (2018:1).
No other UK-based Group company has been served as a co-
defendant in any US tobacco product liability case pending as at
31 December 2019.
14. Since many of these pending cases seek unspecified damages, it
is not possible to quantify the total amounts being claimed, but
the aggregate amounts involved in such litigation are significant,
possibly totalling billions of US dollars. The cases fall into four
broad categories: medical reimbursement cases; class actions;
individual cases and other claims.
15. RJRT (individually and as successor by merger to Lorillard Tobacco),
American Snuff Co., Santa Fe Natural Tobacco Company, Inc.
(“SFNTC”), R.J. Reynolds Vapor Company (“RJR Vapor”), RAI,
Lorillard Inc., other RAI affiliates and indemnitees, including but not
limited to B&W (collectively, the “Reynolds Defendants”), believe
that they have valid defences to the tobacco-related litigation
claims against them, as well as valid bases for appeal of adverse
verdicts against them. The Reynolds Defendants have, through
their counsel, filed pleadings and memoranda in pending tobacco-
related litigation that set forth and discuss a number of grounds
and defences that they and their counsel believe have a valid basis
in law and fact.
16. Scheduled trials. Trial schedules are subject to change, and
many cases are dismissed before trial. In the US, there are 28
cases, exclusive of Engle progeny cases, scheduled for trial as of
31 December 2019 through 31 December 2020, for the Reynolds
Defendants: 14 individual smoking and health cases, 13 Filter
Cases and one non-smoking and health case. There are also
approximately 146 Engle progeny cases against RJRT (individually
and as successor to Lorillard Tobacco) and B&W scheduled for trial
through 31 December 2020. It is not known how many of these
cases will actually be tried.
17. Trial results. From 1 January 2017 through 31 December 2019,
108 trials occurred in individual smoking and health, Engle
progeny, and Filter Cases in which the Reynolds Defendants were
defendants, including 20 where mistrials were declared. Verdicts in
favour of the Reynolds Defendants and, in some cases, other
defendants, were returned in 28 cases (including one directed
verdict after the jury reached an impasse in a punitive damages
trial), tried in Florida (26) and Massachusetts (2). Verdicts in favour
of the plaintiffs were returned in 46 cases (including one in which
the jury found for the plaintiff in Phase I and the parties reached a
resolution agreement prior to completion of Phase II), which were
tried in Florida (41), the US Virgin Islands (2), and Massachusetts
(3). Nine of the cases in Florida were dismissed during trial.
Two cases were continued during trial. Three cases were punitive
damages retrials.
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(a) Medical Reimbursement Cases
18. These civil actions seek to recover amounts spent by government
entities and other third-party providers on healthcare and welfare
costs claimed to result from illnesses associated with smoking.
22. The non-jury trial of the RICO portion of the claim began on
21 September 2004 and ended on 9 June 2005. On 17 August
2006, the federal district court issued its Final Judgment and
Remedial Order, which found certain defendants, including RJRT,
B&W, Lorillard Tobacco and Investments, had violated RICO,
but did not impose any direct financial penalties. The district
court instead enjoined the defendants from committing future
racketeering acts, participating in certain trade organisations,
making misrepresentations concerning smoking and health and
youth marketing, and using certain brand descriptors such as ‘low
tar’, ‘light’, ‘ultra-light’, ‘mild’ and ‘natural’. The district court also
ordered the defendants to issue ‘corrective communications’ on
five subjects, including smoking and health and addiction, and to
comply with further undertakings, including maintaining websites
of historical corporate documents and disseminating certain
marketing information on a confidential basis to the government.
In addition, the district court placed restrictions on the defendants’
ability to dispose of certain assets for use in the United States,
unless the transferee agrees to abide by the terms of the district
court’s order, and ordered certain defendants to reimburse the US
Department of Justice its taxable costs incurred in connection with
the case.
23. Defendants, including RJRT, B&W, Lorillard Tobacco and
Investments, appealed, and the US government cross-appealed
to the DC Circuit. On 22 May 2009, the DC Circuit affirmed the
federal district court’s RICO liability judgment, but vacated the
order and remanded for further factual findings and clarification
as to whether liability should be imposed against B&W, based on
changes in the nature of B&W’s business operations (including the
extent of B&W’s control over tobacco operations). The court also
remanded on three other discrete issues relating to the injunctive
remedies, including for the district court ‘to reformulate’ the
injunction on the use of low-tar descriptors ‘to exempt foreign
activities that have no substantial, direct, and foreseeable domestic
effects,’ and for the district court to evaluate whether corrective
communications could be required at point-of-sale displays (which
requirement the DC Circuit vacated). On 28 June 2010, the US
Supreme Court denied the parties’ petitions for further review.
24. On 22 December 2010, the district court dismissed B&W from
the litigation. In November 2012, the trial court entered an order
setting forth the text of the corrective statements and directed
the parties to engage in discussions with the Special Master to
implement them. After various proceedings and appeals, the
federal district court in October 2017 ordered RJRT and the
other US tobacco company defendants to fund the publishing of
compelled public statements in various US media outlets, including
in newspapers, and on television, the companies’ websites and
cigarette packaging. The compelled public statements began
appearing in US newspapers on 24 November 2017 and ran
serially over four months; they began appearing on national US
broadcast television networks on 27 November 2017 and ran
several times per week for one year. The statements also began
appearing on RJRT websites on 18 June 2018 and first appeared
on package onserts beginning in November 2018 (the onserts
will be distributed periodically through mid-2020). The district
court is considering mandating the display of the compelled
public statements at retail point of sale; an evidentiary hearing is
scheduled to begin on 14 September 2020.
19. At 31 December 2019, one US medical reimbursement suit
(Crow Creek Sioux Tribe v American Tobacco Co.) was pending
against RJRT, B&W and Lorillard Tobacco in a Native American
tribal court in South Dakota. The plaintiffs seek to recover actual
and punitive damages, restitution, funding of a clinical cessation
programme, funding of a corrective public education programme,
and disgorgement of unjust profits from sales to minors. No other
medical reimbursement suits are pending against these companies
by county or other political subdivisions of the states.
US Department of Justice Action
20. On 22 September 1999, the US Department of Justice brought
an action in the US District Court for the District of Columbia
against various industry members, including RJRT, B&W, Lorillard
Tobacco, B.A.T Industries p.l.c. (“Industries”) and Investments
(United States v Philip Morris USA Inc.). The US Department of
Justice initially sought (1) recovery of federal funds expended
in providing health care to smokers who developed alleged
smoking-related diseases pursuant to the Medical Care Recovery
Act and Medicare Secondary Payer provisions of the Social
Security Act and (2) equitable relief under the civil provisions of
the Racketeer Influenced and Corrupt Organizations Act (“RICO”),
including disgorgement of roughly US$280 billion (approximately
£211 billion) in profits the government contended were earned
as a consequence of a purported racketeering ‘enterprise’ along
with certain “corrective communications”. In September 2000, the
district court dismissed the government’s Medical Care Recovery
Act and Medicare Secondary Payer claims. In February 2005, the
US Court of Appeals for the DC Circuit (the “DC Circuit”) ruled
that disgorgement was not an available remedy.
21. Industries was dismissed for lack of personal jurisdiction on
28 September 2000. In addition, Investments was a defendant at
the trial, but intervening changes in controlling law post-trial led to
a 28 March 2011 court ruling that the court’s Final Judgment and
Remedial Order no longer applied to Investments prospectively,
and for this reason, Investments would not have to comply with
any of the remaining injunctive remedies being sought by the
government. As the government did not appeal the 28 March
2011 ruling, this means that Investments is no longer in the case
and is not subject to any injunctive relief that the court is expected
to order against the remaining defendants. As the case continued
as against RJRT and Lorillard Tobacco with respect to injunctive
relief and related matters, the following is noted.
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NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
(b) Class Actions
25. At 31 December 2019, RJRT, B&W and Lorillard Tobacco were
named as defendants in two separate actions attempting to
assert claims on behalf of classes of persons allegedly injured or
financially impacted by their smoking, and SFNTC was named
in 17 separate cases relating to the use of the words ‘natural,’
‘100% additive-free,’ or ‘organic’ in Natural American Spirit
advertising and promotional materials. If the classes are or remain
certified, separate trials may be needed to assess individual
plaintiffs’ damages. Among the pending class actions, 18 specified
the amount of the claim in the complaint, including 17 that
alleged that the plaintiffs were seeking in excess of US$5 million
(approximately £4 million) and one that alleged that the plaintiffs
were seeking less than US$75,000 (approximately £57,000) per
class member plus unspecified punitive damages.
28. Young v. American Tobacco Co. is a case filed in November 1997
in the Circuit Court, Orleans Parish, Louisiana against various US
cigarette manufacturers, including RJRT and B&W, and parent
companies of such manufacturers. This putative ETS class action
was brought on behalf of a putative class of Louisiana residents
who, though not themselves cigarette smokers, have been
exposed to second-hand smoke from cigarettes manufactured by
the defendants, and who allegedly suffered injury as a result of
that exposure, and seeks an unspecified amount of compensatory
and punitive damages. In March 2016, the court entered an order
staying the case, including all discovery, pending the completion of
an ongoing smoking cessation programme ordered by the court in
a now-concluded Louisiana state court certified class action, Scott v.
American Tobacco Co..
No Additive/Natural/Organic Claim Cases
26. A total of 17 putative class actions have been filed in nine US
federal district courts against SFNTC, a subsidiary of RAI, which
cases generally allege, in various combinations, violations of
state deceptive and unfair trade practice statutes, and claim state
common law fraud, negligent misrepresentation, and unjust
enrichment based on the use of descriptors such as ‘natural’,
‘organic’ and ‘100% additive-free’ in the marketing, labelling,
advertising, and promotion of SFNTC’s Natural American Spirit
brand cigarettes. In these actions, the plaintiffs allege that the
use of these terms suggests that Natural American Spirit brand
cigarettes are less harmful than other cigarettes and, for that
reason, violated state consumer protection statutes or amounted to
fraud or a negligent or intentional misrepresentation. The actions
seek various categories of recovery, including economic damages,
injunctive relief (including medical monitoring and cessation
programmes), interest, restitution, disgorgement, treble and
punitive damages, and attorneys’ fees and costs. In April 2016, in
response to a motion by the various plaintiffs, the US Judicial Panel
on Multidistrict Litigation (“JPML”) consolidated these cases for
pre-trial purposes before a federal court in New Mexico. That court
heard argument on defendants’ motion to dismiss the current
consolidated complaint on 9 June 2017. On 21 December 2017,
the district court granted the motion in part, dismissing a number
of claims with prejudice, and denied it in part. The district court’s
scheduling order provides that hearings on motions for class
certification and on motions challenging the admissibility expert
opinion testimony will begin on or after 24 August 2020.
Other Putative Class Actions
27. Jones v. American Tobacco Co. is a putative class action filed in
December 1998 in the Circuit Court, Jackson County, Missouri.
The action was brought by a plaintiff on behalf of a putative class
of Missouri tobacco product users and purchasers against various
defendants, including RJRT, B&W and Lorillard Tobacco alleging
that the plaintiffs’ use of the defendants’ tobacco products has
caused them to become addicted to nicotine, and seeking an
unspecified amount of compensatory and punitive damages.
There is currently no activity in this case.
Engle Class Action and Engle Progeny Cases (Florida)
29. In July 1998, trial began in Engle v. R. J. Reynolds Tobacco Co.,
a then-certified class action filed in Circuit Court, Miami-Dade
County, Florida, against US cigarette manufacturers, including
RJRT, B&W and Lorillard Tobacco. The then-certified class consisted
of Florida citizens and residents, and their survivors, who suffered
from smoking-related diseases that first manifested between
5 May 1990, and 21 November 1996, and were caused by an
addiction to cigarettes. In July 1999, the jury in this Phase I found
against RJRT, B&W, Lorillard Tobacco and the other defendants
on common issues relating to the defendants’ conduct, general
causation, the addictiveness of cigarettes, and entitlement to
punitive damages.
30. In July 2000, the jury in Phase II awarded the class a total of
approximately US$145 billion (approximately £109.5 billion) in
punitive damages, apportioned US$36.3 billion (approximately
£27.4 billion) to RJRT, US$17.6 billion (approximately £13.3 billion)
to B&W, and US$16.3 billion (approximately £12.3 billion) to
Lorillard Tobacco. The three class representatives in the Engle class
action were awarded US$13 million (approximately £10 million) in
compensatory damages.
31. This decision was appealed and ultimately resulted in the Florida
Supreme Court in December 2006 decertifying the class and
allowing judgments entered for only two of the three Engle
class representatives to stand and setting aside the punitive
damages award. The court preserved certain of the jury’s
Phase I findings, including that cigarettes can cause certain
diseases, nicotine is addictive, and defendants placed defective
cigarettes on the market, breached duties of care, concealed
health-related information and conspired. Putative Engle class
members were permitted to file individual lawsuits, deemed
“Engle progeny cases”, against the Engle defendants, within one
year of the Supreme Court’s decision (subsequently extended to
11 January 2008).
32. During 2015, RJRT and Lorillard Tobacco, together with
Philip Morris USA Inc. (“PM USA”), settled virtually all of the
Engle progeny cases then pending against them in federal
district court. The total amount of the settlement was
US$100 million (approximately £75 million) divided as follows:
RJRT US$42.5 million (approximately £32 million); PM USA
US$42.5 million (approximately £32 million); and Lorillard Tobacco
US$15 million (approximately £11 million). The settlement
covered more than 400 federal Engle progeny cases but did not
cover 12 federal progeny cases previously tried to verdict and then
pending on post-trial motions or appeal, and two federal progeny
cases filed by different lawyers from the ones who negotiated the
settlement for the plaintiffs.
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33. As at 31 December 2019, there were approximately 1,773 Engle progeny cases pending in which RJRT, B&W and/or Lorillard Tobacco have
been named as defendants and served. These cases include claims by or on behalf of 2,228 plaintiffs. In addition, as of 31 December 2019,
RJRT was aware of nine additional Engle progeny cases that have been filed but not served. The number of pending cases fluctuates for a
variety of reasons, including voluntary and involuntary dismissals. Voluntary dismissals include cases in which a plaintiff accepts an ‘offer of
judgment’ from RJRT, Lorillard Tobacco and/or RJRT’s affiliates and indemnitees. An offer of judgment, if rejected by the plaintiff, preserves
RJRT’s and Lorillard Tobacco’s right to recover attorneys’ fees under Florida law in the event of a verdict favourable to RJRT or Lorillard
Tobacco, or affiliates of such entities. Such offers are sometimes made through court-ordered mediations.
34. 95 trials occurred in Engle progeny cases in Florida state and federal courts against RJRT, B&W and/or Lorillard Tobacco from 1 January 2017
through 31 December 2019, and additional state court trials are scheduled for 2020.
35. The following chart identifies the number of trials in Engle progeny cases as at 31 December 2019 and additional information about the
adverse judgments entered:
Trials/verdicts/judgments of individual Engle progeny cases from 1 January 2017 through 31 December 2019:
Total number of trials
Number of trials resulting in plaintiffs’ verdicts
Total damages awarded in final judgments against RJRT
Amount of overall damages comprising ‘compensatory damages’
(approximately)
Amount of overall damages comprising ‘punitive damages’
(approximately)
** Of the 40 trials resulting in plaintiffs’ verdicts 1 January 2017 to 31 December 2019 (note 11):
Number of adverse judgments appealed by RJRT
Number of adverse judgments, in which RJRT still has time to file an appeal
Number of adverse judgments in which an appeal was not, and can no longer be, sought
Appeals of individual Engle progeny cases 1 January 2017 to 31 December 2019:
Number of adverse judgments appealed by RJRT
95
40**
US$354,430,892 (approximately £267.5 million)
US$116,552,173 (of overall US$354,430,892)
(approximately £87.9 million of £267.5 million)
US$237,878,719 (of overall US$354,430,892)
(approximately £179.6 million of £267.5 million)
27 (note 12)
3
8
40 (note 13)
Note 11: The 40 trials include one case that was tried twice (Gloger v. R.J. Reynolds Tobacco Co.) and one case (Robert Miller v. R.J. Reynolds Tobacco Co.) where plaintiff moved for a mistrial following
a plaintiff’s verdict where the jury awarded no compensatory or punitive damages, and an adverse judgment has not yet been entered.
Note 12: Of the 27 adverse judgments appealed by RJRT as a result of judgments arising in the period 1 January 2017 to 31 December 2019:
a. 15 appeals remain undecided in the District Courts of Appeal; and
b. 12 were decided and/or closed. Of these 12 appeals, 6 were affirmed in favour of plaintiff, 1 was reversed to the trial court for possible retrial on punitive damages and review of the Florida Supreme
Court has been requested, 1 reversed for new trial on all issues, 1 reversed to reduce amount of compensatory damages by comparative fault, 1 reversed for reinstatement of full amount of
compensatory verdict, 1 was appealed but appeal was voluntarily dismissed, and 1 was involuntarily dismissed by the appellate court.
Note 13: Of the 40 adverse judgments appealed by RJRT:
a. 16 appeals remain undecided in the District Courts of Appeal;
b. 24 were decided and/or closed in the District Courts of Appeal. Of these 24 appeals, 13 were affirmed in favour of plaintiff (review of the Florida Supreme Court sought in 1 case), 1 was reversed
on punitive damages, including a possible retrial (review is pending of the Florida Supreme Court), 1 was reversed for a retrial on punitive damages (review is pending of the Florida Supreme Court),
1 was reversed for new trial (review of the Florida Supreme Court sought), 1 was reversed for the trial court to vacate the punitive damages award and judgment paid, 1 was reversed to reduce
compensatory damages by comparative fault and judgment paid, 2 were reversed to reinstate the full compensatory amount and judgment paid, 3 were voluntarily dismissed and judgments paid,
and 1 was involuntarily dismissed. RJRT has paid damages to plaintiffs in 8 cases that were not appealed that are now closed. The total damages award may vary depending on the outcome of the
pending appeals; and
c. Includes appeals of 2 adverse judgments rendered prior to 1 January 2017 that were appealed by RJRT in the period from 1 January 2017 to 31 December 2019.
36. By statute, Florida applies a US$200 million (approximately £151 million) bond cap to all Engle progeny cases in the aggregate.
Individual bond caps for any given Engle progeny case vary depending on the number of judgments in effect at a given time.
Judicial attempts by several plaintiffs in the Engle progeny cases to challenge the bond cap as violating the Florida Constitution have
failed. In addition, bills have been introduced in sessions of the Florida legislature that would eliminate the Engle progeny bond cap, but those
bills have not been enacted as of 31 December 2019.
196
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
37. In 2019, RJRT or Lorillard Tobacco paid judgments in 22 Engle progeny cases. Those payments totalled US$142 million (approximately
£107 million) in compensatory or punitive damages. Additional costs were paid in respect of attorneys’ fees and statutory interest.
38. In addition, accruals for damages and attorneys’ fees and statutory interest for 3 cases (Starr-Blundell v R. J. Reynolds Tobacco Co., Margaret
Brown v. R. J. Reynolds Tobacco Co., and Graffeo v. R. J. Reynolds Tobacco Co.) were recorded in RAI’s consolidated balance sheet as of
31 December 2019 to the value of US$38 million (approximately £29 million).
(c) Individual Cases
39. As of 31 December 2019, 135 individual cases were pending in the United States against RJRT, B&W and/or Lorillard Tobacco. This category
of cases includes smoking and health cases alleging personal injuries caused by tobacco use or exposure brought by or on behalf of individual
plaintiffs based on theories of negligence, strict liability, breach of express or implied warranty, and violations of state deceptive trade practices
or consumer protection statutes. The plaintiffs seek to recover compensatory damages, attorneys’ fees and costs, and punitive damages.
The category does not include the Engle progeny cases, Broin II cases, and Filter Cases discussed above and below. One of the individual cases
is brought by or on behalf of an individual or his/her survivors alleging personal injury as a result of exposure to ETS.
40. The following chart identifies the number of individual cases pending as of 31 December 2019 as against the number pending as of
31 December 2018, along with the number of Engle progeny cases, Broin II cases, and Filter Cases, which are discussed further below.
Case Type
Individual Smoking and Health Cases (note 14)
Engle Progeny Cases (Number of Plaintiffs) (note 15)
Broin II Cases (note 16)
Filter Cases (note 17)
US Case Numbers
31 December 2019
US Case Numbers
31 December 2018
Change in Number
Increase/(Decrease)
135
1,773 (2,228)
1,228
51
111
2,268 (2,841)
1,406
58
24
(495) (613)
(178)
(7)
(Note 14) Out of the 135 pending individual smoking and health cases, six have received adverse verdicts in the court of first instance or on
appeal, and the total amount of those verdicts is approximately US$192 million (approximately £145 million).
(Note 15) The number of Engle progeny cases will fluctuate as cases are dismissed or if any of the dismissed cases are appealed. Please see earlier
table in paragraph 35.
(Note 16) Broin v Philip Morris, Inc. was a class action filed in Circuit Court in Miami-Dade County, Florida in 1991 and brought on behalf of flight
attendants alleged to have suffered from diseases or ailments caused by exposure to ETS in airplane cabins. In October 1997, RJRT, B&W, Lorillard
Tobacco and other cigarette manufacturer defendants settled Broin, agreeing to pay a total of US$300 million (approximately £226 million)
in three annual US$100 million (approximately £75 million) instalments, allocated among the companies by market share, to fund research
on the early detection and cure of diseases associated with tobacco smoke. It also required those companies to pay a total of US$49 million
(approximately £37 million) for the plaintiffs’ counsel’s fees and expenses. RJRT’s portion of these payments was approximately US$86 million
(approximately £65 million); B&W’s was approximately US$57 million (approximately £43 million); and Lorillard Tobacco’s was approximately
US$31 million (approximately £23 million). The settlement agreement, among other things, limits the types of claims class members may bring
and eliminates claims for punitive damages. The settlement agreement also provides that, in individual cases by class members that are referred
to as Broin II lawsuits, the defendants will bear the burden of proof with respect to whether ETS can cause certain specifically enumerated diseases,
referred to as “general causation.” With respect to all other liability issues, including whether an individual plaintiff’s disease was caused by his
or her exposure to ETS in airplane cabins, referred to as “specific causation”, individual plaintiffs will bear the burden of proof. On 7 September
1999, the Florida Supreme Court approved the settlement. There have been no Broin II trials since 2007. There have been periodic efforts to
activate cases and the Group expects this to continue over time.
(Note 17) Includes claims brought against Lorillard Tobacco and Lorillard Inc. by individuals who seek damages resulting from their alleged
exposure to asbestos fibres that were incorporated into filter material used in one brand of cigarettes manufactured by a predecessor to Lorillard
Tobacco for a limited period of time ending more than 50 years ago. Pursuant to the terms of a 1952 agreement between P. Lorillard Company
and H&V Specialties Co., Inc. (the manufacturer of the filter material), Lorillard Tobacco is required to indemnify Hollingsworth & Vose for legal
fees, expenses, judgments and resolutions in cases and claims alleging injury from finished products sold by P. Lorillard Company that contained
the filter material. As of 31 December 2019, Lorillard Tobacco and/or Lorillard Inc. was a defendant in 51 Filter Cases. Since 1 January 2017,
Lorillard Tobacco and RJRT have paid, or have reached agreement to pay, a total of approximately US$31 million (approximately £23 million) in
settlements to resolve 138 Filter Cases.
(d) State Settlement Agreements
41. In November 1998, the major US cigarette manufacturers, including RJRT, B&W and Lorillard Tobacco, entered into the Master Settlement
Agreement (“MSA”) with attorneys general representing 46 US states, the District of Columbia and certain US territories and possessions.
These cigarette manufacturers previously settled four other cases, brought on behalf of Mississippi, Florida, Texas and Minnesota, by separate
agreements with each state (collectively and with the MSA, the “State Settlement Agreements”).
42. These State Settlement Agreements settled all health care cost recovery actions brought by, or on behalf of, the settling jurisdictions; released
the defending major US cigarette manufacturers from various additional present and potential future claims; imposed future payment
obligations in perpetuity on RJRT, B&W, Lorillard Tobacco and other major US cigarette manufacturers; and placed significant restrictions on
their ability to market and sell cigarettes and smokeless tobacco products. In accordance with the MSA, various tobacco companies agreed
to fund a US$5.2 billion (approximately £3.9 billion) trust fund to be used to address the possible adverse economic impact of the MSA on
tobacco growers.
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43. RJRT and SFNTC are subject to the substantial payment obligations under the State Settlement Agreements. Payments under the State
Settlement Agreements are subject to various adjustments for, among other things, the volume of cigarettes sold, relative market share,
operating profit and inflation. RAI’s operating subsidiaries’ expenses and payments under the State Settlement Agreements for 2017, 2018
and 2019 and the projected expenses and payments for 2020 onwards are set forth below (in millions of US dollars)*:
Settlement expenses
Settlement cash payments
Projected settlement expenses
Projected settlement cash payments
2017
$2,856
$4,612
2018
$2,741
$917
2019
2020 and thereafter
$2,762
$2,918
$>2,900
$>2,600
* Subject to adjustments for changes in sales volume, inflation, operating profit and other factors. Payments are allocated among the companies on the basis of relative market share or other methods.
44. The State Settlement Agreements have materially adversely affected RJRT’s shipment volumes. RAI believes that these settlement obligations
may materially adversely affect the results of operations, cash flows or financial position of RAI and RJRT in future periods. The degree of the
adverse impact will depend, among other things, on the rate of decline in US cigarette sales in the premium and value categories, RJRT’s
share of the domestic premium and value cigarette categories, and the effect of any resulting cost advantage of manufacturers not subject to
the State Settlement Agreements.
45. In addition, the MSA includes an adjustment that potentially reduces the annual payment obligations of RJRT, Lorillard Tobacco and
the other signatories to the MSA, known as “Participating Manufacturers” (“PMs”). Certain requirements, collectively referred to as the
“Adjustment Requirements”, must be satisfied before the Non-Participating Manufacturers (“NPM”) Adjustment for a given year is available:
(i) an Independent Auditor must determine that the PMs have experienced a market share loss, beyond a triggering threshold, to those
manufacturers that do not participate in the MSA (such non-participating manufacturers being referred to as “NPMs”); and (ii) in a binding
arbitration proceeding, a firm of independent economic consultants must find that the disadvantages of the MSA were a significant factor
contributing to the loss of market share. This finding is known as a significant factor determination.
46. When the Adjustment Requirements are satisfied, the MSA provides that the NPM Adjustment applies to reduce the annual payment
obligation of the PMs. However, an individual settling state may avoid its share of the NPM Adjustment if it had in place and diligently
enforced during the entirety of the relevant year a ‘Qualifying Statute’ that imposes escrow obligations on NPMs that are comparable to
what the NPMs would have owed if they had joined the MSA. In such event, the state’s share of the NPM Adjustment is reallocated to other
settling states, if any, that did not have in place and diligently enforce a Qualifying Statute.
47. RJRT and Lorillard Tobacco are or were involved in NPM Adjustment proceedings concerning the years 2003 to 2017. In 2012, RJRT,
Lorillard Tobacco, and SFNTC entered into an agreement (the “Term Sheet”) with certain settling states that resolved accrued and potential
NPM adjustments for the years 2003 through 2012 and, as a result, RJRT and SFNTC collectively received, or are to receive, more than
US$1.1 billion (approximately £830 million) in credits that, in substantial part, were applied to MSA payments in 2014 through 2017. After an
arbitration panel ruled in September 2013 that six states had not diligently enforced their qualifying statutes in the year 2003, additional
states joined the Term Sheet. RJRT executed the NPM Adjustment Settlement Agreement on 25 September 2017 (which incorporated the
Term Sheet). Since the NPM Adjustment Settlement Agreement was executed, an additional 10 states have joined. NPM proceedings are
ongoing and could result in further reductions of the companies’ MSA-related payments.
48. On 18 January 2017, the State of Florida filed a motion to join Imperial Tobacco Group, PLC (“ITG”) as a defendant and to enforce the Florida
State Settlement Agreement, which motion seeks payment under the Florida State Settlement Agreement of approximately US$45 million
(approximately £34 million) with respect to the four brands (Winston, Salem, Kool and Maverick) that were sold to ITG in the divestiture of
certain assets, on 12 June 2015, by subsidiaries or affiliates of RAI and Lorillard, together with the transfer of certain employees and certain
liabilities, to a wholly-owned subsidiary of Imperial Brands plc (the “Divestiture”), referred to as the “Acquired Brands”. The motion also claims
future annual losses of approximately US$30 million per year (approximately £23 million) absent the court’s enforcement of the Florida State
Settlement Agreement. The State’s motion sought, among other things, an order declaring that RJRT and ITG are in breach of the Florida
Settlement Agreement and are required, jointly and severally, to make annual payments to the State under the Florida State Settlement
Agreement with respect to the Acquired Brands. In addition, on 18 January 2017, PM USA filed a motion to enforce the Florida State
Settlement Agreement, asserting among other things that RJRT and ITG breached that agreement by failing to make settlement payments
as to the Acquired Brands, which PM USA asserts has improperly shifted settlement payment obligations to PM USA. On 27 January 2017,
RJRT sought leave to file a supplemental pleading for breach by ITG of its obligations regarding joinder into the Florida State Settlement
Agreement. The Florida court, on 30 March 2017, ruled that ITG should be joined into the enforcement action.
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49. After a bench trial, on 27 December 2017 the court entered an
order holding that RJRT (not ITG) is liable for annual settlement
payments for the Acquired Brands, finding that ITG did not
assume liability for annual settlement payments under the terms
of the asset purchase agreement relating to the Divestiture
and RJRT remained liable for payments under the Florida State
Settlement Agreement as to the Acquired Brands. On 23 January
2018, RJRT filed a notice of appeal, and on 25 January 2018, RJRT
filed an amended notice of appeal, and PM USA filed a notice
of appeal as to the court’s ruling as to ITG. On 26 January 2018,
the State moved for recovery of its attorneys’ fees and costs from
RJRT. The State and PM USA filed a joint motion for the entry of
final judgment on 1 February 2018. The court declined to enter
a final judgment until after resolution of the dispute between
RJRT and PM USA regarding PM USA’s assertion that settlement
payment obligations have been improperly shifted to PM USA.
On 15 August 2018, the court entered a final judgement in the
action (the “Final Judgment”). As a result of the Final Judgment,
PM USA’s challenge to RJRT’s accounting assumptions related to
the Acquired Brands was rendered moot, subject to reinstatement
if ITG joins the Florida State Settlement Agreement or if judgment
is reversed. On 29 August 2018, RJRT filed a notice of appeal
on the Final Judgment. On 7 September 2018, PM USA filed
a notice of appeal with respect to the court’s ruling as to ITG.
On 12 September 2018, RJRT filed a motion to consolidate RJRT’s
appeal with the appeal filed by PM USA, which was granted on
1 October 2018, RJRT’s initial brief was due on 11 February 2019.
Following agreed extensions, RJRT filed its initial appellate brief on
12 April 2019; the State’s, ITG’s and PM USA’s opposition briefs
were filed on 23 August 2019. On 23 December 2019, RJRT filed
its reply brief and request for oral argument. On 23 December
2019, ITG filed its answer brief to PM USA’s appeal with respect
to the court’s ruling as to ITG; PM USA filed its reply brief on
6 February 2020. Oral argument is scheduled for 7 April 2020.
RJRT will seek indemnification from ITG, if necessary. In January
2018, the auditor of the Florida State Settlement Agreement
adjusted the final 2017 invoice for the annual payment and
amended the 2015 and 2016 invoices for the respective annual
payment and the net operating profit penalty for each of
those years under the Florida Settlement Agreement, based on
the auditor’s interpretation of the court’s order. The adjusted
invoices reflected amounts due to both the State of Florida and
PM USA. In total, the estimated additional amounts due were
US$99 million (approximately £75 million) with US$84 million
(approximately £63 million) to the State of Florida and
US$16 million (approximately £12 million) to PM USA. RJRT has
advised the auditor that it disputes these amounts, and therefore
no further amounts were due or would be paid for those years
pending the final resolution of RJRT’s appeal of the court’s order.
Those amounts were not paid.
50. On 17 February 2017, ITG filed an action in the Court of Chancery
of the State of Delaware seeking declaratory relief and a motion
for a temporary restraining order against RAI and RJRT. In its
complaint, ITG asked the court to declare various matters related
to its rights and obligations under the asset purchase agreement
(and related documents) relating to the Divestiture. ITG sought
an injunction barring RAI and/or RJRT from alleging in the Florida
enforcement litigation that ITG had breached the asset purchase
agreement and requiring these companies to litigate issues under
the asset purchase agreement in Delaware. Following a hearing on
ITG’s complaint and motion on 1 March 2017, the Delaware Court
entered a temporary restraining order that enjoined RAI and RJRT
from ‘taking offensive action to assert claims against ITG Brands’
in the Florida enforcement action, but the order does not prevent
RJRT from making arguments in response to claims asserted by
the State of Florida, PM USA or ITG in the Florida enforcement
litigation. On 24 March 2017, RAI and RJRT answered the ITG
complaint and filed a motion to stay proceedings in Delaware
pending the outcome of the Florida enforcement litigation,
which motion was denied 18 May 2017. Cross motions for partial
judgment on the pleadings were filed focusing on whether ITG’s
obligation to use ‘reasonable best efforts’ to join the Florida State
Settlement Agreement continued after the 12 June 2015 closing.
On 30 November 2017, following argument, the Delaware Court
ruled in favour of RJRT, holding that ITG’s obligation to use its
reasonable best efforts to join the Florida Settlement Agreement
did not terminate due to the closing of the asset purchase
agreement relating to the Divestiture. On 4 January 2019, RJRT
filed another motion for partial judgment on the pleadings seeking
to resolve two contract-interpretation questions under the asset
purchase agreement: first, to the extent RJRT is held liable for any
settlement payments based on post-closing sales of the Acquired
Brands, ITG assumed this liability, and second, that the asset
purchase agreement does not entitle ITG to a unique protection
from an equity-fee law that does not yet exist in a Previously
Settled State Argument on RJRT’s motion for partial judgment
was heard on 4 June 2019. On 23 September 2019, the Delaware
Chancery Court declined to resolve, at this time, the first issue,
whether ITG had assumed any liability imposed on RJR Tobacco for
making settlement payments on ITG’s brands. The court concluded
that both sides had presented reasonable interpretations of the
asset purchase agreement, which was therefore ambiguous, so
the court would require an evidentiary hearing to interpret the
intent of the asset purchase agreement on assumed liabilities.
The court also granted RJRT’s motion on the second issue and
ruled that ITG could not refuse to join the Florida State Settlement
Agreement unless a joinder exempted it from a future equity-fee
statute. On 1 October 2019, the Chancery Court entered an order
on these latest motions for partial judgment on the pleadings.
It granted RJRT’s motion on the second issue. It denied both
parties’ motions on the first issue, deferring resolution until after
the court receives evidence related to the parties’ intent in their
contract. On 11 October 2019, ITG filed in the Chancery Court a
motion to seek interlocutory appeal in the Supreme Court, which
was denied on 31 October 2019. On 31 October 2019, ITG filed
a notice of interlocutory appeal directly to the Delaware Supreme
Court, which was denied on 7 November 2019.
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51. On 26 March 2018, the State of Minnesota filed a motion against
RJRT to enforce the Minnesota State Settlement Agreement, which
motion seeks payments under the Minnesota State Settlement
Agreement of approximately US$40 million (approximately
£30 million) with respect to the Acquired Brands. The motion
also claims future annual losses of approximately US$15 million
(approximately £11 million) absent the court’s enforcement of the
Minnesota State Settlement Agreement. The State of Minnesota
also filed a separate complaint against ITG, which complaint
seeks the same payments. The State’s motion against RJRT
and complaint against ITG seek, among other things, an order
declaring that RJRT and ITG are in breach of the Minnesota State
Settlement Agreement and are jointly and severally liable to make
annual payments to the State of Minnesota under the Minnesota
State Settlement Agreement with respect to the Acquired Brands.
In addition, on 28 March 2018, PM USA filed a motion to enforce
the Minnesota State Settlement Agreement, asserting, among
other things, that RJRT and ITG breached the Minnesota State
Settlement Agreement by failing to make settlement payments
as to the Acquired Brands, which PM USA asserts has improperly
shifted settlement payment obligations to PM USA. On 27 March
2018, the Minnesota court consolidated the motions to enforce
and separate complaint against ITG into one proceeding captioned
In re Petition of the State of Minnesota for an Order Compelling
Payments of Settlement Proceeds Related to ITG Brands LLC, Court
File No. 62-CV-18-1912. On 11 June 2018, the court held a
scheduling conference in the case and by order dated 21 June
2018, set a discovery schedule for the case, under which discovery
is complete. A hearing on the motions to enforce to determine
if RJRT and/or ITG are liable to make payments on the Acquired
Brands was held on 26 June 2019. On 24 September 2019, the
Minnesota District Court issued an Order and Memorandum,
holding RJRT liable for settlement payments on the Acquired
Brands, and determining the issue of whether ITG is a ‘successor or
assign’ of RJRT under the Minnesota State Settlement Agreement is
unresolved, reasoning ITG’s status depends on whether it satisfied
its post-closing obligation to expend its reasonable best efforts
to join the Minnesota State Settlement Agreement. A hearing
to determine whether ITG is liable for settlement payments and
other damages issues is scheduled for 28 April 2020; related
discovery is underway. On 23 December 2019, ITG filed a motion
in the Minnesota District Court seeking certification of an appeal
of certain questions arising from the 24 September 2019 order.
On 21 January 2020, a hearing was held on ITG’s motion seeking
certification of an appeal. On 19 February 2020, the Minnesota
District Court entered an Order and Memorandum denying ITG’s
motion for certification.
52. On 28 January 2019, the State of Texas filed motions in the
original Texas health care reimbursement case, brought against
the tobacco industry that led to the Texas State Settlement
Agreement to join ITG as a defendant and to enforce the Texas
State Settlement Agreement against RJRT and ITG, seeking
payment under the Texas State Settlement Agreement of
approximately US$125 million (approximately £94 million)
with respect to the Acquired Brands that were sold to ITG in
the Divestiture. The motion also claims future annual losses of
an unspecified amount absent the court’s enforcement of the
Texas State Settlement Agreement. The State’s motion seeks,
among other things, an order declaring that RJRT, or in the
alternative, ITG, is in breach of the Texas Settlement Agreement
and is required to make annual payments to the State under the
Texas State Settlement Agreement with respect to the Acquired
Brands. In addition, on 29 January 2019, PM USA filed a motion to
enforce the Texas State Settlement Agreement, asserting among
other things that RJRT and ITG breached that agreement by
failing to make settlement payments as to the Acquired Brands,
which PM USA asserts has improperly shifted settlement payment
obligations to PM USA. On 3 March 2019, RJRT filed a motion for
leave to conduct discovery and for entry of a proposed discovery
and briefing schedule, to which ITG joined on 14 March 2019.
On 28 June 2019, the United States District Court issued an
opinion and order in which the Court scheduled discovery to be
completed by 15 August 2019 and scheduled a hearing on the
motions to enforce for 19 September 2019. On 26 July 2019, the
Court entered an order rescheduling certain deadlines; discovery
is to be completed by 15 September 2019. A hearing on the
motions to enforce was held on 30 October 2019; the Court
reserved ruling.
53. In June 2015, ITG joined the Mississippi Settlement Agreement.
On 26 December 2018, PM USA filed a Motion to Enforce
Settlement Agreement against RJRT and ITG alleging RJRT and
ITG failed to act in good faith in calculating the base-year net
operating profits for the Acquired Brands, claiming damages of
approximately US$6 million (approximately £5 million) through
2017. On 21 February 2019, the Chancery Court of Jackson
County, Mississippi held a scheduling conference and issued
a discovery schedule order. Discovery is currently underway.
A hearing on PM USA’s Motion to Enforce Settlement Agreement
has not yet been scheduled. On 3 December 2019, the State
of Mississippi filed a Notice of Violation and Motion to Enforce
the Settlement Agreement in the Chancery Court of Jackson
County, Mississippi against RJRT, PM USA and ITG, seeking a
declaration that the base year 1997 net operating profit to be
used in calculating the Net Operating Profit Adjustment was
not affected by the change in the federal corporate tax rate in
2018 from 35% to 21%, and an order requiring RJRT to pay the
approximately US$5 million (approximately £4 million) difference
in its 2018 payment because of this issue. Determination of this
issue may affect RJRT’s annual payment thereafter. Discovery is
currently underway.
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(e) UK — Based Group Companies
54. As at 31 December 2019, Investments has been served in one
dormant individual action in the US (Perry) in which there has
been no activity since 1998 following the plaintiff’s death in 1997.
Tobacco‑Related Litigation Outside the United States
55. As at 31 December 2019:
a. medical reimbursement actions are being brought in Angola,
Argentina, Brazil, Canada, Nigeria and South Korea;
b. class actions are being brought in Brazil, Canada and
Venezuela; and
c. active tobacco product liability claims against the Group’s
companies existed in 14 markets outside the US. The only
markets with five or more claims were Argentina, Brazil,
Canada, Chile, Nigeria and Italy.
(a) Medical reimbursement cases
Angola
56. In or about November 2016, BAT Angola affiliate Sociedade
Unificada de Tabacos de Angola (“SUT”) was served with a
collective action filed in the Provincial Court of Luanda, 2nd Civil
Section, by the consumer association Associação Angolana dos
Direitos do Consumidor (“AADIC”). The lawsuit seeks damages of
AOA 800,000,000 (approximately £1 million) allegedly incurred
by the Angolan Instituto Nacional do Controlo do Cancro
(“INCC”) for the cost of treating tobacco-related disease, non-
material damages allegedly suffered by certain individual smokers
on the rolls of INCC, and the mandating of certain cigarette
package warnings. SUT filed its answer to the claim on or about
5 December 2016. The case remains pending.
Argentina
57. In 2007, the non-governmental organisation the Argentina Tort
Law Association (“ATLA”) and Emma Mendoza Voguet brought
a reimbursement action against Nobleza Piccardo S.A.I.C.y.F.
(“Nobleza”) and Massalín Particulares. The case is being heard in
the Contentious Administrative Court. The parties filed conclusive
briefs on 20 May 2019 and await the Court’s decision.
Canada
58. On 1 March 2019, the Quebec Court of Appeal handed down a
judgment which largely upheld and endorsed the lower court’s
previous decision in the Quebec Class Actions, as further described
below. The share of the judgment for Imperial, the Group’s
operating company in Canada, is approximately CAD $9.2 billion
(approximately £5.4 billion). As a result of this judgment, the then
immediate attempts by the Quebec plaintiffs to obtain payment
out of the CAD $758 million (approximately £436 million) on
deposit with the court, the fact that JTI-MacDonald Corp (a
co-defendant in the cases) filed for creditor protection under the
Companies’ Creditors Arrangement Act (the “CCAA”) on 8 March
2019 and obtained a court ordered stay of all tobacco litigation
in Canada as against all defendants (including RJRT and its affiliate
R.J. Reynolds Tobacco International Inc. (collectively, the “RJR
Companies”)) until 4 April 2019, and the need for a process to
resolve all of the outstanding litigation across the country, on
12 March 2019 Imperial filed for creditor protection under the
CCAA. In its application Imperial asked the Ontario Superior Court
to stay all pending or contemplated litigation against Imperial,
certain of its subsidiaries and all other Group companies that were
defendants in the Canadian tobacco litigation, including British
American Tobacco p.l.c. (the “Company”), Investments, Industries
and Carreras Rothmans Limited (collectively, the “UK Companies”).
On 22 March 2019, Rothmans, Benson & Hedges Inc. also filed
for CCAA protection and obtained a stay of proceedings (together
with the other two stays, the “Stays”). The Stays are currently in
place until 30 September 2020. While the Stays are in place, no
steps are to be taken in connection with the Canadian tobacco
litigation with respect to any of the defendants.
59. The below represents the state of the referenced litigation as at the
advent of the Stays.
60. Following the implementation of legislation enabling provincial
governments to recover health-care costs directly from tobacco
manufacturers, 10 actions for recovery of health-care costs arising
from the treatment of smoking and health-related diseases have
been brought. These proceedings name various Group companies
as defendants, including the UK Companies and Imperial as well as
the RJR Companies. Pursuant to the terms of the 1999 sale of RJRT’s
international tobacco business to Japan Tobacco Incorporated
(“JTI”), JTI has agreed to indemnify RJRT for all liabilities and
obligations (including litigation costs) arising in respect of the
Canadian recoupment actions. Subject to a reservation of rights, JTI
has assumed the defence of the RJR Companies in these actions.
61. The 10 cases were proceeding in British Columbia, New Brunswick,
Newfoundland and Labrador, Ontario, Quebec, Manitoba, Alberta,
Saskatchewan, Nova Scotia and Prince Edward Island. The enabling
legislation is in force in all 10 provinces. In addition, legislation has
received Royal Assent in two of the three territories in Canada, but
has yet to be proclaimed into force.
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Canadian province
Act pursuant to which
Claim was brought
Companies named as Defendants
Current stage
British Columbia Tobacco Damages
Imperial
and Health Care
Costs Recovery Act
2000
Investments
Industries
Carreras Rothmans Limited
RJR Companies
Other former Rothmans Group
companies
All have been served.
Imperial, the UK Companies and RJR
Companies have all been named as
defendants and served.
New Brunswick
Tobacco Damages
and Health Care
Costs Recovery Act
2006
Ontario
Tobacco Damages
and Health Care
Costs Recovery Act
2009
Imperial, the UK Companies and the
RJR Companies have all been named
as defendants and served.
Newfoundland
and Labrador
Tobacco Health Care
Costs Recovery Act
2001
Imperial, the UK Companies and the
RJR Companies have all been named
as defendants and served.
Saskatchewan
Tobacco Damages
and Health Care
Costs Recovery Act
2007
Imperial, the UK Companies and the
RJR Companies have all been named
as defendants and served.
Manitoba
Tobacco Damages
Health Care Costs
Recovery Act 2006
Imperial, the UK Companies and RJR
Companies have all been named as
defendants and served.
Alberta
Crown’s Right of
Recovery Act 2009
Imperial, the UK Companies and RJR
Companies have all been named as
defendants and served.
The defences of Imperial, Investments, Industries, Carreras
Rothmans Limited and the RJR Companies have been filed, and
document production and discoveries were ongoing. On 13
February 2017 the province delivered an expert report dated
October 2016, quantifying its damages in the amount of CAD$118
billion (approximately £68.7 billion). No trial date has been set. The
federal government is seeking CAD$5 million (approximately £3
million) jointly from all the defendants in respect of costs pertaining
to the third-party claim, now dismissed.
The defences of Imperial, the UK Companies and the RJR
Companies have been filed and document production and
discoveries are substantially complete. The most recent expert
report filed by the Province estimated a range of damages between
CAD $11.1 billion (approximately £6.5 billion) and CAD$23.2
billion (approximately £13.5 billion), including expected future
costs. Following a motion to set a trial date, the New Brunswick
Court of Queen’s Bench ordered that the trial commence on 4
November 2019. On 7 March 2019, the New Brunswick Court of
Queen’s Bench released a decision which requires the Province to
produce a substantial amount of additional documentation and
data to the defendants. As a result, the original trial date of 4
November 2019 would have been delayed. No new trial date has
been set.
The defences of Imperial, the UK Companies and the RJR
Companies have been filed. The parties completed significant
document production in the summer of 2017 and discoveries
commenced in the autumn of 2018. On 15 June 2018, the
province delivered an expert report quantifying its damages in the
range of CAD$280 billion (approximately £163 billion) – CAD$630
billion (approximately £366.7 billion) in 2016/2017 dollars for the
period 1954 – 2060, and the Province amended the damages
sought in its Statement of Claim to CAD$330 billion
(approximately £192 billion). On 31 January 2019, the Province
delivered a further expert report claiming an additional CAD $9.4
billion (approximately £5.5 billion) and CAD$10.9 billion in
damages (approximately £6.3 billion) in respect of ETS. No trial
date has been set.
The case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed and the province began its document production in March
2018. Damages have not been quantified by the province. No trial
date has been set.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed and the province has delivered a test shipment of documents.
Damages have not been quantified by the province. No trial date
has been set.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed and document production commenced. Damages have not
been quantified by the province. No trial date has been set.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed and the province commenced its document production. The
province has stated its claim to be worth CAD$10 billion
(approximately £5.8 billion). No trial date has been set.
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Canadian province
Act pursuant to which
Claim was brought
Companies named as Defendants
Current stage
Quebec
Tobacco Related
Damages and Health
Care Costs Recovery
Act 2009
Imperial, Investments, Industries, the
RJR Companies and Carreras
Rothmans Limited have been named
as defendants and served.
Prince Edward
Island
Tobacco Damages
and Health Care
Costs Recovery Act
2009
Imperial, the UK Companies and RJR
Companies have all been named as
defendants and served.
Nova Scotia
Tobacco Health Care
Costs Recovery Act
2005
Imperial, the UK Companies and RJR
Companies have all been named as
defendants and served.
The case is at an early case management stage. The defences of
Imperial, Investments, Industries, Carreras Rothmans Limited and
the RJR Companies have been filed. Motions over admissibility of
documents and damages discovery have been filed but not heard.
The province is seeking CAD$60 billion (approximately £34.9
billion). No trial date has been set.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed and the next step was expected to be document production,
which the parties deferred for the time being. Damages have not
been quantified by the province. No trial date has been set.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed. The province provided a test document production in March
2018. Damages have not been quantified by the province. No trial
date has been set.
Nigeria
62. British American Tobacco (Nigeria) Limited (“BAT Nigeria“), the Company and Investments have been named as defendants in a medical
reimbursement action by the federal government of Nigeria, filed on 6 November 2007 in the Federal High Court, and in similar actions
filed by the Nigerian states of Kano (9 May 2007), Oyo (30 May 2007), Lagos (13 March 2008), Ogun (26 February 2008), and Gombe
(17 October 2008) commenced in their respective High Courts. In the five cases that remain active, the plaintiffs seek a total of approximately
10.6 trillion Nigerian naira (approximately £22 billion) in damages, including special, anticipatory and punitive damages, restitution and
disgorgement of profits, as well as declaratory and injunctive relief.
63. The suits claim that the state and federal government plaintiffs incurred costs related to the treatment of smoking-related illnesses resulting
from allegedly tortious conduct by the defendants in the manufacture, marketing, and sale of tobacco products in Nigeria, and assert that the
plaintiffs are entitled to reimbursement for such costs. The plaintiffs assert causes of action for negligence, negligent design, fraud and deceit,
fraudulent concealment, breach of express and implied warranty, public nuisance, conspiracy, strict liability, indemnity, restitution, unjust
enrichment, voluntary assumption of a special undertaking, and performance of another’s duty to the public.
64. The Company and Investments have made a number of challenges to the jurisdiction of the Nigerian courts. Such challenges are still pending
(on appeal) against the federal government and the states of Lagos, Kano, Gombe and Ogun. The underlying cases are stayed or adjourned
pending the final outcome of these jurisdictional challenges. In the state of Oyo, on 13 November 2015, and 24 February 2017, respectively,
the Company’s and Investments’ jurisdictional challenges were successful in the Court of Appeal and the issuance of the writ of summons was
set aside.
South Korea
65. In April 2014, Korea’s National Health Insurance Service (“NHIS”) filed a healthcare recoupment action against KT&G (a Korean tobacco
company), PM Korea and BAT Korea (including BAT Korea Manufacturing). The NHIS is seeking damages of roughly 54 billion Korean
Won (approximately £35 million) in respect of health care costs allegedly incurred by the NHIS treating patients with lung (small cell and
squamous cell) and laryngeal (squamous cell) cancer between 2003 and 2012. Court hearings in the case, which constitute the trial,
commenced in September 2014 and remain ongoing.
Brazil
66. On 21 May 2019, the Federal Attorney’s Office (“AGU”) in Brazil filed an action in the Federal Court of Rio Grande do Sul against the
Company, the BAT Group’s Brazilian subsidiary Souza Cruz LTDA (“Souza Cruz”), Philip Morris International, Philip Morris Brazil Indústria
e Comércio LTDA and Philip Morris Brasil S/A, asserting claims for medical reimbursement for funds allegedly expended by the federal
government as public health care expenses to treat 26 tobacco-related diseases over the last five years and that will be expended in
perpetuity during future years, including diseases allegedly caused both by cigarette smoking and exposure to ETS. The action includes a
claim for moral damages allegedly suffered by Brazilian society to be paid into a public welfare fund. The action is for an unspecified amount
of monetary compensation, as the AGU seeks a bifurcated action in which liability would be determined in the first phase followed by an
evidentiary phase to ascertain damages.
67. On 19 July 2019, the trial court ordered that service of the action on the Company be effected via service on Souza Cruz. On 6 August 2019,
Souza Cruz refused to receive service on behalf of the Company due to Souza Cruz’s lack of power to receive the summons on behalf of the
Company and such refusal was attached to the case files on 9 August 2019. On 7 August 2019, Souza Cruz was served with the complaint by
the AGU and Souza Cruz’s acknowledgement of service was attached to the case files on 12 August 2019.
68. On 19 August 2019, Souza Cruz filed an interlocutory appeal challenging the 19 July 2019 trial court order permitting the AGU to effect
service on the Company by serving Souza Cruz and requesting a stay of the proceedings until the appeal is decided. Souza Cruz also
appealed the fact that several documents attached to the AGU’s complaint are in English, without proper translation, and it also appealed the
very short term of 30 days for the defendants to prepare their defences.
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69. On 20 August 2019, Souza Cruz informed the trial court about
the appeal and the trial court entered an order, which ordered
the closure of the online system preventing the parties from
submitting any petition so that no prejudice would be caused
to the defendants and permitted the AGU, within 15 days of its
notification, to respond to the argument that the service of a
foreign defendant via its Brazilian subsidiary constituted improper
service. On 21 August 2019, the substitute reporting judge of the
appellate court, having been notified that the trial court judge
had in the meantime issued a new decision (thereby revoking the
previous decision), ruled that the appeal filed had therefore been
rendered moot. The AGU filed its submission in the trial court on
19 September 2019, and Souza Cruz filed a reply submission on
25 September 2019. Souza Cruz reported on 4 February 2020 that
the trial court ruled that service of the Company via its Brazilian
subsidiary constituted proper service, denied the request for
additional time to file defences, denied the request to have the
foreign language documents attached to the initial complaint fully
translated into Portuguese, and ordered that defences be filed
within 30 business days. On 18 February 2020, Souza Cruz filed an
interlocutory appeal (including a request to stay the deadline to file
defences), which appeal remains pending.
Canada
72. As noted above, on 1 March 2019 the Quebec Court of Appeal
handed down a judgment which largely upheld and endorsed
the lower court’s previous decision in the Quebec Class Actions,
as further described below. Imperial’s share of the judgment is
approximately CAD $9.2 billion (approximately £5.4 billion).
As a result of this judgment, the then immediate attempts by the
Quebec plaintiffs to obtain payment out of the CAD $758 million
(approximately £436 million) on deposit with the court, the
fact that JTI-MacDonald Corp (a co-defendant in the cases) filed
for creditor protection under the CCAA on 8 March 2019 and
obtained a court ordered stay of all tobacco litigation in Canada as
against all defendants (including the RJR Companies) until 4 April
2019, and the need for a process to resolve all of the outstanding
litigation across the country, on 12 March 2019 Imperial filed
for protection under the CCAA. In its application Imperial asked
the Ontario Superior Court to stay all pending or contemplated
litigation against Imperial, certain of its subsidiaries and all other
Group companies that were defendants in the Canadian tobacco
litigation, including the UK companies. On 22 March 2019,
Rothmans, Benson & Hedges Inc. also filed for CCAA protection
and obtained a stay of proceedings (together with the other
two stays, the “Stays”). The Stays are currently in place until
30 September 2020. While the Stays are in place, no steps are to
be taken in connection with the Canadian tobacco litigation with
respect to any of the defendants.
73. The below represents the state of the referenced litigation as at the
advent of the Stays.
74. There are 11 class actions being brought in Canada against
Group companies.
75. Knight Class Action: The Supreme Court of British Columbia
certified a class of all consumers who purchased Imperial cigarettes
in British Columbia bearing ‘light’ or ‘mild’ descriptors since 1974.
The plaintiff is seeking compensation for amounts spent on ‘light
and mild’ products and a disgorgement of profits from Imperial
on the basis that the marketing of light and mild cigarettes was
deceptive because it conveyed a false and misleading message that
those cigarettes are less harmful than regular cigarettes.
76. On appeal, the appellate court confirmed the certification
of the class, but limited any financial liability, if proven, to
1997 onward. Imperial’s third-party claim against the federal
government was dismissed by the Supreme Court of Canada.
The federal government is seeking a cost order of CAD$5 million
(approximately £3 million) from Imperial relating to its now
dismissed third-party claim. After being dormant for several
years, the plaintiff delivered a Notice of Intention to Proceed, and
Imperial delivered an application to dismiss the action for delay.
The application was heard on 23 June 2017 and was dismissed
on 23 August 2017. Notice to class members of certification was
provided on 14 February 2018. As at the date of the Stays, the
next steps were expected to include discovery-related ones.
(b) Class Actions
Brazil
70. In 1995, the Associação de Defesa da Saúde do Fumante
(“ADESF”) class action was filed against Souza Cruz and Philip
Morris in the São Paulo Lower Civil Court alleging that the
defendants are liable to a class of smokers and former smokers for
failing to warn of cigarette addiction. The case was stayed in 2004
pending the defendants’ appeal from a decision issued by the
Lower Civil Court that held that the defendants had not met their
burden of proving that cigarette smoking was not addictive or
harmful to health.
71. On 12 November 2008, the São Paulo Court of Appeals
overturned the lower court’s unfavourable decision of 2004,
returning the case to the lower court for production of evidence
and a new judgment. Following production of evidence, on
16 May 2011, the lower court granted Souza Cruz’s motion to
dismiss the action in its entirety on the merits. The plaintiffs’ appeal
to the Sao Paolo Court of Appeals was unsuccessful. The plaintiffs
then filed a Special Appeal to the Superior Court of Justice, which
was rejected under procedural grounds on 20 February 2017.
The plaintiffs filed an appeal of the rejection in the Superior Court
of Justice on 15 March 2017.
204
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
77. Growers’ Class Action: In December 2009, Imperial was served
with a proposed class action filed by Ontario tobacco farmers
and the Ontario Flue-Cured Tobacco Growers’ Marketing Board.
The plaintiffs allege that Imperial and the Canadian subsidiaries of
Philip Morris International and JTI failed to pay the agreed domestic
contract price to the growers used in products manufactured
for the export market and which were ultimately smuggled
back into Canada. JTI has sought indemnification pursuant to
the JTI Indemnities (discussed below at paragraphs 128-129).
The plaintiffs seek damages in the amount of CAD$50 million
(approximately £29 million). Various preliminary challenges have
been heard, the last being a motion for summary judgment on
a limitation period. The motion was dismissed and ultimately,
leave to appeal to the Ontario Court of Appeal was dismissed in
November 2016. In December 2017, the plaintiffs proposed that
the action proceed by way of individual actions as opposed to a
class action. The defendants did not consent. As at the date of
the Stays, the claim was in abeyance pending further action from
the plaintiffs.
78. Quebec Class Actions: There are currently two class actions in
Quebec. On 21 February 2005, the Quebec Superior Court
granted certification in two class actions against Imperial and
two other domestic manufacturers. The court certified two
classes, with the class definitions being revised in the judgment
rendered 27 May 2015. One class consists of residents of
Quebec who (a) smoked before 20 November 1998 at least
12 pack years of cigarettes manufactured by the Defendants;
and (b) were diagnosed before 12 March 2012 with: lung
cancer, or cancer (squamous cell carcinoma) of the throat,
or emphysema. The group also includes the heirs of persons
deceased after 20 November 1998 who meet the criteria described
above. The second consists of residents of Quebec who, as of
30 September 1998, were addicted to nicotine contained in
cigarettes and who in addition meet the following three criteria:
(a) they started smoking before 30 September 1994 by smoking
cigarettes manufactured by the Defendants; (b) between
1 September and 30 September 1998 they smoked on average
at least 15 cigarettes manufactured by the Defendants on a daily
basis; and (c) they still smoked an average of at least 15 cigarettes
manufactured by the Defendants as of 21 February 2005, or
until their death if it occurred before that date. The group also
includes the heirs of members who meet the criteria described
above. Pursuant to the judgment, the plaintiffs were awarded
damages and interest against Imperial and the Canadian
subsidiaries of Philip Morris International and JTI in the amount
of CAD$15.6 billion (approximately £9.1 billion), most of which
was on a joint and several basis of which Imperial’s share was
CAD$10.4 billion (approximately £6.1 billion). An appeal of the
judgment was filed on 26 June 2015. The court also awarded
provisional execution pending appeal of CAD$1,131 million
(approximately £658 million), of which Imperial’s share was
approximately CAD$742 million (approximately £431 million).
This order was subsequently overturned by the Court of Appeal.
Following the cancellation of the order for provisional execution,
the plaintiffs filed a motion against Imperial and one other
manufacturer seeking security in the amount of CAD $5 billion
(approximately £2.9 billion) to guarantee, in whole or in part, the
payment of costs of the appeal and the judgment. On 27 October
2015, the Court of Appeal ordered the parties to post security in
the amount of CAD$984 million (approximately £573 million),
of which Imperial’s share was CAD$758 million (approximately
£436 million). The security was paid in seven equal quarterly
instalments of just over CAD$108 million (approximately
£63 million) between 31 December 2015 and 30 June 2017 – see
note 13. The appeal was heard in November 2016. On 1 March
2019, the trial judgment was upheld by a unanimous decision of
the five-member panel of the Court of Appeal, with one exception
being an amendment to the original interest calculation applied
to certain portions of the judgment. The interest adjustment has
resulted in the reduction of the total maximum award in the two
cases to CAD $13.7 billion (approximately £8 billion) as of 1 March
2019, with Imperial’s share being reduced to approximately CAD
$9.2 billion (approximately £5.4 billion). The Court of Appeal also
upheld the payment of the initial deposits into the defendants’
solicitors’ trusts account within 60 days, totalling approximately
CAD $1.13 billion (approximately £658 million). Imperial’s
initial deposit is CAD $759 million (approximately £442 million).
Imperial has already paid CAD $758 million (approximately
£436 million) into court as security for the judgment.
79. Other Canadian Smoking and Health Class Actions: Seven putative
class actions, described below, have been filed against various
Canadian and non-Canadian tobacco-related entities, including
the UK Companies, Imperial and the RJR Companies, in various
Canadian Provinces. In these cases, none of which have quantified
their asserted damages, the plaintiffs allege claims based on fraud,
fraudulent concealment, breach of warranty of merchantability,
and of fitness for a particular purpose, failure to warn, design
defects, negligence, breach of a ‘special duty’ to children and
adolescents, conspiracy, concert of action, unjust enrichment,
market share liability and violations of various trade practices and
competition statutes. Pursuant to the terms of the 1999 sale of
RJRT’s international tobacco business, and subject to a reservation
of rights, JTI has assumed the defence of the RJR Companies in
these seven actions (Semple, Kunka, Adams, Dorion, Bourassa,
McDermid and Jacklin, discussed below).
80. In June 2009, four smoking and health class actions were filed in
Nova Scotia (Semple), Manitoba (Kunka), Saskatchewan (Adams)
and Alberta (Dorion) against various Canadian and non-Canadian
tobacco-related entities, including the UK Companies, Imperial
and the RJR Companies. In Saskatchewan, BAT plc and Carreras
Rothmans Limited have been released from Adams, and the RJR
Companies have brought a motion challenging the jurisdiction of
the court. No date has been set in these cases with respect to the
certification motion hearing. There are service issues in relation to
Imperial and the UK Companies in Alberta and in relation to the
UK Companies in Manitoba.
81. In June 2010, two further smoking and health class actions were
filed in British Columbia against various Canadian and non-
Canadian tobacco-related entities, including Imperial, the UK
Companies and the RJR Companies. The Bourassa claim is allegedly
on behalf of all individuals who have suffered chronic respiratory
disease and the McDermid claim proposes a class based on heart
disease. Both claims state that they have been brought on behalf
of those who have ‘smoked a minimum of 25,000 cigarettes.’ The
UK Companies, Imperial, the RJR Companies and other defendants
objected to jurisdiction. Subsequently, the Company and Carreras
Rothmans Limited were released from Bourassa and McDermid.
Imperial, Industries, Investments and the RJR Companies remain
as defendants in both actions. The plaintiffs did not serve their
certification motion materials and no date for a certification motion
was set.
82. In June 2012, a new smoking and health class action was filed
in Ontario (Jacklin) against various Canadian and non-Canadian
tobacco-related entities, including the UK Companies, Imperial and
the RJR Companies. The claim has been in abeyance.
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Venezuela
83. In April 2008, the Venezuelan Federation of Associations of Users
and Consumers (FEVACU) and Wolfang Cardozo Espinel and
Giorgio Di Muro Di Nunno, acting as individuals, filed a class
action against the Venezuelan government. The class action
seeks regulatory controls on tobacco and recovery of medical
expenses for future expenses of treating smoking-related illnesses
in Venezuela. Both C.A Cigarrera Bigott Sucs. (“Cigarrera
Bigott”), a Group subsidiary, and ASUELECTRIC, represented by
its president Giorgio Di Muro Di Nunno (who had previously
filed as an individual), have been admitted as third parties by the
Constitutional Chamber of the Supreme Court of Justice. A hearing
date for the action is yet to be scheduled. On 25 April 2017 and on
23 January 2018, Cigarrera Bigott requested the court to declare
the lapsing of the class action due to no proceedings taking place
in the case in over a year. A ruling on the matter is yet to be issued.
(c) Individual Tobacco Related Personal Injury Claims
84. As at 31 December 2019, the jurisdictions with the most active
individual cases against Group companies were, in descending
order: Brazil (37), Italy (18), Chile (9), Canada (6), Argentina (5)
and Ireland (2). There were a further four jurisdictions with one
active case only. Out of the 81 active individual tobacco related
personal injury claims, two have received unfavourable verdicts
in either the court of first instance or on appeal, only one of
which resulted in any finding on liability. The total value of those
unfavourable verdicts is ARS$2,850,000 (approximately £36,000
with post-judgment interest totalling approximately £380,000).
Non‑Tobacco Related Litigation
Vuse Litigation
85. On 17 December 2019, plaintiff Whatcom County, a municipal
entity in the State of Washington, filed a complaint in California
federal court against RAI, RJR Vapor, the Company, Lorillard
LLC and LOEC, Inc., as well as against JUUL Labs Inc., PAX Labs
Inc., Imperial Brands plc, Fontem Ventures BV, Fontem US Inc.,
Eonsmoke LLC, Altria Group Inc., Altria Client Services Inc.,
Altria Group Distribution Company, Nu Mark LLC and Nu Mark
Innovations Ltd. The plaintiff has asserted, against RAI, RJR Vapor,
the Company, LOEC Inc. and Lorillard LLC, a claim of public
nuisance alleging that these defendants endangered the health of
Whatcom County residents by allegedly designing, manufacturing
and marketing certain vapour products to minors. The case has
been assigned to a multi-district litigation proceeding that was
consolidated for pre-trial purposes in October 2019 by the US JPML
at the request of JUUL Labs Inc. RAI and RJR Vapor received service
of the complaint on 30 December 2019, and on 21 January 2020
filed a motion to dismiss the complaint. On 3 February 2020, the
plaintiff filed a notice of voluntary dismissal of the action, which
dismissed the case, without prejudice, as against all defendants.
206
Croatian Distributor Dispute
86. BAT Hrvatska d.o.o u likvidaciji and British American Tobacco
Investments (Central and Eastern Europe) Limited are named as
defendants in a claim by Mr Perica received on 22 August 2017
and brought before the commercial court of Zagreb, Croatia.
Mr Perica seeks damages of HRK 408,000,000 (approximately
£46 million) relating to a BAT Standard Distribution Agreement
dating from 2005. BAT Hrvatska d.o.o and British American
Tobacco Investments (Central and Eastern Europe) Ltd filed a reply
to the statement of claim on 6 October 2017. A hearing had been
scheduled to take place on 10 May 2018, but it was postponed
due to a change of the judge hearing the case. The Commercial
Court in Zagreb declared they do not have jurisdiction and that the
competent court to hear this case is the Municipal Court in Zagreb.
TDR d.o.o. is also named as the defendant in a claim by Mr Perica
received on 30 April 2018 and brought before the commercial
court of Zagreb, Croatia. Mr. Perica seeks payment in the amount
of HRK 408,000,000 (approximately £46 million) claiming that
BAT Hrvatska d.o.o. transferred a business unit to TDR d.o.o, thus
giving rise to a liability of TDR d.o.o. for the debts incurred by
BAT Hrvatska d.o.o, on the basis of the provisions of Croatian civil
obligations law. A response to the statement of claim was filed on
30 May 2018. The Commercial Court in Zagreb declared they
do not have jurisdiction and that the competent court to hear
this case is the Municipal Court in Pula. Mr Perica filed an appeal
against this decision which was rejected by the High Commercial
Court of The Republic of Croatia confirming therewith that the
competent court to hear this case is the Municipal Court in Pula.
The Municipal Court in Zagreb shall decide whether the claims by
Mr Perica initiated on 22 August 2017 and 30 April 2018 shall be
heard as one case in front of the Municipal Court of Zagreb.
BAT/Reynolds American Inc. Shareholder Litigation
87. Following the Company’s acquisition of the remaining 57.8% of
RAI in July 2017, pursuant to North Carolina law, under which RAI
was incorporated, a number of RAI shareholders dissented and
asserted their rights to a judicial appraisal of the value of their RAI
stock. On 29 November 2017, RAI filed a Complaint for Judicial
Appraisal in state court in North Carolina against 20 dissenting
shareholders, comprised of three groups of affiliated entities.
The complaint asks the court to determine the fair value of the
dissenting shareholders’ shares in RAI and any accrued interest.
A trial was held in June 2019, at which the dissenters sought
US$92.17 per share plus interest. Post-trial briefing and argument
was completed on 2 October 2019.
glo Litigation
88. On 22 June 2018, an affiliate of Philip Morris International (PMI)
commenced proceedings against British American Tobacco Japan,
Ltd. in the Japanese courts challenging the import, export, sale and
offer of sale of the glo device and of the NeoStik consumable in
Japan at the time the claim was brought (and earlier models of the
glo device), alleging that the glo devices directly infringe certain
claims of two Japanese patents that have been issued to the PMI
affiliate and that the NeoStiks indirectly infringe certain claims of
those patents. On 17 January 2019, the PMI affiliate introduced
new grounds of infringement, alleging that the glo device also
infringes some other claims in the two PMI Japanese patents.
Damages for the glo device and NeoStik are claimed in the court
filing, to the amount of 100 million Yen (approximately £694,000).
The PMI affiliate has also filed a request for injunction with respect
to the glo device. BAT denies infringement and is challenging the
validity of the two PMI Japanese patents.
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
Mozambican IP Litigation
89. On 19 April 2017, Sociedade Agrícola de Tabacos, Limitada
(“SAT”) (a BAT Group company in Mozambique) filed a complaint
to the National Inspectorate for Economic Activities (“INAE”),
the government body under the Ministry of Industry and Trade,
regarding alleged infringements of its registered trademark (“GT”)
by GS Tobacco SA (“GST”). INAE subsequently seized the allegedly
infringing products (“GS cigarettes”) and fined and ordered
GST to discontinue manufacturing products that could infringe
SAT’s intellectual property rights. Following INAE’s decision, in
July 2017 and March 2018, SAT sought damages via the Judicial
Court of Nampula, from GST in the amount of and equivalent to
£573,000 as well as a permanent restraint order in connection
with the manufacturing and selling of the allegedly infringing
products. The Judicial court of Nampula (Tribunal Judicial de
Nampula) granted the order on an interim basis on 7 August
2017. After hearing the parties, on 5 September 2017, the court
found that no alleged infringement by GST had occurred and
removed the interim restraint order, this decision was appealed by
SAT and is currently pending a decision. GST filed an application
for review against INAE’s initial decision directly to the Minister
of Trade and Industry, which reversed the decision of INAE.
On 31 December 2018, SAT was notified of GST’s counterclaim
against SAT at the Judicial Court of Nampula for damages allegedly
sustained as a result of SAT’s complaint to INAE (and INAE’s
decision). GST is seeking damages in the amount equivalent to
£190 million. On 31 January 2019 SAT filed a formal response
to the counterclaim. GST was notified on 28 February 2019 to
file a response to our formal response to the counterclaim and
the judge scheduled the preliminary hearing for 14 March 2019.
This hearing was adjourned and was held on 2 April 2019, when
the court heard arguments on the validity of SAT’s counterclaim.
On 2 September 2019, SAT received notification of an order which
provided that (i) SAT’s claim had been dismissed by the court; and
(ii) the GST counterclaim would proceed to trial. On 9 September
2019 SAT responded to the order by appealing the dismissal of
the SAT claim. Additionally, SAT made an interlocutory application
in the counterclaim proceedings to challenge certain questions
posed by the judge, on the basis that the responses may be used
as evidence at trial.
Fox River
Background to environmental liabilities arising out of contamination
of the Fox River:
90. In Wisconsin, the authorities have identified potentially responsible
parties (“PRPs”) to fund the clean-up of river sediments in the
lower Fox River. The pollution was caused by discharges of
Polychlorinated Biphenyls (“PCBs”) from paper mills and other
facilities operating close to the river. Among the PRPs is NCR
Corporation (“NCR”).
91. In NCR’s Form 10-K Annual Report for the year ended
31 December 2014, which is the most recent public source
available, the total clean-up costs for the Fox River are estimated
at US$825 million (approximately £623 million). This estimate
is subject to uncertainties and does not include natural resource
damages (“NRDs”). Total NRDs may range from US$0 to
US$246 million (approximately £0 to £186 million).
92. Industries’ involvement with the environmental liabilities arises
out of indemnity arrangements which it became party to due to a
series of transactions that took place from the late-1970s onwards
and subsequent litigation brought by NCR against Industries and
Appvion Inc. (“Appvion”) (a former Group subsidiary) in relation
to those arrangements which was ultimately settled. US authorities
have never identified Industries as a PRP.
93. There has been a substantial amount of litigation in the United
States involving NCR and Appvion regarding the responsibility
for the costs of the clean-up operations. The US Government also
brought enforcement proceedings against NCR and Appvion to
ensure compliance with regulatory orders made in relation to
the Fox River clean-up. This litigation has been settled through
agreements with other PRPs and a form of settlement known as a
Consent Decree with the US Government.
94. The principal terms of the Consent Decree, in summary, are
as follows:
a. NCR will perform and fund all of the remaining Fox River
remediation work by itself.
b. The US Government enforcement proceedings will be settled,
with NCR having no liability to meet the US Government’s
claim for costs it has incurred in relation to the clean-up to
date and only a secondary responsibility to meet certain
future costs. NCR will have no liability to the US Government
for NRDs.
c. NCR will cease to pursue its contribution claims against the
other PRPs and in return will receive contribution protection
which means that the other PRPs will not be able to pursue
their contribution claims against NCR. NCR will, however,
have the right to reinstate its contribution claims if the other
PRPs decide to continue to pursue certain contractual claims
against NCR.
d. Appvion will also cease to pursue its claims against the other
PRPs to recover monies that it has spent on the clean-up and
in return will receive contribution protection. Appvion will,
however, have the right to reinstate its claims if the other PRPs
decide to continue to pursue certain claims against Appvion.
95. The Consent Decree was approved by the District Court in
Wisconsin on 23 August 2017. The US Government enforcement
action against NCR was terminated as a result of that order.
The PRPs’ claims for contribution against NCR were dismissed by
order of the District Court in Wisconsin given on 11 October 2017.
96. A Consent Decree between the US Government, P.H. Glatfelter and
Georgia Pacific settling the allocation of costs on the Fox River was
approved by the District Court in the Eastern District of Wisconsin
on 14 March 2019. This Consent Decree concludes all existing
litigation on the Fox River, following P.H. Glatfelter’s withdrawal of
its appeal against the issuance of the Consent Decree as a term of
the settlement.
97. In its 10K annual report for the year ended 2018, NCR disclosed
that in the third quarter of 2017, a contractual dispute arose
between the LLC formed by NCR and API to conduct the clean-up
operation of the Fox River and the remediation general contractor
engaged to perform the necessary work. The amounts claimed
by the contractor were stated in NCR’s disclosure to range from
approximately US$35 million to approximately US$45 million
(approximately £26 million to £34 million). NCR further indicated
that it was disputing the claims being made by the contractor, but
that to the extent that the claims succeeded, NCR would look to its
indemnitors and co-obligors to bear responsibility for the majority
of any award, estimating its own share as approximately one-
fourth of any such award. In its 10Q quarterly report for the period
ended 30 September 2019, NCR disclosed that in November
2019, the arbitration tribunal hearing the dispute had awarded the
contractor US$10 million.
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Industries’ involvement with environmental liabilities arising out of
the contamination of the Fox River:
98. NCR has taken the position that, under the terms of a 1998
Settlement Agreement between it, Appvion and Industries and
a 2005 arbitration award, Industries and Appvion generally
had a joint and several obligation to bear 60% of the Fox River
environmental remediation costs imposed on NCR and of any
amounts NCR has to pay in respect of other PRPs’ contribution
claims. BAT has not acknowledged any such liability to NCR and
has defences to such claims. Further, under the terms of the
Funding Agreement (described above and below) any dispute
between Industries and NCR as to the final amount of any NCR
claim against Industries in respect of the Fox River (if any) can
only be determined at the later of (i) the completion of Fox River
remediation works or (ii) the final resolution and exhaustion
of all possible appeals in the proceedings against Sequana,
PricewaterhouseCoopers LLP (PwC) and other former advisers.
99. Until May 2012, Appvion and Windward (another former Group
subsidiary) paid 60% share of the clean-up costs and Industries
was never required to contribute. Around that time Appvion
refused to continue to pay clean-up costs, leading to NCR
demanding that Industries pay a 60% share.
100. Industries commenced proceedings against Windward and
Appvion in December 2011 seeking indemnification in respect
of any liability it might have to NCR (the “English Indemnity
Proceedings”) pursuant to a 1990 de-merger agreement between
those parties.
Funding Agreement of 30 September 2014
101. On 30 September 2014, Industries entered into the Funding
Agreement with Windward, Appvion, NCR and BTI 2014 LLC
(“BTI”) (a wholly-owned subsidiary of Industries). Pursuant to
the Funding Agreement, the English Indemnity Proceedings
and a counterclaim Appvion had brought in those proceedings,
as well as an NCR-Appvion arbitration concerning Appvion’s
indemnity to NCR, were discontinued as part of an overall
agreement between the parties providing a framework through
which they would together fund the ongoing costs of the
Fox River clean-up. Under the agreement, NCR has agreed to
accept funding by Industries at the lower level of 50% of the
ongoing clean-up related costs of the Fox River (rather than
the 60% referenced above; this remains subject to an ability
to litigate at a later stage the extent of Industries’ liability
in relation to Fox River clean-up related costs (including in
respect of the 50% of costs that Industries has paid under
the Funding Agreement to date). In addition, Windward has
contributed US$10 million (approximately £8 million) of funding
and Appvion has contributed US$25 million (approximately
£19 million) for Fox River and agreed to contribute US$25 million
(approximately £19 million) for the Kalamazoo River (see further
below). Appvion entered Chapter 11 bankruptcy protection on
1 October 2017.
102. The parties also agreed to cooperate in order to maximise
recoveries from certain claims made against third parties,
including (i) a claim commenced by Windward in the High Court
of England & Wales (the High Court) against Sequana and the
former Windward directors (the “Windward Dividend Claim”).
That claim was assigned to BTI under the Funding Agreement,
and relates to dividend payments made by Windward to Sequana
of around €443 million (approximately £375 million) in 2008 and
€135 million (approximately £114 million) in 2009 (the “Dividend
Payments”) and (ii) a claim commenced by Industries directly
against Sequana to recover the value of the Dividend Payments
alleging that the dividends were paid for the purpose of putting
assets beyond the reach of Windward’s creditors (including
Industries) (the “BAT section 423 Claim”).
208
103. A trial of the Windward Dividend Claim and the BAT section 423
Claim took place before the English High Court between February
and April 2016. Judgment was handed down by the High Court
on 11 July 2016. The court held that the 2009 Dividend Payment
of €135 million (approximately £114 million) was a transaction at
an undervalue made with the intention of putting assets beyond
the reach of Industries or of otherwise prejudicing Industries’
interests. It therefore contravened Section 423 of the Insolvency
Act. The court dismissed the Windward Dividend Claim.
BTI sought permission to appeal in respect of the Judge’s findings
in relation to the Windward Dividend Claim. Sequana sought
permission to appeal the Judge’s findings in relation to the BAT
section 423 Claim.
104. On 13 and 16 January 2017 and 3 February 2017 further hearings
took place to determine the precise form of relief to be awarded
to Industries and to hear the parties’ applications for permission
to appeal. Judgment was handed down on 10 February 2017.
In respect of relief, the court ordered that Sequana must pay
BTI an amount up to the full value of the 2009 Dividend plus
interest which equates to around US$185 million (approximately
£140 million). This figure is subject to increase as interest is
continuing to accrue. Sequana must make an initial payment of
around US$138 million (approximately £104 million) and further
payments going forward as and when Industries makes payments
in respect of clean-up costs. In respect of appeals, the court
granted BTI and Sequana permission to appeal (the “Sequana
Claims Appeal”). The court also granted Sequana a stay in respect
of the above payments. The stay was lifted in May 2017.
105. In February 2017 Sequana entered into a process in France
seeking court protection (the “Sauvegarde”). This process was
the subject of a challenge before the French courts. On 7 March
2019, Sequana announced that it was incapable of paying
its debts and that it had applied to the Nanterre Commercial
Court to convert the Sauvegarde into a redressement judiciaire,
a form of insolvent receivership. On 15 May 2019, the Nanterre
Commercial Court made an order placing Sequana into formal
liquidation proceedings (liquidation judiciaire). To date, Industries
has not received any payments from Sequana.
106. In June 2018, the Court of Appeal heard arguments in the
Sequana Claims Appeal. On 6 February 2019 the Court of Appeal
gave judgment upholding the High Court’s findings, with one
immaterial change to the method of calculating the damages
awarded. Sequana therefore remains liable to pay approximately
US$185 million (approximately £140 million). However, following
the Court of Appeal judgment, and as referenced above, on
7 March 2019 Sequana entered into receivership in France, thus
staying execution of the US$185 million judgment in favour of
BTI. The Court of Appeal dismissed BTI’s appeal in relation to the
Windward Dividend Claim. The Court of Appeal also dismissed
Sequana’s application for permission to appeal the High Court’s
costs order in favour of Industries. Sequana therefore remains
liable to pay around £10 million in costs to Industries. The Court
of Appeal made no order as to the costs of the appeal. All parties
to the appeal sought permission from the Court of Appeal for a
further appeal to the U.K. Supreme Court. The Court of Appeal
refused the applications. On 5 March 2019, BTI applied directly
to the Supreme Court for permission to appeal in relation to the
Windward Dividend Claim. On 6 March 2019, Sequana applied
directly to the Supreme Court for permission to appeal in relation
to its liability in the BAT section 423 Claim. On 31 July 2019, BTI
was granted permission to appeal to the Supreme Court. On the
same day, the Supreme Court refused Sequana permission to
appeal. A hearing of BTI’s appeal has been listed to take place on
25 and 26 March 2020.
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 115. It is anticipated that NCR will look to Industries to pay 60%
27 Contingent liabilities and financial commitments continued
107. BTI has brought claims against certain of Windward’s former
advisers, including Windward’s auditors at the time of the
dividend payments, PwC (which claims were also assigned to BTI
under the Funding Agreement). The claim was stayed while the
Windward Dividends claim and the BAT section 423 Claim were
heard. Following the Court of Appeal judgment in the Sequana
Claims Appeal, BTI is now pursuing its assigned claim against
PwC. PwC applied to court to strike-out BTI’s claim. A hearing of
this application took place in October 2019. On 15 November
2019, the court dismissed PwC’s application. The court has
granted PwC permission to appeal in respect of part of its
dismissal of the application. A hearing of that appeal has yet to be
scheduled, but is not expected to take place before Q4 2020 at
the earliest.
of any sums it becomes liable to pay to Georgia-Pacific on the
basis, it would be asserted, that the river constitutes a ‘Future
Site’ for the purposes of the Settlement Agreement. The Funding
Agreement described above does not resolve any such claims,
but does provide an agreed mechanism pursuant to which any
surplus from the valuable recoveries of any third-party claims
that remains after all Fox River related clean-up costs have been
paid and Industries and NCR have been made whole may be
applied towards Kalamazoo clean-up costs, in the event that
NCR were to be successful in any claim for a portion of them
from Industries or Appvion (subject to Appvion’s cap, described
below). Industries has defences to any claims made by NCR in
relation to the Kalamazoo River. No such claims have been made
against Industries.
108. An agreed stay is also in place in respect of BTI’s separate assigned
claim against Freshfields Bruckhaus Deringer.
109. The sums Industries has agreed to pay under the Funding
Agreement are subject to ongoing adjustment, as clean-up costs
can only be estimated in advance of the work being carried
out and as certain sums payable are the subject of ongoing US
litigation. In 2018, Industries paid £25 million in respect of clean-
up costs and is potentially liable for further costs associated with
the clean-up. From January through December 2019, Industries
paid £32 million. Industries has a provision of £73 million which
represents the current best estimate of its exposure – see note 20.
Kalamazoo
110. NCR is also being pursued by Georgia-Pacific, as the owner of a
facility on the Kalamazoo River in Michigan which released PCBs
into that river. Georgia-Pacific has been designated as a PRP in
respect of the river.
111. Georgia-Pacific contends that NCR is responsible for, or should
contribute to, the clean-up costs, because:
a. a predecessor to NCR’s Appleton Papers Division sold ‘broke’
containing PCBs to Georgia-Pacific or others for recycling;
b. NCR itself sold paper containing PCBs to Georgia-Pacific or
others for recycling; and/or
c. NCR is liable for sales to Georgia-Pacific or others of PCB-
containing broke by Mead Corporation, which, like the
predecessor to NCR’s Appleton Papers Division, coated paper
with the PCB containing emulsion manufactured by NCR.
112. A full trial on liability took place in February 2013.
On 26 September 2013, the Michigan Court held that NCR
was liable as a PRP on the basis that broke sales constituted
an arrangement for the disposal of hazardous material for the
purposes of CERCLA. The decision was based on NCR’s knowledge
of the hazards of PCBs from at least 1969. The decision is
under appeal.
113. The second phase of the Kalamazoo trial to determine the
apportionment of liability amongst NCR, Georgia-Pacific and
the other PRPs (International Paper Company and Weyerhaeuser
Company) took place between September and December 2015.
114. On 29 March 2018, Judge Jonker handed down judgment in
respect of around US$55 million (approximately £42 million) of
Georgia-Pacific’s past remediation costs. Judge Jonker did not
determine the question of future remediation costs. Judge Jonker
ordered that NCR pay 40% of Georgia-Pacific past costs (around
US$22 million (approximately £17 million)).
116. Industries also anticipates that NCR may seek to recover from
Appvion (subject to a cap of US$25 million (approximately
£19 million)) for ‘Future Sites’ under the Funding Agreement).
The basis of the recovery would be the same as any demand NCR
may make on Industries. Appvion entered Chapter 11 bankruptcy
protection on 1 October 2017. The effect of the Chapter 11
proceedings on Appvion’s liability for Future Sites payments under
the Funding Agreement is currently uncertain.
117. Further hearings were held before Judge Jonker to determine
the final form of the order reflecting this judgment. The parties
commenced appeal proceedings against this judgment in July
2018. NCR also agreed an appeal bond with Georgia-Pacific to
prevent enforcement of the judgment while it remained subject
to appeal.
118. On 11 December 2019, NCR announced that it had entered
into a Consent Decree with the US Government and the
State of Michigan, pursuant to which it assumed liability for
certain remediation work at the Kalamazoo River. This Consent
Decree remains subject to approval by the District Court for
the Western District of Michigan. The payments to be made
on the face of the Consent Decree in respect of such work total
approximately US$245 million (approximately £185 million).
The Consent Decree also provides for the withdrawal of NCR’s
appeal against Georgia-Pacific, and payment by NCR of the
outstanding judgment against it of approximately US$20 million
(approximately £15 million) to Georgia-Pacific.
119. Pending final court approval of the Consent Decree, the quantum
of the clean-up costs for the Kalamazoo River is presently unclear.
It may well exceed the amounts which are payable on the face of
the Consent Decree (even if approved).
120. As detailed above, Industries is taking active steps to protect its
interests, including seeking to procure the repayment of the
Windward dividends, pursuing the other valuable claims that are
now within its control, and working with the other parties to the
Funding Agreement to maximise recoveries from third parties with
a view to ensuring that amounts funded towards clean-up related
costs are later recouped under the agreed repayment mechanisms
under the Funding Agreement.
209
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
Other environmental matters
121. RAI and its subsidiaries are subject to federal, state and local environmental laws and regulations concerning the discharge, storage, handling
and disposal of hazardous or toxic substances. Such laws and regulations provide for significant fines, penalties and liabilities, sometimes
without regard to whether the owner or operator of the property or facility knew of, or was responsible for, the release or presence of
hazardous or toxic substances. In addition, third parties may make claims against owners or operators of properties for personal injuries and
property damage associated with releases of hazardous or toxic substances. In the past, RJRT has been named a PRP with third parties under
the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) with respect to several superfund sites. RAI and its
subsidiaries are not aware of any current environmental matters that are expected to have a material adverse effect on the business, results of
operations or financial position of RAI or its subsidiaries.
Criminal investigations
122. The Group has been investigating, and is aware of governmental authorities’ investigations into, allegations of misconduct. It has been
liaising with relevant authorities, including the UK’s Serious Fraud Office, which is conducting an investigation into suspicions of corruption in
the conduct of business by Group companies and associated persons, and the DOJ and OFAC in the United States, which are conducting an
investigation into suspicions of breach of sanctions. The Group is cooperating with the authorities’ investigations.
123. The potential for fines, penalties or other consequences cannot currently be assessed. As the investigations are ongoing, it is not yet possible
to identify the timescale in which these matters might be resolved.
Closed litigation matters
124. The following matters on which the Company reported in the contingent liabilities and financial commitments note 28 to the Group’s 2018
financial statements have been dismissed, concluded or resolved as noted below:
Matter
Jurisdiction
Companies named as Defendants
Description
Disposition
West Virginia IPIC
Breathe DC
Corwin
Sao Paulo Recoupment Claim Brazil
USA
USA
USA
RJRT, Lorillard Tobacco and/or B&W Personal injury case
RJRT, RAI, SFNTC
RJRT, BAT
Souza Cruz S.A.
Class action
Class action shareholder case
Class action
Dismissed by court
Settlement reached
Supreme Court decision
Plaintiff appeal denied by
Superior Court of Justice
General Litigation Conclusion
125. While it is impossible to be certain of the outcome of any particular case or of the amount of any possible adverse verdict, the Group believes
that the defences of the Group’s companies to all these various claims are meritorious on both the law and the facts, and a vigorous defence
is being made everywhere.
126. As indicated above, on 1 March 2019 the Quebec Court of Appeal released its appeal judgment. The trial judgment was largely upheld by
a unanimous decision of the five-member panel including the requirement that the defendants deposit the initial deposits in their solicitors’
trust accounts within 60 days. This is the only executory aspect of the judgment. In these circumstances we are of the view that it is more
likely than not that there will be an outlay and it is reasonably estimable at CAD$758 million (approximately £436 million), the amount
of the initial deposit. If further adverse judgments are entered against any of the Group’s companies in any case, avenues of appeal will be
pursued. Such appeals could require the appellants to post appeal bonds or substitute security (as has been necessary in Quebec) in amounts
which could in some cases equal or exceed the amount of the judgment. At least in the aggregate, and despite the quality of defences
available to the Group, it is not impossible that the Group’s results of operations or cash flows in any particular period could be materially
adversely affected by the impact of a significant increase in litigation, difficulties in obtaining the bonding required to stay execution of
judgments on appeal, or any final outcome of any particular litigation.
127. Having regard to all these matters, with the exception of the Quebec Class Actions, Fox River and certain Engle progeny cases identified
above, the Group does not consider it appropriate to make any provision in respect of any pending litigation because the likelihood of any
resulting material loss, on an individual case basis, is not considered probable and/or the amount of any such loss cannot be reasonably
estimated. Notwithstanding the negative decision in the Quebec Class Actions, the Group does not believe that the ultimate outcome of
this litigation will significantly impair the Group’s financial condition. If the facts and circumstances change and result in further unfavourable
outcomes in the pending litigation, then there could be a material impact on the financial statements of the Group.
210
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
Other contingencies
128. JTI Indemnities. By a purchase agreement dated 9 March 1999,
amended and restated as of 11 May 1999, referred to as the
1999 Purchase Agreement, R.J. Reynolds Tobacco Holdings, Inc.
(“RJR”) and RJRT sold their international tobacco business to JTI.
Under the 1999 Purchase Agreement, RJR and RJRT retained
certain liabilities relating to the international tobacco business
sold to JTI, and agreed to indemnify JTI against: (i) any liabilities,
costs and expenses arising out of the imposition or assessment of
any tax with respect to the international tobacco business arising
prior to the sale, other than as reflected on the closing balance
sheet; (ii) any liabilities, costs and expenses that JTI or any of
its affiliates, including the acquired entities, may incur after the
sale with respect to any of RJR’s or RJRT’s employee benefit and
welfare plans; and (iii) any liabilities, costs and expenses incurred
by JTI or any of its affiliates arising out of certain activities of
Northern Brands.
129. RJRT has received claims for indemnification from JTI, and several
of these have been resolved. Although RJR and RJRT recognise
that, under certain circumstances, they may have other unresolved
indemnification obligations to JTI under the 1999 Purchase
Agreement, RJR and RJRT disagree what circumstances described
in such claims give rise to any indemnification obligations by
RJR and RJRT and the nature and extent of any such obligation.
RJR and RJRT have conveyed their position to JTI, and the parties
have agreed to resolve their differences at a later date.
130. ITG Indemnity. In the Divestiture, RAI agreed to defend and
indemnify, subject to certain conditions and limitations, ITG in
connection with claims relating to the purchase or use of one or
more of the Winston, Kool, Salem or Maverick cigarette brands
on or before 12 June 2015, as well as in actions filed before
13 June 2023, relating to the purchase or use of one or more of
the Winston, Kool, Salem or Maverick cigarette brands. In the
purchase agreement relating to the Divestiture, ITG agreed
to defend and indemnify, subject to certain conditions and
limitations, RAI and its affiliates in connection with claims relating
to the purchase or use of ‘blu’ brand e-cigarettes. ITG also agreed
to defend and indemnify, subject to certain conditions and
limitations, RAI and its affiliates in actions filed after 12 June 2023,
relating to the purchase or use of one or more of the Winston,
Kool, Salem or Maverick cigarette brands after 12 June 2015.
ITG has tendered a number of actions to RAI under the terms
of this indemnity, and RAI has, subject to a reservation of rights,
agreed to defend and indemnify ITG pursuant to the terms of
the indemnity. These claims are substantially similar in nature and
extent to claims asserted directly against RJRT in similar actions.
131. Loews Indemnity. In 2008, Loews Corporation (“Loews”), entered
into an agreement with Lorillard Inc., Lorillard Tobacco, and
certain of their affiliates, which agreement is referred to as the
“Separation Agreement”. In the Separation Agreement, Lorillard
agreed to indemnify Loews and its officers, directors, employees
and agents against all costs and expenses arising out of third-
party claims (including, without limitation, attorneys’ fees,
interest, penalties and costs of investigation or preparation of
defence), judgments, fines, losses, claims, damages, liabilities,
taxes, demands, assessments, and amounts paid in settlement
based on, arising out of or resulting from, among other things,
Loews’ ownership of or the operation of Lorillard and its assets
and properties, and its operation or conduct of its businesses
at any time prior to or following the separation of Lorillard and
Loews (including with respect to any product liability claims).
Loews is a defendant in three pending product liability actions,
each of which is a putative class action. Pursuant to the Separation
Agreement, Lorillard is required to indemnify Loews for the
amount of any losses and any legal or other fees with respect to
such cases. Following the closing of the Lorillard merger, RJRT
assumed Lorillard’s obligations under the Separation Agreement as
was required under the Separation Agreement.
132. SFRTI Indemnity. In connection with the 13 January 2016 sale
by RAI of the international rights to the Natural American
Spirit brand name and associated trademarks, along with SFR
Tobacco International GmbH (“SFRTI”) and other international
companies that distributed and marketed the brand outside the
United States, to JT International Holding BV (“JTI Holding”),
each of SFNTC, R. J. Reynolds Global Products, Inc., and R. J.
Reynolds Tobacco B.V. agreed to indemnify JTI Holding against,
among other things, any liabilities, costs, and expenses relating
to actions (i) commenced on or before (a) 13 January 2019,
to the extent relating to alleged personal injuries, and (b) in all
other cases, 13 January 2021; (ii) brought by (a) a governmental
authority to enforce legislation implementing European Union
Directive 2001/37/EC or European Directive 2014/40/EU or (b)
consumers or a consumer association; and (iii) arising out of
any statement or claim (a) made on or before 13 January 2016,
(b) by any company sold to JTI Holding in the transaction, (c)
concerning Natural American Spirit brand products consumed
or intended to be consumed outside of the United States and
(d) that the Natural American Spirit brand product is natural,
organic, or additive free. Under the terms of this indemnity, JTI
has requested indemnification from Santa Fe Natural Tobacco
Company Germany GmbH (“SFNTCG”) in connection with an
audit of SFNTCG relating to transfer pricing for the tax years 2007
to 2010 and 2012 to 2015. SFNTCG contests the audit results.
The amount in dispute is approximately €21 million plus interest
(approximately £18 million).
133. Indemnification of Distributors and Retailers. RJRT, Lorillard
Tobacco, SFNTC, American Snuff Co. and RJR Vapor have entered
into agreements to indemnify certain distributors and retailers
from liability and related defence costs arising out of the sale or
distribution of their products. Additionally, SFNTC has entered
into an agreement to indemnify a supplier from liability and
related defence costs arising out of the sale or use of SFNTC’s
products. The cost has been, and is expected to be, insignificant.
RJRT, SFNTC, American Snuff Co. and RJR Vapor believe that the
indemnified claims are substantially similar in nature and extent
to the claims that they are already exposed to by virtue of their
having manufactured those products.
134. Except as otherwise noted above, RAI is not able to estimate the
maximum potential of future payments, if any, related to these
indemnification obligations.
135. Competition Investigations. There are instances where Group
companies are cooperating with relevant national competition
authorities in relation to ongoing competition law investigations
and/or engaged in legal proceedings at the appellate level,
including (amongst others) in Ukraine, Cyprus and Netherlands.
211
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
Tax disputes
The Group has exposures in respect of the payment or recovery of a
number of taxes. The Group is and has been subject to a number of
tax audits covering, amongst others, excise tax, value added taxes,
sales taxes, corporate taxes, withholding taxes and payroll taxes.
Indirect and other taxes
Bangladesh
On 25 July 2018, the Appellate Division of the Supreme Court of
Bangladesh has reversed the decision of the High Court Division
against BAT Bangladesh in respect of the retrospective demands
for VAT and Supplementary Duty amounting to approximately
£170 million. On 3 February 2020, the certified Court Order was
received. The Attorney General has 30 days to file a review petition
with the Court. The Group is not, at the date of this announcement,
aware of any filing.
Egypt
British American Tobacco Egypt LLC is subject to two ongoing civil
cases concerning the imposition of sales tax on low-price category
brands brought by the Egyptian tax authority for £113 million.
Management believes that the tax claims are unfounded and has
appealed the tax claims. These cases are scheduled for hearings on
8 April 2020 and 24 June 2020.
South Korea
In 2016, the Board of Audit and Inspection of Korea (“BAI”) concluded
its tax assessment in relation to the 2014 year-end tobacco inventory,
and imposed additional national excise, local excise, VAT taxes and
penalties. This resulted in the recognition of a KRW 80.7 billion
(approximately £53 million) charge by Group subsidiaries, BAT
Korea Ltd., Rothmans Far East B.V. Korea Branch Office and BAT
Korea Manufacturing Ltd. Management deems the tax and penalties
to be unfounded and has appealed to the tax tribunal against the
assessment. On grounds of materiality and the high likelihood of the
tax and penalties being reversed in future, the Group classified the tax
and penalties charge as an adjusting item in 2016.
On 23 August 2019, the trial court ruled in favour of Rothmans Far East
B.V. Korea Branch Office on KRW 6.7 billion (approximately £4 million),
the VAT portion of the assessment; appeals on the other elements of
the assessment are still pending at trial court. The Korean government
appealed the ruling on 16 September 2019. Management expects
the final ruling by the Supreme Court by 2021. Due to the uncertain
outcome of the case no asset has been recognised in relation to
this ruling.
Brazil
On 15 March 2017, the Brazilian Supreme Court ruled that for all
taxpayers VAT (ICMS) should not be included in the calculation
of social contribution taxes (PIS/Cofins) which are levied based
on revenue. However, the retrospective application of the basis of
calculation is subject to an extraordinary appeal and the final decision
is expected in early 2020.
The Group’s Brazilian subsidiary, Souza Cruz, had filed an individual
lawsuit to establish that it had overpaid taxes to the government.
In 2019, Souza Cruz received a favourable decision in the lower court
and has therefore recognised £86 million in other income representing
management’s best estimate of the amounts likely to be recovered at
this time with the potential for further amounts in future periods.
If the ruling were to be enacted retrospectively for a period of five
years, the potential asset is estimated to be around £723 million.
The estimated costs of known tax obligations have been provided in
these accounts in accordance with the Group’s accounting policies.
In some countries, tax law requires that full or part payment of
disputed tax assessments be made pending resolution of the dispute.
To the extent that such payments exceed the estimated obligation,
they would not be recognised as an expense. While the amounts
that may be payable or receivable in relation to tax disputes could be
material to the results or cash flows of the Group in the period in which
they are recognised, the Board does not expect these amounts to have
a material effect on the Group’s financial condition.
The challenge from the South African Revenue Service regarding the
debt financing of British American Tobacco South Africa was resolved
in 2019.
The following matters may proceed to litigation:
Corporate taxes
Brazil
The Brazilian Federal Tax Authority has filed claims against Souza Cruz
seeking to reassess the profits of overseas subsidiaries to corporate
income tax and social contribution tax. The reassessments are
for the years 2004 until and including 2012 for a total amount of
BRL1,683 million (£316 million) to cover tax, interest and penalties.
Souza Cruz appealed all reassessments. Regarding the first assessments
(2004-2006) Souza Cruz’s appeal was rejected in 2013 although the
written judgment of that tribunal was received in 2016. Souza Cruz
has appealed the decision. The appeal against the second assessments
(2007 and 2008) was upheld at the second tier tribunal and was
closed. In 2015, a further reassessment for the same period (2007 and
2008) was raised after the five-year statute of limitation which has been
appealed against.
Souza Cruz received further reassessments in 2014 for the 2009
calendar year and in 2015 an assessment for the 2010 calendar year.
Souza Cruz appealed both the reassessments in full. In December
2016, assessments were received for the calendar years 2011 and 2012
which have also been appealed.
Netherlands
The Dutch tax authority has issued a number of assessments on
various issues across the years 2003-2016 in relation to various intra-
group transactions. The assessments amount to an aggregate net
liability across these periods of £921 million covering tax, interest and
penalties. The Group has appealed against the assessments in full.
The Group believes that its companies have meritorious defences in
law and fact in each of the above matters and intends to pursue each
dispute through the judicial system as necessary. The Group does not
consider it appropriate to make provision for these amounts nor for
any potential further amounts which may be assessed in relation to
these matters in subsequent years.
212
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 27 Contingent liabilities and financial commitments continued
Commitments in relation to service contracts, non‑capitalised leases
The total future minimum payments under non-cancellable service contracts based on when payments fall due:
Service contracts
Within one year
Between one and five years
Beyond five years
2019
£m
2018
£m
15
20
–
35
20
17
–
37
Financial commitments arising from short-term leases and leases of low-value assets that are not capitalised under IFRS 16 Leases are £10 million
for property and £11 million for plant, equipment and other assets. Refer to note 30 for more information on the adoption of IFRS 16.
Performance guarantees
As part of the acquisition of TDR in 2015, the Group has committed to keeping the manufacturing facility in Kanfanar, Croatia operational for at
least five years following completion of the acquisition. The maximum exposure under this guarantee is £42 million (2018: £45 million).
28 Interests in subsidiaries
Subsidiaries with material non‑controlling interests
Non-controlling interests principally arise from the Group’s listed investment in Malaysia (British American Tobacco (Malaysia) Berhad), where
the Group held 50% of the listed holding company in 2019, 2018 and 2017. The Group has assessed that it exercises de facto control over
Malaysia as it has the practical ability to direct the business through effective control of the Company’s Board as a result of the Group controlling
the largest shareholding block in comparison to other shareholdings which are widely dispersed. Summarised financial information for Malaysia
is shown below as required by IFRS 12. As part of the Group’s reporting processes, Malaysia report consolidated financial information for the
Malaysia group which has been adjusted to comply with Group accounting policies which may differ to local accounting practice. Goodwill in
respect of Malaysia, which arose as a result of the acquisition of the Rothmans group referred to in note 8, has not been included as part of the
net assets below. In addition, no adjustments have been made to the information below for the elimination of intercompany transactions and
balances with the rest of the Group.
Summarised financial information
Revenue
Profit for the year
– Attributable to non-controlling interests
Total comprehensive income
– Attributable to non-controlling interests
Dividends paid to non-controlling interests
Summary net assets:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Total equity at the end of the year
– Attributable to non-controlling interests
Net cash generated from operating activities
Net cash generated in investing activities
Net cash used in financing activities
Differences on exchange
Increase/(decrease) in net cash and cash equivalents
Net cash and cash equivalents at 1 January
Net cash and cash equivalents at 31 December
2019
£m
191
65
33
65
33
(36)
20
97
(4)
(117)
(4)
(2)
61
–
(73)
–
(12)
10
(2)
2018
£m
231
87
43
87
43
(40)
16
116
–
(129)
3
1
86
(2)
(77)
1
8
2
10
2017
£m
237
89
44
87
43
(64)
18
101
(5)
(120)
(6)
(3)
67
14
(86)
(1)
(6)
8
2
213
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
28 Interests in subsidiaries continued
Subsidiaries subject to restrictions
As a result of the Group’s Canadian subsidiary, Imperial Tobacco Canada (ITCAN), entering CCAA protection, the assets of ITCAN are subject to
restrictions. The table below summarises the assets and liabilities of ITCAN:
Summarised financial information
Non-current assets
Current assets
Non-current liabilities
Current liabilities
2019
£m
2,403
768
(131)
(447)
2,593
2018
£m
2,781
394
(129)
(498)
2,548
Under the terms of CCAA, the court has appointed FTI Consulting Canada Inc. to act as a monitor. This monitor has no operational input and is
not involved in the management of the business. The Group considers that ITCAN continues to meet the requirements of IFRS 10 Consolidated
Financial Statements, and, until such requirements are not met, the Group will continue to consolidate the results of ITCAN.
Whilst the Group continues to control the operations of its Canadian subsidiary, there are restrictions over the ability to access or use certain
assets including the ability to remit dividends. Included in current assets are cash and cash equivalents of £595 million, of which £445 million is
restricted (2018: £248 million, none of which was restricted) (note 17) and inventories of £117 million (2018: £105 million). Included in non-
current assets for 2019 and 2018 is goodwill of £2.3 billion subject to impairment reviews (note 8). Included in current liabilities are trade and
other payables of £310 million (2018: £362 million), the majority of which are amounts payable in respect of duties and excise. Refer to note 27
for information on the Quebec Class Actions.
Other shareholdings
The Group holds 92% of the equity shares of PT Bentoel Internasional Investama Tbk (“Bentoel”). In 2011, the Group sold 984 million shares,
representing approximately 14% of Bentoel’s share capital, for the purposes of fulfilling certain obligations pursuant to Bapepam LK (Indonesia)
takeover regulations. The Group simultaneously entered into a total return swap on 971 million of the shares. In June 2016, the Group and other
investors participated in a rights issue by Bentoel, increasing its stake in Bentoel to 92%. Simultaneously, the Group amended the total return
swap to take account of an addition 1,684 million shares. The shares subject to the total return swap now represent 7% of Bentoel’s issued
capital. While the Group does not have legal ownership of these shares, it retains the risks and rewards associated with them which results in the
Group continuing to recognise an effective interest in 99% of Bentoel’s net assets and results.
Refer to note 10 for information on the Group’s 42% investment in Tisak d.d..
214
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information
The following consolidating financial information is required by the rules of the Securities and Exchange Commission and has been prepared as a
requirement of the Regulation S-X 3-10.
The following condensed consolidating financial information relates to the guarantees of:
– US$10.3 billion RAI unsecured notes;
– US$149.5 million of Lorillard unsecured notes;
– US$14.96 billion of bonds representing the portion (99.7%) of a total US$15 billion of bonds issued by B.A.T Capital Corporation (“BATCAP”)
in connection with the acquisition of RAI exchanged for registered bonds in 2018; and
– US$3.5 billion of bonds issued by BATCAP in connection with the Shelf Registration Statement on Form F-3 filed on July 17, 2019, pursuant to
which BATCAP or BATIF may issue an indefinite amount of debt securities.
Note: The following condensed consolidating financial statements report the contribution of each applicable company to the Group’s results and
not the separate financial statements for each applicable company as local financial statements are prepared in accordance with local legislative
requirements and may differ from the financial information provided below. In particular, in respect of the United States region, all financial
statements and financial information provided by or with respect to the US business or RAI (and/or RAI and its subsidiaries (collectively, the “RAI
Group”)) are prepared on the basis of US GAAP and constitute the primary financial statements or financial information of the US business or
RAI (and/or the RAI Group). Solely for the purpose of consolidation within the results of BAT p.l.c. and the BAT Group, this financial information
is then converted to IFRS as issued by the IASB and adopted by the EU. To the extent any such financial information provided in these financial
statements relates to the US business or RAI (and/or the RAI Group), it is provided as an explanation of the US business’s or RAI’s (and/or the RAI
Group’s) primary US GAAP based financial statements and information.
(a) RAI and Lorillard unsecured notes
The following condensed consolidating financial information relates to the guarantees of: US$10.3 billion (2018: US$11 billion) RAI unsecured
notes (referred to as “RB” below) and US$149.5 million (2018: US$231 million) of Lorillard unsecured notes (referred to as “LB” below).
The subsidiaries disclosed below are wholly owned and the guarantees provided are full and unconditional, and joint and several.
The following condensed consolidating financial information includes the accounts and activities of:
a. British American Tobacco p.l.c. (parent guarantor of RB and LB), referred to as “BAT p.l.c.” in the financials below;
b. R.J. Reynolds Tobacco Company (issuer of LB), referred to as “RJRT” in the financials below;
c. Reynolds American Inc. (issuer of RB, subsidiary guarantor of LB), referred to as “RAI” in the financials below;
d. R.J. Reynolds Tobacco Holdings Inc. (subsidiary guarantor of RB and LB), referred to as “RJRTH” in the financials below;
e. other direct and indirect subsidiaries of the BAT Group that are not guarantors;
f. elimination entries necessary to consolidate the parent with the issuer, the subsidiary guarantors and non-guarantor subsidiaries; and
g. the BAT Group on a consolidated basis.
215
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Income Statement
Year ended 31 December 2019
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries Eliminations Consolidated
£m
–
–
–
(4)
–
–
–
(122)
(126)
121
£m
8,474
(672)
(7)
(203)
(179)
2
–
(6,765)
650
2
–
–
(5)
–
5,854
5,849
5,849
–
5,849
652
(187)
2,595
3,060
3,060
–
3,060
£m
–
–
–
(10)
–
26
–
(18)
(2)
(497)
–
(499)
125
3,697
3,323
3,323
–
3,323
£m
–
–
–
(1)
–
–
–
–
(1)
3
–
2
–
3,086
3,088
3,088
–
3,088
£m
17,746
(4,224)
169
(3,004)
£m
(343)
297
–
1
(1,333)
3,589
–
(3,454)
(3)
(4,482)
8,458
(1,188)
–
3,536
37
(43)
£m
25,877
(4,599)
162
(3,221)
(1,512)
163
(3)
(7,851)
9,016
(1,602)
498
–
498
7,768
(2,001)
–
5,767
(6)
–
(15,232)
(15,238)
7,912
(2,063)
–
5,849
5,622
145
5,767
(15,238)
–
(15,238)
5,704
145
5,849
Revenue
Raw materials and consumables used
Changes in inventories of finished
goods and work in progress
Employee benefit costs
Depreciation, amortisation
and impairment costs
Other operating income
Loss on reclassification from
amortised cost to fair value
Other operating expenses
(Loss)/profit from operations
Net finance income/(costs)
Share of post-tax results of associates
and joint ventures
Profit before taxation
Taxation on ordinary activities
Equity income from subsidiaries
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
216
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Income Statement
Year ended 31 December 2018
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
–
–
–
(5)
–
–
–
(124)
(129)
95
£m
7,752
(662)
(4)
(169)
(91)
3
–
(6,579)
250
9
–
–
(34)
–
6,210
6,176
6,176
–
6,176
259
(100)
2,569
2,728
2,728
–
2,728
£m
–
–
–
(13)
–
22
–
(17)
(8)
(421)
–
(429)
93
3,436
3,100
3,100
–
3,100
£m
–
–
–
–
–
–
–
–
–
3
–
3
1
2,755
2,759
2,759
–
2,759
£m
16,959
(4,161)
118
(2,822)
£m
(219)
159
–
4
(947)
3,847
–
(3,787)
(3)
(3,819)
9,172
(947)
–
3,871
28
(120)
£m
24,492
(4,664)
114
(3,005)
(1,038)
85
(3)
(6,668)
9,313
(1,381)
419
–
419
8,644
(2,135)
–
6,509
(92)
–
(14,970)
(15,062)
8,351
(2,141)
–
6,210
6,331
178
6,509
(15,062)
–
(15,062)
6,032
178
6,210
Revenue
Raw materials and consumables used
Changes in inventories of finished
goods and work in progress
Employee benefit costs
Depreciation, amortisation
and impairment costs
Other operating income
Loss on reclassification from
amortised cost to fair value
Other operating expenses
(Loss)/profit from operations
Net finance income/(costs)
Share of post-tax results of associates
and joint ventures
Profit before taxation
Taxation on ordinary activities
Equity income from subsidiaries
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
217
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Income Statement
Year ended 31 December 2017
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
–
–
–
(8)
–
–
(101)
(109)
3
£m
3,459
(346)
(7)
(117)
(28)
7
(2,889)
79
11
–
–
(106)
–
37,656
37,550
37,550
–
37,550
90
(240)
3,870
3,720
3,720
–
3,720
£m
–
–
–
(35)
–
34
(6)
(7)
(190)
–
(197)
61
4,259
4,123
4,123
–
4,123
£m
–
–
–
(2)
–
–
–
(2)
9
–
7
(3)
3,893
3,897
3,897
–
3,897
£m
16,243
(4,286)
(507)
(2,525)
(874)
1,859
(3,499)
6,411
(908)
£m
(138)
112
1
8
–
(1,756)
1,813
40
(19)
£m
19,564
(4,520)
(513)
(2,679)
(902)
144
(4,682)
6,412
(1,094)
24,209
–
24,209
29,712
8,311
–
38,023
21
–
(49,678)
(49,657)
37,852
171
38,023
(49,657)
–
(49,657)
29,527
8,129
–
37,656
37,485
171
37,656
Revenue
Raw materials and consumables used
Changes in inventories of finished
goods and work in progress
Employee benefit costs
Depreciation, amortisation
and impairment costs
Other operating income
Other operating expenses
(Loss)/profit from operations
Net finance income/(costs)
Share of post-tax results of associates
and joint ventures
Profit before taxation
Taxation on ordinary activities
Equity income from subsidiaries
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
218
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Statement of Comprehensive Income
BAT p.l.c.
RJRT
RAI
RJRTH
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Year ended 31 December 2019
All other
companies
BAT Group
Non-guarantor
subsidiaries Eliminations Consolidated
£m
5,849
£m
3,060
£m
3,323
£m
3,088
£m
£m
5,767
(15,238)
£m
5,849
–
–
–
–
–
–
–
–
–
–
–
(507)
(3,216)
30
30
–
–
–
–
167
226
–
(59)
197
–
–
30
30
–
–
–
–
185
245
–
(60)
215
–
–
30
30
–
–
–
–
167
225
–
(58)
197
–
–
(3,217)
(2,968)
(193)
3
(115)
56
(669)
(813)
7
137
(89)
(89)
–
–
–
–
(357)
(472)
–
115
(3,886)
–
–
(446)
507
3,216
(3,216)
(2,967)
(193)
3
(115)
56
(507)
(589)
7
75
(3,723)
–
–
2,126
3,257
3,538
3,285
1,881
(11,961)
2,126
2,126
–
2,126
3,257
–
3,257
3,538
–
3,538
3,285
–
3,285
1,755
126
1,881
(11,961)
–
(11,961)
2,000
126
2,126
Profit for the year
Other comprehensive income/(expense)
Items that may be reclassified
subsequently to profit or loss:
Differences on exchange
Cash flow hedges
Net investment hedges
Associates – share of OCI, net of tax
Tax on items that may be reclassified
Items that will not be reclassified
subsequently to profit or loss:
Retirement benefit schemes
Associates – share of OCI, net of tax
Tax on items that will not be reclassified
Total other comprehensive
income/(expense) for the year, net of tax
Share of subsidiaries OCI (other reserves)
Share of subsidiaries OCI (retained earnings)
Total comprehensive income/(expense)
for the year, net of tax
Attributable to:
Owners of the parent
Non-controlling interests
219
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Statement of Comprehensive Income
BAT p.l.c.
RJRT
RAI
RJRTH
Year ended 31 December 2018
All other
companies
BAT Group
Parent
guarantor
£m
6,176
Issuer (LB)
£m
2,728
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
3,100
£m
2,759
£m
£m
6,509
(15,062)
£m
6,210
–
–
–
–
–
–
–
–
–
–
–
115
3,099
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,099
3,868
(41)
(708)
(38)
18
115
142
6
(33)
–
–
–
–
–
–
–
–
–
–
3,214
–
–
–
(115)
(3,099)
3,099
3,868
(41)
(708)
(38)
18
115
142
6
(33)
3,214
–
–
9,390
2,728
3,100
2,759
9,723
(18,276)
9,424
9,390
–
9,390
2,728
–
2,728
3,100
–
3,100
2,759
–
2,759
9,538
185
9,723
(18,276)
–
(18,276)
9,239
185
9,424
Profit for the year
Other comprehensive income/(expense)
Items that may be reclassified
subsequently to profit or loss:
Differences on exchange
Cash flow hedges
Net investment hedges
Associates – share of OCI, net of tax
Tax on items that may be reclassified
Items that will not be reclassified
subsequently to profit or loss:
Retirement benefit schemes
Associates – share of OCI, net of tax
Tax on items that will not be reclassified
Total other comprehensive
income for the year, net of tax
Share of subsidiaries OCI (other reserves)
Share of subsidiaries OCI (retained earnings)
Total comprehensive income/(expense)
for the year, net of tax
Attributable to:
Owners of the parent
Non-controlling interests
220
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Statement of Comprehensive Income
BAT p.l.c.
RJRT
RAI
RJRTH
Year ended 31 December 2017
All other
companies
BAT Group
Parent
guarantor
£m
37,550
Issuer (LB)
£m
3,720
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
4,123
£m
3,897
£m
£m
£m
38,023
(49,657)
37,656
–
–
–
–
–
–
–
–
–
–
–
–
681
(3,809)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,809)
(3,084)
(171)
(27)
357
(918)
34
681
827
25
(171)
–
–
–
–
–
–
–
–
–
–
–
(3,128)
–
–
–
(681)
3,809
(3,809)
(3,084)
(171)
(27)
357
(918)
34
681
827
25
(171)
(3,128)
–
–
34,422
3,720
4,123
3,897
34,895
(46,529)
34,528
34,422
–
34,422
3,720
–
3,720
4,123
–
4,123
3,897
–
3,897
34,728
167
34,895
(46,529)
–
(46,529)
34,361
167
34,528
Profit for the year
Other comprehensive income/(expense)
Items that may be reclassified
subsequently to profit or loss:
Differences on exchange
Cash flow hedges
Investments held at fair value
Net investment hedges
Associates–share of OCI, net of tax
Tax on items that may be reclassified
Items that will not be reclassified
subsequently to profit or loss:
Retirement benefit schemes
Associates–share of OCI, net of tax
Tax on items that will not be reclassified
Total other comprehensive expense for the year,
net of tax
Share of subsidiaries OCI (other reserves)
Share of subsidiaries OCI (retained earnings)
Total comprehensive income/(expense)
for the year, net of tax
Attributable to:
Owners of the parent
Non-controlling interests
221
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Balance Sheet
At 31 December 2019
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries Eliminations Consolidated
£m
£m
£m
£m
£m
£m
£m
–
–
23,510
–
–
–
–
–
–
23,510
–
–
6,719
–
8
5
6,732
–
6,732
30,242
2,807
683
16,613
–
–
360
5
–
–
20,468
631
–
770
–
–
–
1,401
–
1,401
21,869
–
1
29,714
–
–
22
416
–
–
30,153
–
–
749
–
–
–
749
–
749
30,902
7,438
–
18,812
–
–
4
17
1
–
26,272
–
–
69
–
–
–
69
–
69
26,341
108,542
4,834
–
1,860
430
38
308
11
452
116,475
5,444
122
5,574
123
313
2,526
14,102
3
14,105
130,580
–
–
(88,649)
–
–
–
(498)
–
–
(89,147)
19
–
(9,788)
–
(8)
(5)
(9,782)
–
(9,782)
(98,929)
118,787
5,518
–
1,860
430
424
248
12
452
127,731
6,094
122
4,093
123
313
2,526
13,271
3
13,274
141,005
614
14,378
13,794
21,721
–
(49,893)
614
22,857
(418)
5,470
28,523
–
28,523
1,571
–
–
1
8
–
1,580
13
–
–
126
–
139
30,242
–
21
4,419
18,818
–
18,818
37
604
5
1
10
–
657
171
22
29
2,172
–
2,394
21,869
–
–
6,654
20,448
–
20,448
6,741
53
–
–
70
–
6,864
2,979
29
–
582
–
3,590
30,902
–
22
4,561
26,304
–
26,304
–
16
–
–
–
–
16
–
–
–
21
–
21
26,341
29,116
(3,555)
38,270
63,831
258
64,089
31,026
786
17,045
387
1,454
287
50,985
6,296
628
641
7,760
181
15,506
130,580
(25,364)
375
(19,140)
(94,022)
–
(94,022)
(1,571)
–
–
(1)
(508)
–
(2,080)
(1,897)
4
–
(934)
–
(2,827)
(98,929)
26,609
(3,555)
40,234
63,902
258
64,160
37,804
1,459
17,050
388
1,034
287
58,022
7,562
683
670
9,727
181
18,823
141,005
Assets
Intangible assets
Property, plant and equipment
Investments in subsidiaries
Investments in associates and joint ventures
Retirement benefit assets
Deferred tax assets
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Total non-current assets
Inventories
Income tax receivable
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Cash and cash equivalents
Assets classified as held-for-sale
Total current assets
Total assets
Equity–capital and reserves
Share capital
Share premium, capital redemption
and merger reserves
Other reserves
Retained earnings
Owners of the parent
Non-controlling interests
Total equity
Liabilities
Borrowings
Retirement benefit liabilities
Deferred tax liabilities
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total non-current liabilities
Borrowings
Income tax payable
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total current liabilities
Total equity and liabilities
222
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
Assets
Intangible assets
Property, plant and equipment
Investments in subsidiaries
Investments in associates and joint ventures
Retirement benefit assets
Deferred tax assets
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Total non-current assets
Inventories
Income tax receivable
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Cash and cash equivalents
Assets classified as held-for-sale
Total current assets
Total assets
Equity – capital and reserves
Share capital
Share premium, capital redemption
and merger reserves
Other reserves
Retained earnings
Owners of the parent
Non-controlling interests
Total equity
Liabilities
Borrowings
Retirement benefit liabilities
Deferred tax liabilities
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total non-current liabilities
Borrowings
Income tax payable
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total current liabilities
Total equity and liabilities
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Balance Sheet
At 31 December 2018
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
£m
£m
£m
£m
£m
£m
–
–
32,543
–
–
–
–
–
–
32,543
–
–
7,306
–
–
6
7,312
–
7,312
39,855
2,935
763
21,368
–
–
521
5
–
–
25,592
711
–
1,102
–
–
–
1,813
–
1,813
27,405
–
1
30,625
–
–
17
464
–
–
31,107
–
–
820
–
–
–
820
–
820
31,927
7,737
–
19,636
–
–
4
32
–
–
27,409
–
–
59
–
–
–
59
–
59
27,468
113,342
4,402
–
1,737
1,147
(198)
762
39
556
121,787
5,319
74
4,431
178
179
2,602
12,783
5
12,788
134,575
(1)
–
(104,172)
–
–
–
(578)
–
–
(104,751)
(1)
–
(10,130)
–
–
(6)
(10,137)
–
(10,137)
(114,888)
124,013
5,166
–
1,737
1,147
344
685
39
556
133,687
6,029
74
3,588
178
179
2,602
12,650
5
12,655
146,342
614
14,948
14,348
22,586
1,921
(53,803)
614
22,854
204
11,291
34,963
–
34,963
1,571
–
–
1
8
–
1,580
2,062
–
–
1,248
2
3,312
39,855
–
(46)
8,420
23,322
–
23,322
126
853
–
1
15
–
995
98
8
20
2,962
–
3,088
27,405
–
(44)
6,853
21,157
–
21,157
8,140
53
–
–
89
–
8,282
1,573
133
–
782
–
2,488
31,927
–
(46)
4,888
27,428
–
27,428
–
18
–
–
–
–
18
–
–
–
22
–
22
27,468
28,755
(335)
36,974
67,315
244
67,559
35,018
741
17,776
330
1,529
214
55,608
3,497
712
298
6,599
302
11,408
134,575
(25,003)
(66)
(29,869)
(108,741)
–
(108,741)
(1,571)
–
–
(1)
(586)
–
(2,158)
(3,005)
–
–
(982)
(2)
(3,989)
(114,888)
26,606
(333)
38,557
65,444
244
65,688
43,284
1,665
17,776
331
1,055
214
64,325
4,225
853
318
10,631
302
16,329
146,342
223
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Cash Flow Statement
Year ended 31 December 2019
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries Eliminations Consolidated
£m
(43)
£m
14
£m
50
£m
(3)
£m
8,940
£m
38
£m
8,996
165
2,797
3,770
3,175
(511)
(10,035)
(639)
(123)
(2,811)
(3,820)
(3,172)
(11,564)
12,897
(8,593)
(1)
–
(1)
6
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,135)
(57)
(3,192)
2,322
(870)
2,900
–
2,900
–
2,900
(236)
(57)
(293)
2,328
2,035
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Cash Flow Statement
Year ended 31 December 2018
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
£m
£m
(45)
1,670
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
349
£m
(7)
£m
8,249
£m
79
£m
10,295
187
3,039
4,280
3,366
(877)
(11,016)
(1,021)
(140)
(4,711)
(4,631)
(3,359)
(11,391)
14,602
(9,630)
2
(1)
1
5
6
(2)
–
(2)
2
–
(2)
–
(2)
2
–
–
–
–
–
–
(4,019)
(138)
(4,157)
2,813
(1,344)
3,665
1
3,666
–
3,666
(356)
(138)
(494)
2,822
2,328
Net cash (used in)/generated from
operating activities
Net cash generated from/(used in)
investing activities
Net cash (used in)/generated from
financing activities
Net cash flows (used in)/generated from
operating, investing and financing activities
Differences on exchange
(Decrease)/increase in net cash and
cash equivalents in the year
Net cash and cash equivalents at 1 January*
Net cash and cash equivalents at 31 December
Net cash (used in)/generated from
operating activities
Net cash generated from/(used in)
investing activities
Net cash (used in)/generated from
financing activities
Net cash flows generated from/(used in)
operating, investing and financing activities
Differences on exchange
Increase/(decrease) in net cash and
cash equivalents in the year
Net cash and cash equivalents at 1 January*
Net cash and cash equivalents at 31 December
224
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
BAT p.l.c.
RJRT
RAI
RJRTH
Condensed Consolidating Cash Flow Statement
Year ended 31 December 2017
All other
companies
BAT Group
Parent
guarantor
Issuer (LB)
Issuer (RB)
Subsidiary
guarantor (LB)
Subsidiary
guarantor
(LB & RB)
Non-guarantor
subsidiaries
£m
£m
£m
£m
£m
(12)
(1,860)
(270)
(11)
7,488
Eliminations
Consolidated
£m
12
£m
5,347
2
10
–
–
–
5
5
(88)
1,116
1,950
(844)
2
–
2
–
2
2
–
2
–
2
1
10
–
–
–
–
–
(19,512)
(63)
(18,544)
21,030
(7,397)
14,759
9,006
(391)
8,615
1,646
10,261
(7,448)
–
(7,448)
–
(7,448)
1,562
(391)
1,171
1,651
2,822
Net cash (used in)/generated from
operating activities
Net cash generated from/(used in)
investing activities
Net cash generated from/(used in)
financing activities
Net cash flows generated from/(used in)
operating, investing and financing activities
Differences on exchange
Increase/(decrease) in net cash and
cash equivalents in the year
Net cash and cash equivalents at 1 January*
Net cash and cash equivalents at 31 December
* The opening balance of net cash and cash equivalents represents external cash held by the parent guarantor, issuers, subsidiary guarantors and non-guarantor subsidiaries.
(b) BATCAP bonds
The following condensed consolidating financial information relates to the guarantees of:
– US$14.96 billion of bonds representing the portion (99.7%) of a total US$15 billion principal amount of bonds issued by BATCAP exchanged
for registered bonds in 2018 in the exchange offer required by the registration rights agreement entered into in connection with the bond
offering related to the acquisition of RAI; and
– Shelf Registration Statement on Form F-3 filed on 17 July 2019, pursuant to which B.A.T Capital Corporation (‘BATCAP’) or B.A.T.
International Finance p.l.c. (‘BATIF’) may issue an indefinite amount of debt securities. Under this programme US$3.5 billion of bonds have
been issued by BATCAP.
The subsidiaries disclosed below are wholly-owned and the guarantees provided are full and unconditional, and joint and several.
The following condensed consolidating financial information includes the accounts and activities of:
a. British American Tobacco p.l.c. (as the parent guarantor), referred to as ‘BAT p.l.c.’ in the financials below;
b. B.A.T Capital Corporation (as an issuer or a subsidiary guarantor, as the case may be), referred to as “BATCAP” in financials below;
c. B.A.T. International Finance p.l.c. (as an issuer or a subsidiary guarantor, as the case may be), referred to as ‘BATIF’ in the financials below;
d. British American Tobacco Holdings (The Netherlands) B.V. (as a subsidiary guarantor of the US$17.2 billion bonds only), referred to as
‘BATHTN’ in the financials below*;
e. B.A.T. Netherlands Finance B.V. and Reynolds American Inc. (as subsidiary guarantors), referred to as ‘BATNF’ and ‘RAI’ respectively in the
financials below;
f. other direct and indirect subsidiaries of the BAT Group that are not guarantors;
g. elimination entries necessary to consolidate the parent with the issuer, the subsidiary guarantors and non-guarantor subsidiaries; and
h. the BAT Group on a consolidated basis.
The information presented is based on the results for the 12-month period ended 31 December 2019, 2018 and 2017.
* British American Tobacco Holdings (The Netherlands) B.V. (“BATHTN”) should be added to the column labelled ‘All other companies, Non-guarantor subsidiaries’ for the purposes of the condensed
consolidating financial information relating to the guarantee of the US$3.5 billion issued by BATCAP under the shelf programme, as BATHTN has not provided, and will not provide a guarantee in respect
of these debt securities.
225
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
Condensed Consolidating Income Statement
Year ended 31 December 2019
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries Eliminations Consolidated
£m
–
–
–
(4)
–
–
–
(122)
(126)
121
–
(5)
–
5,854
5,849
5,849
–
5,849
£m
£m
–
–
–
–
–
–
–
(2)
(2)
154
–
152
(35)
–
117
117
–
117
–
–
–
–
–
–
–
(5)
(5)
195
–
190
8
–
198
198
–
198
£m
–
–
–
(2)
–
–
–
(3)
(5)
196
–
191
1
–
192
192
–
192
£m
–
–
–
(10)
–
26
–
(18)
(2)
(497)
–
(499)
125
3,697
3,323
3,323
–
3,323
£m
£m
25,877
(4,599)
162
(3,209)
(1,512)
137
(3)
(7,823)
9,030
(1,760)
498
7,768
(2,162)
–
5,606
–
–
–
4
–
–
–
122
126
(11)
–
115
–
(9,551)
(9,436)
£m
25,877
(4,599)
162
(3,221)
(1,512)
163
(3)
(7,851)
9,016
(1,602)
498
7,912
(2,063)
–
5,849
5,461
145
5,606
(9,436)
–
(9,436)
5,704
145
5,849
Revenue
Raw materials and consumables used
Changes in inventories of finished goods
and work in progress
Employee benefit costs
Depreciation, amortisation and
impairment costs
Other operating income
Loss on reclassification from
amortised cost to fair value
Other operating expenses
(Loss)/Profit from operations
Net finance income/(costs)
Share of post-tax results of associates
and joint ventures
Profit before taxation
Taxation on ordinary activities
Equity income from subsidiaries
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
226
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Income Statement
Year ended 31 December 2018
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
–
–
–
(5)
–
–
–
(124)
(129)
95
–
(34)
–
6,210
6,176
6,176
–
6,176
£m
£m
–
–
–
–
–
–
–
(3)
(3)
239
–
236
(79)
–
157
157
–
157
–
–
–
–
–
–
–
(1)
(1)
96
–
95
7
–
102
102
–
102
£m
–
–
–
(2)
–
–
–
(4)
(6)
248
–
242
1
–
243
243
–
243
£m
–
–
–
(13)
–
22
–
(17)
(8)
(421)
–
(429)
93
3,436
3,100
3,100
–
3,100
£m
£m
24,492
(4,664)
114
(2,990)
(1,038)
63
(3)
(6,643)
9,331
(599)
419
9,151
(2,163)
–
6,988
–
–
–
5
–
–
–
124
129
(1,039)
–
(910)
–
(9,646)
(10,556)
£m
24,492
(4,664)
114
(3,005)
(1,038)
85
(3)
(6,668)
9,313
(1,381)
419
8,351
(2,141)
–
6,210
6,810
178
6,988
(10,556)
–
(10,556)
6,032
178
6,210
Revenue
Raw materials and consumables used
Changes in inventories of finished goods
and work in progress
Employee benefit costs
Depreciation, amortisation and
impairment costs
Other operating income
Loss on reclassification from
amortised cost to fair value
Other operating expenses
(Loss)/Profit from operations
Net finance income/(costs)
Share of post-tax results of associates
and joint ventures
Profit before taxation
Taxation on ordinary activities
Equity income from subsidiaries
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
227
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Income Statement
Year ended 31 December 2017
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
–
–
–
(8)
–
–
(101)
(109)
3
–
(106)
–
37,656
37,550
37,550
–
37,550
£m
£m
–
–
–
–
–
1
(1)
–
(62)
–
(62)
10
–
(52)
(52)
–
(52)
–
–
–
–
–
–
(1)
(1)
(22)
–
(23)
(40)
–
(63)
(63)
–
(63)
£m
–
–
–
(3)
–
1
(2)
(4)
636
–
632
4
–
636
636
–
636
£m
–
–
–
(35)
–
33
(7)
(9)
(191)
–
(200)
61
4,259
4,120
4,120
–
4,120
£m
£m
19,564
(4,520)
(513)
(2,641)
(902)
109
(4,671)
6,426
(1,403)
24,209
29,232
8,094
–
37,326
–
–
–
8
–
–
101
109
(55)
–
54
–
(41,915)
(41,861)
£m
19,564
(4,520)
(513)
(2,679)
(902)
144
(4,682)
6,412
(1,094)
24,209
29,527
8,129
–
37,656
37,155
171
37,326
(41,861)
–
(41,861)
37,485
171
37,656
Revenue
Raw materials and consumables used
Changes in inventories of finished goods
and work in progress
Employee benefit costs
Depreciation, amortisation and
impairment costs
Other operating income
Other operating expenses
(Loss)/Profit from operations
Net finance income/(costs)
Share of post-tax results of associates
and joint ventures
Profit before taxation
Taxation on ordinary activities
Equity income from subsidiaries
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
228
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Statement of Comprehensive Income
Year ended 31 December 2019
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries Eliminations Consolidated
£m
5,849
£m
117
–
–
–
–
–
–
–
–
–
–
(214)
–
(214)
–
–
–
–
–
–
–
–
(507)
(3,216)
(214)
–
–
£m
198
(21)
–
9
(30)
–
–
–
–
–
–
(21)
–
–
£m
192
£m
3,323
£m
£m
5,606
(9,436)
£m
5,849
–
–
–
–
–
–
–
–
–
–
–
–
–
30
30
–
–
–
–
185
245
–
(60)
215
–
–
(3,011)
(2,997)
12
33
(115)
56
(692)
(834)
7
135
(3,703)
–
–
–
–
–
–
–
–
–
–
–
–
–
507
3,216
(3,216)
(2,967)
(193)
3
(115)
56
(507)
(589)
7
75
(3,723)
–
–
2,126
(97)
177
192
3,538
1,903
(5,713)
2,126
2,126
–
2,126
(97)
–
(97)
177
–
177
192
–
192
3,538
–
3,538
1,777
126
1,903
(5,713)
–
(5,713)
2,000
126
2,126
Profit for the year
Other comprehensive income/(expense)
Items that may be reclassified
subsequently to profit or loss:
Differences on exchange
Cash flow hedges
Net investment hedges
Associates – share of OCI, net of tax
Tax on items that may be reclassified
Items that will not be reclassified
subsequently to profit or loss:
Retirement benefit schemes
Associates – share of OCI, net of tax
Tax on items that will not be reclassified
Total other comprehensive (expense)/
income for the year, net of tax
Share of subsidiaries OCI (other reserves)
Share of subsidiaries OCI (retained earnings)
Total comprehensive income/(expense)
for the year, net of tax
Attributable to:
Owners of the parent
Non-controlling interests
229
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Statement of Comprehensive Income
Year ended 31 December 2018
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
£m
6,176
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
157
£m
102
£m
243
£m
3,100
£m
£m
6,988
(10,556)
£m
6,210
–
–
–
–
–
–
–
–
–
–
(101)
–
(101)
–
–
–
–
–
–
–
–
115
3,099
(101)
–
–
15
–
15
–
–
–
–
–
–
–
15
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,185
3,868
45
(708)
(38)
18
115
142
6
(33)
3,300
–
–
–
–
–
–
–
–
–
–
–
–
–
(115)
(3,099)
3,099
3,868
(41)
(708)
(38)
18
115
142
6
(33)
3,214
–
–
9,390
56
117
243
3,100
10,288
(13,770)
9,424
9,390
–
9,390
56
–
56
117
–
117
243
–
243
3,100
–
3,100
10,103
185
10,288
(13,770)
–
(13,770)
9,239
185
9,424
Profit for the year
Other comprehensive income/(expense)
Items that may be reclassified
subsequently to profit or loss:
Differences on exchange
Cash flow hedges
Net investment hedges
Associates – share of OCI, net of tax
Tax on items that may be reclassified
Items that will not be reclassified
subsequently to profit or loss:
Retirement benefit schemes
Associates – share of OCI, net of tax
Tax on items that will not be reclassified
Total other comprehensive (expense)/
income for the year, net of tax
Share of subsidiaries OCI (other reserves)
Share of subsidiaries OCI (retained earnings)
Total comprehensive income/(expense)
for the year, net of tax
Attributable to:
Owners of the parent
Non-controlling interests
230
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Condensed Consolidating Statement of Comprehensive Income
Year ended 31 December 2017
Profit for the year
Other comprehensive income/(expense)
Items that may be reclassified
subsequently to profit or loss:
Differences on exchange
Cash flow hedges
Investments held at fair value
Net investment hedges
Associates – share of OCI, net of tax
Tax on items that may be reclassified
Items that will not be reclassified
subsequently to profit or loss:
Retirement benefit schemes
Associates – share of OCI, net of tax
Tax on items that will not be reclassified
Total other comprehensive expense
for the year, net of tax
Share of subsidiaries OCI (other reserves)
Share of subsidiaries OCI (retained earnings)
Total comprehensive income/(expense)
for the year, net of tax
Attributable to:
Owners of the parent
Non-controlling interests
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Parent
guarantor
£m
37,550
–
–
–
–
–
–
–
–
–
–
–
£m
(52)
(242)
–
(242)
–
–
–
–
–
–
–
–
–
681
(3,809)
(242)
–
–
34,422
(294)
34,422
–
34,422
(294)
–
(294)
£m
(63)
(21)
–
(10)
–
(11)
–
–
–
–
–
–
(21)
–
–
(84)
(84)
–
(84)
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
636
£m
4,120
£m
£m
£m
37,326
(41,861)
37,656
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(3,546)
(3,084)
81
(27)
368
(918)
34
681
827
25
(171)
(2,865)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(681)
3,809
(3,809)
(3,084)
(171)
(27)
357
(918)
34
681
827
25
(171)
(3,128)
–
–
636
4,120
34,461
(38,733)
34,528
636
–
636
4,120
–
4,120
34,294
167
34,461
(38,733)
–
(38,733)
34,361
167
34,528
231
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
29 Condensed consolidating financial information continued
Condensed Consolidating Balance Sheet
At 31 December 2019
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries Eliminations Consolidated
£m
£m
£m
£m
£m
£m
£m
£m
–
–
23,510
–
–
–
–
–
–
23,510
–
–
6,719
–
8
5
6,732
–
6,732
30,242
–
–
–
–
–
118
12,604
–
–
12,722
–
–
6,366
–
–
13
6,379
–
6,379
19,101
–
–
718
–
–
–
15,496
–
692
16,906
–
–
23,659
–
419
138
24,216
–
24,216
41,122
–
–
1,419
–
39
–
–
–
–
1,458
–
–
16
–
–
–
16
–
16
1,474
–
1
29,714
–
–
22
416
–
–
30,153
–
–
749
–
–
–
749
–
749
30,902
118,787
5,517
–
1,860
391
284
(30,446)
12
(3)
96,402
6,094
122
(26,144)
123
(74)
2,375
(17,504)
3
(17,501)
78,901
–
–
(55,361)
–
–
–
2,178
–
(237)
(53,420)
–
–
(7,272)
–
(40)
(5)
(7,317)
–
(7,317)
(60,737)
118,787
5,518
–
1,860
430
424
248
12
452
127,731
6,094
122
4,093
123
313
2,526
13,271
3
13,274
141,005
614
–
231
91
13,794
–
(14,116)
614
22,857
(418)
5,470
28,523
–
28,523
1,571
–
–
1
8
–
1,580
13
–
–
126
–
139
30,242
30
(357)
223
(104)
–
(104)
15,168
–
–
–
–
237
15,405
3,706
33
–
29
32
3,800
19,101
–
(1,114)
3,039
2,156
–
2,156
14,590
–
22
–
4
302
14,918
23,591
–
–
3
454
24,048
41,122
1,223
226
(79)
1,461
–
1,461
–
–
10
–
–
–
10
1
–
–
2
–
3
1,474
–
–
6,654
20,448
–
20,448
6,741
53
–
–
70
–
6,864
2,979
29
–
582
–
3,590
30,902
30,002
(3,555)
40,232
66,679
258
66,937
(2,443)
1,406
17,018
388
960
(15)
17,314
(15,543)
621
670
9,168
(266)
(5,350)
78,901
(27,503)
1,663
(15,305)
(55,261)
–
(55,261)
2,177
–
–
(1)
(8)
(237)
1,931
(7,185)
–
–
(183)
(39)
(7,407)
(60,737)
26,609
(3,555)
40,234
63,902
258
64,160
37,804
1,459
17,050
388
1,034
287
58,022
7,562
683
670
9,727
181
18,823
141,005
Assets
Intangible assets
Property, plant and equipment
Investments in subsidiaries
Investments in associates and joint ventures
Retirement benefit assets
Deferred tax assets
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Total non-current assets
Inventories
Income tax receivable
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Cash and cash equivalents
Assets classified as held-for-sale
Total current assets
Total assets
Equity – capital and reserves
Share capital
Share premium, capital redemption
and merger reserves
Other reserves
Retained earnings
Owners of the parent
Non-controlling interests
Total equity
Liabilities
Borrowings
Retirement benefit liabilities
Deferred tax liabilities
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total non-current liabilities
Borrowings
Income tax payable
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total current liabilities
Total equity and liabilities
232
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
Assets
Intangible assets
Property, plant and equipment
Investments in subsidiaries
Investments in associates and joint ventures
Retirement benefit assets
Deferred tax assets
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Total non-current assets
Inventories
Income tax receivable
Trade and other receivables
Investments held at fair value
Derivative financial instruments
Cash and cash equivalents
Assets classified as held-for-sale
Total current assets
Total assets
Equity – capital and reserves
Share capital
Share premium, capital redemption and
merger reserves
Other reserves
Retained earnings
Owners of the parent
Non-controlling interests
Total equity
Liabilities
Borrowings
Retirement benefit liabilities
Deferred tax liabilities
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total non-current liabilities
Borrowings
Income tax payable
Other provisions for liabilities
Trade and other payables
Derivative financial instruments
Total current liabilities
Total equity and liabilities
Condensed Consolidating Balance Sheet
At 31 December 2018
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
£m
£m
£m
£m
£m
£m
£m
–
–
32,543
–
–
–
–
–
–
32,543
–
–
7,306
–
–
6
7,312
–
7,312
39,855
–
–
–
–
–
74
15,707
–
–
15,781
–
–
2,567
–
–
9
2,576
–
2,576
18,357
–
–
718
–
–
–
21,911
–
708
23,337
–
–
19,576
–
405
56
20,037
–
20,037
43,374
–
–
3,732
–
15
–
–
–
–
3,747
–
–
15
–
–
–
15
–
15
3,762
–
1
30,625
–
–
17
464
–
–
31,107
–
–
820
–
–
–
820
–
820
31,927
124,013
5,165
–
1,737
1,132
253
(38,343)
39
(7)
93,989
6,029
74
(13,626)
178
(215)
2,537
(5,023)
5
(5,018)
88,971
–
–
(67,618)
–
–
–
946
–
(145)
(66,817)
–
–
(13,070)
–
(11)
(6)
(13,087)
–
(13,087)
(79,904)
124,013
5,166
–
1,737
1,147
344
685
39
556
133,687
6,029
74
3,588
178
179
2,602
12,650
5
12,655
146,342
614
–
231
91
14,348
614
(15,284)
614
22,854
204
11,291
34,963
–
34,963
1,571
–
–
1
8
–
1,580
2,062
–
–
1,248
2
3,312
39,855
30
(195)
105
(60)
–
(60)
15,599
–
–
–
–
145
15,744
2,637
2
–
25
9
2,673
18,357
–
(1,091)
2,841
1,981
–
1,981
18,450
–
30
–
4
217
18,701
22,293
–
–
30
369
22,692
43,374
3,401
363
(100)
3,755
–
3,755
–
–
4
–
–
–
4
1
–
–
2
–
3
3,762
–
(44)
6,853
21,157
–
21,157
8,140
53
–
–
89
–
8,282
1,573
133
–
782
–
2,488
31,927
33,562
(333)
38,557
72,400
244
72,644
(1,422)
1,612
17,742
331
962
(3)
19,222
(12,519)
718
318
8,677
(89)
(2,895)
88,971
(33,241)
763
(20,990)
(68,752)
–
(68,752)
946
–
–
(1)
(8)
(145)
792
(11,822)
–
–
(133)
11
(11,944)
(79,904)
26,606
(333)
38,557
65,444
244
65,688
43,284
1,665
17,776
331
1,055
214
64,325
4,225
853
318
10,631
302
16,329
146,342
233
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
Condensed Consolidating Cash Flow Statement
Year ended 31 December 2019
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries Eliminations Consolidated
£m
£m
£m
£m
(43)
(148)
(59)
(4)
£m
50
£m
9,156
£m
44
£m
8,996
165
870
848
(123)
(719)
(882)
(1)
–
(1)
6
5
3
(1)
2
9
(93)
(7)
(100)
(35)
11
(135)
–
4
–
–
–
–
–
3,770
(5,763)
(529)
(639)
(3,820)
(3,645)
592
(8,593)
–
–
–
–
–
(252)
(47)
(299)
2,348
2,049
107
(2)
105
–
105
(236)
(57)
(293)
2,328
2,035
Condensed Consolidating Cash Flow Statement
Year ended 31 December 2018
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
£m
£m
(45)
(81)
£m
19
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
£m
£m
(13)
349
10,025
£m
41
£m
10,295
187
946
709
2
4,280
(6,853)
(292)
(1,021)
(140)
(980)
(1,355)
11
(4,631)
(3,663)
1,128
(9,630)
2
(1)
1
5
6
(115)
2
(113)
122
(627)
34
(593)
558
9
(35)
–
–
–
–
–
(2)
–
(2)
2
–
(491)
(173)
(664)
2,135
1,471
877
–
877
–
877
(356)
(138)
(494)
2,822
2,328
Net cash (used in)/generated
from operating activities
Net cash generated from/(used in)
investing activities
Net cash (used in)/generated
from financing activities
Net cash flows (used in)/generated
from operating, investing and
financing activities
Differences on exchange
(Decrease)/increase in net cash and
cash equivalents in the year
Net cash and cash equivalents at 1 January*
Net cash and cash equivalents
at 31 December
Net cash (used in)/generated
from operating activities
Net cash generated from/(used in)
investing activities
Net cash (used in)/generated
from financing activities
Net cash flows generated from/(used in)
operating, investing and financing
activities
Differences on exchange
Increase/(decrease) in net cash and
cash equivalents in the year
Net cash and cash equivalents at 1 January*
Net cash and cash equivalents
at 31 December
234
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 29 Condensed consolidating financial information continued
Condensed Consolidating Cash Flow Statement
Year ended 31 December 2017
BAT p.l.c.
BATCAP
BATIF
BATHTN
BATNF
and RAI
All other
companies
BAT Group
Parent
guarantor
Issuer /
Subsidiary
guarantor
Issuer /
Subsidiary
guarantor
Subsidiary
guarantor
Subsidiary
guarantors
Non-guarantor
subsidiaries
Eliminations
Consolidated
£m
(12)
2
10
–
–
–
5
5
£m
67
113
(52)
128
(6)
122
–
122
£m
10
350
237
597
15
612
(56)
556
£m
69
£m
£m
(270)
5,470
£m
13
£m
5,347
–
1,116
(20,020)
(105)
(18,544)
(69)
(844)
22,772
(7,295)
14,759
–
–
–
–
–
2
–
2
–
2
8,222
(400)
7,822
1,702
(7,387)
–
(7,387)
–
1,562
(391)
1,171
1,651
9,524
(7,387)
2,822
Net cash (used in)/generated
from operating activities
Net cash generated from/(used in)
investing activities
Net cash generated from/(used in)
financing activities
Net cash flows generated from/(used in)
operating, investing and financing
activities
Differences on exchange
Increase/(decrease) in net cash and
cash equivalents in the year
Net cash and cash equivalents at 1 January*
Net cash and cash equivalents
at 31 December
* The opening balance of net cash and cash equivalents represents external cash held by the parent guarantor, issuers, subsidiary guarantors and non-guarantor subsidiaries.
30 Accounting policy changes
Adoption of new accounting standards effective 1 January 2019
Adoption of IFRS 16
With effect from 1 January 2019, the Group adopted IFRS 16 Leases with no revision of prior periods, as permitted by the Standard. In accordance
with IFRS 16, the distinction between operating leases and finance leases has been removed. As a result, substantially all leasing arrangements
were added to the balance sheet as lease liabilities and right-of-use assets.
On the initial implementation of the Standard, previously recognised operating leases were capitalised as right-of-use assets and financial liabilities
were recognised at the same initial value. The Group has taken advantage of certain practical expedients available under the Standard including:
– ‘grandfathering’ previously recognised lease arrangements;
– applying a single discount rate to a portfolio of leases with reasonably similar characteristics;
– assessing whether a lease is onerous prior to applying the Standard;
– applying hindsight in determining the lease term if the contract contains options to extend or terminate the lease; and
– not applying the capitalisation requirements of the Standard to leases for which the lease term ends within 12 months of the date of
initial application.
After implementation, the Group has adopted several practical expedients under the Standard including:
– not applying the requirements of IFRS 16 to leases of intangible assets;
– applying the portfolio approach where appropriate to do so;
– not applying the recognition and measurement requirements of IFRS 16 to short-term leases and to leases of low-value assets; and
– not separating non-lease components from lease components (except in the case of property-related leases).
As disclosed in the Notes on the Accounts in the 2018 Annual Report on Form 20-F, the anticipated impact of IFRS 16 to the Group’s balance
sheet at 1 January 2019 was the capitalisation of £565 million right-of-use assets and lease liabilities of £562 million.
235
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 30 Accounting policy changes continued
In 2019, as part of the implementation of IFRS 16, further lease commitments were identified resulting in an increase to right-of-use assets and
lease liabilities. The impact of the new Standard to the Group’s balance sheet at 1 January 2019 is shown below:
Minimum lease commitments
Property
Within one year
Between one and five years
Beyond five years
Plant, equipment and other
Within one year
Between one and five years
Total minimum lease commitments
Additional commitments on the exercise of options
Low-value leases and short-term leases excluded
Discounted to present value
To be capitalised as lease liabilities at 1 January 2019
Prepaid leases reclassified from receivables
To be capitalised as right-of-use assets at 1 January 2019
£m
126
290
149
565
63
106
169
734
30
(24)
(133)
607
3
610
The weighted average incremental borrowing rate applied in discounting lease commitments was 5.60%.
Adoption of new accounting standards effective 1 January 2018
Adoption of IFRS 9
With effect from 1 January 2018, the Group has adopted IFRS 9 Financial Instruments with no restatement of prior periods, as permitted by
the Standard.
The cumulative impact of adopting the Standard, including the effect of tax entries, has been recognised as a restatement of opening reserves
in 2018, and is £38 million, arising from the impairment of financial assets under the expected loss model. A simplified ‘lifetime expected loss
model’ is available for balances arising as a result of revenue recognition, by applying a standard rate of provision on initial recognition of trade
debtors based upon the Group’s historical experience of credit loss modified by expectations of the future, and increasing this provision to take
account of overdue receivables. Applying the requirements of IFRS 9 has resulted in a decrease of trade and other debtors of £45 million as at
1 January 2018.
IFRS 9 also changes the classification and measurement of financial assets. The category of available-for-sale investments (where fair value changes
were deferred in reserves until disposal of the investment) has been replaced with the category of financial assets at Fair Value through Profit
and Loss (for most investments) and the category of financial assets at Fair Value through Other Comprehensive Income (for qualifying equity
investments), and the available-for-sale reserve at 1 January 2018 has been reclassified into retained earnings. In addition, certain loans and
receivables which do not meet the measurement tests for amortised cost classification under IFRS 9 have been reclassified as financial assets at Fair
Value through Profit and Loss at the same date. The Group has used the term ‘investments held at fair value’ to refer to all of these financial assets
both pre- and post- the adoption of IFRS 9.
236
NOTES ON THE ACCOUNTSCONTINUEDFinancial StatementsBAT Annual Report and Form 20-F 2019 GROUP COMPANIES
AND UNDERTAKINGS
This disclosure is made in accordance with Section 409 of the Companies Act 2006 and The Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008, as amended by The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015.
A full list of subsidiary undertakings, associates and joint ventures and joint operations as defined by IFRS (showing the country of incorporation,
effective percentage of equity shares held and full registered office addresses) as at 31 December 2019 is disclosed below.
The subsidiary undertakings that are held directly by British American Tobacco p.l.c. (the ultimate Parent Company) are indicated thus*; all others
are held by sub-holding companies.
Unless otherwise stated, the equity shares held are in the form of ordinary shares or common stock, except for those indicated thus#, which
include preference shares. The effective percentage of equity shares held in subsidiary undertakings is 100% unless otherwise stated. Further,
where the effective percentage of equity shares held by the sub-holding company is different from that held by British American Tobacco p.l.c.,
the percentage of equity shares held by British American Tobacco p.l.c. is indicated thus^ and is shown after the percentage interest held by the
sub-holding company.
The results of a number of these subsidiary undertakings principally affect the financial statements of the Group. These principal subsidiary
undertakings are highlighted in grey and are considered to be the main corporate entities in those countries which, in aggregate, contributed
76% of the Group revenue and 78% of profit from operations.
Subsidiary Undertakings
Albania
Rruga e Kavajes, Ish Kombinati Ushqimor, Tirana, Albania
British American Tobacco – Albania SH.P.K.
Algeria
Industrial Zone, Cheraga, El Omrane, Ouled Fayet Road, Lot 04 Ilot
789, Algiers, Algeria
British American Tobacco (Algérie) S.P.A. (51%)
Angola
Viana Park, Polo Industrial, Viana, Luanda, Angola
Agrangol Limitada (77%)
British American Tobacco – B.A.T. Angola, Limitada1
Fabrica de Tabacos de Cacuso (51%)
SETA, Sarl (98%)
Sociedade Geral de Distribuição e Comércio, Limitada
Sociedade Industrial Tabacos Angola LDA (76.60%)
Sociedade Unificada Tabacos Angola LDA (76.39%)
Argentina
San Martín 140, Floor 14, City of Buenos Aires, Argentina
British American Tobacco Argentina S.A.I.C.y F. (99.98%)
Australia
166 William Street, Woolloomooloo, NSW 2011, Australia
British American Tobacco (Australasia Holdings) Pty Limited10
British American Tobacco Australasia Limited10
British American Tobacco Australia Limited10
British American Tobacco Australia Overseas Pty Limited10
British American Tobacco Australia Services Limited10
British American Tobacco Manufacturing Australia Pty Ltd.10
Rothmans Asia Pacific Limited# 10
The Benson & Hedges Company Pty. Limited10
W.D. & H.O. Wills Holdings Limited10
Austria
Dr. Karl Lueger Platz 5, 1010, Wien, Austria
British American Tobacco (Austria) GmbH
Bahrain
Flat 2115, Building 2504, Road 2832, Block 428, Al Seef Area,
Kingdom of Bahrain
British American Tobacco Middle East S.P.C.
Bangladesh
New DOHS Road, Mohakhali, Dhaka 1206, Bangladesh
British American Tobacco Bangladesh Company Limited (72.91%)
Barbados
Braemar Court, Deighton Road, St. Michael, Barbados
B.C.O., Inc
Chancery Chambers, Chancery House, High Street, Bridgetown,
Barbados
Southward Insurance Ltd.
Belarus
7th Floor, 3 Kuprevicha Str., Minsk, 220141, Belarus
British-American Tobacco Trading Company Foreign Private Trading
Unitary Enterprise
Belgium
Globe House, 4 Temple Place, London, WC2R 2PG, United
Kingdom
British American Tobacco Holdings Belgium N.V.
Nieuwe Gentsesteenweg 21, 1702 Groot-Bijgaarden, Belgium
British American Tobacco Belgium N.V.
Tabacofina-Vander Elst N.V.
Rue de Koninck 38, 1080 Sint-Jans-Molenbeek, Belgium
British American Tobacco Co-ordination Centre/L.P. Co-ordination
Centre VOF
Benin
Cotonou, Lot Numbero H19, Quartiers Les Cocotiers, 01 BP 2520, Benin
British American Tobacco Benin SA
Bolivia
Av. Costanerita No. 71, esq Calle 6, floor 5, Zona de Obrajes, La
Paz, Bolivia
BAT Bolivia S.R.L.
237
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CONTINUED
Bosnia and Herzegovina
Blajburških žrtava br. 62, Mostar, Bosnia and Herzegovina
TOBACCO PRESS d.o.o. Mostar
Fra Dominka Mandica 24 A, 88220 Široki Brijeg, Bosnia and
Herzegovina
IPRESS d.o.o.
Ulica Carice Milice br. 11, 78000 Banja Luka, Bosnia and
Herzegovina
British American Tobacco – BAT – BL d.o.o.
ul. Azize Ša´cirbegovi´c 1, 71000 Sarajevo-Novo Sarajevo, Bosnia
and Herzegovina
TDR d.o.o. Sarajevo
ul. Kolodvorska 12, 71000 Sarajevo-Novo Sarajevo, Bosnia and
Herzegovina
iNovine BH d.o.o.
Opresa d.o.o.
ul. Kralja Petra I Karadordevica br. 82, 78000 Banja Luka, Bosnia
and Herzegovina
FDBL-B d.o.o. Banja Luka
Botswana
Plot 20774 Broadhurst Industrial Estate, Gaborone, Botswana
British American Tobacco Botswana (Pty) Limited
Business Venture Investments Botswana 6773 (Pty) Ltd.
Brazil
Rua Candelaria 66, Salas 101 a 1201, Rio de Janeiro, Brazil
Yolanda Participacoes S.A.
Souza Cruz LTDA
Brunei Darussalam
6th Floor, Bang Hj Ahmad Laksamana Othman, 38-39, Jalan Sultan,
Bandar Seri Begawan BS8811, Brunei Darussalam
Commercial Marketers and Distributors Sdn. Bhd. (100%) (50%)^
Bulgaria
115 M, Tsarigradsko Shose Blvd., Building D, Floor 5, Sofia,
Mladost Municipality, 1784, Bulgaria
British American Tobacco Trading EOOD
Burkina Faso
Ouagadougou, Avenue Yennega, BP: 882, Ouagadougou, Burkina
Faso
Tobacco Marketing Consultant Burkina Faso SARL
Burundi
Avenue de L’Uprina a Bujumbura, BP 345, Burundi
Tabarundi SARL
Cambodia
1121 National Road 2, Prek Tanou Village, Sangkat Chak Ang Re
Leu, Khan Mean Chey, Phnom Penh, Kingdom of Cambodia
British American Tobacco (Cambodia) Limited (71%)
British American Tobacco (Cambodge) International Limited
Cameroon
Rue Njo Njo, Bonapriso – B.P. 259, Douala, Cameroon
British American Tobacco Cameroun S.A. (99.76%)
238
Canada
30 Pedigree Court, Brampton, Ontario, L6T 5T8, Canada
Imperial Tobacco Canada Limited
Imperial Tobacco Company Limited
3711 St-Antoine West, Montreal, Quebec, H4C 3P6, Canada
Allan Ramsay and Company Limited
Cameo Inc.
Genstar Corporation2
Imperial Brands Limited
Imperial Tobacco Products Limited
Imperial Tobacco Services Inc.
John Player & Sons Limited
Liggett & Myers Tobacco Company of Canada Limited3
Marlboro Canada Limited
Medaillon Inc.
45 O’Connor Street, Suite 1500, Ottawa, Ontario, K1P 1A4, Canada
2004969 Ontario Inc.
Cayman Islands
Trident Trust Company (Cayman) Ltd., One Capital Place, PO Box
847, Grand Cayman KY1-1103, Cayman Islands
R.J. Reynolds Tobacco (CI) Co.
Chile
Isidora Goyenechea 3000, Piso 15, Las Condes, Chile
BAT Chile S.A. (100%) (99.51%)^
British American Tobacco Chile Operaciones S.A. (99.51%)
Inversiones Casablanca S.A.
China (People’s Republic of)
Floor 6, China Resources Tower, No. 2666 South Keyuan Road,
Nanshan District, Shenzhen, People’s Republic of China
Nicoventures Business Consulting (Shenzhen) Co., Ltd
Room 436, No. 1000, Zenchen Road, Baoshan District, Shanghai,
People’s Republic of China
British American (Shanghai) Enterprise Development Co. Ltd
British American Nico Business Consulting (Shanghai) Co. Ltd
Unit 1001 in 901, 9/F, Building 3, No.8 Guanghuadongli, Chaoyang
District, Beijing, People’s Republic of China
British American Consulting (Beijing) Ltd
Colombia
Av. Cra. 72 # 80-94 Piso 10. Bogotá, Colombia
British American Tobacco Colombia S.A.S.
Vype Colombia S.A.S.
Congo (Democratic Republic of)
149, A&B Boulevard du 30 Juin, Gombe, Kinshasa, Democratic
Republic of Congo
BAT Services Congo SARL
British American Tobacco Import SARL
1er étage, Immeuble du Centenaire, Gombe, Kinshasa, Democratic
Republic of Congo
BAT Distribution SARL
British American Tobacco Congo SARL
Costa Rica
325 Metros este del Puente de la Firestone, Llorente, Flores,
Heredia, Costa Rica
BASS Americas S.A.
BATCCA Park Inversiones Immobiliarias, S.A.
BATCCA Servicios S.A.
Financial StatementsBAT Annual Report and Form 20-F 2019 Croatia
Draškovi´ceva 27, 10000 Zagreb, Croatia
Inovine d.d. (93.42%)
Ivana Lu˘ci´ca 2/a, 10000 Zagreb, Croatia
BAT HRVATSKA d.o.o. u likvidaciji
Obala V. Nazora 1, 52210 Rovinj, Croatia
Adista d.o.o.
TDR d.o.o.
Osje˘cka 2, 33000 Virovitica, Croatia
Hrvatski Duhani d.d. Tobacco Leaf Processing (89.55%)
Cuba
Calle Reyes, No. 6, entre Calzada de Luyanó y Calle Princesa,
Municipio 10 de Octubre, Ciudad de La Habana, Cuba
Brascuba Cigarrillos S.A. (50%)
Cyprus
Photiades Business Centre, 5th Floor, 8 Stasinou Avenue, Nicosia,
CY-1060, Cyprus
B.A.T (Cyprus) Limited
Rothmans (Middle East) Limited
Czech Republic
Karolinská 654/2, Prague 8 – Karlín, 186 00, Czech Republic
British American Tobacco (Czech Republic), s.r.o.
Denmark
Vester Farimagsgade 19, 1606 Copenhagen, Denmark
British American Tobacco Denmark A/S (House of Prince A/S)
Precis (1789) Denmark A/S
X-International ApS
Egypt
Administrative unit no.1, 5th Floor, Building S2B, Sector A,
Downtown Mall Katameya, 5th settlement, New Cairo, Egypt
BETCO for General Services and Marketing LLC
BETCO for Trade and Distribution LLC
British American Tobacco Egypt LLC
British American Tobacco North Africa LLC
Eritrea
P.O. Box 749, 62 Fel Ket Street, Asmara, Eritrea
British American Tobacco (Eritrea) Share Company#
Estonia
Tornimäe 7, 10145 Tallinn, Estonia
British American Tobacco Estonia AS
Ethiopia
Bole Road, TK Building 3rd Floor, Addis Ababa, Ethiopia
Tobacco Marketing Consultants
Fiji
Lady Maria Road, Nabua, Suva, Fiji
British American Tobacco (Fiji) Marketing Pte Limited
Central Manufacturing Company Pte Limited
Rothmans of Pall Mall (Fiji) Pte Limited
Finland
Itamerentori 2, 00180, Helsinki, Finland
British American Tobacco Finland Oy
France
8 Rue La Boétie, 75008 Paris, France
Carreras France SAS
Cœur Défense Tour A 100-110 Esplanade de Gaulle 92932 Paris
La Défense Cedex, France
British American Tobacco France SAS
France 23, Rue du Roule, 75001 Paris, France
Nicoventures France S.A.S.
Germany
Alsterufer 4, 20354 Hamburg, Germany
BATIG Gesellschaft fur Beteiligungen m.b.H.
British American Tobacco (Germany) GmbH
British American Tobacco (Hamburg International) GmbH
British American Tobacco (Industrie) GmbH
Schillerstr. 10, 28195 Bremen, Germany
Chic Deutschland GmbH
Schutterwalder Straße 23, 01458 Ottendorf-Okrilla, Germany
Quantus Beteiligungs – und Beratungsgesellschaft mbH
Ghana
F190/5 Josiah Tongogari Street, Opposite Tante Marie Restaurant,
Labone-Accra, Ghana
British American Tobacco Ghana Limited (97.09%)
Greece
27, Ag. Thoma Street, Maroussi, 151 24, Greece
British American Tobacco Hellas S.A.
Guernsey
St. Martin’s House, Le Bordage, St. Peter’s Port, GY1 4AU,
Guernsey
Belaire Insurance Company Limited
Guyana
90 Carmichael Street, South Cummingsburg, Georgetown, Guyana
Demerara Tobacco Company Limited (70.25%)
Honduras
Boulevard del Sur, Zona El Cacao, San Pedro Sula, Depart. de
Cortés, Honduras
Tabacalera Hondureña S.A. (83.64%)
Hong Kong
11/F, One Pacific Place, 88 Queensway, Hong Kong
British American Tobacco China Investments Limited
Level 30, Three Pacific Place, 1 Queen’s Road East, Wanchai, Hong
Kong
British American Tobacco Asia-Pacific Region Limited
British-American Tobacco Company (Hong Kong) Limited
LEHMAN, LEE & XU CORPORATE SERVICES, Suite 3313, Tower
One, Times Square, 1 Matheson Street, Causeway Bay, Hong Kong
Reynolds Asia-Pacific Limited
Units 2501 and 2506 to 2510, 25/F Island Place Tower, Island Place
510, King’s Road, Hong Kong
American Cigarette Company Limited
Hungary
H-1124, Budapest, Csörsz utca 49-51. 3. em., Hungary
BAT Pécsi Dohánygyár Korlátolt Felelosségu Társaság
239
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP COMPANIES AND UNDERTAKINGS
CONTINUED
Indonesia
Capital Place Office Tower 6th Floor, Jl. Gatot Subroto Kav. 18,
Jakarta 12710 Indonesia
PT Bentoel Internasional Investama, Tbk (92.48%)
Jl. Raya Karanglo, Desa Banjararum, Kecamatan Singosari, Jawa
Timur 65153 Indonesia
PT Bentoel Prima4 (100%) (92.48%)^
Jl. Susanto No. 2B, Ciptomulyo, Sukun, Malang, Jawa Timur 65148
Indonesia
PT Bentoel Distribusi Utama (100%) (92.48%)^
Iran, Islamic Republic of
No.3, Aftab St., Khodami St., Vanak Sq., Post Code: 1994834589,
Islamic Republic of Iran
B.A.T. Pars Company (Private Joint Stock) (99%)
No. 88, Baran Bld., Kuyeh Sayeh, Across Mellat Park, Vali’asr Ave.,
Tehean, Islamic Republic of Iran
TDR Parisian Co
Iraq
Enkawa, Erbil, Kurdistan Region of Iraq
B.A.T. Iraqia Company for Tobacco Trading Limited
Ireland
Suite D, 2nd Floor, The Apex Building, Blackthorn Road, Sandyford
Industrial Estate, Dublin 18, Republic of Ireland
Carroll Group Distributors Limited
P.J. Carroll & Company Limited4
Rothmans of Pall Mall (Ireland) Limited5
Isle of Man
c/o Boston MFO, 2nd Floor, St Mary’s Court, 20 Hill Street,
Douglas, IM1 1EU, Isle of Man
Abbey Investment Company Limited
The Raleigh Investment Company Limited
Tobacco Manufacturers (India) Limited
Italy
Via Amsterdam 147, 00144 Rome, Italy
British American Tobacco Italia S.p.A.
Ivory Coast
Rue des Jardins-Immeuble Woodin- 2eme étage, Abidjan, Cocody 2
plateaux, Ivory Coast
British American Tobacco RCI SARL
Marcory, Immeuble Plein Ciel Boulevard VGE – 6 BP 1377, Ivory
Coast
Tobacco Marketing Consultant CDI SARL
Jamaica
13A Ripon Road, Kingston 5, Jamaica
Carreras Limited (50.40%) 8
Sans Souci Development Limited (100%) (50.40%) ^ 8
Sans Souci Limited (100%) (50.40%) ^ 8
Japan
Midtown Tower 20F, 9-7-1 Akasaka, Minato-ku, Tokyo, Japan
British American Tobacco Japan, Ltd.
Jersey
22 Grenville Street, St Helier, JE4 8PX, Jersey
Pathway 5 (Jersey) Limited
240
Jordan
Salman Quadah Street, Behind Abdoun Mall Opp. Khaled Khreisat
Complex, Villa No. (1), Abdoun, Amman, Jordan
British American Tobacco – Jordan Private Shareholding Company
Limited11
Kazakhstan
240G, Nursultan Nazarbayev avenue, A26F8D4 Almaty, Republic of
Kazakhstan
British American Tobacco Kazakhstan Trading LLP
Kenya
8 Likoni Road, Industrial Area, P.O. Box 30000-00100, Nairobi,
Kenya
African Cigarette Company (Overseas) Limited (100%) (60%)^
BAT Kenya Tobacco Company Limited (100%) (60%)^
9 Likoni Road, Industrial Area, P.O. Box 30000-00100, Nairobi,
Kenya
British American Tobacco Area Limited
10 Likoni Road, Industrial Area, P.O. Box 30000-00100, Nairobi,
Kenya
British American Tobacco Kenya plc (60%)
11 Likoni Road, Industrial Area P.O. Box 30000-00100, Nairobi, Kenya
East African Tobacco Company (Kenya) Limited (100%) (60%)^
Korea, Republic of
Gangnam Finance Center, 152 Teheran-ro, Gangnam-gu, Seoul,
Republic of Korea
British American Tobacco Korea Limited
141, Gongdan1-ro, Sanam-Myun, Sacheon City, Kyungsangnamdo,
Republic of Korea
British American Tobacco Korea Manufacturing Limited
Kosovo, Republic of
Llapllaselle p.n., 10500 Gracanicë, Republic of Kosovo
British American Tobacco Kosovo SH.P.K.
Latvia
Mukusalas iela 101, Riga LV-1004, Latvia
British American Tobacco Latvia SIA
Lithuania
J. Galvydžio g. 11-7, LT-08236 Vilnius Lithuania
UAB British American Tobacco Lietuva
Luxembourg
1, Rue Jean Piret, 2350 Luxembourg, Grand Duchy of Luxembourg
British American Tobacco Brands (Switzerland) Limited
Malawi
Northgate Arcade, Highway Chipembere, Blantyre, Malawi
British American Tobacco (Malawi) Limited
Malaysia
12th Floor, Menara Symphony, No. 5, Jalan Semangat, Seksyen 13,
46200, Petaling Jaya, Selangor Darul Ehsan, Malaysia
British American Tobacco GSD (Kuala Lumpur) Sdn Bhd
Level 11, Sunway Geo Tower, Jalan Lagoon Selatan, Sunway South Quay,
Bandar Sunway, 47500 Subang Jaya, Selangor Darul Ehsan, Malaysia
BAT Aspac Service Centre Sdn Bhd
Level 19, Guoco Tower, Damansara City, No. 6 Jalan Damanlela,
Bukit Damansara, 50490 Kuala Lumpur, Malaysia
British American Tobacco Malaysia Foundation7
British American Tobacco (Malaysia) Berhad (50%)
Commercial Marketers and Distributors Sdn. Bhd. (100%) (50%)^
Rothmans Brands Sdn. Bhd. (100%) (50%)^
Tobacco Importers and Manufacturers Sdn. Bhd. (100%) (50%)^
Financial StatementsBAT Annual Report and Form 20-F 2019 Mali
Djelibougou, Immeuble BASSARO, BP 2065, Bamako – Mali
British American Tobacco (Mali) Sarl
Malta
PM Building, Level 2, Mriehel Industrial Zone, Bone Street,
Mriehel, BKR3000, Malta
British American Tobacco (Malta) Limited
Central Cigarette Company Limited
Rothmans of Pall Mall (Malta) Limited
Mexico
Francisco I Madero 2750 Poniente, Colonia Centro, Monterrey,
Nuevo León, C.P. 64000, Mexico
British American Tobacco Mexico Comercial, S.A. de C.V.
British American Tobacco Mexico, S.A. de C.V.4
British American Tobacco Servicios S.A. de C.V.
Cigarrera La Moderna, S.A. de C.V.
Predio Los Sauces Sin número, Colonia Los Sauces, C.P. 63195,
Tepic, Nayarit, Mexico
Procesadora de Tabacos de Mexico, S.A. de C.V. (93%)
Moldova, Republic of
65, Stephan cel Mare Str., off. 414-417, Chisinau, MD2001,
Republic of Moldova
British American Tobacco – Moldova S.R.L.
Mozambique
2289 Avenida de Angola, Maputo, Mozambique
British American Tobacco Mozambique Limitada (95%)
Sociedade Agricola de Tabacos Limitada (95%)
Myanmar
Min Aye Yar Street, Plot No. 55/56, Survey Ward No.14, Schwe
Than Lwin Industrial Zone, Hlaing Tharyar Township, Yangon,
Myanmar
British American Tobacco Myanmar Limited (95%)8
British American Tobacco Myanmar Services Limited8
Namibia
Shop 48, Second Floor Old Power Station Complex, Armstrong
Street, Windhoek, Namibia
British American Tobacco Namibia (Pty) Limited
Netherlands
Handelsweg 53 A, 1181 ZA, Amstelveen, Netherlands
Aruba Properties B.V.
B.A.T Finance B.V.
B.A.T. Netherlands Finance B.V.
British American Tobacco European Operations Centre B.V.
British American Tobacco Exports B.V.
British American Tobacco Holdings (Australia) B.V.
British American Tobacco Holdings (Malaysia) B.V.
British American Tobacco Holdings (South Africa) B.V.
British American Tobacco Holdings (The Netherlands) B.V.
British American Tobacco Holdings (Venezuela) B.V.
British American Tobacco Holdings (Vietnam) B.V.
British American Tobacco International (Holdings) B.V.
British American Tobacco International Investments B.V.
British American Tobacco Manufacturing B.V.
British American Tobacco Nederland B.V.
British American Tobacco Western Europe Region B.V.
Molensteegh Invest B.V.
Precis (1789) B.V.
Precis (1790) B.V.
Rothmans Far East B.V.
Rothmans International Holdings B.V.
Rothmans International Holdings II B.V.
Rothmans Tobacco Investments B.V.
Rothmans UK Holdings B.V.
Turmac Tobacco Company B.V.
Paterswoldseweg 43, 9726 BB Groninge, Netherlands
Koninklijke Theodorus Niemeyer B.V.
New Zealand
2 Watt Street, Parnell, Auckland, 1052, New Zealand
British American Tobacco (New Zealand) Limited
British American Tobacco Holdings (New Zealand) Limited
c/o Mint Advisory Limited, Suite 6, 8 Turua Street, St Heliers,
Auckland, 1071, New Zealand
New Zealand (UK Finance) Limited#
Niger
Rue du Parc, Quartier Terminus, Niamey, Niger
British American Tobacco Niger
241
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP COMPANIES AND UNDERTAKINGS
CONTINUED
Nigeria
1, Tobacco Road, Oluyole Local Government Area, Ibadan, Oyo
State, Nigeria
British American Tobacco (Nigeria) Limited
2 Olumegbon Road, Ikoyi, Lagos, Nigeria
British American Tobacco Marketing Nigeria Limited
North Macedonia, Republic of
Bul. 8-mi Septemvri No. 18, 1000 Skopje, Republic of North
Macedonia
TDR Skopje d.o.o.e.l. Skopje
Norway
Dronning Eufemias Gate 42, 0191 Oslo, Norway
British American Tobacco Norway AS
Pakistan
Serena Business Complex. Khayaban-e-Suhrwardy, Islamabad,
Pakistan
British American Tobacco SAA Services (Private) Ltd
Pakistan Tobacco Company Limited (94.65%)
Bun Khurma Chichian Road, Mirpur, Azad Kashmir, Pakistan
Phoenix (Private) Limited (100%) (94.65%)^
Panama
Torre Banco Panama, Boulevard Costa Del Este y Aveida La
Rotonda, Piso 14, Oficina 1400, Costa del Este Ciudad de Panama,
Panama
BAT Caribbean, S.A.
British American Tobacco Central America S.A. (87.76%)
British American Tobacco Panama S.A.
Tabacalera Istmeña S.A.
Papau New Guinea
Ashurst PNG, Level 11, MRDC Haus, Port Moresby, National
Capital District, Papua New Guinea
Rothmans of Pall Mall (P.N.G.) Limited
British American Tobacco (PNG) Limited
Papua New Guinea Tobacco Co. Ltd
Paradise Tobacco Co. Limited
Paraguay
Avenida Aviadores del Chaco N° 2050 (World Trade Center, Torre
2, Piso 17), Asunción, Paraguay
British American Tobacco Productora de Cigarrillos S.A.
Peru
Pasaje Santa Rosa 256, Ate, Lima, Perú
British American Tobacco del Peru Holdings S.A. (98.55%)6
British American Tobacco del Peru, S.A.C.
Philippines
31 Tayuman Street, Tondo, Manila, Philippines
Alhambra Industries Inc.#
Poland
Aleja Wojska Polskiego 23c, 63-500, Ostrzeszow, Poland
CHIC sp.zo.o.
CHIC sp.zo.osp.k.
Chic Holding sp.zo.o
Chic Investments sp.zo.o.
eSMOKING Liquids sp.zoo
eSMOKING Liquids sp.zo.o.sp.k.
Nicoventures Polska sp. z.o.o.
242
Krakowiakow 48, 02-255, Warszawa, Poland
British American Tobacco Polska Trading sp. zo.o.
Rubiez 46, 61-612, Poznan, Poland
eSMOKING INSITUTE sp.zoo
Ul. Ilzecka 26E, 02-135, Warsaw, Poland
Nicoventures Poland sp.z.o.o.
Ul. Tytoniowa 16, 16-300, Augustow, Poland
British-American Tobacco Polska S.A.
Portugal
Edificio Amoreiras Square, Rua Carlos Alberto da Mota Pinto 17, 3e
A, 1070-313, Amoreiras, Lisboa, Portugal
COTAPO Empreendimentos Commerciais e Industriais S.A.
Sociedade Unificada de Tabacos Limitada (76%)
Qatar
P O Box 6689, 41 Floor, Tornado Tower, West Bay, Doha, Qatar
British American Tobacco Q LLC
Réunion
5 Immeuble Cap 2000, Avenue Théodore Drouhet, ZAC Horizon
2000 – 97420 Le Port, La Réunion
B.A.T. La Reunion SAS
Romania
319 Splaiul Independentei, Sema Parc ‘City Building’, 1st Floor,
6th Sector, Bucharest, Romania
British American Shared Services (Europe) S.R.L.
Ploiesti, 17-19 Laboratorului Street, Prahova County, Romania
British-American Tobacco (Romania) Investment S.R.L.
Bucharest Business Park, Building A (3rd floor) and Building B2
(floors 2-4), 1A Bucuresti – Ploiesti (DN1) Road, Sector 1,
Bucharest 013681, Romania
British American Tobacco (Romania) Trading SRL
Russia
38, 3rd Konnaya Lakhta, Saint Petersburg, 197229 Russia
JSC ‘British American Tobacco-SPb’#
Building 2, 17 Krylatskaya Street, Moscow, 121614 Russia
JSC ‘International Tobacco Marketing Services’
Rwanda
Societe Rwandaise Dássurances, Boulevard de la Revolution P.O
Box 650 Kigali, Rwanda
British American Tobacco Rwanda Limited
Saint Lucia
c/o ADCO Incorporated, 10 Manoel Street, Castries, Saint Lucia
Carisma Marketing Services Ltd
Pointe Seraphine, Castries, Saint Lucia
Rothmans Holdings (Caricom) Limited
Samoa
Vaitele, Apia, Samoa. P.O.Box 1304.
British American Tobacco Company (Samoa) Limited
Senegal
Almadies, Route Hotel Meridien en Face Club Med, Dakar, Senegal
BP 3174
Tobacco Marketing Consultant TMC S.A.R.L.
Serbia
Bulevar Milutina Milankovica 1ž, Belgrade, 11070, Serbia
British American Tobacco South – East Europe d.o.o.
Kralja Stefana Provencanog 209, Vranje, 17500, Serbia
British American Tobacco Vranje a.d.
Financial StatementsBAT Annual Report and Form 20-F 2019 Singapore
15 Senoko Loop, Singapore 758168
British American Tobacco International Services Pte Ltd
British-American Tobacco (Singapore) Private Limited
British-American Tobacco Marketing (Singapore) Private Limited
18 Ah Hood Road #12-51, Hiap Hoe Bldg at Zhongshan Park,
Singapore 329983
British American Tobacco Sales & Marketing Singapore Pte. Ltd.
Shenton Way, #33-00 OUE Downtown, Singapore 068809
RHL Investments Pte Limited#
Slovenia
Bravni˘carjeva ulica 13, 1000 Ljubljana, Slovenia
British American Tobacco d.o.o.
Solomon Islands
Kukum Highway, Ranadi, Honiara, Honiara, Solomon Islands
Solomon Islands Tobacco Company Limited
South Africa
Unit 19, Frazzitta Business Park, Freedom Way, Marconi Beam,
Cape Town 8000, South Africa
Twisp (Pty) Limited
Waterway House South, 3 Dock Road, V&A Waterfront, Cape Town
8000, South Africa
Agrega EEMEA (Pty) Limited
Amalgamated Tobacco Corporation (South Africa) (Pty) Limited
American Cigarette Company (Overseas) Ltd.
Benson & Hedges (Pty) Limited
British American Shared Services Africa Middle East (Pty) Limited
British American Tobacco GSD (South Africa) (Pty) Limited
British American Tobacco Holdings South Africa (Pty) Limited#
British American Tobacco Properties South Africa (Pty) Ltd.
British American Tobacco Services South Africa (Pty) Limited
British American Tobacco South Africa (Pty) Limited
British American Tobacco Southern Africa Markets (Pty) Limited
Brown & Williamson Tobacco Corporation (Pty) Limited
Business Venture Investments No 216 (Pty) Limited
Carlton Cigarette Company (Pty) Limited
Intercontinental Tobacco Company (Pty) Ltd.
John Chapman (Pty) Limited
John Player & Sons (Pty) Limited
Kentucky Tobacco Corporation (Pty) Limited
Martins of London (Pty) Limited
Rembrandt Tobacco Corporation (Overseas) Ltd
Riggio Tobacco Corporation of New York Ltd
Rothmans of Pall Mall London Limited
St. Regis Tobacco Corporation Ltd
Thomas Bear’s Son & Co (Pty) Limited
Tobacco Research and Development Institute (Pty) Limited
W.D. & H.O. Wills (Pty) Limited
Westminster Tobacco Company (Cape Town & London) (Pty) Limited
Winfield Tobacco Corporation (Pty) Limited
Winston Tobacco Company Limited
Spain
Torreo Espacio, Paseo de la Castellana, 259D, 28046 Madrid, Spain
British American Tobacco España, S.A.
Sri Lanka
178 Srimath Ramanathan Mawatha, Colombo, 15, Sri Lanka
Ceylon Tobacco Company Plc (84.13%)
Sudan
Byblos Tower, Al-Muk Nemer Street, Postal Code 11111, P.O Box
1381, Khartoum, Sudan
Blue Nile Cigarette Company Limited
Swaziland
Rhus Office Park, Kal Grant Street, P.O. Box 569, Mbabane,
Swaziland
British American Tobacco Swaziland (Pty) Limited
Sweden
Stre Järnvägsgatan 13, 4 fl. SE-252 24 Helsingborg, Sweden
Niconovum AB
Västra Trädgårdsgatan 15, 111 53 Stockholm, Sweden
British American Tobacco Sweden AB
Sweden Stationsvägen 11, 523 74 Hökerum, Sweden
Winnington AB
Stenåldersgatan 23, 213 76 Malmö, Sweden
Fiedler & Lundgren AB
Switzerland
Route de France 17, 2926 Boncourt, Geneva, Switzerland
AD Tabacs International S.A.
American-Cigarette Company (Overseas) Limited
British American Tobacco Switzerland S.A.
British American Tobacco Switzerland Vending SA
Nicoventures Communications (Switzerland) AG
Rothmans of Pall Mall Limited
Route de la Glâne 107, c/o NBA Fiduciaire S.A. 1752 Villars-sur-
Glâne, Switzerland
Intertab S.A. (50%)
c/o Seepark AG, Gartenstrasse 4, 6300 Zug, Switzerland
British American Tobacco International Limited in Liquidation
Tanzania
Acacia Estate Building, Kinondoni Rd, P.O. Box 72484, Dar es
Salaam, Tanzania
British American Tobacco (Tanzania) Limited
International Cigarette Distributors Limited (99%)
Zanzibar Distribution Company Limited (99%)
c/o IMMMA Advocates, Plot No.357, UN Road, Upanga, P.O Box
72484, Dar es Salaam, Tanzania
BAT Distribution Tanzania Limited
Trinidad and Tobago
Corner Eastern Main Road and Mt. D’or Road, Champs Fleurs,
Trinidad and Tobago
The West Indian Tobacco Company Limited (50.13%)
Turkey
Orjin Maslak is Merkezi, Eski Büyükdere Caddesi, Kat: 9-10, Maslak,
Sanyer, istanbul, Türkiye – PK: 34485
British American Tobacco Tütün Mamulleri Sanayi ve Ticaret Anonim Sirketi
243
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP COMPANIES AND UNDERTAKINGS
CONTINUED
Uganda
10th Floor, Lotis Towers, Plot 16 Mackinnon Road, Nakasero,
Kampala, Uganda
British American Tobacco Uganda Limited (90%)
Ukraine
13-15 Bolsunovska Str, Kyiv, 01014 Ukraine
LLC ‘British American Tobacco Sales and Marketing Ukraine’
21 Nezalezhnosti Str, Pryluky, Chernihiv Region, 17502 Ukriane
PJSC ‘A/T B.A.T. – Prilucky Tobacco Company’
United Arab Emirates
Jumeriah Business Centre 3, 37th Floor, Jumeirah Lake Towers,
Dubai, P.O. Box 337222, United Arab Emirates
British American Tobacco GCC DMCC
British American Tobacco ME DMCC
United Kingdom
212-218 Upper Newtownards Road, Belfast, BT4 3ET, Northern
Ireland
Murray, Sons & Company, Limited
7 More London, Riverside, London, SE1 2RT, United Kingdom
Ryesekks P.L.C. (50%)
Globe House, 1 Water Street, London, WC2R 3LA, United Kingdom
Advanced Technologies (Cambridge) Limited
Allen & Ginter (UK) Limited
B.A.T (U.K. and Export) Limited
B.A.T Cambodia (Investments) Limited
B.A.T Far East Holding Limited
B.A.T Far East Leaf Limited
B.A.T Services Limited
B.A.T Uzbekistan (Investments) Limited
B.A.T Vietnam Limited
B.A.T. (Westminster House) Limited
B.A.T. China Limited
BAT Finance COP Limited
BATIF Dollar Limited
BATUS Limited
Big Ben Tobacco Company Limited
British American Shared Services (GSD) Limited
British American Shared Services Limited
British American Tobacco (AIT) Limited
British American Tobacco (GLP) Limited
British American Tobacco (Investments) Limited
British American Tobacco (Philippines) Limited
British American Tobacco (Serbia) Limited
British American Tobacco (South America) Limited
British American Tobacco China Holdings Limited
British American Tobacco Georgia Limited
British American Tobacco Global Travel Retail Limited
British American Tobacco International Holdings (UK) Limited
British American Tobacco Investments (Central & Eastern Europe)
Limited
British American Tobacco Italy Investments Limited
British American Tobacco Italy Limited
British American Tobacco Korea (Investments) Limited
British American Tobacco Malaysia (Investments) Limited
British American Tobacco Peru Holdings Limited
British American Tobacco UK Pension Fund Trustee Limited8
British American Tobacco Western Europe Commercial Trading Limited
British-American Tobacco (Mauritius) p.l.c.
Carreras Rothmans Limited#
Chelwood Trading & Investment Company Limited
East African Tobacco Company (U.K.) Limited
Lord Extra Limited
Myddleton Investment Company Limited
Nicovations Limited
Nicoventures Holdings Limited
Nicoventures Retail (UK) Limited
Nicoventures Trading Limited
Powhattan Limited
Precis (2396) Limited
Ridirectors Limited
Rothmans Exports Limited
Rothmans International Limited
Rothmans International Tobacco (UK) Limited
Rothmans International Services Limited
Rothmans of Pall Mall (Overseas) Limited
Rothmans Trading Limited
Ryservs (1995) Limited
Ryservs (No.3) Limited
Tobacco Exporters International Limited
Tobacco Marketing Consultants Limited
Venezuela Property Company Limited
Westanley Trading & Investment Company Limited
Westminster Tobacco Company Limited
Globe House, 2 Milford Lane, London, WC2R 3LN, United
Kingdom
World Investment Company Limited
244
Financial StatementsBAT Annual Report and Form 20-F 2019 Globe House, 4 Temple Place, London, WC2R 2PG, United
Kingdom
Amalgamated Tobacco Company Limited
American Cigarette Company (Overseas) Limited
Ardath Tobacco Company Limited
B.A.T Additional Retirement Benefit Scheme Trustee Limited
B.A.T Industries p.l.c.
B.A.T. International Finance p.l.c.*
B.A.T. Operating Finance Limited
BATLaw Limited
BATMark Limited*
Benson & Hedges (Overseas) Limited
Better Tomorrow Ventures Limited
British American Global Shared Services Limited
British American Tobacco (1998) Limited*
British American Tobacco (2009) Limited
British American Tobacco (2009 PCA) Limited
British American Tobacco (2012) Limited
British American Tobacco (Brands) Limited
British American Tobacco (Corby) Limited
British American Tobacco (NGP) Limited
British American Tobacco Healthcare Trustee Limited
British American Tobacco Taiwan Logistics Limited
British-American Tobacco (Holdings) Limited
Brown & Williamson Tobacco Corporation (Export) Limited
Carreras Limited
Courtleigh of London Limited
Dunhill Tobacco of London Limited
John Sinclair Limited
Louisville Securities Limited
Moorgate Tobacco Co. Limited
Peter Jackson (Overseas) Limited
Precis (1789) Limited
Precis (1814) Limited
Rothmans International Enterprises Limited
Rothmans of Pall Mall Limited
Senior Service (Overseas) Limited
South Western Nominees Limited
The London Tobacco Company Limited
Tobacco Insurance Company Limited
Weston (2009) Limited
Weston Investment Company Limited
One, Eton Street, Richmond Upon Thames, London, TW9 1EF,
United Kingdom
British American Tobacco UK Limited
Ten Motives Limited
10 Motives Limited
United States
2710 Gateway Oaks Drive, Suite 150N, Sacramento CA 95833,
United States
Genstar Pacific Corporation
251 Little Falls Drive, Wilmington, DE 19808, United States
B.A.T Capital Corporation
BATUS Holdings Inc.
BATUS Japan, INC.
BATUS Retail Services, Inc.
British American Tobacco (Brands) Inc.
Brown & Williamson Holdings, Inc.
BTI 2014 LLC
Imasco Holdings Group, Inc.
Imasco Holdings, Inc.
ITL (USA) Limited
Louisville Corporate Services, Inc.
Nicoventures U.S. Limited
Farmers Bank Building, Suite 1402, 301 N. Market Street,
Wilmington, DE 19801, United States
Reynolds Finance Company
3700 Airpark Drive, Owensboro, KY 42301, United States
Kentucky BioProcessing, Inc.
401 N. Main Street, Winston-Salem, NC 27101, United States
CF Vapor Company, LLC
Conwood Holdings, Inc.
EXP Homes, LLC
Lorillard Licensing Company LLC
Lorillard, LLC
Niconovum USA, Inc
Northern Brands International, Inc.
R.J. Reynolds Global Products, Inc.
R.J. Reynolds Tobacco Company
R.J. Reynolds Tobacco International, Inc
R.J. Reynolds Vapor Company
R.J. Reynolds Tobacco Co.
R.J. Reynolds Tobacco Holdings, Inc.
RAI Innovations Company
RAI International, Inc.
RAI Services Company
RAI Strategic Holdings, Inc.
RAI Trade Marketing Services Company
Reynolds American Inc.
Reynolds Brands Inc.
Reynolds Technologies, Inc.
RJR Realty Relocation Services, Inc.
RJR Vapor Co., LLC
Rosswil LLC
S.F. Imports, Inc.
Spot You More, Inc.
245
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP COMPANIES AND UNDERTAKINGS
CONTINUED
3220 Knotts Grove Road, Oxford, NC 27565, United States
Santa Fe Natural Tobacco Company, Inc
4550 Excel Parkway, Suite 100, Addison, TX 75001, United States
Hanu Life LLC (100%) (60%)^
VapeWild LLC (100%) (60%)^
VapeWild Franchising LLC (100%) (60%)^
VapeWild Holdings, LLC (60%)
VapeWild Retail Operations, LLC (100%) (60%)^
VapeWild Wholesale, LLC (100%) (60%)^
Wolfpack Wholesale Global, Ltd. (100%) (60%)^
5106, Tradeport Dr., Memphis, TN 38141, United States
American Snuff Company, LLC
Uruguay
Juncal 1392, Montevideo, Uruguay
Kellian S.A.
Uzbekistan
77 Minor Passage, Tashkent, 100084, Uzbekistan
JSC JV UZBAT A.O. (97.38%)
Venezuela
Registro Mecantil Primero de la Circunscripción, Judical des
Distrito, Capital y Estado, Miranda, Venezuela
Agrega de Venezuela, Agreven, C.A. (50%)
Avenida Francisco de Miranda, Edificio Bigott, Los Ruices, Caracas
– Estado Miranda, 1010, Venezuela
Agrobigott, C.A.
Compania Anonima Cigarrera Bigott Sucesores
Distribuidora Bigott, C.A.
Avenida Francisco de Miranda, Torre Chacao 19.02, Municipio
Chacao, Estado, Miranda, Caracas, Venezuela
Proyectos de Inversion BAT 1902 C.A.
Vietnam
19/F Mplaza Saigon, 39 Le Duan Street, Ben Nghe Ward, District 1,
Ho Chi Minh City, Vietnam
East Asia Area Services Company Limited
Area 8, Long Binh Ward, Bien Hoa City, Dong Nai Province,
Vietnam
British American Tobacco – Vinataba Limited (70%)
Lot 45C/I, Road #7, Vinh Loc Industrial Park, Binh Chanh District,
Ho Chi Minh City, Vietnam
VINA-BAT Joint Venture Company Limited (49%)
Zambia
20992 Kafue Road, P O Box 30622, Lusaka, Zambia
British American Tobacco (Zambia) plc (78%)
Zimbabwe
Manchester Road 1, Southerton, Harare, Zimbabwe
American-Cigarette Company (Overseas) (Private) Ltd
British American Tobacco Zimbabwe (Holdings) Limited (43.13%)
Rothmans Limited
Associated undertakings and joint ventures
Croatia
Slavonska avenija 11a, 10000 Zagreb, Croatia
Tisak d.d. (41.86%)
Hungary
H-6800 Hódmezóvásárhely, Erzsébeti út 5/b, Hungary
Országos Dohányboltellátó Korlátolt Felelosségu Társaság (49%)
India
Virginia House, 37, J.L. Nehru Road, Kolkata, 700 071, India
ITC Limited (29.49%)
Azamabad, Andhra Pradesh, Hyderabad, 500 020, India
VST Industries Limited (32.16%)8
Nepal
Shree Bal Sadan, Gha 2-513, Kantipath, Kathmandu, Nepal
Surya Nepal Pvt. Limited (61%) (19.44%)^
Uganda
69/71 Jinja Road, P.O Box 7100, Kampala, Uganda
Uganda Tobacco Processors Limited (50%)
United Kingdom
65a Hopton Street, London,SE1 9LR, United Kingdom
AYR Limited (13.14%)9
Uzbekistan
Gulobod Village, Samarkand Region, 140100, Uzbekistan
FE “Samfruit” JSC (10.2%)
Yemen
P.O. Box 14, Sanna, Yemen
Kamaran Industry and Investment Company (31%)
P.O. Box 5302, Hoban, Taiz, Yemen
United Industries Company Limited (32%)
Joint operations
Hong Kong
29/F, Oxford House, 979 King’s Road, Taikoo Place, Quarry Bay,
Hong Kong
CTBAT International Co. Limited (50%)
Notes
1. Ownership held in the class of USD 100 (100%) (76.30%)^ and USD 49,900 (100%).
2. Ownership held in the class of Series F and 2nd Preferred shares.
3. Ownership held in the class of A shares (50%) and class of B shares (100%).
4. Ownership held in class of A shares and B shares.
5. Ownership held solely in class of preference shares.
6. Ownership held in class of Investment stock (98.98%) and Ordinary shares (98.35%).
7. Company limited by guarantee.
8. 31 March year-end.
9. 31 May year-end.
10. 30 June year-end.
11. 30 November year-end.
246
Financial StatementsBAT Annual Report and Form 20-F 2019 BALANCE SHEET@
British American Tobacco p.l.c. – at 31 December
Assets
Fixed assets
Investments in Group undertakings
Current assets
Debtors
Cash at bank and in hand
Derivative financial instruments
Total current assets
Total assets
Equity
Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Merger reserves
Other reserves
Profit and loss account
Total shareholders’ funds
Liabilities
Creditors
Derivative financial instruments
Total liabilities
Total Equity and liabilities
The accompanying Notes on the Accounts are an integral part of the Parent Company financial statements.
On behalf of the Board
Richard Burrows
Chairman
17 March 2020
Note
2019
£m
2018
£m
2
3
4
5
27,908
27,901
7,644
5
8
7,657
35,565
614
95
101
23,116
90
8,529
32,545
3,020
–
3,020
35,565
8,276
6
–
8,282
36,183
614
92
101
23,116
90
5,919
29,932
6,249
2
6,251
36,183
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
247
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 STATEMENT OF CHANGES IN EQUITY@
British American Tobacco p.l.c. – for the year ended 31 December
1 January 2019
Increase in share capital – share options
Profit for the financial year
Dividends – on equity shares
Consideration paid for purchase of own shares
held in Employee Share Ownership Trusts
Other movements*
31 December 2019
1 January 2018
Accounting policy change
1 January 2018 (revised)
Increase in share capital – share options
Profit for the financial year
Dividends – declared on equity shares
Consideration paid for purchase of own shares
held in Employee Share Ownership Trusts
Other movements*
31 December 2018
* Other movements includes share-based payments.
Called up
share capital
£m
Share
premium
account
£m
614
–
–
–
–
–
614
92
3
–
–
–
–
95
Called up
share capital
£m
Share
premium
account
£m
614
–
614
–
–
–
–
–
614
88
–
88
4
–
–
–
–
92
Merger
Reserve
£m
23,116
–
–
–
–
–
23,116
Merger
Reserve
£m
23,116
–
23,116
–
–
–
–
–
23,116
Capital
redemption
reserves
£m
Other
Reserves
£m
Profit and
loss account
£m
101
–
–
–
–
–
101
90
–
–
–
–
–
90
5,919
–
6,106
(3,476)
(115)
95
8,529
Capital
redemption
reserves
£m
Other
Reserves
£m
Profit and
loss account
£m
101
–
101
–
–
–
–
–
101
90
–
90
–
–
–
–
–
90
6,163
(42)
6,121
–
4,314
(4,463)
(125)
72
5,919
Total
Equity
£m
29,932
3
6,106
(3,476)
(115)
95
32,545
Total
Equity
£m
30,172
(42)
30,130
4
4,314
(4,463)
(125)
72
29,932
There was no difference between profit and loss for the period and total comprehensive income for the period.
For movements on dividends – on equity shares, refer to note 8 ‘Dividends and other appropriations’.
The profit and loss account is stated after deducting the cost of treasury shares which was £5,247 million at 31 December 2019 (31 December
2018: £5,227 million).
248
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
Financial StatementsBAT Annual Report and Form 20-F 2019 NOTES TO
THE ACCOUNTS@
1 Accounting policies
Basis of accounting
The financial statements of the Company have been prepared in
accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework (’FRS 101’).
In preparing these financial statements, the Company applies the
recognition, measurement and disclosure requirements of International
Financial Reporting Standards as adopted by the EU (’IFRS’), but makes
amendments where necessary in order to comply with Companies Act
2006 and where advantage of certain disclosure exemptions available
under FRS 101 have been taken, including those relating to:
– a cash flow statement and related notes;
– comparative period reconciliations;
– disclosures in respect of transactions with wholly-owned subsidiaries;
– disclosures in respect of capital management;
– the effects of new but not yet effective IFRSs; and
– disclosures in respect of the compensation of key
management personnel.
As the consolidated financial statements of the Group include
equivalent disclosures, the Company has also taken the exemptions
under FRS 101 available in respect of disclosures under IFRS 2 related
to group settled share-based payments.
The preparation of the financial statements requires the Directors to
make estimates and assumptions that affect the reported amounts
of revenues, expenses, assets and liabilities, and the disclosure of
contingent liabilities at the date of the financial statements. The key
estimates and assumptions are set out in the accounting policies below,
together with the related Notes on the Accounts.
The critical accounting judgements include the determination as to
whether to recognise provisions and the exposures to contingent
liabilities (see note 7) and the determination that the dividend
recognition error was not material (see note 8). The critical accounting
estimates include the review of the carrying values of investments in
Group companies (note 2).
As permitted by Section 408 of the Companies Act 2006, the
profit and loss of the Company has not been presented in these
financial statements.
The Company is a public limited company which is listed on the
London Stock Exchange and the Johannesburg Stock Exchange and
is incorporated and domiciled in the UK. In addition, the Company’s
shares are traded on the New York Stock Exchange in the form of
American Depository Shares (ADSs).
Foreign currencies
The functional currency of the Company is sterling. Transactions arising
in currencies other than sterling are translated at the rate of exchange
ruling on the date of the transaction. Assets and liabilities expressed in
currencies other than sterling are translated at rates of exchange ruling
at the end of the financial year. All exchange differences are taken to
the profit and loss account in the year.
Income
Income consists of dividend income from Group undertakings, fee
income from financial guarantees and interest income. These are
included in the profit and loss account when all contractual or other
applicable conditions for recognition have been met. Dividend income
is recognised at the same time as the paying company recognises the
liability to pay a dividend.
Taxation
Taxation is that chargeable on the profits for the period, together with
deferred taxation. Income tax charges, where applicable, are calculated
on the basis of tax laws enacted or substantively enacted at the balance
sheet date. A deferred tax asset is recognised only to the extent that
it is probable that future taxable profits will be available against which
the asset can be utilised.
Deferred tax is determined using the tax rates that have been enacted
or substantively enacted by the balance sheet date and are expected
to apply when the related deferred tax asset is realised or deferred tax
liability is settled. As required under IAS 12 Income Taxes deferred tax
assets and liabilities are not discounted.
Investments in Group companies
Investments in Group companies are stated at cost, together with
subsequent capital contributions, less provisions for any impairment in
value, where appropriate.
Dividends
In 2017 and 2018, dividend distributions to the Company’s
shareholders were recognised as a liability in the Company’s financial
statements in the period in which they were approved by shareholders
(final dividends) or confirmed by the Directors (interim dividends).
With effect from 1 January 2018, the Company moved to quarterly
payments of interim dividends. As referred to in note 8, from 2019
the Company recognises the interim dividend as an appropriation
of reserves in the period in which it is paid. This change in treatment
has no impact to the timing of when shareholders will receive
the dividend.
Repurchase of share capital
When share capital is repurchased, the amount of consideration paid,
including directly attributable costs, is recognised as a deduction
from equity. Repurchased shares which are not cancelled, or shares
purchased for the employee share ownership trusts, are classified as
treasury shares and presented as a deduction from total equity.
Related parties
The Company has taken advantage of the exemption under FRS 101
from disclosing transactions with related parties that are wholly-owned
subsidiaries of British American Tobacco p.l.c. Group.
Financial instruments
With effect from 1 January 2018, the Company has adopted IFRS 9 Financial
Instruments. The cumulative impact of adopting IFRS 9, including the effect
of tax entries, has been recognised as restatement of opening reserves in
2018 and is £42 million arising from the impairment of financial assets under
the expected loss model.
Financial assets and financial liabilities are recognised when the Company
becomes a party to the contractual provisions of the relevant instrument and
derecognised when it ceases to be a party to such provisions. Such assets and
liabilities are classified as current if they are expected to be realised or settled
within 12 months after the balance sheet date. If not, they are classified as
non-current.
Financial instruments are initially recognised at fair value.
The Company’s non-derivative financial assets, including debtors, are held
in order to collect contractual cash flows and are subsequently carried at
amortised cost. Non-derivative financial liabilities, including creditors, are
subsequently carried at amortised cost using the effective interest method.
Financial guarantees are initially recorded at fair value, and subsequently
carried at this fair value less accumulated amortisation within other creditors.
Derivative financial assets and liabilities are initially recognised, and
subsequently measured, at fair value, which includes accrued interest
receivable and payable where relevant. Changes in their fair values are
recognised in profit and loss.
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
249
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NOTES ON THE ACCOUNTS@
CONTINUED
1 Accounting policies continued
Impairment of financial assets held at amortised cost
With effect from 1 January 2018, loss allowances for expected
credit losses on financial assets which are held at amortised cost
are recognised on the initial recognition of the underlying asset.
Allowances in respect of loans and other receivables (debtors) are
initially recognised at an amount equal to 12 month expected
credit losses. Where the credit risk on the receivables has increased
significantly since initial recognition, allowances are measured at an
amount equal to the lifetime expected credit loss. Prior to 1 January
2018, financial assets were reviewed for impairment at each balance
sheet date, or whenever events indicated that the carrying amount
might not be recoverable.
Share‑based payments
The Company has equity-settled share-based compensation plans.
Equity-settled share-based payments are measured at fair value at the date of
grant. The fair value determined at the grant date of the equity-settled share-
based payments is expensed over the vesting period, based on the Group’s
estimate of awards that will eventually vest. For plans where vesting conditions
are based on total shareholder returns, the fair value at date of grant reflects
these conditions, whereas earnings per share vesting conditions are reflected
in the calculation of awards that will eventually vest over the vesting period.
Fair value is measured by the use of the Black-Scholes option pricing
model, except where vesting is dependent on market conditions
when the Monte-Carlo option pricing model is used. The expected life
used in the models has been adjusted, based on management’s best
estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations.
2 Investments in Group companies
The Company’s directly-owned subsidiaries are British American Tobacco (1998) Limited, B.A.T. International Finance p.l.c. and BATMark Limited.
A full list of indirect subsidiaries and other undertakings as required by Section 409 of the Companies Act 2006 is shown on pages 237 to 246 of
the Group’s financial statements.
Other movements in investments (additions) are related to parental guarantees issued by the Company.
The Directors are of the opinion that the individual investments in the subsidiary undertakings have a value not less than the amount at which
they are shown in the Balance Sheet.
Shareholdings at cost less provisions and other fixed asset investments
1 January
Additions
31 December
3 Debtors
Amounts due from Group undertakings
Current
Non-current
Allowance account
31 December
Allowance account
1 January
Released during the year
31 December
Current
Non-current
31 December
2019
£m
27,901
7
27,908
2018
£m
27,898
3
27,901
2019
£m
7,644
6,826
853
(35)
7,644
2018
£m
8,276
7,431
882
(37)
8,276
2019
£m
2018
£m
37
(2)
35
8
27
35
42
(5)
37
7
30
37
Included within amounts due from Group undertakings is an amount of £6,681 million (2018: £7,278 million) which is unsecured, interest-
bearing and repayable on demand. The interest rate is based on LIBOR.
Amounts due from Group undertakings include £989 million (2018: £1,031 million) representing the value of the fees receivable from
the parental guarantees issued by the Company, of which £136 million (2018: £150 million) is due within one year and £853 million
(2018: £882 million) is due after more than one year. In addition, amounts due from Group undertakings include balances of £9 million
(2018: £4 million) which are unsecured, interest free and repayable on demand.
The adoption of IFRS 9 resulted in the recognition of an expected credit loss
allowance of £42 million as at 1 January 2018.
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
250
Financial StatementsBAT Annual Report and Form 20-F 2019 4 Shareholders’ funds
Profit and loss account
The accounting policy change for the adoption of IFRS 9 as at 1 January 2018 was a charge to the profit and loss reserve of £42 million.
In 2017 and 2018, dividend distributions to the Company’s shareholders were recognised as a liability in the Group’s financial statements in
the period in which they were confirmed by the Directors. As referred to in Note 8, Dividends and other appropriations, from 2019, the Group
recognises the interim dividend in the period in which it is paid. This change has no impact to the timing of when shareholders will receive
the dividend.
As permitted by Section 408 of the Companies Act 2006, the profit and loss of the Company has not been presented in these Financial
Statements. The profit for the year ended 31 December 2019 was £6,106 million (2018: £4,314 million).
Details of the Director’s remuneration, share options and retirement benefits are given in the Remuneration Report in the Group Annual Report
and Accounts. Details of key management compensation are included in note 26 of the Group financial statements. The Company had two
employees at 31 December 2019 (2018: two). These two employees are Jack Bowles and Tadeu Marroco. The details of their remuneration are
shown on page 98 of the Group’s Annual Report and Accounts for the year ended 31 December 2019. The costs of these employees are borne
by another Group company.
Shareholders’ funds are stated after deducting the cost of treasury shares which include £4,845 million (2018: £4,845 million) for shares
repurchased and not cancelled and £402 million (2018: £382 million) in respect of the cost of own shares held in Employee Share
Ownership Trusts.
As at 31 December 2019, treasury shares include 8,049,187 (2018: 7,312,975) of shares held in trust and 162,645,590 (2018: 162,645,590)
of shares repurchased and not cancelled as part of the Company’s share buy-back programme.
Other movements in shareholders’ funds principally relate to the release of treasury shares as a result of the exercise of share options.
Called up Share Capital
Called up Share Capital
Allotted and fully paid
1 January 2019
Changes during the year
– share option schemes
31 December 2019
Called up Share Capital
Allotted and fully paid
1 January 2018
Changes during the year
– share option schemes
31 December 2018
Ordinary Shares of 25p each
Number of shares
2,456,415,884
104,854
2,456,520,738
Ordinary Shares of 25p each
Number of shares
2,456,278,414
137,470
2,456,415,884
£m
614.09
0.03
614.12
£m
614.06
0.03
614.09
Merger reserve
In 2017, the Company announced the completion of the acquisition of the remaining 57.8% of Reynolds American Inc. (’RAI’) it did not already
own. Pursuant to the Merger Agreement, the Company, on behalf of its indirect subsidiary BATUS Holdings Inc (’BATUS’), agreed to issue new
shares, represented by American Depositary Shares, for the benefit of RAI shareholders. In consideration for the Company issuing new shares,
BATUS agreed to issue to the Company an assignable obligation owed by BATUS to issue shares to the holder of that obligation.
As a consequence, the Company issued 429,045,762 new shares with a nominal value of £107,261,441.
In accordance with Section 612 of the Companies Act 2006, the excess of the fair value of the shares issued over the nominal value of the shares
has been treated as a merger reserve.
Capital redemption premium
On the purchase of own shares, as part of the share buy-back programme for shares which are cancelled, a transfer is made from retained
earnings to the capital redemption reserve equivalent to the nominal value of the shares purchased. The Company suspended its share buy-back
programme from 30 July 2014.
Other reserves
As part consideration for the acquisition of Rothmans International BV in 1999, convertible redeemable preference shares were issued by the
Company. The discount on these shares was amortised by crediting other reserves and charging retained earnings. The balance of £90 million in
other reserves comprises the accumulated balance in respect of the preference shares converted during 2004.
Share premium
The share premium increase of £3 million (2018: £4 million) relates solely to ordinary shares issued under the Company’s share option schemes.
These schemes are described in the Remuneration Report.
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
251
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
NOTES ON THE ACCOUNTS@
CONTINUED
5 Creditors
Amounts due to Group undertakings
Loans due to Group undertakings
Ordinary dividends payable
Other creditors
Deferred income
Current
Non-current
2019
£m
114
1,571
–
1,327
8
3,020
282
2,738
3,020
2018
£m
124
3,617
1,116
1,384
8
6,249
3,453
2,796
6,249
Amounts due to Group undertaking of £114 million (2018: £124 million) are unsecured, interest free and repayable on demand.
Loans due to Group undertakings of £1,571 million (2018: £3,617 million) are unsecured, bear interest at rates between 1.51% and 2.38%
(2018: 0.9% and 2.28%). An amount of £2,046 million was repaid in 2019, and the remaining amount of £1,571 million is repayable in 2022.
Included in other creditors is a provision of £1,301 million (2018: £1,360 million) in respect of subsidiary undertaking borrowings guaranteed by
the Company. Out of this amount, a total of £144 million (2018: £142 million) represents amounts to be settled within one year.
The movement in ordinary dividends payable relates to the correction for the accounting for dividends as discussed in Note 8.
6 Audit Fees
Fees payable to KPMG
– Audit fees
– Fees paid for other services
2019
2018
£30,000
£nil
£30,000
£nil
The audit fees are borne by another Group Company.
7 Contingent Liabilities
British American Tobacco p.l.c. has guaranteed borrowings by subsidiary undertakings of £43.0 billion (2018: £45.1 billion) and total borrowing
facilities of £48.7 billion (2018: £51.9 billion). The Company has cross-guaranteed the liabilities of the British American Tobacco UK Pension Fund
which had a deficit according to the last formal triennial valuation in March 2017 of £23 million and which had a surplus on an IAS 19 basis at
31 December 2019 of £326 million (2018: £1,063 million). In addition, there are contingent liabilities in respect of litigation in various countries
(note 27 to the Group financial statements).
252
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
Financial StatementsBAT Annual Report and Form 20-F 2019 8 Dividends and other appropriations
During the year, as an outcome of the Financial Reporting Council’s (FRC’s) review of the Company’s 2018 Report and Accounts, it was identified
that the interim dividend paid in February 2018, and in February 2019, should not have been accrued in the balance sheet of the prior period.
The error was identified by reference to the ICAEW Technical Release 02/17BL regarding ‘Guidance on Realised and Distributable Profits under the
Companies Act 2006’. This translated into an overstatement of liabilities and understatement equity by £1,000 million in 2017 and £1,116 million
in 2018.
Accordingly, the Company has revised the treatment with respect to dividends, to recognise interim dividends in the period in which they are
paid. The review conducted by the FRC was based solely on the Company’s published accounts and does not provide any assurance that the
accounts are correct in all material respects.
After considering the requirements of IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors, the Directors determined that the impact of the error would not influence the economic decisions of the users of the financial statements
with the share price trading ‘ex-dividend’ at the balance sheet date. The Directors also determined that there was no impact on the amount
or timing of the cash received by shareholders, no impact to the Company’s Income Statement in those periods and had no impact on the
Company’s performance metrics on an actual or forecast basis. Accordingly, the Directors concluded that the error was not material and that the
prior years would not be restated.
From 2019, the Company will recognise dividends as a liability in the Company’s financial statements in the period in which they are paid as
all dividends are interim dividends. This does not constitute any change in the Company’s approach to dividend distribution to shareholders
which remains being the declaration of the dividend by the Directors in February following the balance sheet date, payable over four equal
quarterly instalments.
9 Post balance sheet event
On 6 February 2020, the fourth quarterly interim dividend of 50.75p (£1,161 million) declared by the Directors in February 2019, and
reconfirmed to the market prior to 31 December 2019, was paid to shareholders. The impact of this on the Company was to reduce the level of
profit and loss reserve from £8,529 million to £7,368 million.
In addition, on 27 February 2020, the Board declared an interim dividend of 210.4p per ordinary share of 25p for the year ended 31 December
2019, payable in four equal quarterly instalments of 52.6p per ordinary share in May 2020, August 2020, November 2020 and February 2021.
These payments will be recognised as appropriations from reserves in 2020 and 2021. The total amount payable is estimated to be £4,826 million
based on the number of shares outstanding at the date of these accounts
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
253
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 OTHER
INFORMATION
CONTENTS
Additional disclosures
Information on the Group
Selected financial information
Non-financial KPIs
Non-GAAP measures
Additional disclosures on liquidity and capital resources
Employees
Group risk factors
Regulation of the Group’s business
Disclosure pursuant to Section 219 of the Iran Threat
Reduction and Syria Human Rights Act of 2012 (ITRA)
Material contracts
Property, plant and equipment
US corporate governance practices
Controls and procedures
Statements regarding competitive position
Directors’ Report information
Cautionary statement
Shareholder information
Share prices and listings
Dividends
Shareholder taxation information
Share capital and security ownership
Articles of Association
Purchases of shares
Group Employee Trust
American Depositary Shares
Shareholding administration and services
Exhibits
Other information
Glossary
Cross-reference to Form 20-F
255
256
257
258
269
271
272
287
291
292
294
295
296
296
297
298
299
300
302
306
317
320
321
322
323
324
326
327
254
Additional DisclosuresBAT Annual Report and Form 20-F 2019 INFORMATION
ON THE GROUP
Overview
British American Tobacco p.l.c. is the parent holding company of the
Group, a leading, multi-category consumer goods company that
provides tobacco and nicotine products to millions of consumers
around the world. According to the Group’s internal estimates, the
BAT Group is a market leader by volume in more than 50 countries,
producing the cigarette chosen by one in eight of the world’s one
billion smokers. Effective 1 January 2018, the Group, excluding the
Group’s associated undertakings, was organised into four regions:
the United States (US – Reynolds American Inc.), Asia-Pacific and the
Middle East (APME), Americas and Sub-Saharan Africa (AmSSA) and
Europe and North Africa (ENA). For presentation purposes within this
Annual Report and Form 20-F, all prior periods have been revised to
be consistent with the current reporting structure. The Group has a
devolved structure, with each local company having responsibility for
its operations.
The Group’s range of combustible products covers all segments, from
value-for-money to premium with a portfolio of international, regional
and local tobacco brands to meet a broad array of adult tobacco
consumer preferences wherever the Group operates. The Group is
investing in building a portfolio of potentially less harmful tobacco and
nicotine products alongside its traditional tobacco business – including
vapour products, tobacco heating products (THPs) and Modern Oral
products, which are collectively termed the New Categories, as well as
Traditional Oral products.
The Group manages a globally-integrated supply chain and its
products are distributed to retail outlets worldwide.
History and development of BAT
The Group has had a significant global presence in the tobacco
industry for over 100 years. BAT Ltd. was incorporated in 1902, when
the Imperial Tobacco Company and the American Tobacco Company
agreed to form a joint venture company. BAT Ltd. inherited companies
and quickly expanded into major markets, including India and Ceylon,
Egypt, Malaya, Northern Europe and East Africa. In 1927, BAT Ltd.
expanded into the US market through its acquisition of B&W.
During the 1960s, 1970s and 1980s, the Group diversified its business
under the umbrella of B.A.T Industries p.l.c., with acquisitions in
the paper, cosmetics, retail and financial services industries, among
others. Various business reorganisations followed as the business was
eventually refocused on the Group’s core cigarette, cigars and tobacco
products businesses with BAT becoming a separately listed entity on
the LSE in 1998.
In 1999, the Group announced a global merger with Rothmans
International, at that time the fourth largest tobacco company in the
world. The Group acquired Imperial Tobacco Canada in 2000, and in
2003 the Group acquired Ente Tabacchi Italiani S.p.A., Italy’s state-
owned tobacco company. Investments were made in Peru and Serbia
in 2003, through the acquisitions of Tabacalera Nacional and Duvanska
Industrija Vranje. In July 2004, the US assets, liabilities and operations,
other than certain specified assets and liabilities, of BAT’s wholly-owned
subsidiary, B&W, were combined with RJR Tobacco Company. RAI was
formed as a new holding company for these combined businesses.
As a result of the B&W business combination, B&W acquired beneficial
ownership of approximately 42% of the RAI shares. In 2008, the BAT
Group acquired Tekel, the Turkish state-owned tobacco company,
as well as 100% of the cigarette and snus business of Skandinavisk
Tobakskompagni A/S. Following the acquisition of its business during
2009, the Group recognised an effective 99% interest in Bentoel in
Indonesia. In 2011, the Group completed the acquisition of 100% of
Protabaco in Colombia.
In 2012, the Group acquired CN Creative Limited, a UK-based
start-up company specialising in the development of e-cigarette
technologies. During 2013, the Group entered into joint operations
in China. In 2015, the Group acquired: the shares it did not already
own in Souza Cruz; the CHIC Group, a vapour product business in
Poland; and TDR d.o.o., a cigarette manufacturer in Central Europe.
Also in 2015, in connection with RAI’s purchase of Lorillard Inc, the
Group invested US$4.7 billion to maintain its approximate 42% equity
position in the enlarged RAI.
In 2016, the Group acquired Ten Motives, a UK-based e-cigarette
business with particular strength in traditional grocery and
convenience channels.
In 2017, the Group completed the acquisition of the remaining 57.8%
of RAI the Group did not already own. Following completion of the
acquisition, RAI became an indirect, wholly-owned subsidiary of BAT
and is no longer a publicly-held corporation.
During 2017, the Group acquired certain tobacco assets from
Bulgartabac Holding AD in Bulgaria and Fabrika Duhana Sarajevo
(FDS) in Bosnia. The Group also acquired Winnington Holdings AB
in Sweden and certain assets from Must Have Limited in the UK,
including the electronic cigarette brand ViP. The financial impact of
these transactions to the Group were immaterial individually and
in aggregate.
In 2018, the Group acquired Quantus Beteiligungs-und
Beratungsgesellschaft mbH, which houses the vapour retail business of
High End Smoke in Germany.
In 2019, the Group acquired 60% of VapeWild Holdings LLC,
a vertically integrated manufacturer and retailer in the US, and
Twisp Propriety Limited, a South African e-cigarette/nicotine
vapour company.
British American Tobacco p.l.c. was incorporated in July 1997 under
the laws of England and Wales as a public limited company and is
domiciled in the United Kingdom.
Seasonality
The Group’s business segments are not significantly affected by
seasonality although in certain markets cigarette consumption trends
rise during summer months due to longer daylight time and tourism.
Patents and trademarks
Our trademarks, which include the brand names under which our
products are sold, are key assets which we consider, in the aggregate,
to be important to the business as a whole. As well as protecting our
brand names by way of trademark registration, we also protect our
innovations by means of patents and designs in key global jurisdictions.
255
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SELECTED FINANCIAL
INFORMATION
This information set out below has been derived from, in part, the audited consolidated financial statements of the Group commencing on
page 124. This selected financial information should be read in conjunction with the consolidated financial statements and the Strategic Report.
All items shown in £m except per share information
2019
2018
2017
2016
2015
As of and for the Year Ended 31 December1
Income statement data
Revenue2
Raw materials and consumables used
Changes in inventories of finished goods and work in progress
Employee benefit costs
Depreciation, amortisation and impairment costs
Other operating income
Loss on reclassification from amortised cost to fair value
Other operating expenses
Profit from operations
Net finance (costs)/income
Share of post-tax results of associates and joint ventures
Profit before taxation
Taxation on ordinary activities
Profit for the year
Per share data
Basic weighted average number of ordinary shares, in millions
Diluted weighted average number of ordinary shares, in millions
Earnings per share-basic (pence)
Earnings per share-diluted (pence)
Dividends per share (pence)3
Dividends per share (US dollars)3
Balance sheet data
Assets
Non-current assets
Current assets
Total assets
Liabilities
Non-current liabilities
Current liabilities
Total borrowings
Equity
Share capital
Total equity
Cash flow data
Net cash generated from operating activities
Net cash used in investing activities
Net cash (used in)/generated from financing activities
25,877
(4,599)
162
(3,221)
(1,512)
163
(3)
(7,851)
9,016
(1,602)
498
7,912
(2,063)
5,849
24,492
(4,664)
114
(3,005)
(1,038)
85
(3)
(6,668)
9,313
(1,381)
419
8,351
(2,141)
6,210
19,564
(4,520)
(513)
(2,679)
(902)
144
–
(4,682)
6,412
(1,094)
24,209
29,527
8,129
37,656
2,284
2,291
249.7p
249.0p
210.4p
$2.69
2,285
2,292
2,044
2,051
264.0p 1,833.9p
263.2p 1,827.6p
195.2p
203.0p
$2.54
$2.71
127,731 133,687
12,655
141,005 146,342
13,274
127,088
13,966
141,054
58,022
18,823
45,366
64,325
16,329
47,509
64,468
15,605
49,450
14,130
(3,777)
44
(2,274)
(607)
176
–
(3,037)
4,655
(637)
2,227
6,245
(1,406)
4,839
1,858
1,865
250.2p
249.2p
169.4p
$2.30
27,414
12,359
39,773
19,511
11,856
19,495
12,536
(3,217)
184
(2,039)
(428)
225
–
(2,704)
4,557
62
1,236
5,855
(1,333)
4,522
1,858
1,863
230.9p
230.3p
154.0p
$2.35
21,701
9,814
31,515
17,477
9,006
17,001
614
64,160
614
65,688
614
60,981
507
8,406
507
5,032
8,996
(639)
(8,593)
10,295
(1,021)
(9,630)
5,347
(18,544)
14,759
4,610
(640)
(4,229)
4,720
(3,991)
(219)
Notes:
1. All of the information above is in respect of continuing operations, revised for the fully retrospective adoption of IFRS 15.
2. Revenue is net of duty, excise and other taxes of £39,826 million, £38,553 million, £37,780 million, £32,136 million and £27,896 million for the years ended 31 December 2019, 31 December 2018, 2017,
2016 and 2015, respectively.
3. In February 2020, the BAT directors declared an interim dividend of 210.4 pence per ordinary share of 25p, payable in four equal quarterly instalments of 52.6 pence per ordinary share. This will be paid
in May 2020, August 2020, November 2020 and February 2021. The equivalent quarterly dividends receivable by holders of ADSs in US dollars will be calculated based on the exchange rate on the
applicable payment date. The BAT Directors declared an interim dividend of 203.0 pence per share for the year ended 31 December 2018, payable in four equal instalments of 50.75 pence per ordinary
share. The interim dividend was paid to BAT shareholders in May 2019, August 2019, November 2019 and February 2020.
256
Additional DisclosuresBAT Annual Report and Form 20-F 2019 NON‑FINANCIAL
KPIS
Volume
Volume is defined as the number of units sold. Units may vary between categories. This can be summarised for the principal metrics as follows:
– Factory made cigarettes (FMC) – sticks, regardless of weight or dimensions;
– Roll-Your-Own / Make-Your-Own – kilos, converted to a stick equivalent based upon 0.8 grams (per stick equivalent) for Roll-Your-Own and
between 0.5 and 0.7 grams (per stick equivalent) for Make-Your-Own;
– Traditional oral – pouches (being 1:1 conversion to stick equivalent) and kilos, converted to a stick equivalent based upon 2.8 grams (per stick
equivalent) for Moist Snuff, 2.0 grams (per stick equivalent) for Dry Snuff and 7.1 grams (per stick equivalent) for other oral;
– Modern Oral – pouches, being 1:1 conversion to stick equivalent;
– Tobacco Heat sticks - sticks, being 1:1 conversion to stick equivalent; and
– Vapour - pods and 10 millilitre bottles. There is no conversion to a stick equivalent.
Volume is recognised in line with IFRS 15 Revenue from Contracts with Customers, based upon transfer of control. It is assumed that there is no
material difference, in line with the Group’s recognition of revenue, between the transfer of control and shipment date.
Volume is used by management and investors to assess the relative performance of the Group and its brands within categories, given volume is a
principal determinant of revenue.
Volume share
Volume share is the number of units bought by consumers of a specific brand or combination of brands, as a proportion of the total units bought
by consumers in the industry, category or other sub-categorisation. Sub-categories include, but are not limited to, the total nicotine category,
modern oral, vapour, traditional oral or cigarette.
Where possible, the Group utilises data provided by third-party organisations, including AC Nielsen, based upon retail audit of sales to consumers.
In certain markets, where such data is not available, other measures are employed which assess volume share based upon other movements
within the supply chain, such as sales to retailers. This may depend on the provision of data to the industry by the customers including
distributors / wholesalers.
Volume share is used by management to assess the relative performance to the Group and its brands against the performance of its competitors
in the categories and geographies in which the Group operates. The Group’s management believes that this measure is useful to investors to
understand the relative performance of the Group and its brands against the performance of its competitors in the categories and geographies in
which the Group operates.
Volume share in each year compares the average volume share in the year with the average volume share in the prior year. This is a more robust
measure of performance, removing short-term volatility that may arise at a point in time.
However, in certain circumstances, related to periods of introduction to a market, in order to illustrate the latest performance, data may be
provided as at the end of the period rather than the average in that period. In these instances the Group states these are at a specific date (for
instance, December 2019).
Value share
Value share is the retail value of units bought by consumers of a particular brand or combination of brands, as a proportion of the total retail value
of units bought by consumers in the industry, category or other sub-categorisation in discussion.
Where possible, the Group utilises data provided by third party organisations, including AC Nielsen, based upon retail audit of sales to consumers.
In certain markets, where such data is not available, other measures are employed which assess value share based upon other movements within
the supply chain, such as sales to retailers. This may depend on the provision of data to the industry by the customers (including distributors
and wholesalers).
Value share is used by management to assess the relative performance of the Group and its brands against the performance of its competitors
in the categories and geographies in which the Group operates, specifically indicating the Group’s ability to realise value relative to the market.
The Group’s management believes that this measure is useful to investors to apprehend the relative performance of the Group and its brands
against the performance of its competitors in the categories and geographies in which the Group operates, specifically indicating the Group’s
ability to realise value relative to the market.
Value share in each year compares the average value share in the year with the average value share in the prior period. This is a more robust
measure of performance, removing short-term volatility that may arise at a point of time. However, in certain circumstances, related to periods
of introduction to a market, in order to illustrate the latest performance, data may be provided that is as at the end of the period rather than the
average in that period. In these instances the Group states these are at a specific date (for instance, December 2019).
Price mix
Price mix is a term used by management and investors to explain the movement in revenue between periods. Revenue is affected by the volume
(how many units are sold) and the value (how much is each unit sold for). Price mix is used to explain the value component of the sales as the
Group sells each unit for a value (price) but may also achieve a movement in revenue due to the relative proportions of higher value volume sold
compared to lower value volume sold (mix).
This term is used to explain the Group’s relative performance between periods only. It is calculated as the difference between the movement in
revenue (between periods) and volume (between periods). For instance, the growth in combustibles revenue of 4.2% in 2019, with a decline in
cigarette volume of 4.7% in 2019, leads to a price mix of 8.9% in 2019. No assumptions underlie this metric as it utilises the Group’s own data.
257
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NON‑GAAP
MEASURES
To supplement the presentation of the Group’s results of operations and financial condition in accordance with IFRS, we also present several
non-GAAP measures used by management to monitor the Group’s performance. The Group’s management regularly reviews the measures
used to assess and present the financial performance of the Group and, as relevant, its geographic segments.
Changes to non‑GAAP measures in 2019
@The Group introduced new non-GAAP measures called ‘Free cash flow before dividends’ and ‘Free cash flow after dividends’. These metrics
identify the level of cash earned before the payment of dividends, to identify the free cashflow generated before distributions to shareholders, and
after the payment of dividends to shareholders, as the latter provides the cash flow earned in the year prior to investments and payment of debt.@
The Group also introduced the metric ‘Change in adjusted revenue from New Categories, at constant rates’. This provides users with an
understanding of the revenue earned from the products within Vapour, THP and Modern Oral, collectively termed ‘New Categories’, excluding
the impact of adjusting items and translational foreign exchange. As part of the analysis, the Group has provided additional disclosures regarding
revenue from all the main product categories including Combustibles, Vapour, THP, Modern Oral and Traditional Oral.
@The Group also introduced the metric ‘Adjusted return on capital employed’. This provides users with an annual assessment of the return
generated (by reference to profit from operations excluding adjusting items and including dividends from associates and joint ventures) from the
average capital employed in that period. The metric includes dividends from associates and joint ventures as the Group’s total asset position is
inclusive of the investment in those associates and joint ventures.@
Results on a representative basis
Definition – the performance of the business including the results of acquisitions for the whole of the immediately preceding
comparator period.
The acquisitions undertaken during 2017 impact the understanding of the Group’s results in 2018, as, in the year of acquisition, the results
include less than a full year’s contribution from the acquired entities. To supplement BAT’s results presented in accordance with IFRS, the Group’s
Management Board, as the chief operating decision-maker, reviews certain of its results, including volume, revenue, profit from operations, and
non-GAAP measures including adjusted revenue, adjusted revenue growth from the Strategic Portfolio and adjusted profit from operations,
against the prior year as though the Group had owned the acquisitions made in 2017 for the whole of that year, and for profit from operations
including an estimated £250 million of additional adjusting items related to the acquired companies, primarily related to Engle Progeny and
transaction costs. Although the Group does not believe that these measures are a substitute for IFRS measures, the Group does believe that
such results provide additional useful information to investors regarding the underlying performance of the business on a comparable (or
‘representative’) basis. Accordingly, the financial measures on a representative basis appearing in this document should be read in conjunction
with the Group’s results as reported under IFRS.
The table below reconciles the Group’s revenue in 2017 to adjusted revenue on a representative basis.
Revenue
US
APME
AmSSA
ENA
For the year ended 31 December (£m)
Reported
£m
4,160
4,973
4,323
6,108
19,564
Adjusting
items
£m
–
–
–
(258)
(258)
Adjusted
£m
4,160
4,973
4,323
5,850
19,306
2017
Include
acquisitions
Adjusted
repres
£m
5,531
(4)
(3)
53
5,577
£m
9,691
4,969
4,320
5,903
24,883
The table below reconciles the Group’s profit from operations in 2017 to adjusted profit from operations on a representative basis.
Profit from operations
US
APME
AmSSA
ENA
For the year ended 31 December (£m)
2017
Reported
Adjusting
items*
Adjusted
Include
acquisitions
Adjusted
repres
£m
1,165
1,902
1,648
1,697
6,412
£m
763
147
134
473
1,517
£m
1,928
2,049
1,782
2,170
7,929
£m
2,502
25
22
29
2,578
£m
4,430
2,074
1,804
2,199
10,507
* Refer to page 262 for further details on the adjusting items.
@ denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
258
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Results on an organic basis
Definition – the performance of the business before inclusion of acquired entities
The acquisition of Reynolds American Inc. and Winnington, and the business and certain tobacco assets of Bulgartabac and Fabrika Duhana
Sarajevo impacted the Group’s results in 2017. To supplement BAT’s results presented in accordance with IFRS, the Group’s Management Board,
as the chief operating decision-maker, reviews certain of its results, including volume, revenue, profit from operations and non-GAAP measures
including adjusted revenue and adjusted profit from operations, prior to the impact of acquisitions. Although the Group does not believe that
these measures are a substitute for IFRS measures, the Group does believe that such results excluding the impact of acquisitions provide additional
useful information to investors regarding the underlying performance of the business on a comparable basis. Accordingly, the organic financial
measures appearing in this document should be read in conjunction with the Group’s results as reported under IFRS.
We also present the growth in organic adjusted operating margin in 2017 compared to adjusted operating margin in 2016; 2017 organic
adjusted operating margin represents the ratio of profit from operations before adjusting items and the impact of 2017 acquisitions to revenue
before adjusting items and the impact of 2017 acquisitions. Please see the following reconciliations of revenue to adjusted revenue and profit
from operations to adjusted profit from operations.
Adjusted revenue
Definition – revenue before the impact of adjusting items.
To supplement BAT’s revenue presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-maker, reviews
adjusted revenue to evaluate the underlying business performance of the Group and its geographic segments. The Group’s Management Board
defines adjusted revenue as revenue before the impact of adjusting items, specifically the excise on bought-in goods that the Group will acquire
and sell, for a limited period, will be recorded in accordance with IFRS as a cost of sale and within revenue, with a dilutive effect on operating
margin. Once the short-term arrangements cease, the goods will be manufactured by the Group, and the excise, in accordance with Group
policy, will not be included in cost of sales or revenue – leading to a reduction in revenue and improvement in operating margin that does not
represent the underlying performance of the Group. As such, the excise on bought-in goods meets the Group’s definition of an adjusting item,
as defined in note 1 in the Notes on the Accounts.
The Group’s Management Board also believes that adjusted revenue provides information that enables investors to better compare the Group’s
business performance across periods. Adjusted revenue has limitations as an analytical tool. The most directly comparable IFRS measure to
adjusted revenue is revenue. Adjusted revenue is not a presentation made in accordance with IFRS, and is not a measure of financial condition
or liquidity and should not be considered as an alternative to revenue as determined in accordance with IFRS. Adjusted revenue is not necessarily
comparable to similarly titled measures used by other companies. As a result, you should not consider this performance measure in isolation from,
or as a substitute analysis for, BAT’s results as determined in accordance with IFRS.
The table below reconciles the Group’s revenue to adjusted revenue for the periods presented and to adjusted revenue at constant rates based on
a re-translation of adjusted revenue for each year at the previous year’s exchange rates. Refer to note 2 in the Notes on the Accounts for further
discussion of the segmental results and for the reconciliation of adjusted revenue at current and constant rates of exchange to segmental revenue
and to Group revenue for the years ended 31 December 2019, 2018 and 2017.
Revenue
Less: Excise on goods bought-in on short-term arrangements
Adjusted revenue
Impact of translational foreign exchange
2019 adjusted revenue re-translated at 2018 exchange rates
2018 adjusted revenue re-translated at 2017 exchange rates
2017 adjusted revenue re-translated at 2016 exchange rates
2016 adjusted revenue re-translated at 2015 exchange rates
2015 adjusted revenue re-translated at 2014 exchange rates
Change in adjusted revenue at prior year’s exchange rates (constant rates)
For the year ended 31 December (£m)
2019
2018
2017
2016
2015
25,877
(50)
25,827
(144)
25,683
24,492
(180)
24,312
1,448
25,760
19,564
(258)
19,306
14,130
–
14,130
12,536
–
12,536
(700)
(687)
1,545
18,606
13,443
+5.6% +33.4% +31.7%
+7.2%
14,081
+5.4%
259
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NON‑GAAP MEASURES
CONTINUED
Adjusted revenue by product category – including revenue from New Categories
Definition – revenue by product category, before the impact of adjusting items and at the prior year’s prevailing exchange rate, derived
from the principal product categories of combustibles, New Categories (being comprised of revenue from Vapour, THP and Modern
oral) and Traditional oral.
To supplement BAT’s revenue presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-maker, reviews
adjusted revenue growth from the principal product categories of combustibles, New Categories and Traditional oral to evaluate the underlying
business performance of the Group reflecting the focus of the Group’s investment activity. The Group’s Management Board assesses adjusted
revenue by product category, at constant rates of exchange, as revenue before the impact of adjusting items and translated to the Group’s
reporting currency at the prior period’s prevailing exchange rate, derived from the Group’s combustible portfolio (including but not limited to
Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Camel (US), Newport (US), Natural American Spirit (US)), the Group’s New Category portfolio
(being vapour, THP and Modern oral) and the Group’s Traditional oral portfolio.
The Group’s Management Board also believes that the adjusted revenue performance by product category provides information that
enables investors to better compare the Group’s business performance across periods and by reference to the Group’s investment activity.
Adjusted revenue performance by product category has limitations as an analytical tool. The most directly comparable IFRS measure to adjusted
revenue by product category is revenue. Adjusted revenue by product category is not a presentation made in accordance with IFRS, is not a
measure of financial condition or liquidity and should not be considered as an alternative to revenue as determined in accordance with IFRS.
Adjusted revenue by product category is not necessarily comparable to similarly titled measures used by other companies. As a result, you should
not consider this performance measure in isolation from, or as a substitute analysis for, BAT’s results as determined in accordance with IFRS.
Reconciliation of revenue by product category to adjusted revenue by product category at constant rates of
exchange – 2019‑2018
Reported
£m
vs 2018
%
Adjusting
items
£m
Impact of
exchange
£m
Adjusted at
constant
£m
2019
Adjusted at
constant vs
2018
%
Reported
£m
Adjusting
items
£m
Uplift for
acquisitions
£m
Combustible
Vapour
THP
Modern oral
New Categories
Traditional oral
Other
Revenue
23,001
401
728
126
1,255
1,081
540
25,877
+4.2%
+26.1%
+28.9%
+267%
+36.9%
+15.0%
-4.0%
+5.7%
(50)
–
–
–
–
–
–
(50)
(59)
(9)
(35)
3
(41)
(45)
1
(144)
22,892
392
693
129
1,214
1,036
541
25,683
+4.6% 22,072
318
+23.4%
565
+22.7%
34
+273%
917
+32.4%
941
+10.2%
-3.8%
562
+5.6% 24,492
(180)
–
–
–
–
–
–
(180)
–
–
–
–
–
–
–
–
Reconciliation of revenue by product category to adjusted revenue by product category at constant rates of
exchange – 2018‑2017
2018
Adjusted
£m
21,892
318
565
34
917
941
562
24,312
2017
Reported
£m
18,171
168
202
15
385
415
593
19,564
Adjusting
items
£m
Uplift for
acquisitions
£m
2017 repres
£m
(258)
–
–
–
–
–
–
(258)
4,926
90
1
–
91
488
72
5,577
22,839
258
203
15
476
903
665
24,883
Adjusting
items
£m
Impact of
exchange
£m
Adjusted at
constant
£m
2018
Adjusted at
constant vs
2017 repres
%
(180)
–
–
–
–
–
–
(180)
1,359
7
11
2
20
34
35
1,448
23,251
+1.8%
325
+26.0%
576 +183.7%
36 +140.0%
+96.8%
+7.9%
-10.2%
+3.5%
937
975
597
25,760
Reported
£m
vs 2017
%
22,072
+21.5%
318
565
34
917
941
562
24,492
+89%
+180%
+127%
+138%
+127%
-5.3%
+25.2%
Combustible
Vapour
THP
Modern oral
New Categories
Traditional oral
Other
Revenue
260
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Adjusted revenue growth from the Strategic Portfolio, at constant rates of exchange
Definition – change in revenue before the impact of adjusting items and at the prior year’s prevailing exchange rate, derived from Kent,
Dunhill, Lucky Strike, Pall Mall, Rothmans, Camel (US), Newport (US), Natural American Spirit (US), the Group’s New Category portfolio
and certain brands within Traditional Oral.
To supplement BAT’s revenue presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-maker, reviews
adjusted revenue growth from the Strategic Portfolio to evaluate the underlying business performance of the Group reflecting the focus of the
Group’s investment activity. The Group’s Management Board defines the growth in adjusted revenue from the Strategic Portfolio, at constant
rates of exchange, as revenue before the impact of adjusting items and translated to the Group’s reporting currency at the prior periods prevailing
exchange rate, derived from the Group’s Strategic Combustible portfolio (Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Camel (US), Newport
(US), Natural American Spirit (US)), the Group’s New Category portfolio (being vapour, THP and modern oral) and certain brands within
Traditional Oral.
The Group’s Management Board also believes that the adjusted revenue growth from the Strategic Portfolio at constant rates of exchange
provides information that enables investors to better compare the Group’s business performance across periods and by reference to the Group’s
investment activity. Adjusted revenue growth from the Strategic Portfolio has limitations as an analytical tool. The most directly comparable IFRS
measure to adjusted revenue growth from the Strategic Portfolio is revenue. Adjusted revenue growth from the Strategic Portfolio at constant
rates of exchange is not a presentation made in accordance with IFRS, is not a measure of financial condition or liquidity and should not be
considered as an alternative to revenue as determined in accordance with IFRS. Adjusted revenue growth from the Strategic Portfolio is not
necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider this performance measure in
isolation from, or as a substitute analysis for, BAT’s results as determined in accordance with IFRS.
Reconciliation of revenue to adjusted revenue from the Strategic Portfolio at constant rates of exchange – 2019‑2018
2019
£m
Adjusting
items
£m
Impact of
exchange
£m
Adjusted at
constant
2019
£m
Adjusted at
constant vs
2018
%
2018
£m
Adjusting
items
£m
Adjusted
2018
£m
Strategic Portfolio comprises:
Combustible portfolio
New Categories products
Vapour
THP
Modern oral
New Categories
Traditional oral
Total New Categories and Traditional
Oral
Strategic Portfolio
Other
Revenue
16,515
401
728
126
1,255
1,023
2,278
18,793
7,084
25,877
–
–
–
–
–
–
–
–
(50)
(50)
(200)
16,315
+5.6%
15,457
(9)
(35)
3
(41)
(43)
(84)
(284)
140
(144)
+23.4%
392
+22.7%
693
129 +273.1%
+32.4%
+11.0%
1,214
980
2,194
18,509
7,174
25,683
+21.9%
+7.3%
+1.7%
+5.6%
318
565
34
917
883
1,800
17,257
7,235
24,492
–
–
–
–
–
–
15,457
318
565
34
917
883
–
–
(180)
(180)
1,800
17,257
7,055
24,312
Reconciliation of revenue to adjusted revenue from the Strategic Portfolio at constant rates of exchange – 2018‑2017
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
%
Adjusted
2017
£m
Uplift for
acquisitions
£m
2017 repres
£m
816
16,273
+50.1%
+5.7%
10,842
4,553
15,395
Strategic Portfolio comprises:
Combustible portfolio
New Categories products
Vapour
THP
Modern oral
New Categories
Traditional oral
Total New Categories and Traditional
Oral
Strategic Portfolio
Other
Revenue
15,457
318
565
34
917
883
1,800
17,257
7,235
24,492
–
–
–
–
–
–
7
11
2
20
33
+93.5% +26.0%
325
576 +185.1% +183.7%
36 +140.0% +140.0%
937 +143.4% +96.8%
+9.0%
916 +136.7%
168
202
15
385
387
–
–
(180)
(180)
53
869
579
1,448
1,853 +140.0% +40.8%
+8.5%
+56.1%
-6.6%
-0.8%
+33.4% +3.5%
18,126
7,634
25,760
772
11,614
7,692
19,306
90
1
–
91
453
544
5,097
480
5,577
258
203
15
476
840
1,316
16,711
8,172
24,883
261
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NON‑GAAP MEASURES
CONTINUED
Adjusted profit from operations and adjusted operating margin
Definition – profit from operations before the impact of adjusting items and adjusted profit from operations as a percentage
of adjusted revenue.
To supplement BAT’s results from operations presented in accordance with IFRS, the Group’s Management Board, as the chief operating
decision-maker, reviews adjusted profit from operations to evaluate the underlying business performance of the Group and its geographic
segments, to allocate resources to the overall business and to communicate financial performance to investors. The Group also presents adjusted
operating margin, which is defined as adjusted profit from operations as a percentage of adjusted revenue, as defined previously. Adjusted profit
from operations and adjusted operating margin are not measures defined by IFRS. The most directly comparable IFRS measure to adjusted profit
from operations is profit from operations.
Adjusting items, as identified in accordance with the Group’s accounting policies, represent certain items of income and expense which the
Group considers distinctive based on their size, nature or incidence. In identifying and quantifying adjusting items, the Group consistently
applies a policy that defines criteria that are required to be met for an item to be classified as adjusting and provides details of items that are
specifically excluded from being classified as adjusting items. Adjusting items in profit from operations include restructuring and integration
costs, amortisation of trademarks and similar intangibles, the fair value movement in stock on acquisition, a gain on deemed partial disposal
of a trademark, and certain litigation. The definition of adjusting items is explained in note 1 in the Notes on the Accounts.
The Group’s Management Board believes that these additional measures are useful to investors and are used by the Group’s Management
Board as described above, because they exclude the impact of adjusting items in profit from operations, which have less bearing on the routine
operating activities of the Group, thereby enhancing users’ understanding of underlying business performance. The Group’s Management Board
also believes that adjusted profit from operations provides information that enables investors to better compare the Group’s business performance
across periods. Additionally, the Group’s Management Board believes that similar measures are frequently used by securities analysts, investors
and other interested parties in their evaluation of companies comparable to the Group, many of which present an adjusted operating profit-
related performance measure when reporting their results. Adjusted profit from operations and adjusted operating margin have limitations as
analytical tools. They are not presentations made in accordance with IFRS, are not measures of financial condition or liquidity and should not be
considered as alternatives to profit for the year, profit from operations or operating margin as determined in accordance with IFRS. Adjusted profit
from operations and adjusted operating margin are not necessarily comparable to similarly titled measures used by other companies. As a result,
you should not consider these performance measures in isolation from, or as a substitute analysis for, BAT’s results of operations as determined in
accordance with IFRS.
The table below reconciles the Group’s profit from operations to adjusted profit from operations, and to adjusted profit from operations at
constant rates based on a re-translation of adjusted profit from operations for each year, at the previous year’s exchange rates, and presents
adjusted operating margin for the periods presented. Refer to note 2 in the Notes on the Accounts for further discussion of the segmental results
and for the reconciliation of adjusted profit from operations at current and constant rates of exchange to segmental profit from operations and to
Group profit for the years ended 31 December 2019, 2018 and 2017.
Profit from operations
Add:
Restructuring and integration costs
Amortisation and impairment of trademarks and similar intangibles
Impairment of goodwill
Charge in respect of an excise tax dispute in Russia
Charge in respect of Canada class action
Fair value movement in stock on acquisition
Fixed asset impairment (hyperinflation)
Fox River
Flintkote
Other
Adjusted profit from operations
Operating margin
Adjusted operating margin*
Impact of translational foreign exchange
2019 adjusted profit from operations re-translated at 2018 exchange rates
2018 adjusted profit from operations re-translated at 2017 exchange rates
2017 adjusted profit from operations re-translated at 2016 exchange rates
2016 adjusted profit from operations re-translated at 2015 exchange rates
2015 adjusted profit from operations re-translated at 2014 exchange rates
Change in adjusted profit from operations at prior year’s exchange rates
(constant rates)
* Adjusted profit from operations as a percentage of adjusted revenue.
262
2019
9,016
2018
9,313
565
481
194
202
436
–
–
–
–
236
11,130
34.8%
43.1%
(98)
11,032
363
377
–
–
–
–
110
–
–
184
10,347
38.0%
42.6%
577
10,924
For the year ended 31 December (£m)
2017
6,412
600
383
–
–
–
465
–
–
–
69
7,929
2016
4,655
603
149
–
–
–
–
–
20
–
53
5,480
2015
4,557
367
65
–
–
–
–
–
–
3
–
4,992
32.8%
41.1%
32.9%
38.8%
(324)
(283)
36.4%
39.8%
628
7,605
5,197
5,620
+6.6% +37.8% +38.8%
+4.1%
+4.0%
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Adjusted share of post‑tax results of associates and joint ventures
Definition – share of post-tax results of associates and joint ventures before the impact of adjusting items.
To supplement BAT’s performance presented in accordance with IFRS, the Group’s share of post-tax results of associates and joint ventures is also
presented before adjusting items (as defined in note 1 in the Notes on the Accounts). The Group’s Management Board believes that adjusted
share of post-tax results of associates and joint ventures provides information that enables investors to better compare the Group’s business
performance across periods. The Group’s Management Board uses adjusted share of post-tax results from associates and joint ventures as part
of the total assessment of the underlying performance of all the Group’s business interests. Adjusted share of post-tax results of associates and
joint ventures has limitations as an analytical tool. It is not a presentation made in accordance with IFRS, is not a measure of financial condition or
liquidity, and should not be considered as an alternative to the Group’s share of post-tax results of associates and joint ventures as determined in
accordance with IFRS. Adjusted share of post-tax results of associates and joint ventures is not necessarily comparable to similarly titled measures
used by other companies. As a result, you should not consider this performance measure in isolation from, or as a substitute analysis for, BAT’s
results of operations as determined in accordance with IFRS.
The most directly comparable IFRS measure to adjusted share of post-tax results of associates and joint ventures is share of post-tax results
of associates and joint ventures.
Group’s share of post tax results of associates and joint ventures
Issue of shares and changes in shareholding
Gain on deemed divestment of RAI
Gain on disposal of assets
Other
Adjusted Group’s share of post tax results of associates and joint ventures
For the year ended 31 December (£m)
2019
2018
2017
498
(25)
–
–
–
473
419
(22)
–
–
(10)
387
24,209
(29)
(23,288)
–
120
1,012
2016
2,227
(11)
–
(941)
52
1,327
2015
1,236
(22)
–
(371)
100
943
Underlying tax rate
Definition – Tax rate incurred before the impact of adjusting items and to adjust for the inclusion of the Group’s share of post-tax results
of associates and joint ventures within the Group’s pre-tax results.
BAT management monitors the Group’s underlying tax rate to assess the tax rate applicable to the Group’s underlying operations, excluding the
Group’s share of post-tax results of associates and joint ventures in BAT’s pre-tax results and adjusting items (as defined in note 1 in the Notes on
the Accounts). Underlying tax rate is not a measure defined by IFRS. The table below provides the calculation of the Group’s effective tax rate
as determined in accordance with IFRS with underlying tax rate for the periods presented. The Group’s Management Board believes that this
additional measure is useful to investors, and is used by BAT management as described above, because it excludes the contribution from the
Group’s associates, recognised after tax but within the Group’s pre-tax profits, and adjusting items, thereby enhancing users’ understanding of
underlying business performance.
Underlying tax rate has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be considered as
an alternative to the effective tax rate as determined in accordance with IFRS. Underlying tax rate is not necessarily comparable to similarly titled
measures used by other companies. As a result, you should not consider this measure in isolation from, or as a substitute analysis for, the Group’s
effective tax rate as determined in accordance with IFRS. The table below provides the calculation of the Group’s underlying tax rate for the
periods presented.
For the year ended 31 December (£m)
2017
2016
2015
Profit before taxation
Less: Share of post-tax results of associates and joint ventures
Adjusting items within profit from operations
Adjusting items within finance costs/(income)
Adjusted profit before taxation, excluding associates and joint ventures
Taxation on ordinary activities
Adjusting items in taxation
Taxation on adjusting items
Adjusted taxation
Effective tax rate
Underlying tax rate
2019
7,912
(498)
2,114
80
9,608
(2,063)
(65)
(373)
(2,501)
26.1%
26.0%
2018
8,351
(419)
1,034
(4)
8,962
(2,141)
(24)
(199)
(2,364)
29,527
(24,209)
1,517
205
7,040
8,129
(9,766)
(454)
(2,091)
6,245
(2,227)
825
108
4,951
(1,406)
61
(128)
(1,473)
25.6% (27.5%)
29.7%
26.4%
22.5%
29.8%
5,855
(1,236)
435
(489)
4,565
(1,333)
22
(80)
(1,391)
22.8%
30.5%
263
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NON‑GAAP MEASURES
CONTINUED
Adjusted diluted earnings per share
Definition – diluted earnings per share before the impact of adjusting items.
BAT management monitors adjusted diluted earnings per share, a measure which removes the impact of adjusting items, (as defined in note 1
in the Notes on the Accounts), from diluted earnings per share. Adjusted diluted earnings per share is used by management within the Group’s
incentive schemes, as reported within the Remuneration Report beginning on page 90 and reported in note 7 in the Notes on the Accounts.
The Group’s Management Board believes that this additional measure is useful to investors, and is used by BAT management as described above,
as an indicator of diluted earnings per share before adjusting items. Adjusted diluted earnings per share has limitations as an analytical tool and
should not be used in isolation from, or as a substitute for, diluted earnings per share as determined in accordance with IFRS. The most directly
comparable IFRS measure to adjusted diluted earnings per share is diluted earnings per share and a reconciliation is provided in note 7 in the
Notes on the Accounts. The definition of adjusting items is provided in note 1 in the Notes on the Accounts.
Operating cash flow conversion ratio
Definition – net cash generated from operating activities before the impact of adjusting items and dividends from associates and
excluding trading loans to third parties, pension short fall funding, taxes paid and net capital expenditure, as a proportion of adjusted
profit from operations.
@ Operating cash flow conversion ratio is a measure of operating cash flow which is used within the Group’s incentive schemes as reported within
the Remuneration Report beginning on page 90. Operating cash flow conversion ratio has limitations as an analytical tool. It is not a presentation
made in accordance with IFRS and should not be considered as an alternative to measures of liquidity or financial position as determined in
accordance with IFRS. Operating cash flow conversion ratio is not necessarily comparable to similarly titled measures used by other companies.
As a result, you should not consider this measure in isolation from, or as a substitute analysis for, the Group’s results of operations or cash flows as
determined in accordance with IFRS. The table below shows the computation of operating cash flow conversion ratio for the periods presented.
Net cash generated from operating activities
Cash related to adjusting items, including FII GLO
Dividends from associates
Tax paid
Net capital expenditure
Pension fund shortfall funding
Trading loans to third parties
Other
Operating cash flow
Exclude operating cash flow from RAI post acquisition (2017 only)
Operating cash flow ex RAI (for LTIP incentive scheme – 2017 only)
Adjusted profit from operations
Exclude adjusted profit from operations from RAI post acquisition
Adjusted profit from operations ex RAI (for LTIP incentive scheme – 2017 only)
Operating cash flow conversion ratio
Operating cash flow conversion ratio – for LTIP
Cash conversion ratio*
* Net cash generated from operating activities as a percentage of profit from operations.
For the year ended 31 December (£m)
2019
2018
8,996
564
(252)
2,204
(774)
–
4
–
10,742
–
10,742
11,130
–
11,130
97%
97%
100%
10,295
601
(214)
1,891
(845)
75
(93)
2
11,712
–
11,712
10,347
–
10,347
113%
113%
111%
2017
5,347
685
(903)
1,675
(767)
156
101
(9)
6,285
(628)
5,657
7,929
(1,928)
6,001
79%
94%
83%
2016
4,610
711
(962)
1,245
(559)
78
–
(1)
5,122
–
5,122
5,480
–
5,480
93%
93%
99%
2015
4,720
(483)
(593)
1,273
(483)
148
–
1
4,583
–
4,583
4,992
–
4,992
92%
92%
104%
In 2017, the Group brought forward the MSA payment (£1,397 million) which impacted operating cash conversion in that year.@ To provide a
view of the operating cash conversion, without such a distortion, the Group has provided the below computation for the periods presented.
Operating cash flow
Normalisation of MSA payment
Operating cash flow (normalised for MSA timing)
Adjusted profit from operations
Operating cash flow conversion (normalised for MSA timing)
For the year ended 31 December (£m)
2019
2018
10,742
–
10,742
11,130
97%
11,712
(1,397)
10,315
10,347
100%
2017
6,285
1,397
7,682
7,929
97%
2016
5,122
–
5,122
5,480
93%
2015
4,583
–
4,583
4,992
92%
@ denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
264
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Adjusted cash generated from operations (adjusted CGFO)
Definition – net cash generated from operating activities before the impact of adjusting items (including FII GLO) and trading loans
provided to a third party, excluding dividends received from associates, and after dividends paid to non-controlling interests, net interest
paid and net capital expenditure.
@ To supplement the Group’s presentation of net cash generated from operating activities, BAT also presents adjusted cash generated from
operations. Adjusted cash generated from operations is a measure of cash flow which is used by management to monitor the Group’s financial
position and is used within the Group’s incentive schemes as reported within the Remuneration Report beginning on page 90. The most directly
comparable IFRS measure to adjusted cash generated from operations is net cash generated from operating activities.
The Group’s Management Board believes that this additional measure is useful to investors and is used by BAT management as described above,
because it excludes the impact of adjusting items on cash, includes the impact of capital expenditure given this is a core component of the
underlying performance of the Group and excludes the impact of financing or dividends received from associates which do not form part of
the underlying performance of the Group’s day-to-day operations. This measure is presented as it enhances users’ understanding of underlying
business performance. The definition of adjusting items is provided in note 1 in the Notes on the Accounts.
Adjusted cash generated from operations is not a measure defined by IFRS and has limitations as an analytical tool. It is not necessarily
comparable to similarly titled measures used by other companies. As a result, you should not consider this measure in isolation from, or as a
substitute analysis for, the Group’s liquidity or measures of financial position as determined in accordance with IFRS. The table below shows the
reconciliation from net cash generated from operating activities to adjusted cash generated from operations for the periods presented.
Net cash generated from operating activities
Net cash impact from adjusting items
Dividends paid to non-controlling interests
Net interest paid
Net capital expenditure
Dividends from associates
Trading loans to third parties
FII GLO
Other
Adjusted cash generated from operations
Impact of translational foreign exchange
2019 adjusted CGFO re-translated at 2018 exchange rates
2018 adjusted CGFO re-translated at 2017 exchange rates
2017 adjusted CGFO re-translated at 2016 exchange rates
2016 adjusted CGFO re-translated at 2015 exchange rates
2015 adjusted CGFO re-translated at 2014 exchange rates
Change in adjusted CGFO at prior year’s exchange rates (constant rates)
For the year ended 31 December (£m)
2019
2018
2017
8,996
564
(157)
(1,550)
(774)
(252)
4
–
–
6,831
(78)
6,753
10,295
601
(142)
(1,533)
(845)
(214)
(93)
–
2
8,071
405
8,476
5,347
685
(167)
(1,004)
(767)
(903)
101
–
(10)
3,282
(157)
3,125
2016
4,610
711
(147)
(537)
(559)
(962)
–
–
(1)
3,115
(197)
2,918
-16.3% +158%
+0.3% +21.3%
2015*
4,720
480
(235)
(522)
(483)
(593)
–
(963)
1
2,405
288
2,693
+1.2%
* For comparison purposes, the receipt, in 2015, of £963 million in relation to the Franked Investment Income Group Litigation Order (FII GLO) has been excluded from adjusted cash generated from
operations in that year. This is in line with the treatment in that year, for remuneration purposes as the receipt did not reflect the adjusted cash generated from operations in that year.
@ denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
265
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NON‑GAAP MEASURES
CONTINUED
@Free cash flow – before and after dividends paid to shareholders
Definition – net cash generated from operating activities before the impact of trading loans provided to a third party and after dividends
paid to non-controlling interests, net interest paid and net capital expenditure. This measure is presented before and after dividends
paid to shareholders.
To supplement BAT’s net cash generated from operating activities as presented in accordance with IFRS, the Group’s Management Board, as the
chief operating decision-maker, reviews free cash flow (before and after dividends paid to shareholders) generated by the Group to evaluate the
underlying business performance of the Group and its geographic segments. This is deemed by the Group Management Board to reflect the
Group’s ability to pay dividends (free cash flow before dividends paid to shareholders) or invest in other investing activities (free cash flow after
dividends paid to shareholders).
Free cash flow (before dividends paid to shareholders) and free cash flow (after dividends paid to shareholders) are not measures defined by
IFRS. The most directly comparable IFRS measure to free cash flow (before and after dividends paid to shareholders) is net cash generated from
operating activities. The Group’s Management Board believes that this additional measure is useful to the users of the financial statements in
helping them to see the level of cash generated by the Group prior to the payment of dividends or debt and prior to other investing activities.
Free cash flow (before and after dividends paid to shareholders) has limitations as an analytical tool. They are not a presentation made in
accordance with IFRS and should not be considered as an alternative to net cash generated from operating activities as determined in accordance
with IFRS. Free cash flow (before and after dividends paid to shareholders) are not necessarily comparable to similarly titled measures used by
other companies. As a result, you should not consider this measure in isolation from, or as a substitute analysis for, the Group’s measures of
financial position or liquidity as determined in accordance with IFRS. The table below shows the reconciliation from net cash generated from
operating activities to free cash flow (before and after dividends paid to shareholders) for the periods presented.
Net cash generated from operating activities
Dividends paid to non-controlling interests
Net interest paid
Net capital expenditure
Proceeds from associates’ share buy-backs
Trading loans to third parties
Other
Free cash flow (before dividends paid to shareholders)
Dividends paid to shareholders
Free cash flow (after dividends paid to shareholders)
For the year ended 31 December (£m)
2019
2018
2017
8,996
(157)
(1,550)
(774)
–
4
–
6,519
(4,598)
1,921
10,295
(142)
(1,533)
(845)
–
(93)
2
7,684
(4,347)
3,337
5,347
(167)
(1,004)
(767)
–
101
(10)
3,500
(3,465)
35
2016
4,610
(147)
(537)
(559)
23
–
(1)
3,389
2015
4,720
(235)
(522)
(483)
–
–
1
3,481
(2,910)
479
(2,770)
711
Net debt
Definition – total borrowings, including related derivatives, less cash and cash equivalents and current investments held at fair value.
The Group uses net debt to assess its financial capacity. Net debt is not a measure defined by IFRS. The most directly comparable IFRS measure to
net debt is total borrowings. The Group’s Management Board believes that this additional measure, which is used internally to assess the Group’s
financial capacity, is useful to the users of the financial statements in helping them to see how business financing has changed over the year.
Net debt has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be considered as an alternative
to total borrowings or total liabilities determined in accordance with IFRS. Net debt is not necessarily comparable to similarly titled measures
used by other companies. As a result, you should not consider this measure in isolation from, or as a substitute analysis for, the Group’s measures
of financial position or liquidity as determined in accordance with IFRS. A reconciliation of borrowings to net debt is provided in note 19 in the
Notes on the Accounts.
@The table below reconciles the movement in net debt during each financial year:
Opening net debt
Free cash flow (before dividends paid to shareholders)
Other cash items, including dividends paid to owners of the parent
Acquired net debt
Other non-cash movements
Adoption of IFRS 16
Impact of foreign exchange
Closing net debt
For the year ended 31 December (£m)
2019
2018
2017
2016
2015
(44,351)
6,519
(4,910)
–
(98)
(607)
873
(42,574)
(45,571)
7,684
(4,688)
1
186
–
(1,963)
(44,351)
(16,767)
3,500
(23,263)
(9,915)
(394)
–
1,268
(45,571)
(14,794)
3,389
(3,552)
–
(126)
–
(1,684)
(16,767)
(10,165)
3,481
(8,014)
–
16
–
(112)
(14,794)
@ denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
266
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Adjusted net debt to adjusted earnings before interest, tax, depreciation and amortisation
(adjusted EBITDA)
Definition – net debt excluding the impact of the revaluation of RAI acquired debt arising as part of the purchase price allocation
process adjusted net debt), as a proportion of profit for the year (earnings) before net finance costs/income, taxation on ordinary
activities, depreciation, amortisation, impairment costs, the Group’s share of post-tax results of associates and joint ventures,
and other adjusting items.
To supplement BAT’s total borrowings as presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-
maker, reviews adjusted net debt to adjusted EBITDA to assess its level of net debt (excluding the impact of the purchase price allocation
adjustment to RAI acquired debt) in comparison to the underlying earnings generated by the Group to evaluate the underlying business
performance of the Group and its geographic segments. This is deemed by the Group’s Management Board to reflect the Group’s ability to
service and repay borrowings.
For the purposes of this ratio, adjusted net debt is net debt, as discussed and reconciled on page 266, adjusted for the uplift arising on the RAI
debt as part of the purchase price allocation, as such an uplift in value is not reflective of the repayment value of the debt.
Adjusted EBITDA is not a measure defined by IFRS. The most directly comparable IFRS measure to adjusted EBITDA is profit for the year.
The Group’s Management Board believes that this additional measure, which is used internally to assess the Group’s financial capacity, is useful
to the users of the financial statements in helping them to see how the Group’s financial capacity has changed over the year. Adjusted EBITDA
has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be considered as an alternative to profit
from operations as determined in accordance with IFRS.
Adjusted net debt to adjusted EBITDA is not necessarily comparable to similarly titled measures used by other companies. As a result, you should
not consider this measure in isolation from, or as a substitute analysis for, the Group’s measures of financial position or liquidity as determined in
accordance with IFRS. The table below reconciles both total borrowings to adjusted net debt and profit for the year to adjusted EBITDA for the
periods presented.
Total borrowings
Derivatives in respect of net debt:
– Assets
– Liabilities
Cash and cash equivalents
Current investments held at fair value
Purchase price allocation adjustment to RAI debt
Adjusted net debt
Profit for the year
Taxation on ordinary activities
Net finance costs/(income)
Depreciation, amortisation and impairment costs
Share of post-tax results of associates and joint ventures
Other adjusting items (not related to depreciation, amortisation and impairment costs)
Adjusted EBITDA
Adjusted net debt to adjusted EBITDA
Impact of translational foreign exchange on adjusted net debt
Adjusted net debt at constant rates of exchange
Impact of translational foreign exchange on adjusted EBITDA
Adjusted EBITDA at constant rates of exchange
Adjusted net debt to adjusted EBITDA at constant rates of exchange
As of the year ended 31 December (£m)
2019
2018
2017
2016
2015
45,366
47,509
49,450
19,495
17,001
(640)
117
(3,291)
(65)
(947)
44,624
37,656
(8,129)
1,094
902
(24,209)
1,049
8,363
5.3x
(809)
300
(2,204)
(15)
–
16,767
4,839
1,406
637
607
(2,227)
612
5,874
2.9x
(373)
164
(1,963)
(35)
–
14,794
4,522
1,333
(62)
428
(1,236)
344
5,329
2.8x
(527)
384
(2,526)
(123)
(848)
41,726
5,849
2,063
1,602
1,512
(498)
1,376
11,904
3.5x
854
42,580
(102)
11,802
3.6x
(647)
269
(2,602)
(178)
(944)
43,407
6,210
2,141
1,381
1,038
(419)
499
10,850
4.0x
(1,694)
41,713
590
11,440
3.6x
267
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 NON‑GAAP MEASURES
CONTINUED
@Adjusted Return on Capital Employed
Definition – Profit from operations, excluding adjusting items and including dividends from associates and joint ventures, as a
proportion of average total assets less current liabilities in the period.
The Group provides adjusted return on capital employed (adjusted ROCE) to provide users of the financial statements with an indication of the
financial return (by reference to the financial performance in a given period), with the assets less current liabilities (defined as Capital Employed)
in the period.
Adjusted ROCE is not a measure defined by IFRS. The most directly comparable IFRS measure to adjusted ROCE is profit from operations as a
proportion of total assets less current liabilities. The Group’s Management Board believes that this additional measure is useful to the users of
the financial statements in helping them to see how the Group’s capital employed has generated a return in any given period, by reference to
Group’s performance as reported via the income statement. Adjusted ROCE has limitations as an analytical tool. It is not a presentation made
in accordance with IFRS and should not be considered as an alternative to other measures that may be derived from the financial statements
prepared in accordance with IFRS.
Adjusted ROCE is not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider this
measure in isolation from, or as a substitute analysis for, the Group’s measures of financial performance or return as determined in accordance
with IFRS. The table below reconciles profit from operations to adjusted profit from operations including dividends from associated and joint
ventures and provides the constituent parts of average capital employed.
Profit from operations
Adjusting items
Dividends received from associates and joint ventures
As of the year ended 31 December (£m)
2019
9,016
2,114
2018
9,313
1,034
2017
6,412
1,517
2016
4,655
825
2015
4,557
435
252
214
903
962
593
Adjusted profit from operations, inclusive of dividends from associates and
joint ventures
11,382
10,561
8,832
6,442
5,585
Total Assets
Current Liabilities
Capital employed at balance sheet date
Average capital
Adjusted ROCE
141,005
18,823
122,182
126,099
9.0%
146,342
16,329
130,013
127,731
8.3%
141,054
15,605
125,449
76,683
11.5%
31,515
39,773
9,006
11,856
22,509
27,917
25,213
19,954
25.6% 28.0%@
Results on a constant translational currency basis
Movements in foreign exchange rates have impacted the Group’s financial results. The Group’s Management Board reviews certain of its results,
including adjusted revenue, adjusted revenue growth from New Categories, adjusted revenue growth from the strategic portfolio, adjusted profit
from operations, adjusted diluted earnings per share and @adjusted cash generated from operations@, at constant rates of exchange. The Group
calculates these financial measures at constant rates of exchange based on a re-translation, at prior year exchange rates, of the current year’s
results of the Group and, where applicable, its geographic segments. The Group does not adjust for the normal transactional gains and losses in
profit from operations that are generated by exchange movements. Although the Group does not believe that these measures are a substitute for
IFRS measures, the Group’s Management Board does believe that such results excluding the impact of currency fluctuations year-on-year provide
additional useful information to investors regarding the Group’s operating performance on a local currency basis. Accordingly, the constant
rates of exchange financial measures appearing in the discussion of the Group results of operations (beginning on page 43) should be read in
conjunction with the information provided in note 2 in the Notes on the Accounts.
In 2019, 2018 and 2017, results were affected by translational exchange rate movements. In 2019, at the prevailing exchange rates, adjusted
revenue increased by 6.2%, adjusted profit from operations increased by 7.6%@ and adjusted cash generated from operations decreased by
15.4%@ versus 2018. At constant rates of exchange, adjusted revenue would have increased by 5.6%, adjusted profit from operations would have
increased by 6.6%@ and adjusted cash generated from operations would have declined by 16.3%@. These higher rates at prevailing exchange
rates reflects the translational benefit as a result of the relative weakness of the pound sterling. In 2018, at the prevailing exchange rates, adjusted
revenue increased by 25.9%, adjusted revenue growth from the strategic portfolio increased by 48.6%, adjusted profit from operations increased
by 30.5%@ and adjusted cash generated from operations increased by 146%@ versus 2017. At constant rates of exchange, adjusted revenue
would have increased by 33.4%, adjusted revenue growth from the strategic portfolio would have increased by 56.1%, adjusted profit from
operations would have increased by 37.8% and @adjusted cash generated from operations would have increased by 158%@. This lower growth
rate at prevailing exchange rates reflects the negative translational impact as a result on the relative strengthening of the pound sterling.
In 2019, 2018 and 2017, adjusted diluted earnings per share was affected by translational exchange rate movements. In 2019, the adjusted
diluted earnings per share of 323.8p, an increase of 9.1%, would, when translated at 2018 exchange rates, have been 321.6p, an increase of
8.4%. This higher growth rate, in 2019, at prevailing exchange rates, reflects the translational benefit as a result of the relative weakness of the
pound sterling. In 2018, the adjusted diluted earnings per share of 296.7p, an increase of 5.2%, would, when translated at 2017 exchange rates,
have been 315.5p, an increase of 11.8%. This lower growth rate, in 2018, at prevailing exchange rates, reflects the negative translational impact
as a result of the relative strength of the pound sterling.
268
Additional DisclosuresBAT Annual Report and Form 20-F 2019 ADDITIONAL DISCLOSURES ON
LIQUIDITY AND CAPITAL RESOURCES
The Group’s cash inflows derive principally from its operating activities. They are supplemented when required by cash flows from financing
activities, typically to support acquisitions. The principal sources of liquidity for the Group are cash flows generated from the operating business
and proceeds from issuances of debt securities described below under ‘capital resources’.
The Board reviews and agrees the overall treasury policies and procedures, delegating appropriate oversight to the Finance Director and the
treasury function. The treasury policies include a set of financing principles and key performance indicators. The Group’s treasury position is
monitored by a Corporate Finance Committee chaired by the Finance Director. Treasury operations are subject to periodic independent reviews
and audits, both internal and external.
In 2019, 2018 and 2017, all contractual borrowing covenants were met and none are expected to inhibit the Group’s operations or
funding plans.
Capital expenditure
Gross capital expenditures include purchases of property, plant and equipment and purchases of certain intangibles. The Group’s gross capital
expenditures for 2019, 2018 and 2017 were £807 million, £883 million and £862 million, respectively, representing investment in the Group’s
global operational infrastructure (including, but not limited to, the manufacturing network, trade marketing and IT systems). The Group expects
gross capital expenditures in 2020 of approximately £650 million, representing the ongoing investment in the Group’s operational infrastructure,
including the continued investment into New Categories. This is expected to be funded by the Group’s cash flows and existing facilities.
Hedging instruments
As discussed in note 22 in the Notes on the Accounts, the Group hedges its exposure to interest rate movements and currency movements. BAT’s
cash flow hedges are principally in respect of sales or purchases of inventory and certain debt instruments. A certain number of forward foreign
currency contracts were used to manage the currency profile of external borrowings. Interest rate swaps have been used to manage the interest
rate profile of external borrowings, while cross-currency swaps have been used to manage the currency profile of external borrowings.
Capital resources
Policy
The Group utilises cash pooling and zero balancing bank account structures in addition to intercompany loans and borrowings to ensure that
there is the maximum mobilisation of cash within the Group. The key objectives of treasury in respect of cash and cash equivalents are to
protect the principal value of the Group’s cash and cash equivalents, to concentrate cash at the centre to minimise the required long-term debt
issuance and to optimise the yield earned. The amount of debt the Group issues is determined by forecasting the net debt requirement after the
mobilisation of cash.
Subsidiary companies are funded by share capital and retained earnings, loans from the central finance companies on commercial terms
or through local borrowings by the subsidiaries in appropriate currencies. All contractual borrowing covenants have been met and none
are expected to inhibit the Group’s operations or funding plans.
Borrowings
The following table sets out the Group’s long- and short-term borrowings as of the dates indicated:
Currency
Euro
Euro
UK pound sterling
US dollar
Swiss franc
Maturity dates
2020 to 2045
2021
2021 to 2055
2019
2021 to 2026
Interest rates at 31 December 2019
0.9% to 4.9%
3m EURIBOR +50bps
1.8% to 7.3%
1.6%
0.6% to 1.4%
US dollar
US dollar
2020 to 2049
2020 to 2022
2.8% to 8.1%
USD 3m LIBOR +59bps to 88bps
Eurobonds3
Bonds issued pursuant to
Rules under the US
Securities Act (as
amended)3
Commercial Paper2,3
Other loans
Bank loans
Bank overdrafts
Finance leases
Total
As of 31 December (£m)1
2018
8,717
986
4,671
512
523
25,428
1,381
536
3,859
608
274
14
47,509
2017
8,585
1,326
4,680
482
498
25,545
1,665
1,200
4,466
512
469
22
49,450
2019
7,591
931
4,161
–
510
23,805
1,325
1,056
4,624
293
491
579
45,366
Notes:
1. The financial data above has been extracted from the Group’s consolidated financial statements.
2. The interest on the commercial paper referred to in the table above is based on US$ LIBOR plus a margin ranging between 22 and 63 basis points (2018: between 22 and 65 basis points, 2017: between
19 and 38 basis points) and EURIBOR plus a margin ranging between 10 and 24 basis point (2018: ranging between 8 and 15 basis points, 2017: ranging between 10 and 24 basis points)
3. The issuers of these debt securities are B.A.T. International Finance p.l.c., B.A.T Capital Corporation, Reynolds American Inc., or R.J. Reynolds Tobacco Company, as applicable. British American Tobacco
p.l.c. is the ultimate guarantor in each case.
269
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019
ADDITIONAL DISCLOSURES ON LIQUIDITY AND CAPITAL RESOURCES
CONTINUED
Off‑balance sheet arrangements and contractual obligations
Except for operating leases, the Group has no significant off-balance sheet arrangements. The Group has contractual obligations to make future
payments on debt agreements. In the normal course of business, the Group enters into contractual arrangements where the Group commits to
future purchases of services from unaffiliated parties and related parties.
The Group’s undiscounted contractual obligations as of 31 December 2019 were as follows:
Long-term notes and other borrowings, exclusive of interest1
Interest payments related to long-term notes1
Lease liabilities
Purchase obligations2
Total cash obligations
Notes:
1. For more information about the Group’s long-term debt, see note 19 in the Notes on the Accounts.
Payments due by period (£m)
Total
44,313
474
579
995
46,361
Less than
1 Year
6,934
474
154
928
8,490
1–3 Years
3–5 Years
Thereafter
9,727
–
212
49
9,988
5,571
–
107
18
5,696
22,081
–
106
–
22,187
2. Purchase obligations primarily include commitments to acquire tobacco leaf. Purchase orders for the purchase of other raw materials and other goods and services are not included in the table, as the
Group’s operating subsidiaries are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders typically represent authorisations to
purchase rather than binding agreements.
The table above does not include any amounts that the Group may pay to fund its retirement benefit plans as the timing and amount of any
such future funding are unknown and dependent on, among other things, the future performance of defined benefit pension plan assets, interest
rate assumptions and other factors. The net retirement benefit scheme liabilities totalled £1,029 million as of 31 December 2019, which is net of
pension assets of £11,860 million. The Group expects to be required to contribute £80 million to its defined benefit plans during 2020. See note
11 in the Notes on the Accounts for further information.
US$ exchange rate
The following table sets forth the high and low noon buying rates of each month of the last six months, as certified for customs purposes by the
Federal Reserve Bank of New York, for the pound sterling expressed in US dollars per pound sterling.
September 2019
October 2019
November 2019
December 2019
January 2020
February 2020
High
Low
1.2493
1.2983
1.2965
1.3349
1.3195
1.3051
1.2086
1.2206
1.2790
1.2917
1.2983
1.2778
The following table sets forth for each year the average of the noon buying rates on the last business day of each month of that year, as certified
for customs purposes by the Federal Reserve Bank of New York, for the pound sterling expressed in US dollars per pound sterling for each of the
five most recent fiscal years.
Year ended 31 December 2015
Year ended 31 December 2016
Year ended 31 December 2017
Year ended 31 December 2018
Year ended 31 December 2019
Average
1.5250
1.3444
1.3016
1.3309
1.2803
On 13 March 2020, the latest practicable date prior to this filing, the noon buying rate was £1.00 = US$1.2406.
The rates presented above may differ from the actual rates used in preparation of financial information appearing in this Annual Report and Form
20-F. The presentation of such rates is not meant to suggest that the US dollar amounts actually represent the pound sterling amounts or that
such amounts could have been converted to US dollars at any particular rate.
270
Additional DisclosuresBAT Annual Report and Form 20-F 2019 EMPLOYEES
As at 31 December 2019, the number of persons permanently employed by the Group was 59,989 worldwide. The Group believes that its labour
relations are good.
Certain temporary employees are included in the below figures. The number of such temporary employees is approximately 3,300 in 2019 and
largely relates to seasonal workers within operations.
The following table sets forth the number of Group employees by region in 2019, 2018 and 2017.
Region (number of employees worldwide)
US
APME
AmSSA
ENA1
Total employees
As of 31 December
2019
2018
2017
5,020
13,465
16,862
24,642
59,989
5,019
15,077
17,372
26,409
63,877
5,201
14,730
17,962
24,377
62,270
Notes:
1. Included within the employee numbers for ENA are certain employees in different locations in respect of central functions. Some of the costs of these employees are allocated or charged to the various
regions and markets in the Group.
271
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 GROUP RISK
FACTORS
Business execution and supply chain risks
Risk: Competition from illicit trade.
Description
Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products and locally manufactured products on
which applicable taxes are evaded represent a significant and growing threat to the legitimate tobacco industry. Factors such as increasing levels
of taxation, price increases, economic downturn, lack of law enforcement, appropriate penalties and weak border control are encouraging more
adult tobacco consumers to switch to illegal cheaper tobacco products and are providing greater rewards for counterfeiters and smugglers.
Regulatory restrictions such as plain packaging or graphic health warnings, display bans, taste or ingredient restrictions and increased
compliance costs further disadvantage legitimate industry participants by providing competitive advantages to illicit manufacturers and
distributors of illicit tobacco products.
Impact
Illicit trade can have an adverse effect on the Group’s overall sales volume and may restrict the ability to increase selling prices. Illicit trade can
also damage brand equity and reputation, which could undermine the Group’s investment in Trade Marketing and Distribution. These factors in
turn could reduce profits and have an adverse effect on the Group’s results of operations and financial conditions.
Risk: Geopolitical tensions that have the potential to disrupt the Group’s business in multiple markets.
Description
The Group’s operations and financial condition are influenced by the economic and political situations in the markets and regions in which
it has operations, which are often unpredictable and outside of its control. Some markets in which the Group operates face the threat of civil
unrest and can be subject to frequent changes in regime. In others, there is a risk of terrorism, conflict, global health crisis, war, organised crime
or other criminal activity. The Group is also exposed to economic policy changes in jurisdictions in which it operates. In addition, some markets
maintain trade barriers or adopt policies that favour domestic producers, preventing or restricting the Group’s sales.
Impact
Deterioration of socio-economic or political conditions could potentially lead to loss of life or loss of assets that limit or eliminate the Group’s
access to particular markets or may disrupt the Group’s operations, such as its supply chain, or manufacturing or distribution capabilities.
Such disruption may result in increased costs due to the need for more complex supply chain arrangements, to build new facilities or to
maintain inefficient facilities, or in a reduction of the Group’s sales volume.
Risk: Disruption to the Group’s data and information technology systems, including by cyber attack or the malicious
manipulation or disclosure of confidential or sensitive information.
Description
The Group increasingly relies on data and information technology systems for its daily business operations, internal communications, controls,
reporting and relations with customers and suppliers. Some of these systems are managed by third-party service providers. A significant
disruption of the Group’s systems, including those managed by third-party service providers, due to computer viruses, cyber threats, malicious
intrusions or unintended or malicious behaviour by employees, contractors or services providers could affect the Group’s communications
and operations. Computer viruses and cyber attacks are becoming more sophisticated and coordinated. In addition, such disruption may
compromise the integrity of information and result in the inappropriate disclosure of confidential information, or may lead to false or misleading
statements being made about the Group.
Impact
Any disruption to technology systems related to the Group’s operations could adversely affect its business and result in financial and reputational
losses. Any delays or failure to rapidly detect or respond to attempts to gain unauthorised access to the Group’s information technology systems
through a cyber attack can lead to a loss of access to systems or information being corrupted or lost, resulting in significantly increased costs for
remediation and reputational consequences. Any delay in response will also impact the outcome.
Security breaches and the loss of data or operational capacity may disrupt relationships throughout the supply chain, expose the Group or our
consumers to a risk of loss or misuse of information, which could further expose the Group to liability, impact the Group’s reputation and lead
to increased costs.
The disclosure of trade secrets or other commercially sensitive information may provide competitors with a competitive advantage resulting
in competitive or operational damage to the Group. The disclosure of confidential and sensitive information about the Group’s employees,
customers, consumers, suppliers or other third parties could compromise data privacy and expose the Group to liability.
Failure to effectively prevent or respond to a major breach or cyber attack may also subject the Group to significant reputational damage.
272
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Risk: Failure to meet current or future New Categories demand
Description
The New Categories supply chain is a multi-tiered and complex environment with reliance on multiple factors, such as third-party suppliers’
ability to upscale production in order to meet demand while maintaining product quality, dependency on single suppliers at various points in
the chain and the Group’s ability to build adequate consumables production capacity in line with product demand. The geographical spread of
suppliers and customers exposes the Group to political and economic conflicts such as Brexit and trade wars which may compromise the New
Categories supply chain. Given the developing nature of the New Categories portfolio, there is also an enhanced risk that some products may
not meet product quality and safety standards or may be subject to regulatory changes, leading to product recalls, which we have experienced
in the past, or bans of certain ingredients or products. In addition, the New Categories supply chain may be vulnerable to changes in local
legislation related to liquid nicotine that could increase import duties. Furthermore, the New Categories supply chain includes the development
of sensitive trade secrets jointly with external design partners, which carries the risk of exposure of innovations to competitors.
Impact
Vulnerabilities in the New Categories supply chain may impact the Group’s ability to maintain supply and meet the current and future
demand requirements across the New Categories portfolio, potentially resulting in significant reputational harm and financial impact that may
negatively affect the Group’s results of operations and financial condition. Over-forecasting may also lead to write-off and negatively impact
working capital. The design of New Categories devices may also prevent the scaling of commercial manufacturing, which will either restrict
supply or increase the costs of production.
In addition, changes in local legislation related to liquid nicotine import duties may increase New Categories production costs, which may
increase end market pricing. Furthermore, the exposure of sensitive trade secrets can lead to competitive disadvantages and further negatively
impact the Group’s results of operations and financial condition.
Risk: Failure of a financial counterparty
Description
The Group relies on transactions with a variety of financial counterparties to manage the Group’s business and financial risks. In the event that
any of these counterparties fails, payments due from such counterparties, such as under hedging or insurance contracts, may not be recovered.
In addition, failure of a transactional banking party may lead to the loss of cash balances and disruption to payment systems involving
such counterparty.
Impact
The inability to recover payments due from one or more failed financial counterparties or the loss of cash balances may cause significant
financial loss and have an adverse impact on the Group’s results of operations, financial condition and financial risk profile. In addition, the loss
of cash balances or a disruption to payment systems may cause disruption to the Group’s ongoing operations and ability to pay its creditors
and suppliers.
Risk: Exposure to unavailability of, and price volatility, in raw materials and increased costs of employment.
Description
The availability and price of various commodities required in the manufacture of the Group’s products fluctuate. Raw materials and other inputs
used in the Group’s business, such as wood pulp and energy, are commodities that are subject to price volatility caused by numerous factors,
including political influence, market fluctuations and natural disasters.
Similarly, the Group is exposed to the risk of an increase above inflation in employment costs, including due to governmental action to
introduce or increase minimum wages. Employment and health care law changes may also increase the cost of provided health care and other
employment benefits expenses.
Impact
Restricted availability and price volatility of commodities may result in supply shortages and unexpected increases in costs for raw materials and
packaging for the Group’s products, which may affect the Group’s results of operations and financial condition.
Similarly, the Group’s profitability may be affected by increases in overall employment costs.
The Group may not be able to increase prices to offset increased costs without suffering reduced sales volume and revenue. In the absence of
compensating for increased costs through pricing, significant increases in raw material, packaging and employment costs above inflation will
impact product margins, leading to lower profits and negatively affecting the Group’s results of operations and financial condition.
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GROUP RISK FACTORS
CONTINUED
Business Execution and Supply Chain Risks continued
Risk: Failure to retain key personnel or to attract and retain skilled talent.
Description
The Group relies on a number of highly experienced employees with detailed knowledge of the tobacco industry and the Group’s business.
Similarly, the Group is dependent on its ability to identify, attract, develop and retain such qualified personnel in the future.
Furthermore, broader economic and ESG trends may impact the Group’s ability to retain key employees and may increase competition for
highly talented employees, potentially resulting in the loss of experienced employees.
Impact
If the Group is unable to retain its existing key employees or to attract and retain skilled talent in the future, critical positions may be left
vacant, which could adversely impact the delivery of strategic objectives, which could ultimately impact the Group’s results of operations
and financial condition.
High voluntary employee turnover may also reduce organisational performance and productivity, which may have a further adverse impact
on the Group’s results of operations and financial condition.
Risk: Disruption to the supply chain and distribution channels.
Description
The Group has an increasingly global approach to managing its supply chain and distribution channels and is exposed to the risk of disruption
to any aspect of the Group’s supply chain, to suppliers’ operations or to distribution channels, and the deterioration in the financial condition of
a trading partner.
Such disruption may be caused by a cyber event, global health crisis, major fire, violent weather conditions or other natural disasters that affect
manufacturing or other facilities of the Group’s operating subsidiaries or those of their suppliers and distributors. In certain geographic areas
where the Group operates, insurance coverage may not be obtainable on commercially reasonable terms, if at all. Coverage may be subject to
limitations or the Group may be unable to recover damages from its insurers.
Disruption may also be caused by spread of infectious disease (such as Coronavirus) or by a deterioration in labour or union relations,
disputes or work stoppages or other labour-related developments within the Group or its suppliers and distributors.
In addition, the Group’s operating subsidiaries may not be able to establish or maintain relationships on favourable commercial terms with their
suppliers and distributors. In some markets, distribution of the Group’s products is through third-party monopoly channels, often licensed by
governments. The Group may be unable to renew these third-party supplier and distribution agreements on satisfactory terms for numerous
reasons, including government regulations or ESG considerations.
Furthermore, there are some product categories for which the Group does not have spare production capacity or where substitution between
different production plants is very difficult. Consolidation of global suppliers and certain distributors that control large geographies may reduce
the Group’s availability of alternatives and negatively impact the Group’s negotiating power with key suppliers and distributors.
These risks are particularly relevant in jurisdictions where the Group’s manufacturing facilities are more concentrated or for certain product
categories where production is more centralised.
Impact
Any disruption to the Group’s supply chain and distribution channels could have an adverse effect on the results of operations and financial
conditions of the Group through failures to meet shipment demand, contract disputes, increased costs and loss of market share.
Risk: Exposure to product contamination.
Description
The Group may experience product contamination, whether by accident or deliberate malicious intent, during supply chain or manufacturing
processes, or may otherwise fail to comply with the Group’s quality standards. The Group may also receive threats of malicious tampering.
Impact
Product contamination or threats of contamination may expose the Group to significant costs associated with recalling products from the
market or temporarily ceasing production. In addition, adult tobacco consumers may lose confidence in the specific brand affected by the
contamination, resulting in reputational damage and a loss of sales volume and market share. The Group could be subject to liability and costs
associated with civil and criminal actions as well as regulatory sanctions brought in connection with a contamination of the Group’s products.
Each of these results may in turn have an adverse effect on the Group’s results of operations and financial condition.
274
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Risk: Inability to obtain adequate supplies of tobacco leaf.
Description
The Group purchases significant volumes of packed leaf each year. Tobacco leaf supplies are impacted by a variety of factors, including weather
conditions, drought, flood and other natural disasters, growing conditions, diseases causing crop failure, climate change and local planting
decisions. Tobacco production in certain countries is also subject to a variety of controls, including regulation affecting farming and production
control programmes, and competition for land use from other agriculture products. Such controls and competition can further constrain the
production of tobacco leaf, raising prices and reducing supply.
Human rights issues may arise in connection with our tobacco leaf supply chain. Due to the large number of casual and temporary workers, the
use of family labour in small-scale farming and high levels of rural poverty, the agricultural sector as a whole is vulnerable to human rights issues.
The Group recognises that child labour is a risk to our tobacco leaf supply chain.
Impact
Restricted availability of tobacco leaf may impact the quality of the Group’s products to a level that may be perceptible by consumers and
may impact the Group’s ability to deliver on consumer needs. Accordingly, the reduction of tobacco leaf supply may impact supply and
demand of the Group’s products and have a negative impact on results of operations. The Group’s commitment to ESG may result in higher
tobacco leaf prices. Higher tobacco leaf prices may also increase the Group’s costs for raw materials and have an adverse effect on its results of
operations and financial condition.
Risk: Failure to successfully design, implement and sustain an integrated operating model.
Description
The Group aims to improve profitability and productivity through supply chain improvements and the implementation of an integrated
operating model and organisational structure, including standardisation of processes, centralised back-office services and a common IT
platform. The Group undertakes transformation initiatives periodically which aims to simplify the organisation and facilitate growth.
Impact
Failure by the Group to successfully design, implement and sustain the integrated operating model, organisational structure and transformation
initiatives could lead to the failure to realise anticipated benefits, increased costs, disruption to operations, decreased trading performance,
disgruntled employees, loss of institutional knowledge and reduced market share. These results could in turn reduce profitability and funds
available for investment by the Group in long-term growth opportunities.
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CONTINUED
Legal, regulatory and compliance risks
Risk: Exposure to increasingly stringent regulatory measures affecting the manufacture, packaging, sale and
marketing of the Group’s products.
Description
Tobacco control measures are in place in nearly all markets in which we operate. Such restrictions are introduced by regulations and/or
voluntary agreements. Most tobacco control measures can be categorised as follows:
– Place: including regulations restricting smoking in private and public spaces (e.g., public place smoking bans, including restaurants
and bars);
– Product: including regulations on the use of and/or testing for ingredients, product design and attributes (e.g., ceilings regarding tar,
nicotine and carbon monoxide yields, as well as restrictions on flavours, including menthol); product safety regulations (e.g., reduced
cigarette ignition propensity standards); and regulatory product disclosure requirements (e.g., ingredients and emissions reporting);
– Packaging and labelling: including regulations on health warnings and other government-mandated messages (e.g., in respect of content,
positioning, size and rotation); restrictions on the use of certain descriptors and brand names; requirements on pack shape, size, weight and
colour; and mandatory plain packaging;
– Sponsorship, promotion and advertising: including partial or total bans on advertising, marketing, promotions and sponsorship; and
restrictions on brand sharing and brand stretching (i.e., using tobacco branding on non-tobacco products);
– Purchase: including regulations on where the products are sold, such as type of outlet (e.g., supermarkets and vending machines) and how
they are sold (e.g., above the counter or under the counter); and
– Price: including regulations that have implications on the prices that manufacturers can charge for their tobacco products (e.g., excise taxes
and minimum prices).
The Group believes that the introduction of further regulation on tobacco control is inevitable over the medium term in many of the Group’s
markets. The actions of competitors contrary to the regulations applicable to certain markets, may cause reputational harm to the industry as a
whole and may result in additional regulation or bans on certain products.
Many of the measures outlined in the FCTC have been or are in the process of being implemented through national legislation in many markets
in which the Group operates. For example, the EU has adopted the revised Tobacco and Related Products Directive (‘TPD2‘) which, among
other things, bans the use of characterising flavours in combustible tobacco products, such as menthol. This is in line with a number of other
jurisdictions banning or restricting the use of menthol in tobacco products.
In November 2018, the US Food and Drug Administration (“FDA”) announced the acceleration of proposed rulemaking to seek a ban on
menthol in combustible tobacco products. Bans or restrictions on the sale of flavoured tobacco products and menthol have been introduced,
and may be introduced in the future, at a municipal, state, national or international level.
Further, various national or international regulatory regimes may seek to require the reduction of nicotine levels in tobacco products.
For example, in March 2018, the FDA published its ANPRM titled “Tobacco Product Standard for Nicotine Level of Combusted Cigarettes”
and invited interested parties to submit comments on, among other issues, maximum nicotine limits and whether any maximum nicotine level
should apply to combustible tobacco products.
In the US, manufacturers of all tobacco products deemed to be under the authority of the FDA as of 2016 (which includes vapour and Modern
Oral products) must submit information to the FDA seeking formal marketing authorisation of such products.
Several countries, including France, Belgium and Pakistan, have sought or are seeking to prohibit certain brands/brand variants or messaging on
cigarette packaging that promotes a brand or usage.
Please refer to pages 287 to 290 for details of tobacco and nicotine regulatory regimes under which the Group’s businesses operate.
With respect to New Categories, although a common framework for regulation and taxation has yet to emerge, the manufacture, sale,
packaging and advertising of such products are increasingly being regulated. In fact, some regulators have applied or are considering applying
combustible tobacco products’ restrictive regulatory framework to New Categories, such as public place vaping bans or plain packaging.
Some jurisdictions have banned or are considering banning New Categories altogether.
Recents reports in North America of individuals experiencing acute respiratory injury in suspected association with vaping certain e-liquids
(EVALI) and youth usage have led to an increase in scrutiny of vapour products at the local, municipal, state, national and international levels.
276
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Impact
Existing and future regulatory measures could adversely affect volume and profits as a result of restrictions on the Group’s ability to sell its
products or brands, including due to the loss of provisional sales approvals for New Categories. Increased regulatory cost may also make certain
products/brands unprofitable, which may lead to discontinuations (e.g. VapeWild). Impediments to building or maintaining brand equity could
also adversely impact volume and profits.
In addition, new regulation could lead to greater complexity, as well as higher production and compliance costs. For example, it may be
that the recent incidents in the US prompt regulators to impose restrictions on the sale of vaping products and/or flavours. New product
specifications may have a negative impact on sales volumes as consumers seek alternatives in illicit trade. The Group’s share price has also
experienced, and could in the future experience, shocks upon the announcement or enactment of restrictive regulation. All these effects
may have an adverse effect on the Group’s results of operations and financial conditions.
In particular, through the acquisition of RAI, the Group acquired the Newport brand, the leading menthol cigarette brand in the US, the
Group’s largest single market. The sales of Newport, together with the other menthol brands of the Group’s operating subsidiaries, represent
a significant portion of the Group’s total net sales. Any action by the FDA or any other governmental authority banning or materially restricting
the use of menthol in tobacco products could have a significant negative impact on sales volumes of the Newport brand and the Group’s other
menthol products which would, in turn, have an adverse effect on the results of operations and financial position of the Group. Any action by
the FDA or any government authority restricting the use of New Category products could also have an adverse effect on the operation and
financial position of the Group.
Failure to obtain formal marketing authorisation for products deemed to be under the authority of the FDA, such as RAI’s vapour or Modern
Oral products, could have a negative impact on RAI’s financial position and, in turn, the financial position of the Group.
Similarly, regulations on nicotine levels in cigarettes and in other products that are being considered in a number of jurisdictions in which the
Group operates could have a negative impact on sales volumes of the Group’s products in the relevant jurisdictions.
In addition, taking into account the significant number of regulations that may apply to the Group’s businesses across the world, the Group
is and may in the future be subject to claims for breach of such regulations. Even when proven untrue, there are often financial costs and
reputational impacts in defending against such claims.
Risk: Adverse implications of proposed EU legislation on single‑use plastics that will result in on‑pack
environmental warnings and financial implications relating to the Extended Producer Responsibility (EPR).
Description
The EU adopted a Directive on single-use plastics in July 2019 which, among other products, targets tobacco products with filters containing
plastic. The Cellulose Acetate in our filters is defined as a single-use plastic under the Directive and, as such, the Directive will have an impact on
the Group’s cigarettes, filters for other tobacco products and consumables for THPs.
Under the Directive, the Group will be subject to EPR schemes, requiring the Group to cover the costs of collecting, transporting, treating and
cleaning-up of filters containing plastic. The Directive also imposes on tobacco manufacturers the obligation to finance consumer awareness
campaigns and to place environmental markings on packs of products with filters containing plastic.
Prior to the anticipated implementation deadline for EPR schemes on 5 January 2023, the European Commission is expected to issue guidelines
on the criteria for the costs of cleaning up litter. In addition, it is expected to adopt an Implementing Act harmonising specifications for required
product markings in the first half of 2020. When transposing the Directive into national law, EU member states could decide to expand its scope
under their respective laws, which may subject the Group to additional regulations and financial obligations.
It is noted that there is a growing level of scrutiny on the use of single-use plastic across the world and a number of markets in which the Group
operates are considering ways to restrict (or ban) the use of filters made of plastic and/or introduce EPR schemes.
Impact
The financial implications of the proposed EPR schemes may have an adverse effect on the Group’s results of operations and financial condition.
If significant space is appropriated on the packaging of some of the Group’s products, this may also be an impediment to maintaining or
building brand equity of the Group’s products which may, in turn, have a negative impact on the Group’s sales volume.
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CONTINUED
Legal, regulatory and compliance risks continued
Risk: Exposure to litigation on tobacco, nicotine, New Categories and other issues.
Description
The Group is involved in litigation related to its tobacco and nicotine products, including legal and regulatory actions, proceedings and claims,
brought against it in a number of jurisdictions. Claims brought against the Group may be based on personal injury (both individual claims and
class actions), economic loss arising from the treatment of smoking and health-related diseases (such as medical recoupment claims brought by
local governments), negligence, strict liability in tort, design defect, failure to warn, fraud, misrepresentation, deceptive/unfair trade practices,
conspiracy, medical monitoring and violations of antitrust/racketeering laws. Certain actions, such as those in the US and Canada, involve claims
in the tens or hundreds of billions of pounds sterling. The Group is also involved in proceedings that are not directly related to its tobacco and
nicotine products, including proceedings based on environmental pollution claims.
Additional legal and regulatory actions, proceedings and claims may be brought against the Group in the future.
Impact
The Group’s consolidated results of operations and financial position could be materially affected by any unfavourable outcome of
certain pending or future litigation. The Group could be exposed to substantial liability, which may take the form of ongoing payments.
Whether successful or not, the costs of the Group’s involvement in litigation could materially increase due to costs associated with bringing
proceedings and defending claims, which may also cause operational and strategic disruption by diverting management time away from
business matters. Liabilities and costs in connection with litigation could result in bankruptcy of one or more Group entities which, in turn, could
cause a material reduction in the Group’s sales volume and profits. Any negative publicity resulting from these claims may also adversely affect
the Group’s reputation.
Please refer to note 27 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Risk: Significant and/or unexpected increases or structural changes in tobacco and nicotine‑related taxes.
Description
Tobacco and nicotine products are subject to high levels of taxation, including excise taxes, sales taxes, import duties and levies in most markets
in which the Group operates. In many of these markets, taxes are generally increasing, but the rate of increase varies between markets and
between different types of tobacco and nicotine products. Increases in, or the introduction of new, tobacco and nicotine-related taxes may be
caused by a number of factors, including fiscal pressures, health policy objectives and increased lobbying pressure from anti-tobacco advocates.
With respect to New Categories, although a common framework for regulation and taxation has yet to emerge, the manufacture, sale,
packaging and advertising of such products are increasingly being regulated.
Impact
Significant or unexpected increases in, or the introduction of new, tobacco-related taxes or minimum retail selling prices, changes in relative tax
rates for different tobacco and nicotine products or adjustments to excise may result in the need for the Group to absorb such tax increases due
to limits in its ability to increase prices, an alteration in the sales mix in favour of value-for-money brands or products, or growth in illicit trade,
each of which could impact pricing, sales volume and profit for the Group’s products.
Risk: Failure to comply with health and safety and environmental laws.
Description
The Group is subject to a variety of laws, regulations and operational standards relating to health and safety and the environment. The Group
may fail to assess certain risks and implement the right level of control measures or to maintain adequate standards of health and safety or
environmental compliance, which could cause injury, ill health, disability or loss of life to employees, contractors or members of the public,
or harm to the natural environment and local communities in which the Group operates. Insufficient information, instruction and training in
the relevant areas and a lack of knowledge of the existence and/or requirements of relevant regulations, or a failure to monitor, assess and
implement the requirements of new or modified legislation, may increase these risks.
Impact
Any failure by the Group to comply with applicable health and safety or environmental laws, or the exposure to the consequences of a
perceived failure, could result in business disruption, reputational damage, difficulties in recruiting and retaining staff, increased insurance costs,
consequential losses, the obligation to install or upgrade costly pollution control equipment, loss of value of the Group’s assets, remedial costs
and damages, fines and penalties as well as civil or criminal liability. Each of these results could in turn adversely impact the Group’s results of
operations and financial condition.
278
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Risk: Exposure to unfavourable tax rulings.
Description
The Group is subject to tax laws in a variety of jurisdictions. The Group‘s interpretation and application of the tax laws could differ from
those of the relevant tax authority, which may subject the Group to claims for breach of such laws, including for late or incorrect filings or for
misinterpretation of rules. Tax authorities in a variety of jurisdictions, such as the Netherlands and Russia, have assessed, and may in the future
assess, the Group for historical tax claims, including interest and penalties, arising from disputed areas of tax law. The Group is currently party to
tax disputes in a number of jurisdictions, some of which involve claims for amounts in the hundreds of millions of pounds sterling.
Please refer to note 27 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Impact
The Group’s failure to comply with the relevant tax authority’s interpretation and application of the tax laws could result in significant financial
and legal penalties, including the payment of additional taxes, fines and interest in the event of an unfavourable ruling by a tax authority in a
disputed area, as well as the payment of dispute costs. Disruption to the business could occur as a result of management’s time being diverted
away from business matters. Each of these results could negatively affect the Group’s results of operations and financial condition.
Risk: Unexpected legislative changes to corporate income tax laws.
Description
The Group is subject to corporate income tax laws in the jurisdictions in which it operates. These laws frequently change on a prospective or
retroactive basis.
Impact
Legislative changes to corporate income tax laws and regulations may have an adverse impact on the Group’s corporate income tax liabilities
and may lead to a material increase of the Group’s overall tax rate. This could, in turn, negatively affect the Group’s results of operations and
financial condition.
Risk: Exposure to potential liability under competition or antitrust laws.
Description
According to the Group’s internal estimates, the Group is a market leader by volume in a number of countries in which it operates and is one of
a small number of tobacco companies in certain other markets in which it operates. As a result, the Group may fail to comply with competition
or antitrust laws and may be subject to investigation for alleged abuse of its position in markets in which it has significant market share or for
alleged collusion with other market participants.
Impact
Failure by the Group to comply with competition or antitrust laws and investigations for violation of such laws may result in significant legal
liability, fines, penalties and/or damages actions, criminal sanctions against the Group, its officers and employees, increased costs, prohibitions
on conduct of the Group’s business, forced divestment of brands and businesses (or parts of businesses) to competitors, director disqualifications
and commercial agreements being held void. The Group may face increased public scrutiny and the investigation or imposition of sanctions by
antitrust regulation agencies for violations of competition regimes which may subject the Group to reputational damage and loss of goodwill.
Risk: Failure to establish and maintain adequate controls and procedures to comply with applicable securities,
corporate governance and compliance regulations.
Description
The Group’s operations are subject to a range of rules and regulations around the world. These include US securities, corporate governance and
compliance laws and regulations such as the Sarbanes-Oxley Act of 2002 and the US Foreign Corrupt Practices Act of 1977, which applies to
the Group’s worldwide activities. While the Group continuously seeks to improve its systems of internal controls and to remedy any weaknesses
identified, there can be no assurance that the policies and procedures will be followed at all times or effectively detect and prevent violations of
applicable laws. In addition, the Group is subject to increasingly stringent reporting obligations under UK corporate reporting regulations.
Impact
The increased scope and complexity of applicable regulations to which the Group is subject may lead to higher costs for compliance. Failure to
comply with laws and regulations may result in significant legal liability, fines, penalties, and/or damages actions, criminal sanctions against the
Group, its officers and employees, and damage to the Group’s reputation. Non-compliance with such regulations could also lead to a loss of the
Group’s listing on one or more stock exchanges or a loss of investor confidence with a subsequent reduction in share price.
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CONTINUED
Legal, regulatory and compliance risks continued
Risk: Loss of confidential information, including through manipulation of data by employees, and failure to comply
with the European General Data Protection Regulation, the UK Data Protection Act 2018 and other privacy laws
governing the processing of personal data.
Description
Unintended or malicious behaviour by employees, contractors, service providers and others using or managing the Group’s confidential
information (including sensitive or confidential information of third parties) or personal data (including sensitive consumer personal data) may
affect the Group’s communications and operations which may result in the unauthorised disclosure of such information.
In addition, a lack of infrastructure or application resilience, slow or insufficient disaster recovery service levels or the installation of new systems
may increase the possibility that data, including confidential, personal or other sensitive information, stored or communicated by IT systems
may be corrupted, lost or disclosed.
Various privacy laws, in particular the European General Data Protection Regulation (‘GDPR‘), and UK Data Protection Act 2018 (“UKDPA”)
mandate that in an unauthorised disclosure of personal data, depending on the risk to the individuals concerned, must be reported to the local
data protection supervisory authority.
In addition, unauthorised disclosures of information (including personal data) through fraudulent abuses of data may cause the Group to fail to
meet statutory or regulatory requirements in particular under the GDPR and/or UKDPA. Following the enforcement of the GDPR in May 2018,
other jurisdictions in which the Group operates have enacted similar local legislation such as the California Consumer Privacy Act US and the
“LGPD” in Brazil which potentially further increases the risks surrounding the processing of personal data.
Impact
The loss of personal data (which may include confidential information) may result in civil or criminal legal liability and prosecution by
enforcement bodies, which may subject the Group to the imposition of material fines and/or penalties and the costs associated with defending
these claims. In addition, the relevant data protection supervisory authority may order certain Group legal entities to cease processing activities,
which would result in a significant operational disruption.
Inappropriate disclosure of confidential information or violation of the GDPR or other privacy laws may also result in significant reputational
harm and public scrutiny, a loss of investor confidence and reduced third-party reliance on the Group’s information technology systems or other
data handling practices. In addition, restoration and remediation of disclosed confidential information or personal data may be costly, difficult or
even impossible. These consequences may adversely impact the Group’s results of operations and financial condition.
Risk: Failure to comply with product regulations due to uncertainty surrounding the proper interpretation and
application of those regulations.
Description
The interpretation and application of regulations concerning the Group’s products, such as the Tobacco and Related Products Directive (TPD2),
may be subject to debate and uncertainty. This includes uncertainty over product classifications and restrictions on advertising. In particular with
respect to the developing category of New Categories, which has grown in size and complexity in a relatively short period of time, a consensus
framework for the interpretation and application of existing regulation, such as the rules concerning nicotine-containing liquids used in vapour
products, has yet to emerge.
The continuously changing and evolving landscape of regulation concerning the Group’s products contributes to the uncertainty surrounding
interpretation and application and creates a risk that the Group may misinterpret or fail to comply with developing regulations in the various
jurisdictions in which it operates, or becomes subject to enforcement actions from regulators. With the continuous changing of product cycle
plans and expansion to new markets and innovations, there is a risk that such changes and launches fail to comply with the relevant regulations,
including pre-approval and/or pre-registration requirements. For example, some governments have intentionally banned or are seeking to ban
novel tobacco products and products containing nicotine, while others would need to amend their existing legislation to permit their sale.
Even in countries where the sale of such products is currently permitted, some governments have adopted, or are seeking to adopt, bans on
New Categories or restrictions on certain flavours.
Impact
The significant number of emerging regulations and the uncertainty surrounding their interpretation and application may subject the Group to
claims for breach of such regulations. Financial costs of such enforcement actions include financial penalties, product recalls and litigation costs,
and entail a significant risk of adverse publicity and damage to the Group’s reputation and goodwill.
280
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Risk: Failure to uphold high standards of corporate behaviour, including under anti‑bribery and anti‑corruption laws.
Description
The Group is subject to various anti-corruption laws and regulations (Anti-Corruption Laws). All employees of BAT, its subsidiaries and joint
ventures which it controls are expected to uphold a high standard of corporate behaviour and comply with the Group Standards of Business
Conduct (SoBC) which includes a requirement to comply with Anti-Corruption Laws. Employees, associates, suppliers, distributors and agents
are prohibited from engaging in improper conduct to obtain or retain business or to improperly influence (directly or indirectly) a person
working in an official capacity to decide in the Group’s favour. The Group’s employees may fail to comply with our SoBC and may violate
applicable Anti-Corruption Laws.
For example, the Group is investigating, through external legal advisers, allegations of misconduct and is liaising with the UK Serious Fraud
Office (SFO) and other relevant authorities. It was announced in August 2017 that the SFO had opened an investigation in relation to the
Company, its subsidiaries and associated persons. The Group continues to cooperate with the SFO’s investigation and a sub-Committee of
the Board has oversight of these matters. The outcomes will be decided by the relevant authorities or, if necessary, the courts. It is too early
to predict the outcomes, but these could include the prosecution of individuals and/or of a Group company or companies. Accordingly, the
potential for fines, penalties or other consequences cannot currently be assessed but may be material. As the investigation is ongoing, it is not
yet possible to identify the timescale in which these matters might be resolved.
Impact
Failure of the Group to comply with Anti-Corruption Laws or to deploy and maintain robust internal policies, procedures and controls could
result in significant fines and penalties, criminal sanctions against the Group and its officers and employees, increased costs, prohibitions
or other limitations on the conduct of the Group’s business and reputational harm and may subject the Group to claims for breach of
such regulations.
Even when proven untrue, there are often financial costs, time demands and reputational impacts associated with investigating and defending
against such claims.
Risk: Imposition of sanctions under sanctions regimes or similar international, regional or national measures.
Description
National and international sanctions regimes or similar international, regional or national measures may affect jurisdictions in which the Group
operates or third parties with which it may have commercial relationships.
In particular, the Group has operations in a number of countries that are subject to various sanctions, including Iran and Cuba. Operations in
these countries expose the Group to the risk of significant financial costs and disruption in operations that may be difficult or impossible to
predict or avoid or the activities could become commercially and/or operationally unviable.
National and international sanctions regimes may also affect third parties with which the Group has commercial relationships and could lead to
supply and payment chain disruptions.
For example, the Group has been investigating, and is aware of governmental authorities’ investigations into, allegations of misconduct.
It has been liaising with the DOJ and OFAC in the United States, which are conducting an investigation into suspicions of breach of sanctions.
The Group is cooperating with the authorities’ investigations. The potential for fines, penalties or other consequences cannot currently be
assessed but may be material. As the investigations are ongoing, it is not yet possible to identify the timescale in which these matters might
be resolved.
Impact
As a result of the limitations imposed by sanctions, it may become commercially and/or operationally unviable for the Group to operate in
certain jurisdictions and the Group may be required to exit existing operations in such jurisdictions. The Group may also experience difficulty in
sourcing materials or importing products and be exposed to increased costs. In addition, the costs of complying with sanctions may increase as
a result of changes to existing sanctions regimes.
Any failure to comply with sanctions regimes or similar international, regional or national measures may result in significant legal liability, fines
and/or penalties, criminal sanctions against the Group, its officers and employees, damage to commercial relationships and reputational harm.
Reputational harm may result regardless of whether the Group complies with imposed sanctions.
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Economic and financial risks
Risk: Foreign exchange rate exposures.
Description
The Group’s reporting currency is the pound sterling. The Group is exposed to the risk of fluctuations in exchange rates affecting the
translation of net assets and earned profits of overseas subsidiaries into the Group’s reporting currency. These translational exposures are not
normally hedged.
Exposures also arise from the foreign currency denominated trading transactions undertaken by subsidiaries and dividend flows. Where not
offset by opposing flows, these exposures are generally hedged according to internal policies, but hedging of exposure to certain currencies
might not be possible due to exchange controls, limited currency availability or prohibitive costs, and errors in hedging may occur. Fiscal policy
divergence in relation to interest rates between key markets may also increase these risks.
Impact
During periods of exchange rate volatility, the impact of exchange rates on the Group’s results of operations and financial condition can be
significant. Fluctuations in exchange rates of key currencies against the pound sterling may result in volatility in the Group’s reported earnings
per share, cash flow and balance sheet. Furthermore, the dividend paid by the Group may be impacted if the payout ratio is not adjusted.
Differences in translation between earnings and net debt may also affect key ratios used by credit rating agencies, which may have an adverse
effect on the Group’s credit ratings.
In addition, volatility and/or increased costs in the Group’s business due to transactional foreign exchange rate exposures may adversely affect
operating margins and profitability and attempts to increase prices to offset such increases could adversely impact sales volumes.
Risk: Inability to obtain price increases and exposure to risks from excessive price increases and value
chain erosion.
Description
Annual manufacturers’ price increases are among the key drivers in increasing market profitability. However, the Group has in the past been,
and may in the future be, unable to obtain such price increases as a result of increased regulation; increased competition from illicit trade;
stretched consumer affordability arising from deteriorating political and economic conditions and rising prices; sharp increases or changes in
excise structures; and competitors’ pricing.
As the New Category market continues to develop, the Group may face erosion in the value chain for New Categories through lower market
prices, excise taxes, high retail trade margins or high production costs that make New Categories less competitive versus combustible
tobacco products.
In addition, the Group faces the risk that price increases it has conducted in the past, and may conduct in the future, may be excessive and not
find adequate adult tobacco consumer acceptance.
Impact
If the Group is unable to obtain price increases or is adversely affected by impacts of excessive price increases, it may be unable to achieve its
strategic growth metrics, have fewer funds to invest in growth opportunities, and, in the case of excessive price increases, be faced with quicker
reductions in sales volumes than anticipated due to accelerated market decline, down-trading (switching to a cheaper brand) and increased
illicit trade. These in turn impact the Group’s market share, results of operations and financial condition.
In addition, erosion in the value chain for New Categories could have a negative impact on the Group’s sales volume or pricing for these
products. High excise could dampen demand for New Categories or result in lower profit margins. Lower market prices, high retail trade
margins or increases in production costs could also negatively impact profit margins or lead to uncompetitive pricing.
282
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Risk: Effects of declining consumption of legitimate tobacco products and a tough competitive environment.
Description
Evidence of market contraction and the growth of illicit trade of tobacco products is apparent in several key global markets in which the Group
operates. This decline is due to multiple factors, including increases in excise taxes leading to continued above-inflation price rises, changes
in the regulatory environment, the continuing difficult economic environment in many countries impacting consumers’ disposable incomes,
the increase in the trade of illicit tobacco products, health concerns, a decline in the social acceptability of smoking and an increase in New
Category uptake.
The Group competes on the basis of product quality, brand recognition, brand loyalty, taste, innovation, packaging, service, marketing,
advertising and price. The Group is subject to highly competitive conditions in all aspects of its business. The competitive environment and the
Group’s competitive position can be significantly influenced by the prevailing economic climate, consumers’ disposable income, regulation,
competitors’ introduction of lower-price or innovative products, higher tobacco product taxes, higher absolute prices, governmental action to
increase minimum wages, employment costs, interest rates and increase in raw material costs.
Furthermore, the Group is subject to substantial payment obligations under the State Settlement Agreements, which adversely affect the ability
of the Group to compete in the US with manufacturers of deep-discount cigarettes that are not subject to such substantial obligations.
Impact
Any future decline in the demand for legitimate tobacco products could have an adverse effect on the Group’s results of operations and
financial conditions.
In a tough competitive environment, factors such as market size reduction, customer down-trading, illicit trade and competitors aggressively
taking market share through price re-positioning or price wars generally reduce the overall profit pool of the market and may impact the
Group’s profits. These risks may also lead to a decline in sales volume of the Group, loss of market share, erosion of its portfolio mix and
reduction of funds available to it for investment in growth opportunities.
Risk: Funding, liquidity and interest rate risks.
Description
The Group cannot be certain that it will have access to bank financing or to the debt and equity capital markets at all times and is therefore
subject to funding and liquidity risks. In addition, the Group’s access to funding may be affected by restrictive covenants to which it is subject
under some of its credit facilities. Furthermore, broader ESG trends may impact the Group’s access to funding.
The Group is also exposed to increases in interest rates in connection with both existing floating rate debt and future debt refinancings.
The current economic environment, with historically low interest rates, increases the likelihood of higher interest rates in the future.
The phaseout of LIBOR and uncertainty regarding the appropriate benchmark replacement similarly increases uncertainty with respect to the
interest rates applicable to the Group’s floating rate debt.
Furthermore, the Group operates in several markets closely regulated by governmental bodies that intervene in foreign exchange markets by
imposing limitations on the ability to transfer local currency into foreign currency and introducing other currency controls that expose cash
balances to devaluation risks or that increase costs to obtain hard currency. As a result, the Group’s operational entities in these markets may be
restricted from using end-market cash resources to pay for imported goods, dividend remittances, interest payments and royalties. The inability
to access end-market cash resources in certain markets contributes to the Group’s funding and liquidity risks.
Impact
Adverse developments in the Group’s funding, liquidity and interest rate environment may lead to shortages of cash and cash equivalents
needed to operate the Group’s business and to refinance its existing debt. Inability to fund the business under the Group’s current capital
structure, failure to access funding and foreign exchange or increases in interest rates may also have an adverse effect on the Group’s credit
rating, which would in turn result in further increased funding costs and may require the Group to issue equity or seek new sources of capital.
Non-compliance with the Group’s covenants under certain credit facilities could lead to an acceleration of its debt. The phaseout of LIBOR may
result in the Group being subject to higher or uncertain interest rates with respect to outstanding future and floating rate debt.
All these factors may have material adverse effects on the Group’s results of operations and financial conditions. These conditions could also lead
to underperforming bond prices and increased yields.
In the case of funding or liquidity constraints, the Group may also suffer reputational damage due to its perceived failure to manage the
financial risk profile of its business, which may result in an erosion of shareholder value reflected in an underperforming share price, and/or
underperforming bond prices and higher yields. In addition, the Group’s ability to finance strategic opportunities or respond to threats may
be impacted by limited access to funds.
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Economic and financial risks continued
Risk: Failure to achieve growth through mergers, acquisitions and joint ventures.
Description
The Group’s growth strategy includes a combination of organic growth as well as mergers, acquisitions and joint ventures. The Group may be
unable to acquire attractive businesses on favourable terms and may inappropriately value or otherwise fail to identify or capitalise on growth
opportunities. The Group may not be able to deliver strategic objectives and revenue improvements from business combinations, successfully
integrate businesses it acquires or establishes, or obtain appropriate regulatory approvals for business combinations. Risks from integration of
businesses also include the risk that the integration may divert the Group’s focus and resources from its other strategic goals.
Additionally, the Group could be exposed to financial, legal or reputational risks if it fails to appropriately consider any compliance or antitrust
aspects of a transaction. Further, the Group has certain uncapped indemnification obligations in connection with divestitures and could incur
similar obligations in the future.
Impact
Any of the foregoing risks could result in increased costs, decreased revenues or a loss of opportunities and have an adverse effect on
the Group’s results of operations and financial condition, and in the case of a breach of compliance or antitrust regulation, could lead to
reputational damage, fines and potentially criminal sanctions.
The Group may become liable for claims arising in respect of conduct prior to any merger or acquisition of businesses if deemed to be a
successor to the liabilities of the acquired company or indemnification claims relating to divestitures, and any resulting adverse judgment
against the Group may adversely affect its results of operations and financial condition.
Please refer to note 27 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Risk: Unforeseen underperformance in key global markets.
Description
A substantial majority of the Group’s profit from operations is based on its operations in certain key markets, including the US. A number of
these markets are declining for a variety of factors, including price increases, restrictions on advertising and promotions, smoking prevention
campaigns, increased pressure from anti-tobacco groups, migration to smokeless products and private businesses adopting policies that prohibit
or restrict, or are intended to discourage, smoking and tobacco use.
Economic and political factors affecting the Group’s key markets include the prevailing economic climate, governmental austerity measures,
levels of employment, inflation, governmental action to increase minimum wages, employment costs, interest rates, raw material costs,
consumer confidence and consumer pricing.
Impact
Any change to the economic and political factors in any of the key markets in which the Group operates could affect consumer behaviour and
have an impact on the Group’s results of operations and financial condition.
Risk: Increases in net liabilities under the Group’s retirement benefit schemes.
Description
The Group currently maintains and contributes to defined benefit pension plans and other post-retirement benefit plans that cover various
categories of employees and retirees worldwide. The Group’s obligations to make contributions under these arrangements may increase in the
case of increases in pension liabilities, decreases in asset returns, salary increases, inflation, decreases in long-term interest rates, increases in life
expectancies, changes in population trends and other actuarial assumptions.
Please refer to the information under the caption ‘Retirement benefit schemes’ on page 158 and to note 11 in the Notes on the Accounts for
details of the Group’s retirement benefit schemes.
Impact
Higher contributions to the Group’s retirement benefit schemes could have an adverse impact on the Group’s results of operations, financial
condition and ability to raise funds.
284
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Risk: Adverse consequences of the UK’s exit from the EU.
Description
The consequences of the UK’s exit from the EU are uncertain, but could include reductions in the size of the UK market, down-trading as a
result of affordability pressure/weakening economy in the UK, an increased cost of doing business in the UK, higher cost of capital in the UK and
both transactional and translational foreign exchange impacts, disruption to supply of materials due to changed customs procedures or duties,
increased complexity and scrutiny on tax-related activities, or other changes to UK law. In addition, the UK’s exit from the EU may impose
restrictions on employment and cross-border movements.
Impact
Any of the consequences of the UK’s exit from the EU may have a negative effect on the Group’s results of operations and financial conditions.
In addition, any restrictions on employment and cross-border movements may result in additional employment and hiring costs and reduce the
Group’s ability to attract and retain highly talented individuals from the EU in the UK.
Product pipeline, commercialisation and Intellectual Property risks
Risk: Inability to predict consumers’ changing behaviours and launch innovative products that offer adult tobacco
and nicotine consumers meaningful value‑added differentiation.
Description
The Group focuses its research and development activities on both creating new products, including New Category product, and maintaining
and improving the quality of its existing products. In a competitive market, the Group believes that innovation is key to growth. The Group
considers that one of its key challenges in the medium and long term is to provide adult tobacco and nicotine consumers with high-quality
products that take into account their changing preferences and expectations, including those in relation to ESG, while complying with
evolving regulation.
The Group is in the early stages of development and roll-out of its New Category portfolio which requires significant initial investment.
The Group may be unsuccessful in developing and launching innovative products or maintaining and improving the quality of existing products
across both combustibles and New Categories that offer consumers meaningful value-added differentiation. The Group may fail to keep
pace with innovation in its sector or changes in consumer expectations and is also exposed to the risk of an inability to build a strong enough
brand equity through social media and other technological tools to compete with its competitors. There are potential bans and restrictions in
key markets when using social media to advertise and communicate. Competitors may be more successful in predicting changing consumer
behaviour, developing and rolling out consumer-relevant products and may be able to do so more quickly and at a lower cost.
In addition, the Group devotes considerable resources to the research and development of innovative products, in particular in New Categories
that may have the potential to reduce the risks of smoking-related diseases. The complex nature of research and development programmes
necessary to satisfy emerging regulatory and scientific requirements creates a substantial risk that these programmes will fail to demonstrate
health-related claims regarding New Categories or to achieve adult tobacco consumer, regulatory and scientific acceptance.
Furthermore, the regulatory environment impacting non-combustible tobacco products, vapour products and other non-tobacco nicotine
products, including classification of products for regulatory and excise purposes, is still developing and it cannot be predicted whether
regulations will permit the marketing of such New Categories in any given market in the future. Categorisation as medicines, for example,
and restrictions on advertising could stifle innovation, increase complexity and costs and significantly undermine the commercial viability of
these products. Alternatively, categorisation of any New Categories, as tobacco products for instance, could result in the application of onerous
regulation, which could further stifle uptake.
Impact
The inability to timely develop and roll out innovations or products in line with consumer demand, including any failure to predict changes in
adult tobacco consumer and societal behaviour and expectations and to fill gaps in the product portfolio, as well as the risk of poor product
quality, could lead to missed opportunities, under- or over-supply, loss of competitive advantage, unrecoverable costs and/or the erosion of the
Group’s consumer base or brand equity.
Restrictions on packaging and labelling or on promotion and advertising could impact the Group’s ability to communicate its innovations
and product differences to adult tobacco consumers, leading to unsuccessful product launches. An inability to provide robust scientific results
sufficient to substantiate health-related product claims poses a significant threat to the ability to launch innovative products and comply with
emerging regulatory and legal regimes.
The occurrence of any of the above effects could in turn have an adverse effect on the Group’s results of operations and financial condition and
cause the Group to fail to deliver on its strategic growth plans.
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Risk: Exposure to risks associated with intellectual property rights, including the failure to identify, protect and
prevent infringement of the Group’s intellectual property rights and potential infringement of, or the failure to retain
licences to use, third‑party intellectual property rights.
Description
The Group relies on trademarks, patents, registered designs, copyrights and trade secrets. The brand names under which the Group’s products
are sold are key assets of its business. The protection and maintenance of the reputation of these brands is important to the Group’s success.
Protection of intellectual property rights is also important in connection with the Group’s innovative products, including New Categories.
The Group is exposed to the risk of infringements of its intellectual property rights by third parties due to limitations in judicial protection, failure to
identify, protect and register its innovations and/or inadequate enforceability of these rights in some markets in which the Group operates.
Some brands and trademarks under which the Group’s products are sold are licensed for a fixed period of time in certain markets. If any of
these licences are terminated or not renewed after the end of the applicable term, the Group would no longer have the right to use, and to sell
products under, those brand(s) and trademark(s).
In addition, as third-party rights are not always identifiable, the Group may be subject to claims for infringement of third-party intellectual property rights.
Impact
Any erosion in the value of the Group’s brands, or failure to obtain or maintain adequate protection of intellectual property rights for any reason,
or the loss of brands or trademarks under licence to Group companies, may have a material adverse effect on the Group’s market share, results
of operations and financial condition. Any inability to appropriately protect the Group’s products and key innovations will also limit its growth
and affect competitiveness and return on innovation investment.
Any infringement of third-party intellectual property rights could result in interim injunctions, product recalls, legal liability and the payment of
damages, any of which may disrupt operations, negatively impact the Group’s reputation and have an adverse effect on its results of operations
and financial condition.
286
Additional DisclosuresBAT Annual Report and Form 20-F 2019 REGULATION OF
THE GROUP’S BUSINESS
Overview
The Group’s businesses operate under increasingly stringent regulatory regimes worldwide. The tobacco industry is one of the most highly-
regulated in the world, with manufacturers required to comply with a variety of different regulatory regimes across the globe. The Group
continues to respond to these regimes and engages with governments and other regulatory bodies to find solutions to changing regulatory
landscapes. Restrictions on the manufacture, sale, marketing and packaging of tobacco products are in place in nearly all countries and markets.
Regulation can typically be categorised as follows:
– Place: including regulations restricting smoking in private, public and work places (e.g. public place smoking bans);
– Product: including: regulations on the use of ingredients, product design and attributes (e.g. ceilings regarding tar, nicotine and carbon
monoxide yields, as well as restrictions on flavours); product safety regulations (e.g. General Product Safety Directive (2001/95/EC), electrical
safety regulations and reduced cigarette ignition propensity standards); and regulatory product disclosure requirements (e.g. in relation to
ingredients and emissions);
– Packaging and labelling: including regulations on health warnings and other government-mandated messages (e.g. in respect of content,
positioning, size and rotation); restrictions on the use of certain descriptors and brand names; requirements on pack shape, size, weight and
colour and mandatory plain packaging;
– Sponsorship, promotion and advertising: including partial or total bans on tobacco advertising, marketing, promotions and sponsorship
and restrictions on brand sharing and stretching (the latter refers to the creation of an association between a tobacco product and a non-
tobacco product by the use of tobacco branding on the non-tobacco product);
– Purchase: including regulations on the manner in which tobacco products are sold, such as type of outlet (e.g. supermarkets and vending
machines) and how they are sold (e.g. above-the-counter versus beneath-the-counter); and
– Price: including regulations which have implications for the prices that manufacturers can charge for their tobacco products (e.g. excise taxes
and minimum prices).
In addition, the Group operates a number of global policies, and in some cases its businesses have also entered into voluntary agreements, which
may impose more onerous obligations or standards than those imposed by local legislation.
World Health Organization Framework Convention on Tobacco Control
Much of the recent development in regulation at a global level has been driven by the World Health Organization Framework Convention
on Tobacco Control (FCTC). The FCTC came into force in 2005 and contains provisions aimed at, among other things, reducing tobacco
consumption and toxicity. The original treaty is supplemented by protocols and guidelines. While these guidelines are not legally binding, they
provide a framework of recommendations for parties to the guidelines.
To date, the FCTC has been ratified by 181 countries, not including the US. The FCTC has led to increased efforts by tobacco-control advocates
and public health organisations to reduce the supply of, and demand, for tobacco products, and to encourage governments to further regulate
the tobacco industry. As national regulations increasingly reflect global influences, the scope of areas regulated will likely further expand.
The guidelines on advertising, promotion and sponsorship, for example, seek to broaden the definition of tobacco advertising to include product
display, the use of vending machines as well as the design of the pack itself. Where adopted by contracting parties, a number of the measures
referred to in the guidelines may result in either additional costs for the tobacco industry or restrictions on a manufacturer’s ability to differentiate
its products and communicate those differences to adult smokers. For example, a change in the number and size of on-pack health warnings
requires new printing cylinders to be commissioned, while the implementation of new plant protection product standards, product testing and
the submission of ingredients information to national governments require extensive resources, time and material.
EU Tobacco and Related Products Directive (2014/40/EU)
Other developments in regulation have been driven by tobacco control activities undertaken outside the FCTC process. For example, the EU
Tobacco Products Directive (2001/37/EC), referred to as TPD1, was adopted by the EU in May 2001 for transposition into EU member states’ laws
by September 2002. TPD1 included provisions that set maximum tar, nicotine and carbon monoxide yields, introduced larger health warnings
and banned descriptors such as ‘light’ and ‘mild’.
A revised TPD1, the EU Tobacco and Related Products Directive (2014/40/EU), referred to as the TPD2, was adopted in April 2014 for
transposition into EU member states’ law by May 2016. Provisions of the TPD2 include: larger combined pictorial and textual health warnings
covering 65% of the two main pack surfaces (front and back) for cigarettes; restrictions on pack shape and size, including minimum pack
sizes of 20 sticks for cigarettes and 30g for roll-your-own and make-your-own tobacco; increased ingredients reporting; ‘tracking and tracing’
requirements; and for e-cigarettes: nicotine limits, pre-market notification, ingredients reporting and advertising bans. Among other things, the
TPD2 bans the sale of cigarettes and roll-your-own tobacco with a characterising flavour. Menthol-flavoured cigarettes are exempt from the ban
until May 2020. (See ‘The US’ for information pertaining to the regulation of menthol in that market.)
The TPD2 also purports to leave open to EU member states the possibility of further standardising the packaging of tobacco products and to
apply its provisions in different ways. For example, it provides, among other things, that the labelling, packaging and the tobacco product itself
shall not include any element or feature that suggests that a particular tobacco product has vitalising, energetic, healing, rejuvenating, natural
or organic properties or has other health or lifestyle benefits. On 1 February 2017, the French government applied its laws transposing these
provisions into French national law to prohibit the sale of all variants of Vogue cigarettes from February 2018, as well as the use of certain other
tobacco brand and brand variant names. The law was subsequently annulled, but France may seek to reintroduce it. On 26 April 2019, Belgium
adopted a Royal Decree that allows the Minister of Health to establish a procedure to put brands on a prohibited list and to draw up such a list.
To date, such a procedure has not yet been established by the Belgian Minister of Health.
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Single‑use plastics
The Single Use Plastics Directive (EU) 2019/904 (the SUP Directive) entered into force on 02 July 2019. The Directive requires that EU
Member States introduce Extended Producer Responsibility (EPR) schemes covering the cost to clean up litter and the application of on-pack
marking requirements for tobacco product filters. Member States must transpose the SUP Directive into national law by 3 July 2021, with an
implementation deadline of 5 January 2023.
Other governments have passed or are considering similar legislation including Russia, South Korea and various levels of government in the
United States.
Restrictions on smoking in private, public and work places
The Group operates in a number of markets which have in place restrictions on smoking in certain private, public and work places, including
restaurants, bars and nightclubs. While these restrictions vary in scope and severity, extensive public and work place smoking bans have been
enacted in markets including the US, Canada, the UK, Spain, New Zealand and Australia. Restrictions on smoking in private have also been
adopted or proposed, and typically take the form of prohibitions on smoking in cars or residential homes when children are present, or smoking
within a certain distance from specified public places (such as primary schools).
Regulation of ingredients, including flavoured tobacco products
A number of countries have restricted and others are seeking to restrict or ban the use of certain flavours or ingredients in cigarettes and other
tobacco products, on the basis that such products are alleged to appeal disproportionally to minors, act as a catalyst for young people taking up
smoking and/or increase the addictiveness or toxicity of the relevant product.
In Canada, the manufacture and sale of cigarettes, little cigars and blunt wraps with characterising flavours are banned, and a federal menthol
ban for cigarettes is in effect across the country. In Australia, the majority of the states have banned flavours in cigarettes that give an ‘overtly’
fruit-flavoured taste and the government is reportedly considering further regulatory options. The TPD2 similarly bans the manufacture and
sale of cigarettes and roll-your-own tobacco with a characterising flavour other than tobacco, subject to an exemption until May 2020 for
menthol cigarettes.
An ingredients ban in Brazil, which would ban the use of certain ingredients with flavouring or aromatic properties, including menthol, is not currently in
force due to ongoing legal challenges. In Turkey, a ban on the use of menthol in cigarettes has been fully implemented as of 5 January 2020. A number
of the above regulations are subject to ongoing legal challenges. (See ‘The US’ for information pertaining to the regulation of menthol in that market).
Further legislation on ingredients is to be expected. In particular, the EU Commission is required to prepare a report by no later than 20 May
2021 in respect of, among other things, the benefits of establishing a single list of permitted ingredients at the EU level by reference to available
scientific evidence on the toxic and addictive effects of different ingredients. Similarly, the Conference of Parties to the FCTC has tasked a working
group to further elaborate the partial guidelines on the regulation of the contents of tobacco products and tobacco product disclosures.
Plain and standardised packaging
Plain (or ‘standardised’) packaging generally refers to a ban on the use of trademarks, logos and colours on packaging other than the use of a
single colour and the presentation of brand name and variant in a specified font and location(s). The presentation of individual cigarettes may be
similarly restricted.
Plain packaging is high on the agenda of tobacco control groups, and the FCTC guidelines recommend that contracting parties consider
introducing plain packaging. To date, 19 countries (including Australia, Belgium, Canada, France, Ireland, New Zealand, Saudi Arabia, Singapore,
Turkey, and the UK) have adopted plain packaging legislation, although in the majority of those countries the legislation has not yet been
fully implemented. Countries, territories and states that are currently considering adopting plain packaging legislation include, but are not
limited to, Brazil, Chile, Denmark, the Netherlands, and South Africa. Others, such as South Korea, are considering implementing large graphic
health warnings.
Product display bans at point of sale and licensing regimes
Product display bans at point of sale and licensing regimes have been in place in a number of countries for several years and have been
implemented both at national and state levels. Ireland was the first EU member state to introduce a point-of-sale display ban, which became
effective in July 2009, with Norway, Iceland, Finland, New Zealand, Thailand, Canada, Australia, the UK and a number of other countries
implementing or passing similar legislation banning tobacco displays. A number of countries, such as Hungary, have also sought to restrict the
supply of tobacco products, including through the adoption of licensing regimes limiting the number of retail outlets from which it is possible to
purchase tobacco products and/or by prohibiting the sale of tobacco products within a certain distance of specified public places.
Illicit trade
The illegal market for tobacco products is an increasingly important issue for governments and the industry across the world.
Euromonitor International estimates that approximately 456 billion cigarettes per year are smuggled, manufactured illegally or counterfeited.
A number of governments, regulators and organisations have or are considering adopting regulation to support anti-illicit trade activities.
Among other forms, such regulation may comprise mandatory ‘tracking and tracing’ requirements, enabling regulators to identify the point at
which any seized product left the legal supply chain, security features to combat counterfeiting and inspection and authentication obligations in
respect of seized product. The TPD2, for example, requires that all unit packets of tobacco are marked with a unique and irremovable identifier,
which when scanned provides various information about that product’s route to market.
In November 2012, the FCTC adopted the Protocol to Eliminate Illicit Trade in Tobacco Products which includes a raft of supply chain control
measures, including the implementation of ‘tracking and tracing’ technologies. The Protocol entered into force on 25 September 2018 and
was considered at the first session of the Meeting of the Parties to the Protocol in October 2018. As at 1 January 2020, 58 parties have ratified
the Protocol.
288
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Vapour products
More recently, significant debate has been generated regarding the appropriate regulation of vapour products, including regulation of the
nicotine liquids used in them. As the nascent vapour category has grown in size and complexity in a relatively short period of time, a consensus
framework for regulation and taxation has yet to emerge. The TPD2, for example, establishes frameworks for the regulation of novel tobacco
products and e-cigarettes, introducing nicotine limits, health warnings requirements, advertising bans and pre-market notification and post-
market disclosure obligations. Conversely, some governments have intentionally banned or are seeking to ban novel tobacco products and
products containing nicotine, while others would need to amend their existing legislation in order to permit their sale. For example, in Australia
nicotine is classified as poison, meaning that the importation of vaping products or nicotine refill liquids is illegal in every state and territory, as is
the possession and use of these products. Even in countries where the sale of vapour products is permitted, some governments have adopted,
or are seeking to adopt, bans on vaping in public places. Recent reports in North America of individuals experiencing acute respiratory injury in
suspected association with vaping certain e-liquids (EVALI) and youth usage have led to an increase in scrutiny of vapour products, especially at
State and Provincial levels in the United States and Canada.
The US
Through the RAI subsidiaries, the Group is subject to US federal, state and local laws and regulations. In 2009, President Obama signed into law
the Family Smoking Prevention and Tobacco Control Act (FSPTCA), which grants the US Food & Drug Administration (FDA) broad authority over
the manufacture, sale, marketing and packaging of tobacco products but at the outset limited the agency’s authority to cigarettes, smokeless
tobacco products, cigarette tobacco and roll-your-own tobacco products. Key elements of the FSPTCA include: filing of facility registrations,
product listing, constituent testing and ingredient information; obtaining FDA clearance for all new products or product modifications; banning
all characterising flavours other than tobacco or menthol in cigarettes; establishing ‘user fees’ to fund the FDA’s regulation of tobacco products;
increasing the health warning size on cigarette packs with the option to introduce pictorial health warnings; implementing good manufacturing
practices; revising the labelling and advertising requirements for smokeless tobacco products; and requiring the study of menthol. The US
Congress did limit the FDA’s authority in two areas, prohibiting it from:
– banning categories of tobacco products; and
– requiring the reduction of nicotine yields of a tobacco product to zero.
On 10 May 2016, the FDA issued a final regulation, referred to as the Deeming Rule, deeming all remaining products that meet the FSPTCA’s
definition of ‘tobacco product’ to be subject to the FDA’s regulatory authority under the FSPTCA. The Final Rule became effective as of 8 August
2016, though each requirement of the Final Rule has its own compliance date. Such newly ‘deemed’ tobacco products subject to the FSPTCA
include, among others, electronic nicotine delivery systems (including e-cigarettes, e-hookah, e-cigars, vape pens, advanced refillable personal
vapourisers, electronic pipes and e-liquids mixed in vape shops), certain dissolvable tobacco products, cigars and pipe tobacco.
The ‘grandfather’ date under the Final Rule for newly deemed products remains the same as the ‘grandfather’ date for those tobacco products
already subject to the FSPTCA – 15 February 2007. Any tobacco product that was not legally marketed as of 15 February 2007 will be considered
a new tobacco product subject to pre-market review by the FDA. The FDA has recognised that few, if any, e-cigarettes were on the market as of
15 February 2007, but thousands of such products (including R.J. Reynolds Vapor’s Vuse Digital Vapor Cigarette) subsequently have entered into
commerce. To address this issue, the FDA established a compliance policy regarding the pre-market review requirements for all newly deemed
tobacco products that are not grandfathered products, but were on the market as of 8 August 2016. The FDA will allow such products to remain
on the market so long as the manufacturer has filed the appropriate Premarket Tobacco Application (PMTA) by a specific deadline.
The Final Rule established staggered initial compliance periods based on the expected complexity of the applications to be submitted. On 28 July
2017, as part of the FDA’s announcement of a comprehensive regulatory plan for nicotine and tobacco, the FDA extended the deadline for
submission of PMTAs for newly deemed products by several years (for e-cigarettes, the new deadline was August 2022). However, as a result of
legal action, in July 2019 a federal court ultimately brought forward the filing deadline for non-combustible products to 12 May 2020. This court
decision has been appealed and is currently under judicial review. In October 2019, R.J. Reynolds Vapor filed PMTAs for Vuse Solo and intends
to file PMTAs for Vuse Vibe, Ciro, and Alto, as well as Revel and Velo, by May 2020. In the case of the later three PMTAs, certain data from
ongoing tests will not be included, but will be submitted during the FDA review process. Based on the FDA’s draft guidance setting forth the
type of evidence that must be included within a pre-market review application, R.J. Reynolds Vapor expects the costs of preparing a PMTA to
be significant.
In January 2020, the FDA reinforced the filing deadline of 12 May 2020 in its Guidance related to vapor, but reversed its previous compliance
policy that allowed products to remain on the market without a PMTA and to enforce (as of February 2020) the PMTA requirements on certain
products as follows: 1) Flavoured, cartridge-based vapor products except for tobacco- or menthol-flavoured products; 2) All other vapor products
for which the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; 3) Any vapor products that
targets or whose marketing is likely to promote use by minors; and 4) Any vapor product that is offered for sale in the United States after 12 May
2020, and for which the manufacturer has not submitted a premarket application. Flavoured disposable vapor products and flavoured open
systems would remain available for sale unless 1) the manufacture has failed to take adequate measures to prevent minors’ access, 2) product that
targets or whose marketing is likely to promote use by minors, or 3) fails to file PMTA by 12 May 2020.
289
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 REGULATION OF THE GROUP’S BUSINESS
CONTINUED
Comprehensive plan for tobacco and nicotine regulation
On 28 July 2017, the FDA announced its intent to develop a comprehensive plan for tobacco and nicotine regulation that recognises the
continuum of risk for nicotine delivery. As part of that plan, the FDA planned to publish an Advance Notice of Proposed Rulemaking (ANPRM) to
seek public input regarding the potential health benefits and possible adverse effects of lowering the level of nicotine in combustible cigarettes.
The ANPRM would request comments from interested stakeholders regarding the potential impact of a nicotine product standard on, among
other things:
– the likelihood that existing users of tobacco products will stop using cigarettes;
– the likelihood that those who do not use tobacco products will start using such products; and
– the illicit trade of cigarettes containing nicotine at levels higher than a non-addictive nicotine threshold.
In addition, the Center for Tobacco Products (CTP), which was established within the FDA in 2009, will coordinate with the FDA Center for Drug
Evaluation and Research regarding medicinal nicotine and other therapeutic products as part of an agency-wide nicotine framework. As part
of the comprehensive plan, the FDA also announced its intent to issue ANPRMs requesting public stakeholder input on the impact of flavours
(including menthol) in increased initiation among youth and young adults as well as assisting adult smokers to switch to potentially less harmful
forms of nicotine delivery, and the patterns of use and public health impact of premium cigars. This follows on from the FDA’s decision to issue its
own preliminary scientific evaluation regarding menthol cigarettes in 2013, which concluded that menthol cigarettes adversely affect initiation,
addiction and cessation compared to non-menthol cigarettes.
In 2018, the FDA took several steps to further this plan. Firstly, in January 2018, the FDA held a public hearing to obtain input from a broad group
of stakeholders on ways to streamline the regulatory process for the issuance of therapeutic claims for nicotine products. Secondly, in March
2018, the agency issued three ANPRMs, seeking information on (1) the lowering of nicotine levels to non-addictive or minimally addictive levels,
(2) the impact of flavours (including menthol) in increased initiation among youth and young adults as well as assisting adult smokers to switch to
potentially less harmful forms of nicotine delivery, and (3) the patterns of use and public health impact of premium cigars.
Additional regulation
In addition to the ANPRMs on reduced nicotine products and flavours, the FDA, in April 2019, issued a proposed rule on the format and content
of substantial equivalence applications. This follows on the FDA’s previous statements regarding the development of foundational rules so as to
provide clarity and predictability to the tobacco product submission process, including not only substantial equivalence applications but new
product applications as well as MRTP applications. To that end, FDA, in September 2019, published a proposed rule on the format and content of
Premarket Tobacco Product Applications.
Under the FSPTCA, for a manufacturer to launch a new tobacco product or modify an existing tobacco product after 22 March 2011, the
manufacturer must obtain an order from the CTP allowing the new or modified product to be marketed. Similarly, a manufacturer that
introduced a cigarette or smokeless tobacco product between 15 February 2007 and 22 March 2011 was required to file a substantial
equivalence report with the CTP demonstrating either (1) that the new or modified product had the same characteristics as a product
commercially available as at 15 February 2007, referred to as a predicate product, or (2) if the new or modified product had different
characteristics than the predicate product, that it did not raise different questions of public health. A product subject to such report is referred
to as a provisional product. A manufacturer may continue to market a provisional product unless and until the CTP issues an order that the
provisional product is not substantially equivalent (NSE), in which case the FDA could then require the manufacturer to remove the provisional
product from the market. Substantially, all RAI subsidiaries’ products currently on the market are provisional products. At present, there is
substantial uncertainty over the approaches that the FDA and CTP will take to determining RAI subsidiaries’ MRTP applications, PMTAs and
substantial equivalence reports.
In January 2017, the FDA issued its first proposed product standard just prior to President Trump’s inauguration whereby the agency would
require the reduction, over a three-year period, of the levels of N-nitrosonornicotine (NNN) contained in smokeless tobacco products.
Since issuing this proposal, the agency has simply stated that it is evaluating submitted comments. It is not known whether or when this
proposed rule will be adopted, and, if adopted, whether the final rule will be the same as or similar to the proposed rule.
On 18 December 2017, the CTP accepted for review MRTP applications for six Camel Snus smokeless tobacco products. In 2018, the CTP began
its review of these applications which included facility inspections and a meeting on 13-14 September 2018 before the Tobacco Product Scientific
Advisory Committee for its review and recommendation. The FDA is completing its independent review of the applications with no announced
deadline for the agency to complete its review.
Cigarettes and other tobacco products are subject to substantial taxes in the US. All states and the District of Columbia currently impose cigarette
excise taxes. Certain city and county governments, such as New York, Philadelphia and Chicago, also impose substantial excise taxes on cigarettes
sold in those jurisdictions. Also, all states and the District of Columbia currently subject smokeless tobacco products to excise taxes. Various states
and the District of Columbia impose a tax on vapour products, such as e-cigarettes, and many other states have proposed taxes on vapour
products. Currently, there is no federal tax on vapour products, such as e-cigarettes.
State and local governments also consider and implement other legislation and regulation regarding the sale of tobacco products.
Measures include, among others, limiting or prohibiting the sale of flavours in tobacco products, restricting where tobacco products may be sold
and increasing the minimum age to purchase tobacco products.
The Group believes that, as a responsible business, it can contribute through information, ideas and practical steps, to help regulators address the
key issues regarding its products, including underage access, illicit trade, product information, product design, involuntary exposure to smoke
and the development of potentially less harmful products, while maintaining a competitive market that accommodates the significant percentage
of adults who choose to be tobacco consumers. The Group is committed to working with national governments and multilateral organisations
and welcomes opportunities to participate in good faith to achieve sensible and balanced regulation of traditional tobacco and potentially
reduced-risk products.
290
Additional DisclosuresBAT Annual Report and Form 20-F 2019 DISCLOSURE PURSUANT TO SECTION 219 OF THE
IRAN THREAT REDUCTION AND SYRIA HUMAN
RIGHTS ACT OF 2012 (ITRA)
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires
an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities,
transactions or dealings relating to Iran or with designated natural persons or entities sanctioned under programmes relating to terrorism or the
proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the
US by non-US affiliates in compliance with applicable law, and whether or not the activities are sanctionable under US law.
As of the date of this report, BAT is not aware of any activity, transaction or dealing by the Group or any of its affiliates during the financial year
ended 31 December 2019 that is disclosable under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and Section
13(r) of the Exchange Act, except as set forth below. This information is to the best of BAT’s knowledge.
BAT has a local operation in Iran, established on 18 October 2003, through its wholly-owned non-US subsidiary, B.A.T. Pars Company (Private
Joint Stock) (BAT Pars). BAT Pars produces its products, which include Kent, Pall Mall and Montana brands, in its own factory in Eshtehard, which
is in the Alborz province of Iran. BAT Pars distributes its product via 75 sub-agents with national and provincial distribution licences, who sell
products to wholesalers and retailers with the support of BAT Pars’ sales representatives. BAT Pars has 307 direct employees and an additional
1,159 contract workers supplied by a private company.
Concerning the business of BAT Pars, various elements such as income tax, payroll, social security, other taxes, excise, monopoly fees, duties and
other fees, including for utilities, licences and judicial fees to commence litigation, are payable to the Government of Iran and affiliated entities
regarding BAT Pars’ operation. BAT Pars maintains bank accounts in Iran with various banks to facilitate its operations in the country and to make
any required payments, as described above, to the Government of Iran and affiliated entities regarding its operations.
During the year ended 31 December 2019, BAT did not have any gross revenues or net profits derived from transactions with the Government of
Iran or affiliated entities.
BAT believes, and maintains policies and procedures designed to ensure, that its activities in Iran and elsewhere comply in all material aspects with
the applicable and relevant trade sanctions laws and regulations, including US and other international trade sanctions and/or embargoes. BAT’s
sanctions policies and procedures have been designed to be as robust as possible. However, there can be no absolute assurance that these policies
and procedures will be effective. Were they to be ineffective, penalties or sanctions could be imposed against BAT, which could be material.
To the extent permitted under applicable law, and as long as it continues to meet BAT’s risk management and operational requirements, BAT Pars’
activities in Iran are expected to continue.
291
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 MATERIAL
CONTRACTS
The Master Settlement Agreement & State Settlement Agreements
In 1998, the major US cigarette manufacturers (including R.J. Reynolds Tobacco Company, Lorillard and Brown & Williamson, businesses which
are now part of Reynolds American) entered into the Master Settlement Agreement (MSA) with attorneys general representing most US states
and territories. The MSA imposes a perpetual stream of future payment obligations on the major US cigarette manufacturers. The amounts of
money that the participating manufacturers are required to annually contribute are based upon, among other things, the volume of cigarettes
sold and market share (based on cigarette shipments in that year).
During 2012, R.J. Reynolds Tobacco Company, various other tobacco manufacturers, 17 states, the District of Columbia and Puerto Rico
reached a final agreement related to Reynolds American’s 2003 MSA activities, and three more states joined the agreement in 2013. Under this
agreement, R.J. Reynolds Tobacco Company has received credits of more than US$1 billion in respect of its Non-Participating Manufacturer
(NPM) Adjustment claims related to the period from 2003 to 2012. These credits have been applied against the company’s MSA payments
over a period of five years from 2013, subject to, and dependent upon, meeting the various ongoing performance obligations. During 2014,
two additional states agreed to settle NPM disputes related to claims for the period 2003 to 2012. R.J. Reynolds Tobacco Company received
US$170 million in credits, which have been applied over a five-year period from 2014. During 2015, another state agreed to settle NPM disputes
related to claims for the period 2004 to 2014. R.J. Reynolds Tobacco Company received US$285 million in credits, which have been applied over
a four-year period from 2016. During 2016, no additional states agreed to settle NPM disputes. During 2017, two more states agreed to settle
NPM disputes related to claims for the period 2004 to 2014. It is estimated that R.J. Reynolds Tobacco Company will receive US$61 million in
credits, which will be applied over a five-year period from 2017. During 2018, nine more states agreed to settle NPM disputes related to claims
for the period 2004 to 2019, with an option through 2022, subject to certain conditions. It is estimated that R.J. Reynolds Tobacco Company will
receive US$182 million in credits for settled periods through 2017, which will be applied over a five-year period from 2018. Also in 2018, one
additional state agreed to settle NPM disputes related to claims for the period 2004 to 2024, subject to certain conditions. It is estimated that R.J.
Reynolds Tobacco Company will receive US$205 million in credits for settled periods through 2017, which will be applied over a five-year period
from 2019. Credits in respect of future years’ payments and the NPM Adjustment claims would be accounted for in the applicable year and will
not be treated as adjusting items. Only credits in respect of prior year payments are included as adjusting items.
The BAT Group is subject to substantial payment obligations under the MSA and the state settlement agreements with the states of Mississippi,
Florida, Texas and Minnesota (such settlement agreements, collectively State Settlement Agreements). RAl’s operating subsidiaries’ expenses and
payments under the MSA and the State Settlement Agreements for 2019 amounted to US$2,762 million in respect of settlement expenses and
US$2,918 million in respect of settlement cash payments. RAl’s operating subsidiaries’ expenses and payments under the MSA and the State
Settlement Agreements for 2018 amounted to US$2,741 million in respect of settlement expenses and US$917 million in respect of settlement
cash payments.
292
Additional DisclosuresBAT Annual Report and Form 20-F 2019 Change of control provisions as at 31 December 2019
Significant agreements
Nature of agreement
Key provisions
The revolving credit facilities agreement effective 25 July 2017 and
entered into between the Company, B.A.T. International Finance p.l.c.,
B.A.T. Netherlands Finance B.V., British American Tobacco Holdings
(The Netherlands) B.V. and B.A.T Capital Corporation (as borrowers
and, in the case of the Company, as a guarantor) and HSBC Bank plc
(as agent) and certain financial institutions (as lenders), pursuant to
which the lenders agreed to make available to the borrowers £6 billion
for general corporate purposes (the Facility).
Term loan facilities agreement dated 16 January 2017: B.A.T.
International Finance p.l.c. and B.A.T Capital Corporation
(as borrowers), the Company, (as guarantor) and HSBC Bank plc (as
agent) and certain financial institutions (as lenders) pursuant to which
the lenders agreed to make available to the borrowers US$25 billion
for the acquisition of RAI. Facilities A and B have been repaid and
facilities C and D, totalling the sterling equivalent of US$5 billion,
are still outstanding.
Packaging Materials Agreement dated 8 April 2015, between Souza
Cruz S.A. and Amcor Group GmbH for the production and supply
of packaging for a value of R$1.5 billion.
On 25 July 2017, the Company acceded as a guarantor under the
indenture of its indirect, wholly-owned subsidiary RAI. The securities
issued under the indenture include approximately US$11 billion
aggregate principal amount of unsecured RAI debt securities.
– should a borrower (other than the Company) cease to be a direct or
indirect subsidiary of the Company, such borrower shall immediately
repay any outstanding advances made to it; and
– where there is a change of control in respect of the Company,
the lenders can require all amounts outstanding under the Facility
to be repaid.
– should a borrower cease to be a direct or indirect subsidiary of the
Company, such borrower shall immediately repay any outstanding
advances made to it; and
– where there is a change of control in respect of the Company,
the lenders can require all amounts outstanding under the term
loan facilities to be repaid.
– that either party may terminate the agreement in the event of any
direct or indirect acquisition of at least 25% of the voting shares of
the supplier and/or its affiliates by directly or indirectly a competitor
of Souza Cruz S.A., importer or distributor.
– with respect to each series of debt securities issued under the
indenture, upon a change of control event, combined with a credit
ratings downgrade of the series to below investment-grade level (such
downgrade occurring on any date from the date of the public notice
of an arrangement that could result in a change of control event until
the end of the 60-day period following public notice of the
occurrence of a change of control event), RAI is obligated to make an
offer to repurchase all debt securities from each holder of debt
securities. As a guarantor under the indenture, the Company
guarantees such payments.
LTIPs
The rules of the long-term incentive plans 2007 and 2016 (the LTIPs).
– in the event of a change of control of the Company as a result of a
takeover, reconstruction or winding-up of the Company (not being an
internal reorganisation), LTIP awards will become exercisable for
a limited period based on the period of time that has elapsed since
the date of the award and the achievement of the performance
conditions at that date, unless the Remuneration Committee
determines this not to be appropriate in the circumstances; and
– the rules of the LTIPs allow (as an alternative to early release) that
participants may, if permitted, exchange their LTIP awards for new
awards of shares in the acquiring company on a comparable basis.
293
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 PROPERTY, PLANT
AND EQUIPMENT
The Group uses a combination of in-house and contract manufacturers to manufacture its products.
BAT‑owned manufacturing facilities1
Fully integrated cigarette manufacturing
Sites processing tobacco only
Site manufacturing other tobacco products, Snus, Modern Oral
and Liquids
R&D facilities and Product Centres
Total
Note:
1. As of 31 December 2019.
United States
APME
AmSSA
ENA
Total
2
1
3
1
7
16
7
–
1
24
15
9
–
3
27
12
2
5
2
21
45
19
8
7
79
The plants and properties owned or leased and operated by the Group’s subsidiaries are maintained in good condition and are believed to be
suitable and adequate for the Group’s present needs.
The technology employed in the Group’s factories is sophisticated, especially in the area of cigarette making and packing where throughputs can
reach between 500 and 1,000 packs per minute. The Group can produce many different pack formats (e.g., the number of cigarettes per packet)
and configurations (e.g., bevel edge, round corner, international) to suit marketing and consumer requirements. New technology machines are
sourced from the leading machinery suppliers to the industry. Close cooperation with these organisations helps the Group support its marketing
strategy by driving its product innovations, which are brought to the market on a regular basis.
The Group utilises quality standards, processes and procedures covering the entire end-to-end value chain to help to ensure quality products are
provided to its customers and adult tobacco consumers according to the Group’s requirements and end market regulatory requirements.
The Group has several improvement initiatives which it is currently managing. For example, the Group is continuing to realise the benefits of its
Integrated Work System Programme launched in 2014, which is centrally led with an aim to improve the performance of the Group’s factories
globally by focusing on manufacturing standards, continuous improvement, assessment and benchmarking, and organisational development.
The Group also utilises a survey process in the factories with an aim to improve factory productivity and reduce costs in the manufacturing
environment. This process, known as ‘Bulls Eye’, has been in existence for a number of years and highlights productivity opportunities
by benchmarking.
In 2019, the Group manufactured cigarettes in 45 cigarette factories in 43 countries. These plants and properties are owned or leased and
operated by the Group’s subsidiaries. The Group’s factory outputs and establishments vary significantly in size and production capacity.
In 2019, the Group used third-party manufacturers to manufacture the components required, including the devices, related to New Categories.
The Group also used third-party manufacturers to supplement the Group’s own production facilities in the US and Poland to bottle the liquids
used in the vapour products.
For more information on property, plant and equipment, see note 9 in the Notes on the Accounts.
294
Additional DisclosuresBAT Annual Report and Form 20-F 2019 US CORPORATE
GOVERNANCE PRACTICES
Principles
In the US, ADSs of the Company are listed on the New York Stock Exchange (NYSE). The significant differences between the Company’s
corporate governance practices as a UK company and those required by NYSE listing standards for US companies are discussed below.
The Company has applied a robust set of board governance principles, which reflect the UK Corporate Governance Code 2018 and its principles-
based approach to corporate governance. NYSE rules require US companies to adopt and disclose on their websites corporate governance
guidelines. The Company complies with UK requirements, including a statement in this report of how the Company has applied the principles of
the UK Corporate Governance Code 2018 and that the Company has complied with the provisions of the UK Corporate Governance Code 2018.
Independence
The Company’s Board governance principles require that all Non-Executive Directors be determined by the Board to be independent in character
and judgement and free from any business or other relationships that could interfere materially with, or appear to affect, their judgement.
The Board also has formal procedures for managing conflicts of interest. The Board has determined that, in its judgement, all of the Non-
Executive Directors are independent. In doing so, the Board has taken into consideration the independence requirements outlined in the NYSE’s
listing standards and considers these to be met by the Chairman and all of its Non-Executive Directors.
Committees
The Company has a number of Board Committees that are broadly comparable in purpose and composition to those required by NYSE rules
for domestic US companies. For instance, the Company has a Nominations (rather than nominating/corporate governance) Committee and
a Remuneration (rather than compensation) Committee. The Company also has an Audit Committee, which NYSE rules require for both US
companies and foreign private issuers.
These Committees are composed solely of Non-Executive Directors and, in the case of the Nominations Committee, the Chairman whom the
Board has determined to be independent in the manner described above.
Each Board Committee has its own terms of reference, which prescribe the composition, main tasks and requirements of each of the Committees
(see the Board Committee reports on pages 79, 83 and 111).
Under US securities law and the listing standards of the NYSE, the Company is required to have an audit committee that satisfies the requirements
of Rule 10A-3 under the Exchange Act and Section 303A.06 of the NYSE Listed Company Manual. The Company’s Audit Committee complies
with these requirements. The Company’s Audit Committee does not have direct responsibility for the appointment, reappointment or removal of
the independent auditors. Instead, it follows the UK Companies Act 2006 by making recommendations to the Board on these matters for it to put
forward for shareholder approval at the AGM.
One of the NYSE’s additional requirements for the audit committee states that at least one member of the audit committee is to have ‘accounting
or related financial management expertise’. The Board has determined that Luc Jobin, Holly Keller Koeppel and Kieran Poynter possess such
expertise and also possess the financial and audit committee experiences set forth in both the UK Corporate Governance Code 2018 and SEC
rules (see the Audit Committee report on page 83). Mr Jobin, Ms Keller Koeppel and Mr Poynter have also each been designated as an Audit
Committee financial expert as defined in Item 16.A. of Form 20-F. The Board has also determined that each Audit Committee member meets the
financial literacy requirements applicable under NYSE listing standards.
Shareholder approval of equity compensation plans
The NYSE rules for US companies require that shareholders must be given the opportunity to vote on all equity-compensation plans and material
revisions to those plans. The Company complies with UK requirements that are similar to the NYSE rules. The Board, however, does not explicitly
take into consideration the NYSE’s detailed definition of what are considered ‘material revisions’.
Codes of business conduct and ethics
The NYSE rules require US companies to adopt and disclose a code of business conduct and ethics for all directors, officers and employees
and promptly disclose any waivers of the code for directors or executive officers. The Group Standards of Business Conduct (SoBC) described
on pages 30 to 32 apply to all staff in the Group, including senior management and the Board, and satisfy the NYSE requirements. All Group
companies have adopted the SoBC (or localised versions). The SoBC also set out the Group’s whistleblowing policy, enabling staff, in confidence
and anonymously, to raise concerns without fear of reprisal, including concerns regarding questionable accounting or auditing matters. The SoBC
is available at bat.com/sobc.
The Company has also adopted a code of ethics for its Chief Executive, Finance Director, Group Financial Controller and Group Chief Accountant
as required by the provisions of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules issued by the SEC. No waivers or exceptions to the
Code of Ethics were granted in 2019. The Code of Ethics includes requirements in relation to confidentiality, conflicts of interest and corporate
opportunities, and obligations for those senior financial officers to act with honesty and integrity in the performance of their duties and to
promote full, fair, accurate, timely and understandable disclosures in all reports and other documents submitted to the SEC, the UK Financial
Conduct Authority, and any other regulatory agency.
The Company considers that these codes and policies address the matters specified in the NYSE rules for US companies.
Independent director contact
Interested parties may communicate directly with the independent directors, individually or as a group, by sending written correspondence
addressed to the independent director(s) to the attention of the Company Secretary at the following address: c/o Paul McCrory, Company
Secretary, British American Tobacco p.l.c., Globe House, 4 Temple Place, London WC2R 2PG.
295
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 CONTROLS AND
PROCEDURES
Evaluation of disclosure controls and procedures
Disclosure controls and procedures
The Group maintains ‘disclosure controls and procedures’ (as such term is defined in Exchange Act Rule 13a-15(e)), that are designed to ensure
that information required to be disclosed in reports the Group files or submits under the Exchange Act is recorded, processed, summarised
and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to
management, including the Chief Executive and Finance Director, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, our management, including the Chief Executive and Finance Director,
recognise that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the objectives of the disclosure controls and procedures are met. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Group have been detected. The Group’s
disclosure controls and procedures have been designed to meet, and management believes that they meet, reasonable assurance standards.
Management, with the participation of the Chief Executive and Finance Director, has evaluated the effectiveness of the Group disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this annual report. Based on that evaluation,
the Chief Executive and Finance Director have concluded that the Group disclosure controls and procedures were effective at a reasonable
assurance level.
Management’s report on internal control over financial reporting
Management, under the oversight of the Chief Executive and the Finance Director, is responsible for establishing and maintaining adequate
internal control over financial reporting for the Group. The Group’s internal control over financial reporting consists of processes which are
designed to: provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Group’s financial statements
for external reporting purposes in accordance with IFRS as adopted by the EU and IFRS as issued by the IASB; provide reasonable assurance that
receipts and expenditure are made only in accordance with the authorisation of management; and provide reasonable assurance regarding the
prevention or timely detection of any unauthorised acquisition, use or disposal of assets that could have a material effect on the consolidated
financial statements.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of the internal control over financial
reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the US Securities Exchange Act of 1934) based on the updated Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) (2013). Based on
that assessment, management has determined that the Group’s internal control over financial reporting was effective as at 31 December 2019.
Any internal control framework, no matter how well designed, has inherent limitations, including the possibility of human error and the
circumvention or overriding of controls and procedures and may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because
the degree of compliance with the policies or procedures may deteriorate.
»KPMG LLP, an independent registered public accounting firm, who also audit the Group’s consolidated financial statements, has audited the
effectiveness of the Group’s internal control over financial reporting as at 31 December 2019 and has issued an unqualified report thereon,
which is included in this document.»
Changes in internal control over financial reporting
During the period covered by this report, there were no changes in the Group’s internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the effectiveness of internal control over financial reporting.
STATEMENTS REGARDING
COMPETITIVE POSITION
Statements referring to the competitive position of BAT and its subsidiaries are based on the Group’s belief and best estimates. In certain cases,
such statements and figures rely on a range of sources, including investment analyst reports, independent market surveys, and the Group’s own
internal assessments of market share.
296
Additional DisclosuresBAT Annual Report and Form 20-F 2019 DIRECTORS’ REPORT
INFORMATION
This Other Information section of the British American Tobacco Annual Report and Form 20-F, which includes Additional Disclosures and
Shareholder Information, forms part of, and includes certain disclosures which are required by law to be included in, the Directors’ Report.
Strategic Report disclosures
Section 414C(11) of the Companies Act 2006 allows the Board to include in the Strategic Report information that it considers to be of strategic
importance that would otherwise need to be disclosed in the Directors’ Report. The Board has chosen to take advantage of this provision and
accordingly, the information set out below, which would otherwise be required to be contained in the Directors’ Report, has been included in
the Strategic Report.
Information required in the Directors’ Report
Information on dividends
Certain risk information about the use of financial instruments
An indication of likely future developments in the business of the Group
An indication of the activities of the Group in the field of research and development
A statement describing the Group’s policy regarding the hiring, continuing employment
and training, career development and promotion of disabled persons
Details of employee engagement: information, consultation, regard to employee interests,
share scheme participation and the achievement of a common awareness of the financial
and economic factors affecting the performance of the Group
Details of business relationships: Directors’ regard to business relationships with customers,
suppliers and other external stakeholders
Details of charitable donations
Disclosures concerning greenhouse gas emissions
Section in the Strategic Report
Financial review
Financial review
A strategy for accelerated growth
Building world-class capabilities for innovation
Our business model
Delivering our strategy: Winning organisation
Engaging with our stakeholders
Delivering our strategy: Winning organisation
Engaging with our stakeholders
Delivering our strategy: Sustainability
Delivering our strategy: Sustainability
Shareholder information disclosures
Information required in the Directors’ Report
Change of control provisions
Information on dividends
Share capital – structure and voting rights; restrictions on transfers of shares
Major shareholders
Directors – appointment and retirement
Amendment of Articles of Association
Directors – share buy-back powers
Listing Rules (LRs) disclosures
For the purpose of LR 9.8.4C R the applicable information
required to be disclosed by LR 9.8.4 R
Section (12) – shareholder waivers of dividends
Section in Other Information
Material contracts
Dividends
Articles of Association
Share capital and security ownership
Articles of Association
Articles of Association
Purchases of shares
Section in Other Information
Group Employee Trust
Section (13) – shareholder waivers of future dividends
Group Employee Trust
Directors: interests and indemnities
Interests
– details of Directors’ remuneration and emoluments, and their interests in the Company’s shares (including share options and
deferred shares) as at 31 December 2019 are given in the Remuneration Report; and
– no Director had any material interest in a contract of significance (other than a service contract) with the Company or any
subsidiary company during the year.
Insurance
Indemnities
– appropriate cover provided in the event of legal action against the Company’s Directors.
– provision of indemnities to Directors in accordance with the Company’s Articles of Association and to the maximum extent permitted by
law; and
– as at the date of this report, such indemnities are in force covering any costs, charges, expenses or liabilities that they may incur in or
about the execution of their duties to the Company or to any entity which is an associated company (as defined in Section 256 of the
Companies Act 2006), or as a result of duties performed by them on behalf of the Company or any such associated company.
Directors’ Report approval and signature
The Directors’ Report comprises the information on pages 63 to 89 and page 114@ and pages 254 to 323. The Directors’ Report was approved
by the Board of Directors on 17 March 2020 and signed on its behalf by Paul McCrory, Company Secretary.
297
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 CAUTIONARY
STATEMENT
This document contains certain forward-looking statements, including “forward-looking” statements made within the meaning of Section 21E
of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases
such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,”
“project,” “positioned,” “strategy,” “outlook”, “target” and similar expressions. These include statements regarding our intentions, beliefs or
current expectations concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and
the economic and business circumstances occurring from time to time in the countries and markets in which the Group operates. In particular,
among other statements: (i) certain statements in the Overview section (pages 2 to 19), including the Chairman’s introduction, Chief Executive’s
review and Finance Director’s overview; (ii) certain statements in the Strategic Management section (pages 20 to 42), including the Global
industry overview; (iii) certain statements in the Financial Review section (pages 43 to 57), including the Treasury and cash flow section and going
concern discussions; and (iv) certain statements in the Other Information section (pages 254 to 323), including the Additional disclosures and
Shareholder information sections.
All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause
actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the
forward-looking statements and other financial and/or statistical data within this document. Among the key factors that could cause actual results
to differ materially from those projected in the forward-looking statements are uncertainties related to the following: the impact of competition
from illicit trade; the impact of adverse domestic or international legislation and regulation; changes in domestic or international tax laws and
rates and the impact of an unfavourable ruling by a tax authority in a disputed area; adverse litigation and dispute outcomes and the effect of
such outcomes on the Group’s financial condition; changes or differences in domestic or international economic or political conditions; adverse
decisions by domestic or international regulatory bodies; the impact of market size reduction and consumer down-trading; translational and
transactional foreign exchange rate exposure; the impact of serious injury, illness or death in the work place; the ability to maintain credit ratings
and to fund the business under the current capital structure; the inability to develop, commercialise and deliver the New Categories strategy; and
changes in the market position, businesses, financial condition, results of operations or prospects of the Group. Further details on the principal
risks that may affect the Group can be found in the ‘Principal Group risks’ section of the Strategic Report on pages 58 to 62 of this document.
A summary of all the risk factors (including the principal risks) which are monitored by the Board through the Group’s risk register is set out in
the Additional Disclosures section under the heading ‘Group risk factors’ on pages 272 to 286.
It is believed that the expectations reflected in this document are reasonable but they may be affected by a wide range of variables that could
cause actual results to differ materially from those currently anticipated. Past performance is no guide to future performance and persons needing
advice should consult an independent financial adviser. The forward-looking statements reflect knowledge and information available at the date of
preparation of this document and the Group undertakes no obligation to update or revise these forward-looking statements, whether as a result of
new information, future events or otherwise. Readers are cautioned not to place undue reliance on such forward-looking statements.
No statement in this document is intended to be a profit forecast and no statement in this document should be interpreted to mean that earnings
per share of BAT for the current or future financial years would necessarily match or exceed the historical published earnings per share of BAT.
298
Additional DisclosuresBAT Annual Report and Form 20-F 2019 SHARE PRICES
AND LISTINGS
Premium listing – London Stock Exchange (LSE)
The primary market for BAT’s ordinary shares is the LSE (Share Code: BATS; ISIN: GB0002875804). BAT’s ordinary shares have been listed on the
LSE main market since 8 September 1998 and are a constituent element of the Financial Times Stock Exchange (FTSE) 100 Index.
Secondary listing – Johannesburg Stock Exchange (JSE Limited), South Africa
BAT’s ordinary shares have a secondary listing and are traded in South African rand on the Main Board of the JSE in South Africa (Abbreviated
name: BATS; Trading code: BTI). BAT’s ordinary shares have been listed on the JSE since 28 October 2008 and are a constituent element of the
JSE Top 40 Index.
American Depositary Shares (ADSs) – New York Stock Exchange (NYSE)
BAT ordinary shares trade in the form of BAT ADSs in the United States under the symbol BTI (CUSIP Number: 110448107). The BAT ADSs have
been listed on the NYSE since 25 July 2017 as a Sponsored Level III ADS programme for which Citibank, N.A. is the depositary (the ‘Depositary’)
and transfer agent. Each ADS represents one ordinary share. ADSs are evidenced by American Depositary Receipts (ADRs).
Share prices
The high and low prices at which the Company’s ordinary shares and ADSs are recorded as having traded during the year on each of the LSE,
JSE and NYSE are as follows:
LSE
JSE
NYSE
High
Low
£32.88
R606.84
£23.75
R424.18
US$42.80 US$31.41
299
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 DIVIDENDS
Policy
The Group’s policy is to pay dividends of 65% of long-term sustainable earnings, calculated with reference to adjusted diluted earnings per share,
as defined on page 264, and reconciled from earnings per share in note 7 in the Notes on the Accounts. Please see page 47 of this Annual Report
and Form 20-F 2019 for further discussion on the Group’s dividend.
Currencies and exchange rates
Details of foreign exchange rates are set out in the Financial Review section of the Strategic Report on page 51 of this Annual Report and
Form 20-F 2019. There are currently no UK foreign exchange controls or restrictions on remittance of dividends on the ordinary shares or on
the conduct of the Company’s operations, other than restrictions applicable to certain countries and persons subject to EU economic sanctions
or those sanctions adopted by the UK Government which implement resolutions of the Security Council of the United Nations.
American Depositary Shares – Dividends
The following table shows the dividends paid by British American Tobacco p.l.c. in the years ended 31 December 2015 to 31 December
2019 inclusive.
Announcement
Year
Payment
2015
2016
May
September/October
May
September/October
Dividend period
Final 2014
Interim 2015
Total
Final 2015
Interim 2016
Total
Announcement
Year
Payment
2017
2018
2019
May
September/October
February 2018
May
August
November
February 2019
May
August
November
February 2020
Dividend Period
Final 2016
Interim 2017
Second Interim 2017
Total
Quarterly Interim 2018
Quarterly Interim 2018
Quarterly Interim 2018
Quarterly Interim 2018
Total
Quarterly Interim 2019
Quarterly Interim 2019
Quarterly Interim 2019
Quarterly Interim 2019
Total
Dividend per BAT ordinary share
GBP
Dividend per BAT ADS1
ADS ratio 2:1
USD2
1.006
0.494
1.500
1.046
0.513
1.559
Dividend Per BAT Ordinary Share
GBP
1.181
0.565
0.436
2.182
0.488
0.488
0.488
0.488
1.952
0.5075
0.5075
0.5075
0.5075
2.0300
3.0616600
1.4928680
4.5545280
3.0292160
1.3324660
4.3616820
Dividend Per BAT ADS1
ADS ratio 1:1
USD2
1.5239380
0.7585690
0.6068680
2.8893750
0.6611420
0.6281530
0.6217120
0.6324960
2.5435030
0.6596990
0.6155970
0.6521370
0.6571610
2.5845940
Notes:
1. ADS ratio change: prior to 14 February 2017, each BAT ADS represented two BAT ordinary shares; from 14 February 2017, each BAT ADS represents one BAT ordinary share.
2. Holders of BAT ADSs: dividends are receivable in US dollars based on the £ sterling/US dollar exchange rate on the applicable ADS payment date, being three business days after the payment date for
the BAT ordinary shares.
300
Shareholder InformationBAT Annual Report and Form 20-F 2019 Quarterly Dividends for the year ended 31 December 2019
On 26 April 2017, the Group announced its move to quarterly dividends with effect from 1 January 2018.
The Board has declared an interim dividend of 210.4p per ordinary share of 25p which is payable in four equal quarterly instalments of 52.6p per
ordinary share in May 2020, August 2020, November 2020 and February 2021. This represents an increase of 3.6% on 2018 (2018: 203.0p per
share), and a payout ratio, on 2019 adjusted diluted earnings per share, of 65.0%.
The quarterly dividends will be paid to shareholders registered on either the UK main register or the South Africa branch register and to ADS
holders, each on the applicable record dates set out under the heading ‘Key dates’ below.
Holders of American Depositary Shares (ADSs)
For holders of ADSs listed on the NYSE, the record dates and payment dates are set out below. The equivalent quarterly dividends receivable
by holders of ADSs in US dollars will be calculated based on the exchange rate on the applicable payment date.
South Africa branch register
In accordance with the JSE Listing Requirements, the finalisation information relating to shareholders registered on the South Africa branch
register (comprising the amount of the dividend in South African rand, the exchange rate and the associated conversion date) will be published
on the dates stated below, together with South Africa dividends tax information.
The quarterly dividends are regarded as ‘foreign dividends’ for the purposes of the South Africa Dividends Tax. For the purposes of South Africa
Dividends Tax reporting, the source of income for the payment of the quarterly dividends is the United Kingdom.
Key dates
In compliance with the requirements of the LSE, the NYSE and Strate, the electronic settlement and custody system used by the JSE,
the following are the salient dates for the quarterly dividend payments. All dates are 2020 unless otherwise stated.
Event
Preliminary announcement
(includes declaration data required for JSE
purposes)
Publication of finalisation information (JSE)
No removal requests (in either direction)
permitted between the UK main register
and the South Africa branch register
Last day to trade (LDT) cum-dividend (JSE)
Shares commence trading ex-dividend (JSE)
No transfers permitted between the UK
main register and the South Africa
branch register
No shares to be dematerialised or
rematerialised on the South Africa
branch register
Shares commence trading ex-dividend
(LSE)
Shares commence trading ex-dividend
(NYSE)
Record date (LSE, JSE and NYSE)
Last date for receipt of Dividend Reinvestment
Plan (DRIP) elections (LSE)
Payment date (LSE and JSE)
ADS payment date (NYSE)
Payment No. 1
Payment No. 2
Payment No. 3
Payment No. 4
27 February
17 March
17 March–
27 March
(inclusive)
24 March
25 March
25 March–
27 March
(inclusive)
25 March–
27 March
(inclusive)
26 March
26 March
27 March
21 April
13 May
18 May
30 June
30 June–
10 July
(inclusive)
7 July
8 July
8 July–
10 July
(inclusive)
8 July–
10 July
(inclusive)
9 July
9 July
10 July
29 July
19 August
24 August
21 September
21 September–
2 October
(inclusive)
29 September
30 September
30 September –
2 October
(inclusive)
30 September–
2 October
(inclusive)
1 October
7 December
7 December–
18 December
(inclusive)
14 December
15 December
15 December–
18 December
(inclusive)
15 December–
18 December
(inclusive)
17 December
1 October
17 December
2 October
22 October
12 November
17 November
18 December
13 January 2021
3 February 2021
8 February 2021
Note:
Further details of the total amounts of dividends paid in 2019 (with 2018 comparatives) are given in note 8 in the Notes on the Accounts.
301
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHAREHOLDER
TAXATION INFORMATION
The following discussion summarises material US federal income tax consequences and UK taxation consequences to US holders of owning and
disposing of ordinary shares or ADSs. This discussion does not address any tax consequences arising under the laws of any state, local or foreign
jurisdiction or under any US federal laws other than those pertaining to income tax. This discussion is based upon the US Internal Revenue Code
of 1986 (the ‘US Tax Code’), the Treasury regulations promulgated under the US Tax Code and court and administrative rulings and decisions,
all as in effect on the date hereof. These laws may change, possibly retroactively, and any change could affect the accuracy of the statements
and conclusions set forth in this discussion.
This discussion addresses only those US holders of ordinary shares or ADSs who hold such equity interests as capital assets within the meaning
of Section 1221 of the US Tax Code. Further, this discussion does not address all aspects of US federal income taxation that may be relevant
to US holders in light of their particular circumstances or that may be applicable to them if they are subject to special treatment under the US
federal income tax laws, including, without limitation:
– a bank or other financial institution;
– a US holder that is a tax-qualified retirement plan or a participant
– a tax-exempt organisation;
– an S corporation or other pass-through entity and an investor therein;
or a beneficiary under such a plan;
– a person that is not a US holder (as defined below);
– an insurance company;
– a mutual fund;
– a regulated investment company or real estate investment trust;
– a dealer or broker in stocks and securities, or currencies;
– a trader in securities that elects mark-to-market treatment;
– a US holder subject to the alternative minimum tax provisions of the
US Tax Code;
– a US holder that received ordinary shares or ADSs through the
exercise of an employee stock option, pursuant to a tax qualified
retirement plan or otherwise as compensation;
– a person that has a functional currency other than the US dollar;
– a person required to recognise any item of gross income as a result of
such income being recognised on an applicable financial statement;
– a US holder of ordinary shares or ADSs that holds such equity interest
as part of a hedge, straddle, constructive sale, conversion or other
integrated transaction;
– a US holder that owns (directly, indirectly or constructively) 10% or
more of ordinary shares or ADSs by vote or by value; or
– a US expatriate.
The determination of the actual tax consequences to a US holder will depend on the US holder’s specific situation. US holders of ordinary shares
or ADSs should consult their own tax advisers as to the tax consequences of owning and disposing of ordinary shares or ADSs, in each case,
including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and of changes in those laws.
For purposes of this discussion, the term US holder means a beneficial owner of ordinary shares or ADSs (as the case may be) that:
– is for US federal income tax purposes: (i) an individual citizen or resident of the United States; (ii) a corporation, including any entity treated
as a corporation for US federal income tax purposes, created or organised in or under the laws of the United States, any state thereof or the
District of Columbia; (iii) a trust if a US court is able to exercise primary supervision over the trust’s administration and one or more US persons
are authorised to control all substantial decisions of the trust or it has a valid election in effect under applicable Treasury regulations to be
treated as a US person; or (iv) an estate that is subject to US federal income tax on its income regardless of its source; and
– is not resident in the UK for UK tax purposes.
The US federal income tax consequences to a partner in an entity or arrangement treated as a partnership for US federal income tax purposes
that holds ordinary shares or ADSs generally will depend on the status of the partner and the activities of the partnership. Partners in a partnership
holding any such equity interest should consult their own tax advisers.
Material US federal income tax consequences relating to the ownership and disposition of ordinary
shares or ADSs
The following is a discussion of the material US federal income tax consequences of the ownership and disposition by US holders of ordinary
shares or ADSs. This discussion assumes that BAT is not, and will not become, a passive foreign investment company for US federal income tax
purposes, as described below.
ADSs
A US holder of ADSs, for US federal income tax purposes, generally will be treated as the owner of the underlying ordinary shares that are
represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for or from ADSs will not be subject to US federal income tax.
Taxation of Dividends
The gross amount of distributions on the ordinary shares or ADSs will be taxable as dividends to the extent paid out of BAT’s current or
accumulated earnings and profits, as determined under US federal income tax principles. Such income will be includable in a US holder’s gross
income as ordinary income on the day actually or constructively received by the US holder. Such dividends will be treated as foreign source
income and will not be eligible for the dividends received deduction allowed to corporations under the US Tax Code.
302
Shareholder InformationBAT Annual Report and Form 20-F 2019 With respect to non-corporate US investors, certain dividends received from a qualified foreign corporation may be subject to reduced rates of
taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income tax treaty with
the United States that the Treasury determines to be satisfactory for these purposes and that includes an exchange of information provision.
The Treasury has determined that the treaty between the United States and the United Kingdom meets these requirements, and BAT believes that
it is eligible for the benefits of the treaty. However, non-corporate holders that do not meet a minimum holding period requirement during which
they are not protected from the risk of loss or that elect to treat the dividend income as ‘investment income’ pursuant to Section 163(d)(4) of the
US Tax Code will not be eligible for the reduced rates of taxation. In addition, the rate reduction will not apply to dividends if the recipient of a
dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even
if the minimum holding period has been met. US holders should consult their own tax advisers regarding the application of these rules to their
particular circumstances.
The amount of any dividend paid by BAT in £ sterling (including any such amount in respect of ADSs that is converted into US dollars by the
depositary bank) will equal the US dollar value of the £ sterling actually or constructively received, calculated by reference to the exchange rate in
effect on the date the dividend is so received by the US holder, regardless of whether the £ sterling are converted into US dollars. If the £ sterling
received as a dividend are converted into US dollars on the date received, the US holder generally will not be required to recognise foreign
currency exchange gain or loss in respect of the dividend income. If the £ sterling received as a dividend are not converted into US dollars on
the date of receipt, the US holder will have a basis in £ sterling equal to their US dollar value on the date of receipt. Any gain or loss realised on a
subsequent conversion or other disposition of £ sterling will be treated as US source ordinary income or loss. US holders of ADSs should consult
their own tax advisers regarding the application of these rules to the amount of any dividend paid by BAT in £ sterling that is converted into US
dollars by the depositary bank.
To the extent that the amount of any distribution exceeds BAT’s current and accumulated earnings and profits for a taxable year, as determined
under US federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the US holder’s
adjusted basis of the ordinary shares or ADSs, and to the extent the amount of the distribution exceeds the US holder’s tax basis, the excess
will be taxed as capital gain recognised on a sale or exchange, as described below. BAT does not expect to determine earnings and profits
in accordance with US federal income tax principles. Therefore, notwithstanding the foregoing, US holders should expect that distributions
generally will be reported as dividend income for US information reporting purposes.
Distributions by BAT of additional ordinary shares (which may be distributed by the depositary bank to a holder of ADSs in the form of ADSs) to
a US holder that is made as part of a pro rata distribution to all holders of ordinary shares and ADSs in respect of their ordinary shares or ADSs,
and for which there is no option to receive other property (not including ADSs), generally will not be subject to US federal income tax. The basis
of any new ordinary shares (or ADSs representing new ordinary shares) so received will be determined by allocating the US holder’s basis in the
previously held ordinary shares or ADSs between the previously held ordinary shares or ADSs and the new ordinary shares or ADSs, based on their
relative fair market values on the date of distribution.
Passive foreign investment company
A passive foreign investment company (PFIC), is any foreign corporation if, after the application of certain ‘look-through’ rules: (1) at least 75% of
its gross income is ‘passive income’ as that term is defined in the relevant provisions of the US Tax Code; or (2) at least 50% of the average value
of its assets produce ‘passive income’ or are held for the production of ‘passive income.’ The determination as to PFIC status is made annually.
BAT does not believe that it is, for US federal income tax purposes, a PFIC, and BAT expects to operate in such a manner so as not to become a
PFIC. If, however, BAT is or becomes a PFIC, US holders could be subject to additional US federal income taxes on gain recognised with respect to
the ordinary shares or ADSs and on certain distributions, plus an interest charge on certain taxes treated as having been deferred under the PFIC
rules. Non-corporate US holders will not be eligible for reduced rates of taxation on any dividends received from BAT if it is a PFIC in the taxable
year in which such dividends are paid or in the preceding taxable year. BAT’s US counsel expresses no opinion with respect to BAT’s PFIC status.
Taxation of capital gains
Upon a sale, exchange or other taxable disposition of ordinary shares or ADSs, a US holder will generally recognise capital gain or loss for US
federal income tax purposes in an amount equal to the difference between the US dollar value of the amount realised on the disposition and the
US holder’s adjusted tax basis in the ordinary shares or ADSs as determined in US dollars. Such gain or loss generally will be US source gain or loss,
and will be long-term capital gain or loss if the US holder has held the ordinary shares or ADSs for more than one year. Certain non-corporate US
holders may be eligible for preferential rates of US federal income tax in respect of net long-term capital gains. The deductibility of capital losses
is subject to limitations.
The amount realised on a sale, exchange or other taxable disposition of ordinary shares for an amount in foreign currency will be the US dollar
value of that amount on the date of sale or disposition. On the settlement date, the US holder will recognise US source foreign currency exchange
gain or loss (taxable as ordinary income or loss) equal to the difference (if any) between the US dollar value of the amount received based on the
exchange rates in effect on the date of sale, exchange or other disposition and the settlement date. However, in the case of ordinary shares traded
on an established securities market that are sold by a cash-basis US holder (or an accrual-basis US holder that so elects), the amount realised will
be based on the exchange rate in effect on the settlement date for the sale, and no foreign currency exchange gain or loss will be recognised
at that time.
A US holder’s tax basis in ordinary shares or ADSs will generally equal the US dollar cost of the ordinary shares or ADSs. The US dollar cost of
ordinary shares purchased with foreign currency will generally be the US dollar value of the purchase price on the date of purchase, or the
settlement date for the purchase in the case of ordinary shares traded on an established securities market that are purchased by a cash-basis
US holder (or an accrual-basis US holder that so elects).
303
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHAREHOLDER TAXATION INFORMATION
CONTINUED
Information with respect to foreign financial assets
Individuals and certain entities that own ‘specified foreign financial assets’ with an aggregate value in excess of US$50,000 are generally required
to file information reports with respect to such assets with their US federal income tax returns. Depending on the individual’s circumstances,
higher threshold amounts may apply. Specified foreign financial assets include any financial accounts maintained by foreign financial institutions,
as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (1) stocks and securities issued by
non-US persons; (2) financial instruments and contracts held for investment that have non-US issuers or counterparties; and (3) interests in
non-US entities. If a US holder is subject to this information reporting regime, the failure to file information reports may subject the US holder to
penalties. US holders are urged to consult their own tax advisers regarding their obligations to file information reports with respect to ordinary
shares or ADSs.
Medicare net investment tax
Certain persons who are individuals (other than non-resident aliens), estates or trusts are required to pay an additional 3.8% tax on the lesser of
(1) their ‘net investment income’ (in the case of individuals) or ‘undistributed net investment income’ (in the case of estates and trusts) (which
includes dividend income in respect of, and gain recognised on the disposition of, ordinary shares or ADSs) for the relevant taxable year; and
(2) the excess of their modified adjusted gross income (in the case of individuals) or adjusted gross income (in the case of estates and trusts)
for the taxable year over specified dollar amounts. US holders are urged to consult their tax advisers regarding the applicability of this provision
to their ownership of ordinary shares or ADSs.
Credits or deductions for UK taxes
As indicated under ‘Material UK tax consequences’ below, dividends in respect of, and gains on the disposition of, ordinary shares or ADSs may
be subject to UK taxation in certain circumstances. A US holder may be eligible to claim a credit or deduction in respect of UK taxes attributable
to such income or gain for purposes of computing the US holder’s US federal income tax liability, subject to certain limitations. The US foreign
tax credit rules are complex, and US holders should consult their own tax advisers regarding the availability of US foreign tax credits and the
application of the US foreign tax credit rules to their particular situation.
Information reporting and backup withholding
Information reporting and backup withholding may apply to dividend payments and proceeds from the sale, exchange or other taxable
disposition of ordinary shares or ADSs. Backup withholding will not apply, however, to a US holder that: (1) furnishes a correct taxpayer
identification number (TIN), certifies that such holder is not subject to backup withholding on Internal Revenue Service Form W-9 (or appropriate
successor form) and otherwise complies with all applicable requirements of the backup withholding rules; or (2) provides proof that such holder
is otherwise exempt from backup withholding. Backup withholding is not an additional tax, and any amounts withheld under the backup
withholding rules may be refunded or credited against a holder’s US federal income tax liability, if any, provided that such holder furnishes the
required information to the Internal Revenue Service in a timely manner. The Internal Revenue Service may impose a penalty upon any taxpayer
that fails to provide the correct TIN.
This summary of material US federal income tax consequences is not tax advice. The determination of the actual tax consequences for a
US holder will depend on the US holder’s specific situation. US holders of ordinary shares or ADSs, in each case, should consult their own
tax advisers as to the tax consequences of owning and disposing of ordinary shares or ADSs, including the applicability and effect of the
alternative minimum tax and any state, local, foreign or other tax laws and of changes in those laws.
Material UK tax consequences
The following paragraphs summarise material aspects of the UK tax treatment of US holders of ordinary shares or ADSs and do not purport
to be either a complete analysis of all tax considerations relating to holding ordinary shares or ADSs or an analysis of the tax position of BAT.
They are based on current UK legislation and what is understood to be current HMRC practice, both of which are subject to change, possibly with
retrospective effect.
The comments are intended as a general guide and (otherwise than where expressly stated to the contrary) apply only to US holders of ordinary
shares or ADSs (other than under a personal equity plan or individual savings account) and who are the absolute beneficial owners of such shares.
These comments do not deal with certain types of shareholders such as charities, dealers in securities, persons holding or acquiring shares in
the course of a trade, persons who have or could be treated for tax purposes as having acquired their ordinary shares or ADSs by reason of their
employment, collective investment schemes, persons subject to UK tax on the remittance basis and insurance companies. You are encouraged
to consult an appropriate independent professional tax adviser with respect to your tax position.
Tax on chargeable gains as a result of disposals of ordinary shares or ADSs
Subject to the below, US holders will not generally be subject to UK tax on chargeable gains on a disposal of ordinary shares or ADSs provided
that they do not carry on a trade, profession or vocation in the United Kingdom through a branch, agency or permanent establishment in
connection with which the ordinary shares or ADSs are held.
A US holder who is an individual, who has ceased to be resident for tax purposes in the United Kingdom for a period of less than five years and
who disposes of ordinary shares or ADSs during that period may be liable for UK tax on capital gains (in the absence of any available exemptions
or reliefs). If applicable, the tax charge will arise in the tax year that the individual returns to the United Kingdom.
304
Shareholder InformationBAT Annual Report and Form 20-F 2019 Tax on dividends
BAT is not required to withhold UK tax at source from dividends paid on ordinary shares or ADSs.
US holders will not generally be subject to UK tax on dividends received from BAT provided that they do not carry on a trade, profession or
vocation in the United Kingdom through a branch, agency or permanent establishment in connection with which the ordinary shares or ADSs
are held.
Stamp duty and stamp duty reserve tax (SDRT)
Based on current published HMRC practice and recent case law, transfers of ADSs should not be subject to SDRT or stamp duty provided that any
instrument of transfer is executed and remains outside the UK. The transfer of an underlying ordinary share to the ADS holder in exchange for the
cancellation of an ADS should also not give rise to a stamp duty or SDRT charge.
Transfers of ordinary shares outside of the depositary bank, including the repurchase of ordinary shares by BAT, will generally be subject to
stamp duty or SDRT at the rate of 0.5% of the amount or value of the consideration given, except as described above in connection with the
cancellation of an ADS. If ordinary shares are redeposited into a clearance service or depositary system, the redeposit will attract stamp duty
or SDRT at the higher rate of 1.5%.
The purchaser or the transferee of the ordinary shares or ADSs will generally be responsible for paying any stamp duty or SDRT payable.
Where stamp duty or SDRT is payable, it is payable regardless of the residence position of the purchaser.
Inheritance tax
A gift or settlement of ordinary shares or ADSs by, or on the death of, an individual shareholder may give rise to a liability to UK inheritance tax
even if the shareholder is not a resident of, or domiciled in, the United Kingdom.
A charge to inheritance tax may arise in certain circumstances where ordinary shares or ADSs are held by close companies and trustees
of settlements.
However, pursuant to the Estate and Gift Tax Treaty 1980 (the ‘Treaty’) entered into between the United Kingdom and the United States, a gift or
settlement of ordinary shares or ADSs by shareholders who are domiciled in the United States for the purposes of the Treaty may be exempt from
any liability to UK inheritance tax.
305
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHARE CAPITAL AND
SECURITY OWNERSHIP
Share capital
Share capital
Ordinary shares of 25p each
Issued ordinary shares
(excluding treasury shares)
Treasury shares
Total allotted and fully paid ordinary shares1
Aggregate nominal value £m
31 December 2019
2,293,875,148
162,645,590
2,456,520,738
614.1
Note:
1. Includes treasury shares and shares owned by employee share trusts.
Analyses of shareholders
Ordinary Shares
At 31 December 2019, there was a total of 2,456,520,738 ordinary
shares in issue held by 108,283 shareholders. These shareholdings
are analysed as follows:
(a) by listing as at 31 December 2019:
Register
UK
South Africa
Total
Total number
of shares
% of issued
share capital
Number of
holders
2,173,460,394
283,060,344
2,456,520,738
88.48
11.52
100.00
37,324
70,959
108,283
(b) by size of shareholding as at 31 December 2019:
UK Register
Number of
holders
% of UK
ordinary
share capital
31,657
4,059
1,126
182
299
1
37,324
0.63
0.72
2.58
2.66
85.93
7.48
100.00
Number of
holders
% of SA
ordinary
share capital
65,189
3,853
1,746
102
69
70,959
6.35
5.49
25.09
10.94
52.13
100.00
1–1,999
2,000–9,999
10,000–199,999
200,000–499,999
500,000 and over
Treasury shares (UK)
Total
South Africa Register
1–1,999
2,000–9,999
10,000–199,999
200,000–499,999
500,000 and over
Total
306
Combined registers
1–1,999
2,000–9,999
10,000–199,999
200,000–499,999
500,000 and over
Treasury shares (UK)
Total
Number of
holders
% of issued
ordinary
share capital
96,846
7,912
2,872
284
368
1
108,283
1.29
1.27
5.17
3.62
82.03
6.62
100.00
American Depositary Shares (ADSs)
At 31 December 2019, there was a total of 178,347,785 ADSs
outstanding held by 9,715 registered holders. The ADS register is
analysed by size of shareholding as at 31 December 2019 as follows:
1–1,999
2,000–9,999
10,000–199,999
200,000–499,999
500,000 and over1
Total
Number of
holders
% of total
ADSs
9,492
195
26
1
1
9,715
1.07
0.36
0.39
0.13
98.05
100.00
Note:
1. One registered holder of ADSs represents 320,387 underlying shareholders.
Security ownership of ordinary shares
As at 13 March 2020, there were 37,081 record holders of ordinary
shares listed on the LSE (including Citibank as the depositary bank for
the ADSs) and 2,181,571,009 of such ordinary shares outstanding.
As at that date, to BAT’s knowledge, 293 record holders, representing
0.01% of the ordinary shares listed on the LSE, had a registered
address in the US. As at 13 March 2020, there were 770 record
holders of ordinary shares listed on the JSE (including PLC Nominees
(Proprietary) Limited as the nominee for the dematerialised ordinary
shares listed on the JSE) and 274,978,175 of such ordinary shares
outstanding. As at such date, to BAT’s knowledge, no record holders
of the ordinary shares listed on the JSE had a registered address in
the US. As at 13 March 2020, based on information received from
Citibank, there were 9,623 record holders of ADSs and 175,445,843
ADSs outstanding. As at that date, based on information received
from Citibank, 9,546 record holders, representing 99.91% of ADSs
representing ordinary shares, had a registered address in the US.
Security ownership – major shareholders
At 31 December 2019, the following substantial interests (3% or
more) in the Company’s ordinary share capital (voting securities) had
been notified to the Company in accordance with Section 5.1.2 of
the Disclosure Guidance and Transparency Rules (DTRs).
Name
Number of
ordinary shares
% of issued
share capital1
The Capital Group Companies, Inc.2
BlackRock, Inc.
253,543,406
132,891,526
11.05
5.79
Notes:
1. The latest percentage of issued share capital excludes treasury shares.
2. Includes 24,494,199 ordinary shares represented by ADRs.
On 6 January 2020, The Capital Group Companies, Inc. notified the
Company that on 3 January 2020 its interest had increased to
275,376,579 ordinary shares (12.00% of issued share capital),
including 25,941,762 ordinary shares represented by ADRs.
Shareholder InformationBAT Annual Report and Form 20-F 2019
All shares held by the significant shareholders represent the Company’s ordinary shares. These significant shareholders have no special voting
rights compared with other holders of the Company’s ordinary shares.
Additional significant shareholding disclosure
BlackRock, Inc. filed with the SEC a statement on Schedule 13G under the Exchange Act on 7 February 2020 disclosing that as of
31 December 2019 it beneficially owned 170,313,722 ordinary shares representing 7.4% of the Company’s ordinary shares outstanding as of
31 December 2019.
Capital Research Global Investors, a division of Capital Research and Management Company, filed with the SEC an amendment to Schedule
13G under the Exchange Act on 14 February 2020 disclosing that as of 31 December 2019 it beneficially owned 120,959,021 ordinary shares
representing 5.2% of the Company’s ordinary shares outstanding as of 31 December 2019. The notifications regarding the holdings by
The Capital Group Companies, Inc., listed below, indicate that Capital Research and Management Company is part of a chain of controlled
undertakings with The Capital Group Companies, Inc.
In accordance with the DTRs, shareholders must notify the Company if their shareholding reaches, exceeds or falls below 3% of total voting
rights and each 1% threshold thereafter. The notifications received by the Company during the past three years to the best of the Company’s
knowledge are set out below.
Reinet Investments S.C.A. notified the Company on 6 October 2017 that its interest had decreased below the notifiable threshold
of 3% to 68,053,670 ordinary shares on 25 July 2017.
The Capital Group Companies, Inc. notified the Company on 15 March 2018 that its interest had increased above 10% to 229,777,471 ordinary
shares on 14 March 2018.
The Capital Group Companies, Inc. notified the Company on 16 October 2018 that its interest had increased above 11% to 252,733,863
ordinary shares on 12 October 2018.
The Capital Group Companies, Inc. notified the Company on 14 January 2019 that its interest had decreased below 11% to 249,831,584
ordinary shares on 11 January 2019.
The Capital Group Companies, Inc. notified the Company on 8 March 2019 that its interest had increased above 11% to 253,390,697 ordinary
shares on 7 March 2019.
The Capital Group Companies, Inc. notified the Company on 11 April 2019 that its interest had decreased below 11% to 252,158,534 ordinary
shares on 10 April 2019.
The Capital Group Companies, Inc. notified the Company on 15 April 2019 that its interest had increased above 11% to 252,776,216 ordinary
shares on 11 April 2019.
The Capital Group Companies, Inc. notified the Company on 16 April 2019 that its interest had decreased below 11% to 251,780,072 ordinary
shares on 15 April 2019.
The Capital Group Companies, Inc. notified the Company on 19 November 2019 that its interest had increased above 11% to 253,543,406
ordinary shares on 18 November 2019.
The Capital Group Companies, Inc. notified the Company on 6 January 2020 that its interest had increased above 12% to 275,376,579 ordinary
shares on 3 January 2020.
To the extent known by BAT, BAT is not directly or indirectly owned or controlled by another corporation, any foreign government or by any
other natural or legal person, severally or jointly. BAT is not aware of any arrangements, the operation of which may at a subsequent date result
in a change of control of the Group.
Security ownership of the Board of Directors and the Management Board
The following table presents information regarding the total amount of ordinary shares beneficially owned (outright, by their family or by connected
persons) by each current Director of BAT, each member of the Management Board and all Directors and the Management Board as a group, as of
13 March 2020. Unless otherwise indicated, the address for each Director and member of the Management Board listed is: c/o British American Tobacco
p.l.c., Globe House, 4 Temple Place, London, WC2R 2PG, United Kingdom. The address for Guy Meldrum is Level 30, Three Pacific Place, 1 Queen’s Road
East, Hong Kong. The address for Ricardo Oberlander is 401 North Main Street, Winston-Salem, NC 27101, United States of America.
Number of Ordinary Shares
Percentage of Class10
Directors
Richard Burrows
Jack Bowles1,2,3
Tadeu Marroco1,2,3
Sue Farr
Jerry Fowden4
Dr Marion Helmes
Luc Jobin4
Holly Keller Koeppel4,5
Savio Kwan
Dimitri Panayotopoulos
Kieran Poynter
19,000
210,577
61,477
–
2,000
4,500
45,236
8,416
7,185
3,300
5,000
0.0008
0.0092
0.0027
–
0.0001
0.0002
0.0020
0.0004
0.0003
0.0001
0.0002
307
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHARE CAPITAL AND SECURITY OWNERSHIP
CONTINUED
Management Board
Jerome Abelman6,7,8
Marina Bellini6
Luciano Comin6,7,8
Alan Davy6,7,8
Hae In Kim6,7,8
Paul Lageweg6,7,8,9
Guy Meldrum6,7,8
David O’Reilly6,7,8
Ricardo Oberlander6,7,8
Johan Vandermeulen6,7,8
Kingsley Wheaton6,7,8
All Directors and Management Board as a group (22 persons)
Number of Ordinary Shares
Percentage of Class10
84,762
159
25,988
100,117
13,607
122,124
18,881
67,593
108,828
66,444
57,243
1,032,437
0.0037
0.0000
0.0011
0.0044
0.0006
0.0053
0.0008
0.0029
0.0047
0.0029
0.0025
0.0450
Notes:
1. The number of ordinary shares beneficially owned by the Executive Directors include ordinary shares awarded and required to be held for a period of at least three years in a UK-based trust under the SIP.
Ordinary shares cannot be sold or transferred out of the trust until the end of the three-year holding period. The amounts next to the corresponding Executive Director include the following ordinary shares
held in the trust under the SIP: (a) 573 ordinary shares for Mr Bowles, of which 311 have been held for less than three years; (b) 854 ordinary shares for Mr Marroco, of which 351 have been held for less
than three years. In all cases, the beneficial owner of ordinary shares under the SIP may direct the trust to exercise its voting rights in accordance with his instructions. See footnote (5) to the table below
under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of Directors and the Management Board’ for additional details regarding the SIP and the ordinary shares
held thereunder.
2. The number of ordinary shares beneficially owned by the Executive Directors include the following number of options granted under the LTIP that are scheduled to vest and may be exercised within
60 days of 13 March 2020: (a) 18,497 options under the LTIP for Mr Bowles; and (b) 14,755 options under the LTIP for Mr Marroco. Each option is convertible into one ordinary share upon exercise.
See footnote (1) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of Directors and the Management Board’ for additional details
regarding the LTIP.
3. The number of ordinary shares beneficially owned by the Executive Directors include the following number of awards of restricted ordinary shares granted under the DSBS that are scheduled to vest within
60 days of 13 March 2020: (a) 8,997 ordinary shares for Mr Bowles; (b) 7,177 ordinary shares for Mr Marroco. Until awards of ordinary shares under the DSBS vest, they are held in trust and the recipient
of such award does not have the ability to transfer, sell or direct the voting of the applicable ordinary shares. See footnote (4) to the table below under the heading ‘Outstanding Share-based Awards and
Options-based Awards of the Board of Directors and the Management Board’ for additional details regarding the DSBS.
4. The ordinary shares beneficially owned by Mr Fowden, Mr Jobin and Ms Koeppel are represented by ADSs, each of which represents one ordinary share.
5. Ms Koeppel, being a former director of RAI and a participant in the Deferred Compensation Plan for Directors of RAI (DCP), holds DSUs which were granted prior to becoming a Director of BAT. Each DSU
entitles the holder to receive a cash payment upon ceasing to be a Director equal to the value of one BAT ADS. The number of DSUs increases on each dividend date by reference to the value of dividends
declared on the ADSs underlying the DSUs. Ms Koeppel currently holds 23,333.51 DSUs.
6. The number of ordinary shares beneficially owned by the members of the Management Board include ordinary shares awarded and required to be held for a period of at least three years in a UK-based
trust under the SIP. Ordinary shares cannot be sold or transferred out of the trust until the end of the three-year holding period. The amounts next to the corresponding Management Board member include
the following ordinary shares held in the trust under the SIP: (a) 705 ordinary shares for Mr Abelman, of which 327 have been held for less than three years; (b) 159 ordinary shares for Ms Bellini, of which
105 have been held for less than three years; (c) 724 ordinary shares for Mr Comin, of which 330 have been held for less than three years; (d) 762 ordinary shares for Mr Davy, of which 350 have been held
for less than three years; (e) 263 ordinary shares for Ms Kim, of which 263 have been held for less than three years; (f) 295 ordinary shares for Mr Lageweg, of which 261 have been held for less than three
years; (g) 249 ordinary shares for Mr Meldrum, of which 249 have been held for less than three years; (h) 1,994 ordinary shares for Dr O’Reilly, of which 540 have been held for less than three years; (i) 619
ordinary shares for Mr Oberlander, of which 316 have been held for less than three years; (j) 701 ordinary shares for Mr Vandermeulen, of which 323 have been held for less than three years; and (k) 911
ordinary shares for Mr Wheaton, of which 373 have been held for less than three years. In all cases, the beneficial owner of ordinary shares under the SIP may direct the trust to exercise its voting rights
in accordance with their instructions. See footnote (5) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of Directors and the Management
Board’ for additional details regarding the SIP and the ordinary shares held thereunder.
7. The number of ordinary shares beneficially owned by the members of the Management Board include the following number of options granted under the LTIP that are scheduled to vest and may be
exercised within 60 days of 13 March 2020: (a) 13,688 options under the LTIP for Mr Abelman; (b) 5,229 options under the LTIP for Mr Comin; (c) 13,350 options under the LTIP for Mr Davy; (d) 2,802
options under the LTIP for Ms Kim; (e) 25,205 options under the LTIP for Mr Lageweg; (f) 5,633 options under the LTIP for Mr Meldrum; (g) 12,354 options under the LTIP for Mr O’Reilly; (h) 15,375 options
under the LTIP for Mr Oberlander; (i) 14,815 options under the LTIP for Mr Vandermeulen; (j) 14,946 options under the LTIP for Mr Wheaton. Each option is convertible into one ordinary share upon exercise.
See footnote (1) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of Directors and the Management Board’ for additional details regarding
the LTIP.
8. The number of ordinary shares beneficially owned by the members of the Management Board include the following number of awards of restricted ordinary shares granted under the DSBS that are
scheduled to vest within 60 days of 13 March 2020: (a) 6,658 ordinary shares for Mr Abelman; (b) 2,866 ordinary shares for Mr Comin; (c) 6,493 ordinary shares for Mr Davy; (d) 1,373 ordinary shares for
Ms Kim; (e) 3,048 ordinary shares for Mr Lageweg; (f) 2,751 ordinary shares for Mr Meldrum; (g) 6,009 ordinary shares for Dr O’Reilly; (h) 7,478 ordinary shares for Mr Oberlander; (i) 7,206 ordinary shares
for Mr Vandermeulen; and (j) 7,270 ordinary shares for Mr Wheaton. Until awards of ordinary shares under the DSBS vest, they are held in trust and the recipient of such award does not have the ability
to transfer, sell or direct the voting of the applicable ordinary shares. See footnote (4) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of
Directors and the Management Board’ for additional details regarding the DSBS.
9. The number of ordinary shares beneficially owned by Mr Lageweg includes 83,416 ADSs, each of which represents one ordinary share.
10. The information in this column is based on [2,293,894,961] ordinary shares outstanding (excluding treasury shares) as of 13 March 2020. Any securities not outstanding subject to options, warrants,
rights or conversion privileges that give the beneficial owner the right to acquire the securities within 60 days are deemed to be outstanding for the purpose of computing the percentage of outstanding
securities of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class by any other person.
308
Shareholder InformationBAT Annual Report and Form 20-F 2019 Outstanding Share‑based Awards and Options‑based Awards of the Board of Directors and
the Management Board
The following table presents information regarding the options and the restricted share awards held by the Directors and the Management
Board as of 13 March 2020. The following Directors (being the Chairman and the Non-Executive Directors) have not been granted share-based
Awards or Options-based Awards over ordinary shares: Mr Burrows, Ms Farr, Mr Fowden, Dr Helmes, Mr Jobin, Ms Koeppel, Mr Kwan,
Mr Panayotopoulos and Mr Poynter.
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
Directors
Jack Bowles
LTIP1
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
26,463 27 Mar 2017
43,785 26 Mar 2018
176,532 28 Mar 2019
246,780
0.00
0.00
0.00
52.11
38.94
33.28
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2024 – 27 Mar 2029
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
8 Aug 2019
–
– 14 Nov 2019
6 Feb 2020
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,997
12,064
26,192
67
6
3
3
70
3
4
6
7
112
6
8
9
7
47,564
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
309
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHARE CAPITAL AND SECURITY OWNERSHIP
CONTINUED
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
21,109 27 Mar 2017
28,248 26 Mar 2018
36,057 28 Mar 2019
495 23 Mar 2015
266 28 Mar 2018
86,175
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
8 Aug 2019
–
– 14 Nov 2019
6 Feb 2020
–
0.00
0.00
0.00
30.26
33.76
52.11
38.94
33.28
37.82
42.20
–
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2020 – 31 Oct 2020
1 May 2021 – 31 Oct 2021
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,177
7,783
13,233
67
8
6
4
70
6
7
10
11
112
11
13
14
12
28,544
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
Tadeu Marroco
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
310
Shareholder InformationBAT Annual Report and Form 20-F 2019 Management Board
Jerome Abelman
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Marina Bellini
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
19,583 27 Mar 2017
32,100 26 Mar 2018
37,560 28 Mar 2019
991 23 Mar 2015
90,234
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
0.00
0.00
0.00
30.26
52.11
38.94
33.28
37.82
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2020 – 31 Oct 2020
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,658
8,844
13,785
67
5
4
3
70
4
5
8
9
112
9
10
11
10
29,614
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
29,296 28 Mar 2019
785 28 Mar 2019
0.00
22.91
33.28
28.63
–
–
28 Mar 2022 – 27 Mar 2029
1 May 2022 – 31 Oct 2022
30,081
– 28 Mar 2019
1 Apr 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
–
–
–
–
–
–
–
–
–
–
5,525
99
1
3
2
5,630
28 Mar 2022
1 Apr 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
311
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHARE CAPITAL AND SECURITY OWNERSHIP
CONTINUED
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
7,482 27 Mar 2017
10,313 26 Mar 2018
31,550 28 Mar 2019
533 28 Mar 2018
49,878
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
19,099 27 Mar 2017
26,579 26 Mar 2018
33,804 28 Mar 2019
221 24 Mar 2017
79,703
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
0.00
0.00
0.00
33.76
52.11
38.94
33.28
42.20
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2021 – 31 Oct 2021
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,866
3,464
5,084
67
5
4
3
70
5
5
9
8
112
9
11
12
10
11,744
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
0.00
0.00
0.00
40.56
52.11
38.94
33.28
50.70
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2020 – 31 Oct 2020
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,493
7,323
12,406
67
10
6
4
70
7
7
9
11
112
11
12
13
11
26,572
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
Luciano Comin
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Alan Davy
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
312
Shareholder InformationBAT Annual Report and Form 20-F 2019 Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
Hae In Kim
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Paul Lageweg
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
4,010 27 Mar 2017
6,497 26 Mar 2018
30,048 28 Mar 2019
533 28 Mar 2018
41,088
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
–
3 Apr 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
4,540 28 Mar 2014
8,954 27 Mar 2015
5,956 12 May 2016
8,234 27 Mar 2017
11,471 26 Mar 2018
29,296 28 Mar 2019
1,309 28 Mar 2019
69,760
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
3 Apr 2018
–
–
9 May 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
0.00
0.00
0.00
33.76
52.11
38.94
33.28
42.20
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2021 – 31 Oct 2021
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,373
1,863
3,798
67
70
2
1
112
1
3
4
3
7,297
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
3 Apr 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
0.00
0.00
0.00
0.00
0.00
0.00
22.91
32.58
36.25
42.34
52.11
38.94
33.28
28.63
28 Mar 2017 – 27 Mar 2024
–
–
27 Mar 2018 – 26 Mar 2025
– 12 May 2019 – 11 May 2026
27 Mar 2020 – 26 Mar 2027
–
26 Mar 2021 – 25 Mar 2028
–
28 Mar 2022 – 27 Mar 2029
–
1 May 2024 – 31 Oct 2024
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,048
2,039
5,265
67
1
70
1
1
1
112
1
2
3
2
10,613
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
3 Apr 2021
9 May 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
313
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHARE CAPITAL AND SECURITY OWNERSHIP
CONTINUED
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
8,059 27 Mar 2017
11,066 26 Mar 2018
31,550 28 Mar 2019
50,675
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
3 Apr 2018
–
1 Apr 2019
–
17,674 27 Mar 2017
24,364 26 Mar 2018
30,048 28 Mar 2019
72,086
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
0.00
0.00
0.00
–
–
–
–
–
–
0.00
0.00
0.00
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
52.11
38.94
33.28
–
–
–
–
–
–
52.11
38.94
33.28
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
2,751
3,796
5,651
67
70
112
12,447
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
3 Apr 2021
1 Apr 2022
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
6,009
6,713
11,028
67
32
19
15
70
21
19
29
31
112
31
32
33
29
24,290
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
Guy Meldrum
LTIP1
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Dr David O’Reilly
LTIP1
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
314
Shareholder InformationBAT Annual Report and Form 20-F 2019 Ricardo Oberlander
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Johan Vandermeulen
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
21,996 27 Mar 2017
38,520 26 Mar 2018
45,072 28 Mar 2019
495 23 Mar 2015
106,083
0.00
0.00
0.00
30.26
52.11
38.94
33.28
37.82
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2020 – 31 Oct 2020
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
21,195 27 Mar 2017
30,335 26 Mar 2018
39,438 28 Mar 2019
991 23 Mar 2015
91,959
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,478
8,438
16,542
67
7
5
3
70
6
4
7
7
112
7
7
8
6
32,774
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
0.00
0.00
0.00
30.26
52.11
38.94
33.28
37.82
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2020 – 31 Oct 2020
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,206
8,358
13,785
67
4
4
3
70
4
5
7
8
112
8
10
11
10
29,672
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
315
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 SHARE CAPITAL AND SECURITY OWNERSHIP
CONTINUED
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
Number of
Exercisable (LTIP/Sharesave)
£
Shares Awarded
Vesting (DSBS/SIP)
21,382 27 Mar 2017
32,100 26 Mar 2018
43,194 28 Mar 2019
1,309 28 Mar 2019
97,985
– 27 Mar 2017
– 26 Mar 2018
– 28 Mar 2019
3 Apr 2017
–
4 May 2017
–
28 Sep 2017
–
8 Feb 2018
–
3 Apr 2018
–
9 May 2018
–
–
8 Aug 2018
– 15 Nov 2018
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
–
8 Aug 2019
– 14 Nov 2019
6 Feb 2020
–
0.00
0.00
0.00
22.91
52.11
38.94
33.28
28.63
–
–
–
–
27 Mar 2020 – 26 Mar 2027
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
1 May 2024 – 31 Oct 2024
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,270
8,358
13,785
67
12
8
6
70
8
8
13
13
112
13
14
16
13
29,786
27 Mar 2020
26 Mar 2021
28 Mar 2022
3 Apr 2020
4 May 2020
28 Sep 2020
8 Feb 2021
3 Apr 2021
9 May 2021
8 Aug 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
Kingsley Wheaton
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Notes:
Options
1. LTIP: grants or awards of ordinary shares under the LTIP are for nil consideration. The number of options shown is the maximum that may be exercised subject to the completion of the applicable
performance period and conditions under the rules of the LTIP. The number of options which may vest and become exercisable may be less than the number of ordinary shares shown in the table.
2. Sharesave Scheme: grants of options under the Sharesave Scheme are: (a) normally granted at a discount of 20% to the market price of ordinary shares at the time of invitation, as permitted by the
rules of the Sharesave Scheme; and (b) are exercisable at the end of a three-year or five-year savings contract up to a monthly limit of £500.
3. Each of the LTIP and Sharesave Scheme contains provisions which permit the Board of Directors or a duly authorised committee of the Board of Directors to establish further plans for the benefit of
overseas employees based on the relevant share plan but modified as necessary or desirable to take account of overseas tax, exchange control or applicable securities laws. Any new ordinary shares
issued under such plans would not count towards any applicable plan limits under the LTIP or the Sharesave Scheme.
Restricted Share Awards
4. DSBS: awards of deferred shares are made through the DSBS and comprise free ordinary shares normally held in trust for three years and no further performance conditions apply in that period.
The ordinary shares carry no rights to vote in that period.
5. SIP: the SIP is an all-employee plan which includes the SRS under which eligible employees receive an award of ordinary shares (Free Shares) in April of each year in which the plan operates in respect
of performance in the previous financial year. The Free Shares are held in a UK-based trust from the date of the award for a minimum period of three years. During that time the SIP participant is entitled to
receive dividends on those ordinary shares which are re-invested by such trust to buy further ordinary shares (Dividend Shares) on behalf of the SIP participant. The Dividend Shares are also held in the
trust from the date of acquisition for a minimum period of three years. During the three-year holding periods, the SIP participant may not remove the Free Shares or the Dividend Shares from the trust, but
may direct the trust to exercise its voting rights in accordance with his or her instructions. In addition to the Free Shares and Dividend Shares, participants in the SIP are also eligible to purchase additional
ordinary shares from their pre-tax salary up to an annual statutory limit (Partnership Shares). The SIP also provides that BAT has the right to offer additional ordinary shares to a participant at no cost for
each Partnership Share the participant purchases, at a ratio of two such ordinary shares for each Partnership Share purchased (Matching Shares). BAT does not currently provide any Matching Shares.
6. BAT has established similar plans to the SIP for non-UK employees and specific plans for employees in Germany, Belgium and the Netherlands. Each of these plans has been modified to take account
of overseas tax, exchange control and applicable securities laws.
316
Shareholder InformationBAT Annual Report and Form 20-F 2019 ARTICLES OF
ASSOCIATION
The Company is incorporated under the name of British American Tobacco p.l.c. and is registered in England and Wales under registered
number 3407696. Under the Companies Act 2006 (Companies Act), the Company’s objects are unrestricted. The following descriptions
summarise certain provisions of the Company’s current Articles of Association (Articles) (as adopted by special resolution at the AGM on 28 April
2010), applicable English and Welsh law and the Companies Act. This summary is qualified in its entirety by reference to the Companies Act and
the Articles, available on bat.com. The Articles may be altered or added to, or completely new articles may be adopted by, a special resolution of
the shareholders of the Company, subject to the provisions of the Companies Act.
Share capital – structure
Ordinary shares
– all of the Company’s ordinary shares are fully paid
– no further contribution of capital may be required by the Company from the holders of such shares
Alteration of share capital – the Company by ordinary resolution may:
– consolidate and divide all or any of its shares into shares of a larger amount than its existing shares
– divide or sub-divide any of its shares into shares of smaller amount than its existing shares
– determine that, as between the shares resulting from such a sub-division, any of them may have any preference or advantage as compared
with the others
Alteration of share capital – the Company, subject to the provisions of the Companies Act, may:
– reduce its share capital, its capital redemption reserve and any share premium account in any way
– purchase its own shares, including redeemable shares, and may hold such shares as treasury shares or cancel them
Dividend rights
– shareholders may, by ordinary resolution, declare dividends but not in excess of the amount recommended by the Directors
– the Directors may pay interim dividends out of distributable profits
– no dividend shall be paid otherwise than out of the profits available for distribution as specified under the provisions of the Companies Act
– the Directors may, with the authority of an ordinary resolution of the shareholders, pay scrip dividends or satisfy the payment of a dividend
by the distribution of specific assets
– unclaimed dividends for a period of 12 years may be forfeited and cease to be owed by the Company
– specific provisions enable the Directors to elect to pay dividends by bank or electronic transfer only
Share capital – voting rights
Voting at general meetings
– by a show of hands, unless a poll is demanded, and on a show of hands, every shareholder who is present in person at a general meeting has
one vote regardless of the number of shares held by the shareholder
– every proxy appointed by a shareholder and present at a general meeting has one vote except that if the proxy has been duly appointed by more
than one shareholder entitled to vote on the resolution and is instructed by one or more of those shareholders to vote for the resolution and by one
or more others to vote against it, or is instructed by one or more of those shareholders to vote in one way and is given discretion as to how to vote
by one or more others (and wishes to use that discretion to vote in the other way), he has one vote for and one vote against the resolution
– on a poll, every shareholder who is present in person or by proxy has one vote for every share held by the shareholder
– a shareholder (or his duly appointed proxy) entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way
– a poll may be demanded by any of the following:
(1) the Chairman of the meeting; (2) the Directors; (3) not less than five shareholders having the right to vote at the meeting;
(4) a shareholder or shareholders representing not less than one-tenth of the total voting rights of all shareholders having the right to vote
at the meeting (excluding any voting rights attached to treasury shares); or
(5) a shareholder or shareholders holding shares which confer a right to vote on the resolution at the meeting being shares on which an
aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right (excluding any
voting rights attached to treasury shares)
Matters transacted at general meetings
– ordinary resolutions can include resolutions for the appointment, reappointment and removal of Directors, the receiving of the Annual
Report, the declaration of final dividends, the appointment and reappointment of the external auditor, the authority for the Company
to purchase its own shares and the grant of authority to allot shares
– an ordinary resolution is passed when a simple majority of the votes cast at a meeting at which there is a quorum vote in favour of the resolution
– special resolutions can include resolutions amending the Company’s Articles and resolutions relating to certain matters concerning
a winding-up of the Company
– a special resolution is passed when not less than three-quarters of the votes cast at a meeting at which there is a quorum vote in favour
of the resolution
– quorum for a meeting of the Company is a minimum of two shareholders present in person or by proxy or by a duly authorised
representative(s) of a corporation which is a shareholder and entitled to vote
– convening a meeting: the Company may specify a time not more than 48 hours before the time of the meeting (excluding any part of a day that
is not a working day) by which a person must be entered on the register of members in order to have the right to attend or vote at the meeting
317
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 ARTICLES OF ASSOCIATION
CONTINUED
Share capital – pre-emptive rights and new issues of shares
– holders of ordinary shares have no pre-emptive rights under the Articles – the ability of the Directors to cause the Company to issue shares,
securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted
– under the Companies Act, the Directors of a company are, with certain exceptions, unable to allot any equity securities without express
authorisation, which may be contained in a company’s articles of association or given by its shareholders in a general meeting, but which
in either event cannot last for more than five years
– under the Companies Act, a company may also not allot shares for cash (otherwise than pursuant to an employee share scheme) without first
making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion to their respective
shareholdings, unless this requirement is waived by a special resolution of the shareholders
Restrictions on transfers of shares
– Directors can, in their absolute discretion, refuse to register the transfer of a share in certificated form which is not fully paid, provided that
such a refusal would not prevent dealings in shares in certificated form which are not fully paid from taking place on a proper basis
– The Directors may also refuse to register a transfer of a share in certificated form (whether fully paid or not) unless the instrument of transfer:
(1) is lodged, duly stamped, and is deposited at the registered office of the Company or such other place as the Directors may appoint and
is accompanied by a certificate for the shares to which it relates and such other evidence as the Directors may reasonably require to show the
right of the transferor to make the transfer; (2) is in respect of only one class of share; and (3) is in favour of not more than four transferees
– for uncertificated shares, transfers shall be registered only in accordance with the terms of the Uncertificated Securities Regulations 2001
so that Directors may refuse to register a transfer which would require shares to be held jointly by more than four persons
– if the Directors refuse to register a share transfer, they must give the transferee notice of this refusal as soon as practicable and in any event
within two months of the instrument of transfer being lodged with the Company
Repurchase of shares
– subject to authorisation by shareholder resolution, the Company may purchase its own shares in accordance with the Companies Act
– any shares which have been bought back may be held as treasury shares or, if not so held, must be cancelled immediately upon completion
of the purchase, thereby reducing the amount of the Company’s issued share capital
Directors
Appointment and retirement
– a Board of Directors of not fewer than five Directors and not subject to any maximum (unless otherwise determined by ordinary resolution
of shareholders)
– Directors and the Company (by ordinary resolution) may appoint a person who is willing to act as a Director
– the Articles govern the minimum number of Directors who must be subject to retirement at each AGM and who may seek re-election
– notwithstanding the Articles, all of the Directors of the Company will be subject to re-election at the forthcoming AGM to be held
on 30 April 2020 in accordance with the UK Corporate Governance Code
– fees for Non-Executive Directors and the Chairman are determined by the Directors but cannot currently exceed in aggregate an annual
sum of £2,500,000, unless determined otherwise by ordinary resolution of the shareholders
– the remuneration of the Executive Directors is determined by the Remuneration Committee, which comprises independent
Non-Executive Directors
Disclosure of interests
– specific provisions apply to the regulation and management of the disclosure of Directors’ interests in transactions and any conflicts of interest
that may occur in such situations including those which may arise as a result of the Director’s office or employment or persons connected
with him or her
Meetings and voting
– the quorum for a meeting of Directors is two Directors
– the Directors may delegate any of their powers to a person or a committee
– the Articles place a general prohibition on a Director voting at a Board meeting on any matter in which he has an interest other than
by virtue of his interest in shares in the Company
– specific provisions apply to a Director’s ability to vote in relation to: the giving of guarantees; the provision of indemnities; insurance
proposals; retirement benefits; and transactions or arrangements with a company in which the Director may have an interest
Borrowing powers
– the Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property, assets
(present and future) and uncalled capital
– the Directors may also issue debentures, debenture stock and other securities
318
Shareholder InformationBAT Annual Report and Form 20-F 2019 Additional disclosures
Disclosure of ownership of shares
There are no provisions in the Articles whereby persons acquiring, holding or disposing of a certain percentage of the Company’s ordinary shares
are required to make disclosure of their ownership percentage, although there are such requirements under statute and regulation.
Director retirement
There is no requirement for a director to retire on reaching any age.
Sinking Funds
There is no sinking fund provision in the Articles applicable to the Company’s ordinary shares.
Limitations on voting and shareholding
There are no limitations under the Articles restricting the right of non-resident or foreign owners to hold or vote ordinary shares in the Company.
Distribution of assets on a winding up
If the Company is wound up, the liquidator may, with the sanction of a special resolution and any other sanction required by law, divide among
the members in specie the whole or any part of the assets of the Company and may, for that purpose, value any assets and determine how the
division shall be carried out as between the members or different classes of members. The liquidator may, with the like sanction, vest the whole
or any part of the assets in trustees upon such trusts for the benefit of the members as he may with the like sanction determine, but no member
shall be compelled to accept any assets upon which there is a liability.
Anti-takeover devices and change of control
There are no provisions in the Articles that would have the effect of delaying, deferring or preventing a takeover, or change of control, of the
Company. Under English law, the Company’s directors have a fiduciary duty to take only those actions that are in the interests of the Company
and any anti-takeover devices employed by the directors in the future, if any, must accordingly be in the interests of the Company. The Company
is also subject to the City Code on Takeovers and Mergers (the “City Code”), which governs the conduct of mergers and takeovers in the UK.
Any takeover of the Company would have to be in accordance with the City Code.
319
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 PURCHASES
OF SHARES
Renewal of authority for Company to purchase own shares
Current authority
to purchase shares
– this authority (granted at the 2019 AGM) will expire at the 2020 AGM; the share buy-back programme was
suspended with effect from 30 July 2014; and
Proposed authority to
purchase shares
– renewed authority to purchase the Company’s ordinary shares in order that the appropriate mechanisms are in place
to enable the share buy-back programme to be reinstated at any time and authority would be exercised when, in the
opinion of the Directors, the exercise of the authority would result in an increase in the Company’s earnings per share
and would be in the interest of its shareholders generally.
– the minimum price that may be paid for such shares is 25p, and the maximum price is the higher of: (i) an amount
equal to 105% of the average of the middle-market prices shown in the quotation for an ordinary share as derived
from the LSE Daily Official List for the five business days immediately preceding the day on which the ordinary share
is contracted to be purchased; and (ii) the higher of the price of the last independent trade and the highest current
independent bid for an ordinary share in the Company on the trading venues where the market purchases by the
Company will be carried out;
– in the absence of the necessary practical arrangements, the proposed authority has not been extended to enable BAT
to purchase its own ordinary shares on the JSE in South Africa or the NYSE in the form of ADSs; and
– further details are set out in the Notice of Annual General Meeting 2020 which is made available to all shareholders
and is published on bat.com.
Treasury shares
– in accordance with the Company’s policy, any repurchased shares are expected to be held as treasury shares;
at 31 December 2019, the number of treasury shares was 162,645,590 (2018: 162,645,590); no dividends are
paid on treasury shares; treasury shares have no voting rights; and treasury shares may be resold at a later date.
Purchases of equity securities by the issuer and affiliated purchasers
At the AGM on 25 April 2019, authorisation was given to the Company to repurchase up to 229.3 million ordinary shares for the period until
the next AGM in 2020. This authorisation is renewed annually at the AGM. No ordinary shares were repurchased by the Company during 2019.
The following table provides details of ordinary share purchases made by the trustees of employee share ownership plans (ESOPs) and other
purchases of ordinary shares and ADSs made to satisfy the commitments to deliver shares under certain employee share-based payment plans.
Total number of
ordinary shares
purchased
by ESOPs or certain
employee share-based
plans
Average price
paid per
ordinary share
£
Total number of
ADSs purchased
by ESOPs or certain
employee share-based
plans
Average price
paid per
ADS
US$
Total number of
ordinary shares
purchased as
part of a publicly
announced plan1
Maximum number of
shares that may
yet be purchased as
part of a publicly
announced plan1
2019
2 January
6 February
6 March
29 March–2 April
1 April
3 April
3 April
3 April
25 April
1 May
5 June
3 July
7 August
4 September
2 October
6 November
4 December
4,041
3,608
3,296
2,900,000
233,150
3,078
2,205*
26,658
63,067
3,407
3,640
3,340
3,271
3,228
3,224
3,355
3,103
3,265,671
24.890000
27.760000
29.990000
31.944600
31.599204
31.200000
31.350000
31.109000
30.270000
29.870000
28.475000
29.750000
29.750000
29.395000
29.750000
28.295000
29.740000
29.713988
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Notes:
1. There was no publicly announced plan for BAT to purchase its own ordinary shares or ADSs during the year ended 31 December 2019.
2. All the purchases of ordinary shares and/or ADSs were made on open market transactions except for the purchase marked * which was made by way of an arm’s-length private treaty arrangement
between BAT and the relevant trustee.
320
Shareholder InformationBAT Annual Report and Form 20-F 2019 GROUP
EMPLOYEE TRUST
The British American Tobacco Group Employee Trust (BATGET)
Function
– used to satisfy the vesting and exercise of awards of ordinary shares under the BAT Deferred Share Bonus Scheme
and Long-Term Incentive Plans; and
– a committee of senior management reporting to the Board’s Share Schemes Committee monitors the number
of ordinary shares held in BATGET to satisfy outstanding awards.
Funding
– funded by interest-free loan facilities from the Company totalling £1 billion;
– this enables BATGET to facilitate the purchase of ordinary shares to satisfy the future vesting or exercise of options
and awards;
– loan to BATGET: £788.24 million at 31 December 2019 (2018: £681.43 million);
– the loan is either repaid from the proceeds of the exercise of options or, in the case of ordinary shares acquired by
BATGET to satisfy the vesting and exercise of awards, the Company will subsequently waive the loan provided over
the life of the awards; and
– if any options lapse, ordinary shares may be sold by BATGET to cover the loan repayment.
Ordinary shares
held in BATGET
Dividends
paid in 2019
Voting rights
Number of ordinary shares
Market value of ordinary shares
% of issued share capital of Company
– BATGET currently waives dividends on the ordinary shares held by it; and
1 Jan 2019
7,312,975
£182.8m
0.30
31 Dec 2019
8,049,187
£260.1m
0.33
– quarterly interim dividends 2019: £15.67 million across 2019.
– the trustee does not exercise any voting rights while ordinary shares are held in BATGET; and
– share scheme participants may exercise the voting rights attaching to those ordinary shares once the ordinary shares
have been transferred out of BATGET.
Notes:
1. Company share – based payment arrangements: details of the material equity share-based and cash-settled share-based arrangements are set out in note 24 in the Notes on the Accounts.
2. The values of ordinary shares shown are based on the closing mid-market share price on 31 December 2019: 3,232p (31 December 2018: 2,500p).
3. In addition to the ordinary shares held in BATGET, the trust held the following American Depositary Shares (ADSs) which relate to the vesting and exercise of certain employee stock awards formerly
granted by RAI over RAI common stock and which were assumed by BAT to be satisfied by the delivery of ADSs following the merger with RAI on 25 July 2017.
Number of ADSs
Market value of ADSs(a)
% of issued share capital
Note:
(a) The value of the ADSs shown is based on the closing price of ADSs on 31 December 2019 of US$42.46.
1 Jan 2019
75,267
US$2.4m
0.003
31 Dec 2019
15,197
US$0.6m
0.0006
321
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 AMERICAN
DEPOSITARY SHARES
Fees and charges payable by ADS holders
Citibank, N.A. (Citibank) was appointed as the depositary bank (the ‘Depositary’) for BAT’s ADS programme pursuant to the Amended and
Restated Deposit Agreement dated 1 December 2008 and amended as of 14 February 2017 and 14 June 2017 between BAT, the Depositary and
the owners and holders of ADSs (the ‘Deposit Agreement’). Citibank was reappointed as the Depositary pursuant to the Second Amended and
Restated Deposit Agreement dated 26 November 2018 (the ‘Restated Deposit Agreement’).
The Restated Deposit Agreement provides that ADS holders may be required to pay various fees to the Depositary, and the Depositary may refuse
to provide any service for which a fee is assessed until the applicable fee has been paid.
Service
Issuance of ADSs upon deposit of ordinary shares (excluding issuances
as a result of distributions of shares described below)
Cancellation of ADSs
Distribution of cash dividends or other cash distributions (i.e. sale of
rights and other entitlements)
Distribution of ADSs pursuant to: (1) stock dividends or other free stock
distributions; or (2) exercise of rights to purchase additional BAT ADSs
Distribution of securities other than ADSs or rights to purchase
additional ADSs (i.e. spinoff shares)
Depositary bank services
Fees
Up to US$0.05 per ADS issued1
Up to US$0.05 per ADS surrendered1
Up to US$0.05 per ADS held2
Up to US$0.05 per ADS held
Up to US$0.05 per ADS held
Up to US$0.05 per ADS held
Notes:
1. Under the terms of a separate agreement between BAT and the Depositary, the Depositary has agreed to waive the fees that would otherwise be payable in connection with the issuance of ADSs upon
deposit of ordinary shares and the cancellation of ADSs and corresponding withdrawal of ordinary shares, in each case by BAT or any of its affiliates, officers, directors or employees. The terms of this
separate agreement may be amended at any time by BAT and the Depositary.
2. While under the Restated Deposit Agreement cash dividends paid in respect of ADSs are subject to a fee of up to US$0.05 per ADS payable to the Depositary, under the terms of the separate agreement
between BAT and the Depositary referred to above, such dividends are instead subject to a fee of up to US$0.02 per ADS per year (a fee of US$0.005 per dividend based on the distribution of four
quarterly cash dividends per year). Under the separate agreement, this dividend fee may not be varied by the Depositary without the consent of BAT.
Contact details for Citibank Shareholder Services are on page 323.
In addition, ADS holders may be required under the Restated Deposit Agreement to pay the Depositary: (a) taxes (including applicable interest
and penalties) and other governmental charges; (b) registration fees; (c) certain cable, telex and facsimile transmission and delivery expenses;
(d) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (e) such fees and expenses as are incurred by
the Depositary in connection with compliance with applicable exchange control regulations and other regulatory requirements; and (f) the fees
and expenses incurred by the Depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities.
The Depositary may: (a) withhold dividends or other distributions or sell for the account of any ADS holder any or all of the shares underlying
the ADSs in order to satisfy any tax or governmental charge; and (b) deduct from any cash distribution the applicable fees and charges of,
and expenses incurred by, the Depositary and any taxes, duties or other governmental charges on account.
Fees and payments made by the Depositary to BAT
Under the terms of the contractual arrangements set out in the separate agreement between BAT and the Depositary referred to above,
BAT received a total of approximately US$4.4 million from the Depositary, comprising fees charged in respect of dividends and a fixed
contribution to BAT’s ADS programme administration costs for the year ended 31 December 2019.
In 2019, these programme administration costs principally included those associated with AGM proxy mailings, exchange listing and regulatory
fees, foreign private issuer analysis, legal fees, share registration fees and other expenses incurred by BAT in relation to the ADS programme.
Under these contractual arrangements, the Depositary has also agreed to waive certain standard fees associated with the administration of the
ADS programme.
322
Shareholder InformationBAT Annual Report and Form 20-F 2019 SHAREHOLDING ADMINISTRATION
AND SERVICES
United Kingdom Registrar
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ
tel: 0800 408 0094 or +44 370 889 3159
web-based enquiries: www.investorcentre.co.uk/contactus
www.computershare.com/uk/investor/bri
Access the web-based enquiry service of Computershare Investor
Services PLC for holders of shares on the UK share register. View details
of your BAT shareholding and recent dividend payments and register
for shareholder electronic communications to receive notification of
BAT shareholder mailings by email.
www.computershare.com/dealing/uk
Go online or telephone 0370 703 0084 (UK) to buy or sell British
American Tobacco shares traded on the London Stock Exchange.
Before you can trade, you will need to register for this service.
Please go to www.computershare.trade/cert_faqs.html for a list
of permitted domiciles.
South Africa Registrar
Computershare Investor Services Proprietary Limited
Private Bag X9000, Saxonwold, 2132, South Africa
tel: 0861 100 634; +27 11 870 8216
email enquiries: web.queries@computershare.co.za
American Depositary Shares
Enquiries regarding ADS holder accounts and payment of dividends
should be directed to:
Citibank Shareholder Services
PO Box 43077, Providence, Rhode Island 02940-3077, USA
tel: +1 888 985 2055 (toll-free) or +1 781 575 4555
email enquiries: citibank@shareholders-online.com
website: www.citi.com/dr
Documents on Display and Publications
This Annual Report and Form 20-F 2019 is available online at
bat.com/annualreport. Copies of current and past Annual Reports
are available on request. Highlights from these publications can
be produced in alternative formats such as Braille, audio tape and
large print. Documents referred to in this Annual Report and Form
20-F 2019 do not form part of this Annual Report unless specifically
incorporated by reference.
Contact:
British American Tobacco Publications
Unit 80, London Industrial Park, Roding Road, London E6 6LS
tel: +44 20 7511 7797; facsimile: +44 20 7540 4326
email: bat@team365.co.uk
Holders of shares held on the South Africa register can contact the
Company’s Representative office in South Africa using the contact
details shown at the end of this Annual Report and Form 20-F 2019.
ADS holders can contact Citibank Shareholder Services in the United
States using the contact details shown above.
The Company is subject to the information requirements of the US
Securities Exchange Act of 1934 applicable to foreign private issuers.
In accordance with these requirements, the company files its Annual
Report on Form 20-F and other documents with the SEC. You also
may call the SEC at +1 800-SEC-0330. In addition, BAT’s SEC filings are
available to the public, together with the public filings of other issuers,
at the SEC’s website, www.sec.gov.
Our website – www.bat.com
Access comprehensive information about British American Tobacco
and download shareholder publications at the corporate website.
Visit the Investors section for valuation and charting tools, dividend
and share price data and subscribe to the email alert services for key
financial events in the British American Tobacco financial calendar.
Download the British American Tobacco Investor Relations app to
access all the latest financial information on your iPad, iPhone or
Android device.
Dividend Reinvestment Plan
Available to the majority of shareholders on the UK register, this
is a straightforward and economic way of utilising your dividends
to build up your shareholding in British American Tobacco.
Contact Computershare Investor Services PLC in the UK for details.
Individual Savings Accounts (ISAs)
A British American Tobacco sponsored ISA – contact:
The Share Centre
PO Box 2000, Aylesbury, Bucks HP21 8ZB
tel: 0800 800 008; +44 1296 414 141
email enquiries: services@share.co.uk
website: www.share.com
(The tax advantages of ISAs depend on your individual circumstances
and the benefits of ISAs could change in the future. You should
note that investments, their value and the income they provide
can go down as well as up and you might not get back what you
originally invested.)
Capital gains tax
Fact sheet for British American Tobacco historical UK capital gains
tax information; contact the British American Tobacco Company
Secretarial Department, tel: +44 20 7845 1000 or access online at
www.bat.com/cgt.
Share Fraud
The practice of share fraud (also known as ‘boiler room’ scams)
unfortunately continues with many companies’ shareholders receiving
unsolicited phone calls or mail from people offering to sell them
what often turn out to be worthless or high risk shares in US or UK
investments, or to buy shares at an inflated price in return for an
upfront payment.
If you suspect that you have been approached by fraudsters, please
tell the FCA using the share fraud reporting form at www.fca.org.uk/
scams, where you can find out more about investment scams. You can
also call the FCA Consumer Helpline on 0800 111 6768. If you have
lost money to investment fraud you should report it to Action Fraud on
0300 123 2040 or online at www.actionfraud.police.uk.
Calendar 2020
Thu
30 April
at
11:30am
Annual General Meeting
Globe House, 4 Temple Place, London WC2R 2PG.
Details of the business to be proposed at the meeting are
in the Notice of AGM, which is made available to all
shareholders and is published on www.bat.com.
BAT provides for the vote on each resolution to be by poll
rather than by a show of hands. This provides for greater
transparency and allows the votes of all shareholders to be
counted, including those cast by proxy. The voting results
will be released on the same day in accordance with
regulatory requirements and made available on bat.com.
Fri 31 July Half-Year Report
323
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 EXHIBITS
The following documents are filed in the SEC EDGAR system, as part of this Annual Report on Form 20-F, and can be viewed on the SEC’s
website, www.sec.gov:
Exhibit Number Description
Articles of Association of British American Tobacco p.l.c.1
Second Amended and Restated Deposit Agreement, dated as of 26 November 2018, by and among British American Tobacco
p.l.c., Citibank, N.A., as depositary bank, and all holders and beneficial owners of American Depositary Shares issued thereunder.2
Indenture, dated as of 15 August 2017, among British American Tobacco p.l.c. and certain of its subsidiaries as guarantors,
and Wilmington Trust, National Association, as Trustee.3
Supplemental Indenture No. 1, dated as of 28 September 2018, among British American Tobacco p.l.c. and certain of its
subsidiaries as guarantors, and Wilmington Trust, National Association, as Trustee.4
Indenture, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party thereto and Citibank,
N.A., as trustee, authentication agent, transfer agent, registrar, calculation agent and initial paying agent.5
Supplemental Indenture No. 1, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party
thereto and Citibank, N.A., as Trustee.6
Supplemental Indenture No. 2, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party
thereto and Citibank, N.A., as Trustee.7
Supplemental Indenture No. 3, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party
thereto and Citibank, N.A., as Trustee.8
Supplemental Indenture No. 4, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party
thereto and Citibank, N.A., as Trustee.9
Thirty-first Supplemental Trust Deed, dated 1 May 2019, by and among B.A.T. International Finance p.l.c., B.A.T Capital
Corporation, B.A.T. Netherlands Finance B.V., British American Tobacco p.l.c. and the Law Debenture Trust Corporation p.l.c.,
further modifying the Trust Deed, dated as of 6 July 1998 (as previously modified and restated) relating to the US$3,000,000,000
(now £25,000,000,000) Euro Medium Term Note Programme.10
Description of Securities registered under Section 12 of the Exchange Act.
Term loan facilities agreement, dated as of 16 January 2017, among B.A.T. International Finance p.l.c. and B.A.T Capital
Corporation, as original borrowers, British American Tobacco p.l.c., as guarantor, HSBC Bank plc, as agent, HSBC Bank USA,
National Association, as US agent and the lenders and financial institutions party thereto.11
Revolving credit facilities agreement, dated as of 20 January 2017, among British American Tobacco p.l.c., B.A.T. International
Finance p.l.c., British American Tobacco Holdings (The Netherlands) B.V., B.A.T. Netherlands Finance B.V. and B.A.T Capital
Corporation, as borrowers, British American Tobacco p.l.c., as guarantor, HSBC Bank plc, as agent and euro swingline agent, HSBC
Bank USA, National Association, as US agent and US$ swingline agent, and the banks and financial institutions party thereto.12
Rules of the British American Tobacco 2007 Long-Term Incentive Plan.13
Rules of the British American Tobacco 2016 Long-Term Incentive Plan (Amended and Restated as of 25 February 2020)
British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.14
Annex to British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.15
British American Tobacco p.l.c. 2019 Deferred Annual Share Bonus Scheme.16
Rules of the British American Tobacco Restricted Share Plan.17
Deferred Compensation Plan for Directors of Reynolds American Inc. (Amended and Restated Effective 30 November 2017).18
Service Contract between British American Tobacco p.l.c. and Nicandro Durante, dated as of 10 December 2010.19
Service Contract between British American Tobacco p.l.c. and John Benedict Stevens, dated as of 26 March 2008.20
Service Contract between British American Tobacco p.l.c. and Jack Bowles, dated as of 11 December 2018.21
Letter Agreement between British American Tobacco p.l.c. and John Benedict Stevens, dated as of 23 July 2010.22
Service Contract between British American Tobacco p.l.c. and Tadeu Marroco, dated as of 27 February 2019.
Master Settlement Agreement, referred to as the MSA, dated 23 November 1998, between the Settling States named in the MSA
and the Participating Manufacturers also named therein.23
Settlement Agreement dated 25 August 1997, between the State of Florida and settling defendants in The State of Florida v.
American Tobacco Co.24
Comprehensive Settlement Agreement and Release dated 16 January 1998, between the State of Texas and settling defendants
in The State of Texas v. American Tobacco Co.25
Settlement Agreement and Release in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of Minnesota, Blue
Cross and Blue Shield of Minnesota and the various tobacco company defendants named therein, dated as of 8 May 1998.26
Settlement Agreement and Stipulation for Entry of Consent Judgment in re: The State of Minnesota v. Philip Morris, Inc., by and
among the State of Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named
therein, dated as of 8 May 1998.27
Form of Consent Judgment by Judge Kenneth J. Fitzpatrick, Judge of District Court in re: The State of Minnesota v. Philip Morris, Inc.28
1
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
324
Shareholder InformationBAT Annual Report and Form 20-F 2019 Exhibit Number Description
4.21
4.22
4.23
4.24
4.25
8
11
12
13
15
101
Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order dated 2 July 1998, by and among the
Mississippi Defendants, Mississippi and the Mississippi Counsel in connection with the Mississippi Action.29
Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated 24 July 1998, by and among the
Texas Defendants, Texas and the Texas Counsel in connection with the Texas Action.30
Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated 11 September 1998, by and among
the State of Florida and the tobacco companies named therein.31
Term Sheet agreed to by R. J. Reynolds Tobacco Company, an indirect subsidiary of Reynolds American Inc., certain other
Participating Manufacturers, 17 states, the District of Columbia and Puerto Rico.32
Revolving credit facilities agreement, dated as of 12 March 2020, among British American Tobacco p.l.c., B.A.T. International
Finance p.l.c., B.A.T. Netherlands Finance B.V. and B.A.T Capital Corporation, as borrowers, British American Tobacco p.l.c., as
guarantor, HSBC Bank plc, as agent and euro swingline agent, HSBC Bank USA, National Association, as US agent and US$
swingline agent, and the banks and financial institutions party thereto.
List of Subsidiaries included on pages 237 to 246 in this report.
Code of Ethics.33
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification under Section 906 of the Sarbanes-Oxley Act of 2002.34
Consent of KPMG LLP (United Kingdom), independent registered public accounting firm of British American Tobacco p.l.c.
Interactive Data Files (formatted in XBRL (Extensible Business Reporting Language) and furnished electronically).
Notes:
1. Incorporated by reference to Exhibit 3.1 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
2. Incorporated by reference to Exhibit 4.1 to BAT’s Registration Statement on Form S-8 (Reg. No. 333-237186) filed on 16 March 2020.
3. Incorporated by reference to Exhibit 2.4 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2017 filed on 15 March 2018.
4. Incorporated by reference to Exhibit 4.2 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-227658) filed on 2 October 2018.
5. Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
6. Incorporated by reference to Exhibit 4.2 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
7. Incorporated by reference to Exhibit 4.3 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
8. Incorporated by reference to Exhibit 4.4 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
9. Incorporated by reference to Exhibit 4.5 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
10. Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form F-3 filed on 17 July 2019.
11. Incorporated by reference to BAT’s Amendment No. 4 to Schedule 13D filed on 17 January 2017.
12. Incorporated by reference to Exhibit 4.5 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017,
and replaced by the revolving credit facilities agreement, dated as of 12 March 2020, included in Exhibit 4.25 hereto.
13. Incorporated by reference to Exhibit 10.6 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
14. Incorporated by reference to Exhibit 10.8 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
15. Incorporated by reference to Exhibit 4.6 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2018 filed on 15 March 2019.
16. Incorporated by reference to Exhibit 4.7 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2018 filed on 15 March 2019.
17. Incorporated by reference to Exhibit 4.2 to BAT’s Registration Statement on Form S-8 (Reg. No. 333-237186) filed on 16 March 2020.
18. Incorporated by reference to Exhibit 10.43 to Reynolds American Inc.’s Annual Report on Form 10-K for the fiscal year ended 31 December 2007 filed on 27 February 2008.
19. Incorporated by reference to Exhibit 10.9 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
20. Incorporated by reference to Exhibit 10.10 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
21. Incorporated by reference to Exhibit 4.11 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2018 filed on 15 March 2019.
22. Incorporated by reference to Exhibit 10.11 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
23. Incorporated by reference to Exhibit 4 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 24 November 1998.
24. Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 5 September 1997.
25. Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 27 January 1998.
26. Incorporated by reference to Exhibit 99.1 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.
27. Incorporated by reference to Exhibit 99.2 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.
28. Incorporated by reference to Exhibit 99.3 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.
29. Incorporated by reference to Exhibit 99.2 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 June 1998 filed on 14 August 1998.
30. Incorporated by reference to Exhibit 99.4 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 June 1998 filed on 14 August 1998.
31. Incorporated by reference to Exhibit 99.1 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 September 1998 filed on 12 November 1998.
32. Incorporated by reference to Exhibit 10.1 to Reynolds American Inc.’s Form 8-K dated 12 March 2013.
33. Incorporated by reference to Exhibit 11 to to BAT’s Annual Report on Form 20-F for the year ended 31 December 2017 filed on 15 March 2018.
34. These certifications are furnished only and are not filed as part of BAT’s Annual Report on Form 20-F for the year ended 31 December 2019.
Certain instruments which define the rights of holders of long-term debt issued by BAT and its subsidiaries are not being filed because the total
amount of securities authorised under each such instrument does not exceed 10% of the total consolidated assets of BAT and its subsidiaries.
BAT agrees to furnish copies of any or all such instruments to the SEC on request.
325
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 @ROCE
SAFL
SEC
SIP
SoBC
SOx
SRS
TaO
TCFD
TDR
THP
TPD1
TPD2
TSR
US
UURBS
WHO
Return on capital employed@
Sustainable Agriculture and Farmer Livelihoods
United States Securities and Exchange Commission
Share incentive plan
Group Standards of Business Conduct
United States Sarbanes-Oxley Act of 2002
Share reward scheme
Programme to implement the new operating
model, including one instance of SAP
Taskforce on Climate-related Financial Disclosures
TDR d.o.o
Tobacco heating products
European Tobacco Products Directive
(directive 2001/37/EC)
European Tobacco and Related Products Directive
(directive 2014/40/EU)
Total shareholder return
United States of America
Unfunded unapproved retirement benefit scheme
World Health Organisation
GLOSSARY
American Depositary Receipt
American Depositary Share – 1 ADS is equivalent
to 1 BAT ordinary share
Annual General Meeting
Americas (excluding US) and Sub-Saharan Africa
Adjusted profit from operations
Asia-Pacific and Middle East
British American Tobacco Group Employee Trust
Basis points
Constant currency
Cash generated from operations
Carbon dioxide equivalent
UK Corporate Governance Code 2018
Corporate Social Responsibility
Deferred share bonus scheme
European Medium Term Notes
Europe and North Africa
Earnings per share
Environmental, Social and Governance
European Union
Franked Investment Income Group Litigation Order
Framework Convention on Tobacco Control
Fast Moving Consumer Goods
Generally Accepted Accounting Practice
Global Drive Brands, being Kent, Dunhill, Pall Mall,
Lucky Strike and Rothmans
EU General Data Protection Regulation
Global Drive and Key Strategic Brands, being the
GDBs, plus Shuang Xi and State Express 555
Gigajoules (of energy use)
International Accounting Standards Board
International Executive Incentive Scheme
International Financial Reporting Standards as
issued by the IASB and as adopted by the EU
International Standards on Auditing
Johannesburg Stock Exchange
Key performance indicator
London Interbank Offered Rate
London Stock Exchange
Listing rules
Long-Term Incentive Plan
Million cigarettes equivalent
Master Settlement Agreement
Next Generation Product
Net turnover or revenue
New York Stock Exchange
Operating cash flow
Organisation for Economic Co-operation
and Development
Other tobacco products, including but not limited
to roll-your-own, make-your-own and cigars
The Parker Review Committee’s final report
on ethnic diversity in UK boards published
on 12 October 2017
Public Company Accounting Oversight Board
Reynolds American Inc.
Reynolds American Inc. group of companies
ADR
ADS
AGM
AmSSA
APFO
APME
BATGET
bps
CC
CGFO
CO2e
Code
CSR
DSBS
EMTN
ENA
EPS
ESG
EU
FII GLO
FCTC
FMCG
GAAP
GDB
GDPR
GDSB
GJ
IASB
IEIS
IFRS
ISA
JSE
KPI
LIBOR
LSE
LR
LTIP
MCE
MSA
NGP
NTO
NYSE
OCF
OECD
OTP
Parker Report
PCAOB
RAI
RAI Companies
326
Other InformationBAT Annual Report and Form 20-F 2019 CROSS‑REFERENCE
TO FORM 20‑F
Item
Form 20-F caption
Location in this document
1
2
3
4
4a
5
6
7
8
9
10
11
A
B
C
D
A
B
C
D
A
B
C
D
E
F
G
A
B
C
D
E
A
B
C
A
B
A
B
C
D
E
F
A
B
C
D
E
F
G
H
I
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Selected financial data
Capitalisation and indebtedness
Reasons for the offer and use of proceeds
Risk factors
Information on the Company
History and development of the Company
Business overview
Organisational structure
Property, plants and equipment
Unresolved staff comments
Operating and Financial Review and Prospects
Operating results
Liquidity and capital resources
Research and development, patent and licences
Trend information
Off-balance sheet arrangements
Tabular disclosure of contractual commitments
Safe harbour
Directors, Senior Management and Employees
Directors and senior management
Compensation
Board practices
Employees
Share ownership
Major Shareholders and Related Party Transactions
Major shareholders
Related party transactions
Interests of experts and counsel
Financial Information
Consolidated statements and other financial information
Significant changes
The Offer and Listing
Offer and listing details
Plan of distribution
Markets
Selling shareholders
Dilution
Expenses of the issue
Additional Information
Share capital
Memorandum and Articles of Association
Material contracts
Exchange controls
Taxation
Dividends and paying agents
Statements by experts
Documents on display
Subsidiary information
Quantitative and Qualitative Disclosures about Market Risk
N/A
N/A
256
N/A
N/A
58-62, 272-286
48-49, 145-146, 157-158, 185-186, 255, 269, 323, inside back cover
3-42, 44, 52-57, 136-139, 255, 287-290, 292, 296
237-246, 255
156-157, 294
N/A
17-21, 34-37, 39, 43-47, 50, 51, 61, 131, 159, 166-168,
180-184, 268, 269, 287-290
48-50, 129, 169, 175-178, 180-184, 266, 269-270, 283
2-10, 14-15, 44, 141, 255
2-42, 58-62, 287-290
51, 211, 213, 270
270
298
66-68, 76
90-113, 158-163, 189-190, 307-316
66-68, 79-80, 83-89, 90-92, 111, 189-190, 297, 318-319
5, 189, 271
42, 95-96, 186-188, 306-316, 321
306-307
189-190
N/A
47, 122-236, 300-301
N/A
299
N/A
299
N/A
N/A
N/A
N/A
107, 317-319
292
300
302-305
N/A
N/A
323
N/A
180-184
327
Strategic ReportGovernanceFinancial StatementsOther InformationBAT Annual Report and Form 20-F 2019 CROSS‑REFERENCE TO FORM 20‑F
CONTINUED
A
B
C
D
Item
12
13
14
15
16A
16B
16C
16D
16E
16F
16G
16H
17
18
19
Form 20-F caption
Location in this document
Description of Securities Other Than Equity Securities
Debt securities
Warrants and rights
Other securities
American Depositary Shares
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders
and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and
Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Financial Statements
Financial Statements
Exhibits
N/A
N/A
N/A
322
N/A
N/A
122-123, 296
83, 295
88, 295
85-86, 141
N/A
320
N/A
295
N/A
N/A
122-236
324-325
328
Other InformationBAT Annual Report and Form 20-F 2019 Registered office
Globe House, 4 Temple Place, London WC2R 2PG
tel: +44 20 7845 1000, facsimile: +44 20 7240 0555
Incorporated in England and Wales No. 3407696
Representative Office in South Africa
Waterway House South, No 3 Dock Road, V&A Waterfront,
Cape Town 8000, South Africa
PO Box 631, Cape Town 8000, South Africa
tel: +27 21 003 6712
Secretary
Paul McCrory
Investor relations
Enquiries should be directed to Mike Nightingale, Victoria Buxton,
William Houston or John Harney
tel: +44 20 7845 1180
Press office
Enquiries should be directed to Anna Vickerstaff
tel: +44 20 7845 2888
email: press_office@bat.com
Auditors
KPMG LLP
15 Canada Square, Canary Wharf, London E14 5GL
References in this publication to ‘British American Tobacco’, ‘BAT’, ‘we’, ‘us’,
and ‘our’ when denoting opinion refer to British American Tobacco p.l.c.
(the Company) (No. 3407696) and when denoting tobacco business activity
refer to British American Tobacco Group operating companies, collectively
or individually as the case may be.
Design and production: Radley Yeldar www.ry.com
Printed in the UK by Pureprint Group on Revive 100% recycled papers, made
entirely from post-consumer waste. All pulps used are Elemental Chlorine Free.
The manufacturing mills hold the ISO14001 and EU Ecolabel (EMAS)
certificates for environmental management.
We believe in Diversity. At BAT we employ over 55,000 people
and operate across more than 180 markets globally.
We understand and recognise that to be a truly global
company we must have a truly global culture and values.
This diversity of people, thinking and ideas is key to delivering
a better tomorrow for our consumers, society, shareholders
and employees.
We believe in Science. At BAT we are leaders in the field of plant
genomics and bioinformatics, and have research facilities in the
UK and USA employing over 150 PHDs.
Our pioneering, published genome data enables the scientific
community to advance map-based gene discoveries and accelerates
our research into new product categories.
This scientific capability is critical to delivering a better tomorrow
for our consumers, employees, shareholders and society.
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