Building the
Enterprise of
the Future
Annual Report and Form 20-F 2020
30%
Of our direct energy
from renewable sources
>35%
Reduce the total amount
of water withdrawn from
our 2017 baseline
100%
Of plastic packaging to
be reusable, recyclable
or compostable
> 30%
Reduce our absolute
Scope 1 and Scope 2
CO2e emissions from
our 2017 baseline
Ambitious
Environmental
Targets
2025
2030Carbon Neutrality Target Ambitious Business Goals
New Category Revenue
Target of £5bn
2025
2030
Target of 50mn
Consumers of
Non-Combustible
Products
d
Our Purpose
To reduce the health impact
of our business by offering
a greater choice of enjoyable
and less risky products
for our consumers.
1
We are clear that combustible cigarettes pose serious health risks.
The only way to avoid these risks is not to start or to quit. However, we
encourage those who would otherwise continue to smoke to switch
completely to scientifically-substantiated, reduced-risk alternatives.*†
In order to deliver this, BAT is transforming into a truly consumer-
centric multi-category consumer products business.
Consumer
Moments
Multi-Category
Portfolio
Consumer
Digital Insights
Consumer
Centricity
Digitally
Embedded
RGM
Product
Boundaries
Product
Satisfaction
Index
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be
made as to these products without agency clearance.
BAT Annual Report and Form 20-F 2020 Inside This Report
Delivering A Better TomorrowTM
For Consumers
Tobacco Harm Reduction
Through World-Class Science
Digital Transformation
Unlocking Commercial Value
Short-Term Deliverables
to Fuel A Better TomorrowTM
For Society and the Environment
Awards and Recognition
Putting ESG Front and Centre
ESG Framework
Reducing the Health Impact of Our Business
Excellence in Environmental Management
Delivering a Positive Societal Impact
Robust Governance
For Employees
Ethos
People and Culture
For Shareholders
Financial Performance Summary
Treasury and Cash Flow
Other
Regional Review
Engaging With Our Stakeholders
Business Environment
Group Principal Risks
29
30
32
34
44
45
46
48
49
51
54
56
58
59
60
64
65
70
72
74
82
84
Strategic Report
Overview
Chairman’s Introduction
Responding to the COVID-19 Pandemic
Chief Executive’s Review
04
Finance and Transformation Director’s Overview 07
Our Year in Numbers
09
Investment Case
03
02
10
Strategic Management
Global Industry Overview
The Foundations of our Evolved Strategy
A Strategy for Accelerated Growth
Our Consumer-Centric Multi-Category Portfolio
Our Global Business
Our Business Model
Accelerating the Enterprise of the Future
Short-Term Deliverables
to Fuel A Better TomorrowTM
12
16
18
20
22
24
26
28
Explore the story
of our year
Featuring downloadable
versions of this report,
along with our ESG report
and other content – all
accessible on desktop,
tablet and mobile.
www.bat.com/reporting
01
89
91
92
94
95
96
97
100
102
104
105
106
110
117
140
Governance
Directors’ Report
Chairman’s Introduction on Governance
Governance
Board of Directors
Management Board
Leadership Overview
Our Culture and Values
Board Engagement With Stakeholders
Board Activities in 2020
Division of Responsibilities
Board Effectiveness
Nominations Committee
Chairman Succession
Audit Committee
Remuneration Report
Annual Statement on Remuneration
Responsibility of Directors@
Financial Statements
Group Financial Statements
Independent Auditor’s Report
Group Companies and Undertakings
Parent Company Financial Statements@
141
254
264
Other Information
Additional Disclosures
Shareholder Information
271
319
British American Tobacco p.l.c. (No. 3407696)
Annual Report 2020
This document constitutes the Annual Report and Accounts of British American Tobacco
p.l.c. (the Company) and the British American Tobacco Group prepared in accordance with
UK requirements and the Annual Report on Form 20-F prepared in accordance with the US
Securities Exchange Act of 1934 (the Exchange Act) and the rules promulgated thereunder
for the year ended 31 December 2020, 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 148 and 149 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
88, includes our purpose and strategy, global market overview, business model, global
performance, as well as our financial performance and principal Group risks. The Strategic
Report has been approved by the Board of Directors and signed on its behalf by Paul McCrory,
Company Secretary. Our Governance Report on pages 89 to 140 contains detailed corporate
governance information, our Committee reports@ and our Responsibility of Directors@.
The Directors’ Report on pages 89 to 116 (the Governance pages)@, page 140 (Responsibility of
Directors)@ and 271 to 343 (the Additional Disclosure and Shareholder Information pages) has
been approved by the Board of Directors and signed on its behalf by Paul McCrory, Company
Secretary. Our Financial Statements and Notes are on pages 141 to 253. The Other Information
section commences on page 271.
This document provides alternative performance measures (APMs) which are not defined
or specified under the requirements of International Financial Reporting Standards (IFRS).
We believe these APMs provide readers with important additional information on our
business. We have included a Non-GAAP measures section on pages 276 to 284 which
provides a comprehensive list of the APMs that we use, an explanation of how they are
calculated, why we use them and a reconciliation to the most directly comparable IFRS
measure where relevant.
British American Tobacco p.l.c. has shares listed on the London Stock Exchange (BATS) and
the Johannesburg Stock Exchange (BTI), and, as American Depositary Shares, on the New York
Stock Exchange (BTI).
The Annual Report is published on bat.com. A printed copy is mailed to shareholders on the
UK main register who have elected to receive it. Otherwise, shareholders are notified that
the Annual Report is available on the website and will, at the time of that notification, receive
a short Performance Summary (which sets out an overview of the Group’s performance,
headline facts and figures and key dates in the Company’s financial calendar) and Proxy Form.
Specific local mailing and/or notification requirements will apply to shareholders on the South
Africa branch register.
References in this publication to ‘British American Tobacco’, ‘BAT’, ‘Group’, ‘we’, ‘us’ and ‘our’
when denoting opinion refer to British American Tobacco p.l.c. and when denoting tobacco
business activity refer to British American Tobacco Group operating companies, collectively
or individually as the case may be.
The material in this Annual Report is provided for the purpose of giving information about
the Company to investors only and is not intended for general consumers. The Company,
its Directors, employees, agents or advisers do not accept or assume responsibility
to any other person to whom this material is shown or into whose hands it may come
and any such responsibility or liability is expressly disclaimed. The material in this Annual
Report is not provided for product advertising, promotional or marketing purposes.
This material does not constitute and should not be construed as constituting an offer
to sell, or a solicitation of an offer to buy, any of our products. Our products are sold only
in compliance with the laws of the particular jurisdictions in which they are sold.
References in this document to information on websites, including the web address of BAT,
have been included as inactive textual references only. These websites and the information
contained therein or connected thereto are not intended to be incorporated into or to form
part of the Annual Report and Form 20-F.
Cautionary statement
This document contains forward-looking statements. For our full cautionary statement,
please see page 318.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
02
Overview
Chairman’s Introduction
A Strong Operational Performance
During Challenging Times
The strength of the business,
combined with the professionalism
and resilience of our global teams
have enabled us, in 2020, to deliver
a strong operational performance
during challenging times.
Welcome to our combined Annual Report
and Form 20-F for 2020, my last as
Chairman of BAT.
The unprecedented impact of the COVID-19
crisis has disrupted all aspects of life
around the world and our sympathies are
with anyone suffering from the virus or who
has lost family or friends in the pandemic.
Our priority throughout has been to
safeguard the welfare of our people while
ensuring that the business has continued
to operate effectively.
The Board and management have worked
very closely together to address the
disruptions experienced throughout
the year.
The strength of the business, combined
with the professionalism and resilience of
our global teams have enabled us, in 2020,
to deliver a strong operational performance
during challenging times.
Foreign exchange headwinds impacted
our reported results, with Group revenue
down 0.4%. This was despite a good
revenue performance (excluding the impact
of currency) and I am pleased to report
growth in both value and volume share,
with revenue from New Categories
growing 15%.
Clarity around the full impact of the
pandemic, and for life to return to some
semblance of normality, will take time.
The duration of the short-term impact
on the performance of the business will
depend on the nature and timing of the
subsequent economic recovery, but we
believe we are well positioned to emerge
as a stronger company.
Good Governance at the Heart
of a Sustainable Business
Increasingly, business is moving beyond
seeking only to deliver ‘shareholder value’
and is embracing a wider purpose that
serves the interests of all stakeholders.
The expectations of broader society are
that business should play a more active
role in addressing and finding solutions to
crucial social, economic and environmental
issues. Evidence of these expectations can
be found in the increasing amount of capital
that is being channelled into environmental,
social and governance (ESG) funds.
We at BAT welcome this shift. It is aligned
to our Company’s purpose, our sustainability
agenda and the decision-making approach
that the Board encourages.
Our commitment to delivering for the
whole of society is evidenced by the
ambitious ESG targets we set out in 2020.
I am pleased to report we have made
steady progress against our ambitions.
We are increasingly shifting our business
to consumers of non-combustible
products, while reducing our impact on
the environment.
Dividends
We have maintained our dividend
commitment despite the challenging
operating environment and the Board has
declared a dividend of 215.6p per ordinary
share, payable in four equal instalments of
53.9p per ordinary share, to shareholders
registered on the UK main register or
the South Africa branch register and to
American Depository Shares (ADS) holders,
each on the applicable record dates.
Further information on dividends can
be found on page 69 of the Financial
Review and page 320 in the Shareholder
information section.
Board Composition
I am delighted that Luc Jobin has been
appointed by the Board to be my successor
as Chairman of BAT. Having worked closely
with him in his role as a Non-Executive
Director over the last three years, I am
confident that BAT is well positioned for
future success with Luc as Chairman.
I am also very pleased to welcome Karen
Guerra and Darrell Thomas, who joined
the Board as Non-Executive Directors
on 14 September and 7 December 2020,
respectively. Karen brings substantial
knowledge and understanding of consumer
goods and Darrell brings significant
financial, regulatory and US experience.
I have no doubt that both Karen and
Darrell will be assets to the Board, its work
and BAT.
Future Outlook
As I reflect on my tenure as Chairman of
BAT, I am thankful for all the efforts of,
and collaboration between, our Board of
Directors, management and employees
around the world.
BAT made considerable progress strategically
and financially during a difficult 2020.
I have no doubt that the Company will
navigate the future with both confidence
and determination to continue building
A Better TomorrowTM.
Richard Burrows
Chairman
In the longer term, BAT’s strong
foundations, resilient business model and
consumer-focused strategy mean I remain
excited about its future prospects.
The dividends receivable by ADS holders
in US dollars will be calculated based
on the exchange rate on the applicable
payment dates.
BAT Annual Report and Form 20-F 2020 Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2020
03
Responding to the
COVID-19 Pandemic
The Group’s response to the global COVID-19 pandemic continues to
evolve and we expect the actions we take to develop over time as the
needs of our people, our customers and society as a whole change.
We are steadfastly committed to supporting all our stakeholders
throughout the COVID-19 pandemic, whether that be our workforce,
customers, partners or suppliers.
Keeping the Group Operating
in a Time of Crisis
The Group continues to navigate the
challenges and impacts of COVID-19,
with effective crisis management and
risk management processes in place, and
remains a financially resilient business.
Our Board has maintained close oversight
of the Group’s response to the impact of
COVID-19 throughout this period.
The Group remains financially robust,
@with the Board reiterating the
commitment to the Group’s dividend
pay-out policy of 65% of adjusted diluted
EPS.@ This demonstrates the confidence in
the Group’s ability to continue to navigate
COVID-19 with the associated macro and
socio-economic challenges and uncertainty
this international crisis brings.
We are committed to supporting all our
stakeholders throughout the COVID-19
pandemic, whether that be our workforce,
customers, partners or suppliers. We have
not furloughed any staff or utilised any
government schemes (or subsidies) due
to the pandemic, other than in respect of
the deferral of tax instalment payments
within the calendar year.
Vaccine Development
BAT’s US bio-tech subsidiary, Kentucky
BioProcessing (KBP), is developing a potential
vaccine for COVID-19. Its Initial New Drug
application was approved by the US Food
and Drug Administration (FDA) in December
2020 and we are progressing through
the first Phase I study of KBP’s COVID-19
vaccine candidate.
This move to human trials is the first phase
of development that would, if successful,
form part of the full-scale development
programme that would aim to fully assess the
safety and efficacy of the candidate vaccine.
KBP is a world leader in using plants to
express, extract and purify proteins for use
as vaccines and other pharmaceuticals.
The candidate vaccine’s unique use of
innovative fast-growing plant-based
technology means rapid production of
the vaccine’s active ingredients in around
six weeks compared to several months
using conventional methods. The vaccine
also has the potential to be stable at room
temperature, which could be a significant
advantage for healthcare systems.
Testing and Logistical Support
We have continued to evolve the forms of
direct support we have deployed to address
the global impact of COVID-19.
In addition to the COVID-19 vaccine
candidate that is in development by our
US bio-tech subsidiary, KBP, we have:
– Loaned testing equipment to the
UK government;
Supporting our Suppliers
and Communities
Our response to COVID-19 has been
developed to incorporate the needs of
wider stakeholder groups, including
our smaller suppliers and those living in
tobacco growing communities.
Some tobacco growing communities may
be particularly vulnerable to both the virus
and the economic implications of a global
pandemic. We are taking great care that we
don’t increase the immediate vulnerability
of these communities and are committed
to supporting them during the inevitable
economic recovery that will follow.
We are working to support our smaller
suppliers across the globe who may
be struggling with cash flow issues by
ensuring that, where needed, they are paid
earlier than existing payment terms require
or by extending payment terms to those
customers who have expressed concerns.
Looking After our People
The Group’s management is doing all that
it can to make sure that employees working
from home feel connected.
Most importantly, we are working to ensure
that the health, safety and wellbeing of
employees who are unable to work from
home, and those in countries where
lockdown restrictions are not in place, are
protected in their workplace.
For all employees, we are making sure
they are aware of the extensive wellbeing
support available to them, including:
– Provided access to 3D printers to help
– Online medical consultations;
produce protective face shields;
– Manufactured and distributed medical
and hygiene equipment to vulnerable
communities; and
– Donated to many funds around the
world focusing on supporting local
COVID-19 responses.
– Counselling services; and
– Mental health support.
04
Overview
Chief Executive’s Review
Building A Better TomorrowTM and Delivering
Growth in a Challenging Environment
From the start of our portfolio transformation
journey, we have always been clear that no consumer
is the same. In order to meet differing needs in multiple
marketplaces, a portfolio of solutions is required –
that is the hallmark of a modern consumer products
business. I am delighted, therefore, that adoption has
accelerated across all three of our New Categories
in 2020 and that 13.5 million consumers are now
choosing our non-combustible products.
Dear Stakeholders,
As the largest, and only truly global
company in our industry, we take seriously
our role to transform ourselves and
demonstrate thought leadership.
We have a very clear purpose to reduce
the harm footprint of our business. We are
uniquely positioned to encourage the
switch to reduced-risk products.*†
– We operate worldwide, inclusive of the
US, which represents 40% of the global
industry’s value.
– Our well-embedded consumer-centric,
multi-category consumer strategy is
activated on a global scale, leveraging
our insights on consumer satisfaction,
innovation needs and taste preference.
– We are building the brands of the
future – strong, global brands,
specifically positioned in each target
consumer segment.
From the start of our portfolio
transformation journey, we have always
been clear that no consumer is the same.
In order to meet differing needs in multiple
marketplaces, a portfolio of solutions is
required – that is the hallmark of a modern
consumer products business.
I am delighted, therefore, that adoption
has accelerated across all three of
our New Categories in 2020 and that
13.5 million consumers are now choosing
our non-combustible products. We have
a way to go – yet BAT is changing, and
that change is accelerating.
Our Response to the Pandemic
Recent months have seen upheaval on a
global scale as a result of the COVID-19
pandemic. It has had a profound impact on
business and society as a whole. First and
foremost, our thoughts are with the many
individuals and families whose lives have
been impacted by the virus.
At the beginning of the crisis, we took
swift action across the entire business to
ensure we could continue to operate safely
and effectively.
Today, working remotely remains the
norm for many at BAT. Where this has not
been possible, for example in many of our
factories around the world, the necessary
measures have been put in place to ensure
our people can work safely and securely.
I would like to thank our teams around
the world for their ongoing commitment,
energy and passion.
Our Purpose: A Better TomorrowTM
Our business continues to transform
during this period of unprecedented
change. Our purpose – to build A Better
TomorrowTM by reducing the health impact
of our business – has remained our North
Star. It continues to guide our strategic
choices and the execution of our strategy.
Delivering A Better TomorrowTM through
consumer-led insights, innovation and
science are central to this purpose.
Our consumer-centric, multi-category
approach offers the widest range
of enjoyable and less risky products,
including Vapour products, Tobacco
Heating Products (THP) and Modern Oral
nicotine pouches.*†
We believe our multi-category strategy is
the most effective way of appealing to the
diverse preferences of adult consumers
around the world while reducing the
health impact of our business. We believe
consumers should either stop smoking,
or not start.
For those who would otherwise continue to
smoke, we are committed to encouraging
them to switch completely to scientifically-
substantiated, reduced-risk alternatives.* †
As the largest, and only
truly global company in our
industry, we take seriously
our role to transform ourselves
and demonstrate thought
leadership.
We have a very clear
purpose to reduce the harm
footprint of our business.
We are uniquely positioned
in that regard.
Recent months have seen
upheaval on a global scale as a
result of the COVID-19 pandemic.
It has had a profound impact
on business and society as
a whole.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance.
BAT Annual Report and Form 20-F 2020
05
Our business continues to
transform during this period of
unprecedented change.
Our purpose – to build A Better
Tomorrow by reducing the
health impact of our business –
has remained our North Star.
It continues to guide our strategic
choices and the execution of
our strategy.
Sustainability is at the heart of our business
and is key to our transformation journey.
In support of our A Better TomorrowTM
purpose, we set out three ambitious
ESG targets:
– Increasing the consumer base of our non-
combustible products to 50 million by 2030;
– Achieving carbon neutrality by 2030 while
accelerating our existing environmental
targets to 2025; and
Profit from operations grew by 10.5% to
£9,962 million with diluted earnings per
share up 12%. Excluding adjusting items and
the impact of foreign exchange, adjusted
profit from operations, at constant rates of
exchange, grew by 4.8% and adjusted diluted
earnings per share grew by 5.5%.
Reported operating margin grew by 380
bps to 38.6%. On an adjusted basis, it grew
by 100 bps at current rates.
– Eliminating unnecessary single-use
plastic and making all plastic packaging
reusable, recyclable or compostable
by 2025.
@With operating cash conversion of 103%@,
we have continued to demonstrate our
commitment to reducing leverage and
investing in the business by maximising cash.
We believe our multi-
category strategy is the most
effective way to appeal to the
diverse preferences of adult
consumers around the world
while reducing the health
impact of our business.
I am pleased that we are
making great progress towards
our ESG ambitions and business
transformation. BAT’s non-
combustible products are now
available in over 50 countries.
We have increased the number
of non-combustible product
consumers by 3 million, reaching
13.5 million, and remain on track
for 50 million by 2030.
We are providing an
increasing number of adult
consumers with products that
provide satisfaction and can
reduce the overall health risk
compared with our combustible
products. Our ambition is to build
the brands of the future.
@ Denotes phrase, paragraph or similar that does not form
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
I am pleased that we are making great
progress towards our ESG ambitions and
business transformation. BAT’s non-
combustible products are now available in
more than 50 countries. We have increased
the number of non-combustible product
consumers by 3 million, reaching 13.5 million,
and remain on track for 50 million by 2030.
In addition, we achieved a 37.4% decrease
in our Scope 1 and Scope 2 CO2e carbon
emissions against our 2017 baseline,
supported by a 16 percentage point
increase in our use of renewable energy
compared with last year. Further details of
our progress in all ESG areas are provided
on pages 44-57 and in our ESG Report.
We are proud that our ESG efforts are
being recognised externally through our
inclusion in the Dow Jones Sustainability
Indices for 19 consecutive years, our scores
in leading investor indices such as MSCI and
Sustainalytics, and through our CDP Climate
A-List status.
In fact, BAT achieved more worldwide
recognition and awards in 2020 than ever
before, with well over 200 awards received.
Our Performance for Year Ended
31 December 2020
The year ended 31 December 2020 was
a strong one for BAT’s global business.
The impact of the COVID-19 pandemic has
been felt unequally across markets, with
resilience seen across many developed
markets, where around three-quarters
of our revenue is generated, while some
developing markets have experienced
product, sales or supply chain restrictions.
Revenue was marginally lower than 2019
(down 0.4%), due to a foreign currency
headwind of 3.5%. Excluding currency (and
adjusting items in revenue impacting 2019),
the Group delivered 3.3% revenue growth
to £26,670 million, which was at the top end
of our guidance range.
Delivering a Step Change
in New Categories
Our New Categories portfolio is the
broadest in the industry.
Through our multi-category approach,
combined with powerful data and consumer
analytics, we are providing an increasing
number of adult consumers with products
that provide satisfaction and can reduce
the overall health risk compared with our
combustible products.*† Our ambition is to
build the brands of the future.
We aim to further accelerate the growth of
revenue from our New Categories, reaching
£5 billion in 2025. I am pleased to report
that £1.4 billion of our revenues came from
these products in 2020, representing 15%
growth compared to 2019.
Overall, total Group Vapour revenue grew by
52% to £611 million. I am pleased to report we
are the value share leader in closed systems
in four of the top five markets, rapidly closing
the gap on the US market leader.
We continue to grow volume share in THP,
with consumable volume up 19% to 11 billion
sticks – which would have been a growth
of 29% had it not been for the withdrawal
of glo Sens in the year. While overall
revenue declined 13% to £634 million this
was predominantly due to the impact of a
£50 million charge to revenue (related to
the withdrawal of glo Sens) and excise rate
harmonisation in Japan. We now have around
20% share of category in multiple markets
including Japan, Romania and Kazakhstan.
Our volume of Modern Oral increased 62%
to 1.9 billion pouches with revenue increasing
57% to £198 million. Our acquisition of certain
assets from Dryft, a US-based Modern Oral
company, in October positions us well for
future US growth and represents a further
step towards building A Better TomorrowTM.
These results, combined with the
investment of an additional £426 million
in New Categories in 2020, demonstrate
our commitment to delivering results
sustainably in this exciting area of
the business.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
Confidence in Our Future
As these results demonstrate, we are
accelerating our business transformation
and building A Better TomorrowTM.
Our ongoing success is only made
possible by the dedication and energy
of our talented people around the world
and I want to thank them all for their
commitment, determination and resilience
in such a challenging environment.
This year, I want to extend a special thank
you to our Chairman, Richard Burrows, who
is stepping down from the role and retiring
from the Board. Having served as Chairman
since 2009, Richard’s strong leadership and
contribution have been instrumental in the
progress BAT has made in recent years.
I would also like to congratulate Luc Jobin on
his appointment as Chairman of the Board.
As Chief Executive, I am as proud of the
rich heritage of BAT as I am excited by the
journey ahead. With our history of strong
financial performance, coupled with a deep
understanding of our consumers and an
innovation-led, multi-category approach,
we have the foundations in place to propel
this great Company even further forward.
Jack Bowles
Chief Executive
06
Overview
Chief Executive’s Review
Continued
Driving Value from Combustibles
While we aim to generate an increasing
proportion of our overall revenues from
New Categories, the performance of
our combustibles business remains
essential to funding the delivery of
A Better TomorrowTM.
Revenue from combustibles declined
1.1% as the results were impacted by
a translational exchange headwind of
3.7%. On a constant currency basis (and
excluding adjusting items that impacted
2019), this was a growth of 2.8% to
£23.6 billion as higher pricing across the
Group, notably in the US, Russia, Germany,
Canada, Australia, Mexico and Pakistan
more than offset the impact of lower
combustible volume.
Group cigarette value share increased 20
bps, with cigarette volume share up 40 bps.
While Group cigarette volume declined
4.6% to 638 billion sticks, this should be
seen in the context of an estimated decline
in the industry of between 5.0% to 5.5%.
Our developed and developing market
coverage supported our growth, with value
share accelerating in developed markets
and volume share in developing markets.
Simplifying the Business
Creating a more efficient, agile and
focused business is vital to delivering
A Better TomorrowTM. Our aim is to deliver
annualised £1 billion in efficiency savings by
2022 and in 2020 we made good progress,
with Quantum enabling gross savings of
£660 million through organisational change
and productivity initiatives.
A major component of simplifying the
business is our digital transformation.
We are investing in a digitally-enabled,
empowered and connected organisation.
@Our e-commerce performance was
evidence of that, with revenue growing
by over 50% on a year-on-year basis.@
Our efforts to simplify the business go
much further than digital transformation.
We are removing complexities for our
management structure, rigorously
managing our cost base and embedding
our internal culture.
We aim to further accelerate
the growth of revenue from our
New Categories, reaching £5
billion in 2025. I am pleased to
report that £1.4 billion, of our
revenues came from these
products in 2020 representing
15% growth compared to 2019.
These results, combined
with the investment of an
additional £426 million in
New Categories in 2020,
demonstrate our commitment
to delivering results in this
exciting area of the business
sustainably.
As these results
demonstrate, we are
accelerating our business
transformation and building
A Better Tomorrow.
With our history of strong
financial performance, coupled
with a deep understanding of
our consumers and an
innovation-led, multi-category
approach, we have the
foundations in place to propel
this great Company even
further forward.
@ Denotes phrase, paragraph or similar that does not form
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
BAT Annual Report and Form 20-F 2020
Financial Review
Finance and Transformation
Director’s Overview
07
We continue to deliver against
our financial objectives, despite the
unprecedented challenges arising
in 2020. This allows us to continue
to reward shareholders with growth
in dividends while deleveraging and
investing in A Better Tomorrow.
Revenue growth driven by
New Categories performance
and combustibles pricing, more
than offsets an estimated 2.5%
COVID-19 headwind.
Project Quantum has
realised savings that allowed us
to invest a further £426 million
in New Categories.
Profit from operations
was up 10.5% (2019: down 3.2%),
driven by the growth in revenue
(excluding the impact from
currency) and operational
efficiencies while 2019 was
impacted by certain charges that
did not repeat, notably in relation
to Canada and Russia.
Financial Strength to Overcome
Operational Challenges
2020 has provided unique challenges
that the Group has met and overcome.
Our geographic diversity, integrated
infrastructure and determination to deliver
has again delivered growth in our key
financial indicators.
Our combustible portfolio, particularly
in the US where we led industry pricing,
has provided both the fuel to continue
to increase our investment in our New
Category portfolio and to deleverage the
Group’s balance sheet despite headwind
from COVID-19 of an estimated 2.5%
on revenue.
Pricing and New Categories
Drive Revenue Growth
Revenue was marginally lower than 2019,
down 0.4%, at £25,776 million (while 2019
was up 5.7% to £25,877 million), as a
translational currency headwind more than
offset the operational performance, with
revenue up 3.3% in 2020 (2019: 5.6%) on an
adjusted constant currency basis, despite
an estimated headwind on revenue from
COVID-19 of approximately 2.5% in 2020.
Pricing across the cigarette portfolio
(with price/mix of 7% in 2020 compared
to 9% in 2019), higher revenue from New
Categories (up 14.9% in 2020 and 37% in
2019) and Traditional Oral (up 7.2% in 2020
compared to 15% in 2019) more than offset
a decline in cigarette volume of 4.6% in
2020 (2019: 4.7% decline). 2020 was also
impacted by an estimated 2.5% headwind
from COVID-19 due to the disruption and
restrictions affecting certain markets
(including South Africa and in Global
Travel Retail).
Margin Growth While
Investing in New Categories
Profit from operations increased by 10.5%
to £9,962 million, compared to a decline
of 3.2% to £9,016 million in 2019. This was
largely driven by the operational efficiencies
achieved under the Group’s restructuring
programme (Project Quantum) and while
2020 was impacted by charges in respect
of goodwill impairment (£209 million, largely
in respect of Malaysia; 2019: £172 million
mainly in respect of Indonesia), litigation
charges (mainly in the US) of £487 million
(2019: £236 million) and Quantum costs
(£81 million; 2019: £264 million), 2019 was
also negatively impacted by a charge in
respect of the Quebec Class Action in
Canada (£436 million) and the settlement of
an excise dispute in Russia (£202 million).
Our operating margin increased by 380 bps
to 38.6% in 2020 (2019 declined 320 bps to
34.8% driven by the lack of charges referred
to above).
On an adjusted constant currency basis,
profit from operations grew by 4.8%
(2019: up 6.6%) with adjusted operating
margin (at current rates) up 100 bps to
44.1% (2019: 43.1%). This was driven by
growth in high margin markets (including
the US) and efficiencies delivered in 2020
as part of Project Quantum which more
than offset the continued investment in
New Categories.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
08
Financial Review
Finance and Transformation
Director’s Overview Continued
Dividends per share
increasing by a further 2.5%,
underpinned by the financial
strength of our business .
Cash flow generation
remains extremely strong,
with high conversion from
profit to cash, facilitating the
drive to deleverage while
investing for the future.
@ We remain committed to
consistent and sustainable
long-term 3-5% revenue growth
(excluding currency) and a
progressive dividend policy.
@
The Group continues to
deliver against the financial
objectives, despite the
unprecedented challenges
arising in 2020. This allows
the Group to continue to
reward shareholders with
a growth in dividends while
deleveraging and investing
in A Better Tomorrow.
Future Funding De-R isked
Through Proactive Action
In 2020, we reduced future refinancing risk
by raising £8.9 billion in the US dollar, euro
and sterling markets, using the proceeds
to repurchase and redeem £3.1 billion of
bonds. This de-risked the future repayment
profile by securing lower interest rates
and future liquidity in uncertain times.
This led to an increase in net finance
costs of 8.9% to £1,745 million as we
recognised net charges of £142 million
in respect of the early redemption and
tender offer. The increase in 2019 (up 16%
to £1,602 million) was driven by foreign
exchange headwinds and interest on leases
recognised under IFRS 16 Leases.
As part of the Group’s de-risking of future
funding, during 2020 gross interest cover
ceased to be a covenant on the Group’s
debt facilities.
EPS Growth Underpins
Dividend Increase
On a reported basis, basic EPS was up
12.1% at 280.0p (2019: down 5.4% at 249.7p)
with diluted EPS up 12.0% to 278.9p (2019:
down 5.4% to 249.0p), largely due to the
increase in profit from operations as
discussed earlier.
Excluding the adjusting items and the
effect of foreign exchange on the Group’s
results, adjusted diluted earnings per share,
at constant rates, increased by 5.5% to
341.4p, with 2019 ahead of 2018 by 8.4%.
Dividends per share for 2020 will be 215.6p,
an increase of 2.5% (2019: 210.4p, up 3.6%),
in line with our commitment of a 65% pay-
out ratio on adjusted diluted earnings per
share (2019: 65.0%).
Cash Generation Drives
Debt Deleveraging
We continue to focus on a balanced
approach of deleveraging, while investing
for the future and providing a return via
dividends to shareholders.
We remain extremely successful in
converting operating performance to
cash. The Group’s cash conversion ratio,
based upon net cash generated from
operations, was 98% (2019: 100%) @and the
operating cash conversion ratio was 103%
(2019: 97%)@. The Group realised £9.8 billion
(2019: £9.0 billion) of net cash generated
from operating activities, @or £2.6 billion
(2019: £1.9 billion) of free cash flow after
dividends – which is a measure the Group
uses to assess total cash generated by the
Group with which to repay borrowings.@
Consequently, in 2020, total borrowings
(including lease liabilities) have
reduced from £45,366 million in 2019 to
£43,968 million in 2020, largely due to the
net repayment of borrowings in the year,
and a currency tailwind of £219 million. @We
continued to deleverage our balance sheet
with adjusted net debt to adjusted EBITDA
ratio improved from 3.5 times to 3.3 times.
We expect this ratio to be around 3.0 times
by the end of 2021.@
@Adjusted net debt to adjusted EBITDA, as
defined on page 283 provides a measure
to assess the Group’s ability to meet its
borrowing obligations and, from 2020, is
a KPI.@
Confidence in Future Delivery
@We remain confident in our medium term
guidance of 3-5% revenue and high-single
figure adjusted diluted EPS growth at
constant currency, post COVID-19, while
targeting a minimum of 90% operating
cash conversion and a dividend pay-out
ratio of 65% of adjusted diluted EPS over
the medium to long term.@
In summary, the Group continues to deliver
against the financial objectives, despite the
unprecedented challenges arising in 2020.
This allows the Group to continue to reward
shareholders with a growth in dividends
while deleveraging and investing
in A Better TomorrowTM.
Tadeu Marroco
Finance and Transformation Director
@ Denotes phrase, paragraph or similar that does not form
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
BAT Annual Report and Form 20-F 2020
09
P
A
A
G
-
S
R
F
I
P
A
A
G
-
n
o
N
I
P
K
• •
• •
•
• •
•
• •
• •
Our Year in Numbers
Our performance metrics
Consumer
Number of Non-Combustible
Product Consumers
Market Share
Cigarette and THP volume share growth (bps)
Cigarette and THP value share growth (bps)
Volume
Cigarettes (bn sticks)
Other Tobacco Products (bn stick equivalents)
Vapour (mn 10ml units / pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn stick equivalents)
Financial
Revenue (£m)
Target / Ambition
2020
%
2019
%
2018
50 million consumers by 2030
13.5m
10.5m
8m
Grow by 0-10 bps (2020)
+30 bps
+20 bps
+20 bps
+30 bps
•
+40 bps
+40 bps
638
20
-5%
-2%
344
+52%
11
+19%
668
21
226
9
-5%
-7%
+19%
+32%
1,934
+62%
1,194
+188%
8
-1%
8
-1%
701
22
189
7
414
8n
Change in Adjusted Revenue at cc (%)
@3-5% CAGR@
Change in Revenue from Strategic Portfolio at cc (%)* Increase 3-6% (2020)
+3.3%
+7.0%
25,776
-0.4% 25,877
+5.7% 24,492 •
+5.6%
+7.3%
Revenue from New Categories (£m)
£5 billion by 2025
1,443 +14.9%
1,255 +36.9%
917 •
Change in Revenue from New Categories at cc (%)*
Profit from Operations (£m)
+15.4%
+32.4%
9,962 +10.5%
9,016
-3.2%
9,313 •
Change in Adjusted Profit from Operations at cc (%)
Increase 4.0% to 6.5% (2020)
+4.8%
+6.6%
Operating Margin (%)
Adjusted Operating Margin (%)
Diluted Earnings per Share (p)
Adjusted Diluted Earnings per Share (p)
@5-10% CAGR@
Change in Adjusted Diluted Earnings per Share at cc (%) @5-10% CAGR@
Dividends per Share (p)
Dividend Pay-Out Ratio (%)
Net Cash Generated from Operating Activities (£m)
@Free Cash Flow after Dividends (£m)
Cash Conversion (%)
@Operating Cash Conversion (%)
85-95% each year on average
Borrowings, including Lease Liabilities (£m)
@Adjusted Net Debt to Adjusted EBITDA (ratio)
Around 3.0x by end 2021
38.6%
44.1%
34.8%
43.1%
278.9 +12.0% 249.0
+2.4% 323.8
331.7
+5.5%
-5.4%
+9.1%
+8.4%
215.6 +2.5%
210.4
+3.6%
38.0% •
42.6%
263.2 •
296.7
203.0
68%
9,786 +8.8% 8,996
1,921
2,550 +32.7%
98%
103%
43,968
3.3x
10%
20 of 23
100%
97%
-3.1% 45,366
3.5x
9%
21 of 23
-12.6% 10,295 •
-42.4%
•
3,337
111% •
113% • •
-4.5% 47,509 •
• •
4.0x
8%
19 of 23
•
@65% of long-term earnings@
65%
65%
@Adjusted Return on Capital Employed (%)
Total Shareholder Return (rank)
ESG
Total Scope 1 and 2 CO2e emissions (‘000 tonnes)
Water Withdrawn (mn metres3)
Recycling (% of Waste Recycled Annually)
Carbon neutral by 2030 for
our own business activities
Reduce water withdrawn by
35% by 2025 to 3.38 against
2017 baseline
Recycle min 95% of waste
541 -30.9%
4.03 -10.8%
782
4.51
-7.0%
-5.3%
874
4.77
22.5%
90.7%
13.1%
90.5%
8.2%
90.2%
Please refer to pages 276 to 284 for definitions of the Non-GAAP measures. See the section ‘Non-Financial KPIs’ on page 274 for more information on these non-financial KPIs.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
* From 2021, Change in Revenue from Strategic Portfolio at cc will cease to be a KPI, being replaced as a KPI by Revenue from New Categories at cc.
1. Where measures are presented ‘at constant rates’ or ‘at cc’, the measures are calculated based on a re-translation, at the prior year’s exchange rates, of the current year results of the Group
and, where applicable, its segments. See page 73 for the major foreign exchange rates used for Group reporting.
2. Where measures are presented as ‘adjusted’, they are presented before the impact of adjusting items. Adjusting items represent certain items of income and expense which the Group
considers distinctive based on their size, nature or incidence.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 10
Overview
Investment Case
Transformation Driving
Sustainable Growth
Delivering growth by reducing harm
and expanding our portfolio
Our corporate purpose is to build A Better
TomorrowTM. Reducing the health impact of our
business, by encouraging those smokers who would
otherwise continue to smoke to switch completely to
scientifically-substantiated, reduced-risk alternatives,
is the greatest contribution we can make to society.*†
This means growing our New Category business and
increasing the proportion of our revenue coming from
New Category products as fast as possible.
Revenue growth in the global nicotine industry is accelerating
through the development of New Categories, which offer reduced-
risk alternatives to combustible products.*† To capitalise on this
growth, our well-embedded consumer-centric, multi-category
strategy is activated on a global scale, leveraging our insights on
consumer satisfaction, innovation needs and taste. We are building
the brands of the future – strong, global brands, specifically
positioned in each target consumer segment.
We have set ourselves ambitious targets to reach 50 million
consumers of our non-combustible products by 2030, and more
than triple our revenue from New Categories from £1.3 billion in
2019 to £5 billion by 2025. These ambitions will be met through
the delivery of our three clear strategic priorities:
– to drive a step change in New Categories, to accelerate
growth supported by increased investment;
– to generate value through Combustibles, to provide the
capabilities and funding; and
– to simplify the Group, to create a stronger, faster, more
agile organisation.
1.1bn
consumers in global
combustibles market
to convert to reduced-
risk products*†
10%
Group revenue from
Non-Combustibles
50mn
Non-Combustible
product consumers
targeted by 2030
£5bn
New Categories revenue
targeted by 2025
Reducing the Health and Environmental
Impact of our Business
Creating value for all our stakeholders
Our work to reduce the health and environmental
impact of the business will drive growth and create
shared value, delivering results that simultaneously
benefit shareholders and wider society.
We will continue to create a stronger BAT by:
– focusing on excellence in environmental management;
– delivering a positive social impact; and
– adhering to robust corporate governance.
This builds on our strong ESG foundations including our status as:
– the first tobacco company to produce a Sustainability Report
in 2001;
– named in the Dow Jones Sustainability Indices for 19 consecutive
years; and
– a member of CDP Climate A List.
Our commitments are anchored in challenging targets, against
which we will track and share the progress of our transformation.
Meanwhile, our ‘delivery with integrity’ programme is focused
on ensuring that our ethical standards are never compromised
for the sake of results.
19th
consecutive year
in the Dow Jones
Sustainability Indices
100%
of plastic packaging to be
reuseable, recyclable or
compostable by 2025
A-List
member of CDP Climate
A-List
Carbon
Neutral
operations by 2030
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.
BAT Annual Report and Form 20-F 2020 11
Unrivalled Global
Capabilities
Leveraging proven expertise and developing
new capabilities to deliver our ambitions
Our New Category portfolio benefits from decades
of insights and expertise that have driven our No.1
global revenue position in combustibles (excl. China).
This combined with increased investment behind
new capabilities gives us confidence that we can
deliver our medium to long-term ambitions.
Our three global New Category brands leverage the benefits
of our world-class R&D and our manufacturing, distribution,
marketing and brand building capabilities, which are supported
by our unrivalled global footprint across 180 markets, with
11 million points of sale, reaching 150 million consumers daily.
Together with our long-standing experience operating within
complex regulatory, legal and fiscal frameworks, these provide
BAT with a compelling competitive advantage to drive portfolio
growth and transformation within the wider tobacco industry.
Through Project Quantum, our ongoing business simplification and
efficiency programme, we aim to achieve a minimum of £1 billion of
annualised savings by the end of 2022 to invest in new capabilities
in areas such as:
@Continuing our Track Record
of Delivery
Commitment to deliver returns
and cash flow to shareholders
We are confident in our growth outlook, and have
a proven track record of performance whatever
the external environment.
We have delivered 10% adjusted diluted EPS (at constant rates)
and 7% dividend CAGR over the last 10 years and are confident
in our medium-term targets of 3-5% revenue growth (excluding
currency, increased operating margin and high-single digit adjusted
EPS growth).
This will be driven by:
– accelerated New Category revenue growth;
– continued value growth in combustibles; and
– business simplification to eliminate cost and improve returns,
to become a stronger, simpler, more agile organisation.
With strong profitability and >90% operating cash conversion, we
are committed to deleveraging the balance sheet to our long-
term corridor of 2 to 3x adjusted net debt / adjusted EBITDA, in
combination with a progressive dividend policy.@
– data analytics;
– enhanced consumer insight;
– IP and innovation;
– design and technology; and
– e-commerce, enabling our ongoing digital transformation.
We are attracting new senior talent from a diverse range of
industries globally to further enhance our current and future
capabilities, which will enable us to deliver on our growth ambitions
over the medium to long term.
1,500+
dedicated scientists
and engineers
>11m
points of sale
>180
markets in which
we operate
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report
on Form 20-F as filed with the SEC.
High
Single Digit
medium-term adjusted diluted
EPS growth target (at cc)@
>90%
operating cash
conversion targeted
annually@
10%
adj. diluted
EPS average growth
(at cc) over 10 years@
>£1bn
annualised savings by 2022
>150mn
daily consumer
interactions
3-5%
medium-term
revenue growth target (at cc)@
7%
dividend CAGR
over 10 years
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 12
Strategic Management
Global Industry Overview
We are a global business, operating at scale, in a fast-paced world. To be sustainable we must anticipate,
detect and adapt to major social, environmental, economic, political and technological shifts. Mega
trends are important indicators, representing significant movements, patterns or trends shaping
the macroenvironment. In the context of our industry, we see four megatrends as being likely to have
substantial impact on the way we conduct our business.
Mega trend
Reduced Risk & Beyond
Mega trend
Digital Technology
Consumer Choice
It is widely accepted that most of the harm associated with
tobacco is caused by inhaling the smoke produced by its
combustion. Around the world, consumers now have increasingly
high expectations beyond combustible products and nicotine.
Many consumers are seeking out new products that deliver
nicotine, with potentially reduced risk, as well as other ingredients
from a wellbeing perspective – so-called ‘new active’ products.
World-Class Science
There is broad agreement among policy makers and the public
health community: We need to develop a robust science base
to inform policies and educate consumers about potentially
reduced-risk products. The science associated with tobacco
harm reduction plays a core role within the industry and society.
World-class science can establish whether products are safer, or
less risky, compared with cigarette smoking. It can also help build
consumer trust in reduced-risk products.*†
Regulation and Standards
The regulatory environment around tobacco harm reduction and
‘new active’ products is evolving. Science increasingly points to
the likely benefit of reduced-risk products as an alternative to
smoking.*† This means we are seeing policy and regulatory shifts in
several markets. Some countries have greater restrictions in place.
Others, like the UK, view tobacco harm reduction within a regulated
framework, encouraging smokers to use potentially reduced-risk
nicotine products.
Smart Technology
Smart electronic devices and social media have increasingly
become integral to people’s lives and daily routines. They have
enabled greater access to new platforms and have enhanced the
way people consume news, make connections and shop.
E-commerce platforms, available on the go, have led to social
media platforms being used by brands to sell their products.
Social e-commerce is increasingly viewed as a mainstream retail
channel, on a par with other platforms, like websites and offline
stores. This trend is only accelerating as greater numbers of social
networks introduce pro-selling features like shoppable posts.
Online Sales During COVID-19
A major impact of the pandemic has been the implementation of
city-wide, regional and national lockdowns. Many non-essential
businesses have been ordered to close. As a result, many
customers are generally avoiding public places. While the crisis
is continually evolving, it has increasingly limited shopping for
all but necessary essentials. Brands are having to adapt. Now,
e-commerce is expanding to include new businesses, customers
and product types.
Today, customers already have access to a wide variety of products
from the convenience and safety of their homes. Firms have
still been able to operate, despite contact restrictions and other
confinement measures.
H
Reducing the HEALTH impact
of our business
Consumer
choice
World-class
science
Standards
and regulation
* Based on the weight of evidence and assuming a complete switch from cigarette smoking.
These products are not risk free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are
subject to FDA regulation and no reduced-risk claims will be made as to these products
without agency clearance.
>50%@
increase in own
e-commerce revenue
vs. 2019@
BAT Annual Report and Form 20-F 2020 13
Mega trend
Climate Change
Mega trend
Waste and Recycling
Population Migration
Climate change can re-shape patterns of migration and population
displacement. This is driven by shoreline erosion, coastal flooding
and agricultural disruption.
Various analysts have attempted to forecast future flows of climate
migrants. These people are moving within their countries or across
borders, on a permanent or temporary basis. The most widely
repeated prediction is 200 million by 2050.
The impacts of climate migration on regional security, labour
patterns and consumer habits will have wide-ranging effects on
businesses across the globe.
Manufacturing Resource Reduction
Reducing the resources needed for manufacturing – often referred
to within the circular economy – is a key trend. This includes
reducing waste and pollution by continuously re-using materials
and products.
Many factors have brought this into focus. Resource prices
have become more volatile and are expected to rise over
the long term. Consumer demand is increasing. Meanwhile,
easy-access, high-grade stocks of key commodities are reducing.
Governments are also considering new restrictions on pollution
and waste that apply for entire product lifecycles.
Farming
Agricultural crops, such as tobacco, need suitable soil, water,
sunlight and heat to grow. The length of the growing season in large
parts of Europe, for example, has already been impacted by warmer
air temperatures. Some crops are now experiencing harvest and
flowering dates several days earlier in the season. Many regions are
expected to see this trend continue.
Shifts in temperatures and growing seasons may also impact
the production and spread of some species (i.e. insects),
invasive weeds, or diseases, with crop yields potentially affected.
Yield losses could be offset by different farming practices,
such as: Crop rotation to match water availability, adjusting
sowing dates to rainfall and temperature patterns and using
crop varieties suited to new conditions.
Recycling and Packaging
Today, businesses are expected to go further and recycle more. It is
possible for most plastics used in packaging to be mechanically
recycled with little loss of quality. However, current estimates place
global uptake at less than 15%. Why?
One of the most important reasons is the lack of global standards.
Proliferating materials, formats and labelling requirements mean
many types of packaging are produced in quantities too small for
recyclers to achieve economies of scale and profitability. There are
also variations in collection methods and processing systems.
This means the recyclability of a product in one city may not be
compatible with another. As packaging changes, local waste-
collection and recycling programmes are struggling to keep pace.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 14
Strategic Management
Global Industry Overview**
Continued
Today, the tobacco and nicotine market serves a growing base of more than
one billion adult consumers. Generational differences and shifts in taste are
continuing to emerge, as health and wellness become ever-more important.
We anticipate growth in new categories of products, including – and beyond
– tobacco and nicotine. Consumers expect these to provide stimulation and
pleasure, in ways previously associated with cigarettes. We believe such growth
will offset the predicted decline in cigarette consumption.
Sales for the legal global tobacco
market (2019) were worth
approximately US$818 billion,
according to the most recent
estimates.
The latest global figures (2019)
suggest that global vapour sales
are worth US$20.2 billion, while
global THP revenues stand at
US$15.2 billion. This is an increase
of US$4.5 billion and US$3.3 billion,
respectively, on 2018.
Traditional oral products
show steady, incremental growth.
Meanwhile, new Modern Oral
products are showing accelerated
volume expansion in both Europe
and the US.
As one of the world’s most
regulated and taxed industries,
tobacco contributes over US$200
billion to government treasuries
annually.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance.
** All data sources on this page are from Euromonitor
International unless otherwise stated.
Global Combustible Market
Sales for the legal global tobacco
market (2019) were worth approximately
US$818 billion, according to the most
recent estimates.
The largest global tobacco category
remains combustible cigarettes. With over
5,200 billion cigarettes consumed annually,
it is valued at US$705 billion. Over 19% of
the world’s adult population still chooses to
smoke and will likely continue to do so unless
consumers are offered suitable alternatives.
However, cigarette volumes have been falling.
This is largely due to increased regulation and
changing societal attitudes. One reason for
the decline of legal tobacco volumes is the
continued rise in illicit product consumption.
This is now estimated to account for 12% of
the global tobacco market.
A number of factors are driving the
significant and growing illicit cigarette
trade. These include the fact that cigarettes
remain a reliable source of tax revenue for
governments worldwide, price differentials
between markets, regulatory changes and
broader macroeconomic pressures.
It is generally accepted that there is a direct
correlation between steep, ad hoc increases
in taxes and illicit sales. The current sanctions
in many countries often fail to deter criminals
in search of profit.
See pages 84 to 88 to read more about
our Principal Group Risks
For further discussion regarding the regulation
of our business, please see pages 307 to 310
Global combustible regulation
As one of the world’s most regulated and
taxed industries, tobacco contributes
over US$200 billion to government
treasuries annually.
Manufacturers are required to comply
with a variety of regulations, varying
considerably from market to market.
Legislation and regulation has focused
mainly on: the introduction of plain
packaging, product-specific regulations,
graphic health warnings on packs, tougher
restrictions on smoking in enclosed public
places and bans on shops displaying
tobacco products at the point of sale.
More recently, governments have begun
considering and adopting regulations
aimed at menthol flavourings. They have
also targeted environmental concerns
resulting from litter associated with
cigarette consumption.
Impact of COVID-19
Beyond disruption to supply chains,
analysts believe the short-term impact
of COVID-19 on the tobacco industry will
be relatively limited. It is likely that key
cigarette volumes were only slightly lower
than expected in 2020, in a number of
markets globally.
This impact on volumes is expected to be
felt unequally across geographies, with
resilience seen across more developed
markets while developing markets
experience potentially greater numbers of
consumers turning to the illicit market.
Production of the principal raw material
– tobacco leaf – remains broadly
diversified across a number of continents.
The industry has proven adept at dealing
with supply-side shocks.
Global New Categories Market
In recent years, the global tobacco and
nicotine market has diversified beyond
traditional, combustible tobacco.
Evidence can be seen in growing
categories like Vapour Products, Tobacco
Heating Products (THP) and modern oral
nicotine pouches.
The success of these New Categories
is based on many factors. One is their
ability to offer consumers satisfaction,
in circumstances where combustible
tobacco is no longer permitted or
socially acceptable. Another is their
ability to offer reduced risk compared to
combustible products.*†
New generations of adult consumers
are focusing on health and lifestyle
considerations, technological innovation,
and personalised experiences. As a result,
we expect the growth of New Categories to
keep accelerating, as these products better
meet those preferences and demands.
BAT Annual Report and Form 20-F 2020 15
The latest global figures (2019) suggest
that global vapour sales are worth
US$20.2 billion, while global THP revenues
stand at US$15.2 billion. This is an increase
of US$4.5 billion and US$3.3 billion,
respectively, on 2018.
Traditional oral products show steady,
incremental growth. Meanwhile, new
modern oral products are showing
accelerated volume expansion in both
Europe and the US.
The relatively nascent market for wellbeing
and ‘new active’ products has also grown.
This is expected to continue as consumer
tastes fragment and evolve. Within this
space, cannabidiol (CBD) is expected to
gain wider use, as evidenced by its recent
growth in market size.
New Categories regulation
At a global level, the THP and
vapour markets are still emerging.
Regulation is in its early stages in many
countries. While many governments are
considering regulation specific to this
category, it has often not been enacted.
Globally, there is a mix of attitudes
towards THPs and vapour products.
Some regulators aim to encourage them
as potentially lower risk, while balancing
concerns around possible increased youth
usage. Others view them with greater
scepticism, including some countries where
they are banned.
Litigation
Legal and regulatory court proceedings
continue in a number of forums against the
tobacco industry, and more recently the
vaping industry, with the most common
being third-party reimbursement cases,
class actions and individual lawsuits.
Special factors that led to product liability
litigation in the US and Canada are not
typically replicated in other countries, which
is why large volume and high-value litigation
has not generally spread to other parts of
the globe. The industry has a proven track
record of defending its rights and managing
risks such as these.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 16
Strategic Management
The Foundations of
our Evolved Strategy
We are committed to providing A Better TomorrowTM for all our
stakeholders. Our ambition is to deliver long-term sustainable
growth with a range of innovative and less harmful products that
stimulate the senses of new adult generations.
Strong
Foundations
Satisfying Consumer Tastes
and Moments
20 years ago
combustible products fulfilled a multitude
of consumer moments
>180
markets in which
we operate
>150m
daily consumer
interactions
Night
Morning
>11m
points of sale across
over 180 markets
Evening
Afternoon
Our wide range of capabilities make us
exceptionally well-placed for future growth:
– our unique global marketing and
distribution reach;
– our track record of R&D and innovation;
– our decades’ worth of consumer insights
and brand-building expertise; and
– our New Categories business aims
to generate £5bn in revenue in 2025.
For decades, combustible products satisfied a
need for sensorial enjoyment for many individuals.
While occasions for tobacco consumption are
now reduced, new opportunities have arisen:
– new products provide us with an opportunity
to capture, in a focused way, the lost
consumer moments previously associated
with tobacco; and
– evolving and fragmenting consumer needs
provide us with opportunities for additional
growth in a variety of new categories.
BAT Annual Report and Form 20-F 2020 17
A Developing
Portfolio
Parameters to Guide
Growth Opportunities
y
t
i
l
i
b
a
t
p
e
c
c
a
l
i
a
c
o
S
Beyond
nicotine
New nicotine
categories
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:
– scientifically-substantiated, reduced-risk
tobacco and nicotine products;
– building the brands of the future; and
– ultimately, a portfolio of products beyond
nicotine that leverages our proven expertise.
Reduced health impact
compared to cigarettes
Science and
regulatory expertise
BAT global
marketing
reach
New Category
Growth
Opportunities
Leveraging
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 our knowledge of delivery
platforms and technology;
– relying on our experience in managing complex
regulatory and scientific matters; and
– meeting stringent strategic and
financial metrics.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
18
Strategic Management
A Strategy for
Accelerated Growth
As a leading consumer-centric, multi-category consumer goods business, we are
dedicated to stimulating the senses of adult consumers worldwide. We aim to
generate an increasingly greater proportion of our revenues from products other
than combustibles, thereby reducing the health impact of our business.
This will deliver A Better TomorrowTM for our consumers who will have a range
of enjoyable and less risky*† choices for every mood and moment; for society
through reducing the overall health and environmental impacts of our business;
for our employees by creating a dynamic and purposeful place to work; and for
our shareholders by delivering sustainable superior returns.
OUR MISSION
Stimulating
the Senses
of New Adult
Generations
Our Mission
Stimulating the Senses
of New Adult Generations
Today, we see opportunities to capture
consumer moments which have, over time,
become limited by societal and regulatory
shifts, and to satisfy evolving consumer
needs and preferences.
Our mission is to anticipate and satisfy this
ever-evolving consumer: provide pleasure,
reduce risk, increase choice and stimulate
the senses of adult consumers worldwide.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance
HOW WE WIN
Where
How
High
Growth
Segments
Priority
Markets
Inspirational foresights
Remarkable innovation
Powerful brands
Connected organisation
People & partnerships
US focus
Must Wins
High Growth Segments
Driven by our unique and data-driven
consumer insight platform (PRISM), we will
focus on product categories and consumer
segments across our global business
that have the best potential for long-term
sustainable growth.
Priority Markets
By relying on a rigorous market
prioritisation system (MAPS), we will focus
the strengths of our unparalleled retail and
marketing reach, as well as our regulatory
and scientific expertise, on those markets
and marketplaces with the greatest
opportunities for growth.
Remarkable Innovation
As consumer preferences and technology
evolve rapidly, we rely on our growing global
network of digital hubs, innovation super
centres, world-class R&D laboratories,
external partnerships and our corporate
venturing initiative to stay ahead of the curve.
Powerful Brands
For over a century, we have built trusted
and powerful brands that satisfy our
consumers and serve as a promise for
quality and enjoyment. We will build the
brands of the future by focusing on fewer,
stronger and global brands across all our
product categories, delivered through
our deep understanding and segmenting
of our consumers.
How We Win
Inspirational Foresights
As one of the most long-standing and
established consumer goods businesses
in the world, we have a unique view of
the consumer across all of our product
categories, which is increasingly driven by
powerful data and analytics.
These insights ensure that the development
and responsible marketing of our products
is fit to satisfy consumer needs.
Connected
Few companies can claim over 150 million daily
consumer interactions, over 11 million retail
points of sale and a global network of expert
employees around the world. Cultivating an
ecosystem that directly connects us with
consumers and stakeholders, especially
through the power of digital technology,
ensures we can build the brands of the
future, deliver access to markets and
foster innovations that offer sensorial
enjoyment and satisfy consumer needs.
BAT Annual Report and Form 20-F 2020 19
We will become a business that defines itself by the consumer
needs it meets. We aim to provide our consumers with a portfolio
of solutions, recognising that tastes and preferences differ across
markets. This will enable sustainable, long-term growth as a
modern consumer products company with a clear focus on
insights, innovation, brands, activation, teams and technology.
Our ambition is to build the brands of the future.
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
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 TomorrowTM for all
our stakeholders.
We will create A Better TomorrowTM for:
Consumers
By responsibly offering enjoyable and
stimulating choices for every mood and
every moment, today and tomorrow;
Short-Term Deliverables to
Fuel A Better TomorrowTM
1
Ensure a Step Change in
New Categories Performance
With our unique cross-category consumer
understanding we are clear there is a huge
opportunity for our New Categories.
For more key detail
see pages 34 to 39
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;
Drive Value
From Combustibles
Our ambition is to drive value from
Combustibles to fuel our investment in,
and transition revenue to, New Categories.
Employees
By creating a dynamic, inspiring and
purposeful place to work; and
Shareholders
By delivering sustainable and
superior returns.
For more information about our purpose
see inside front cover
For more key detail
see pages 41 to 42
Simplify the
Business
Our ongoing simplification programme,
Project Quantum, will realise £1 billion of
annualised savings through simplification
and efficiencies by the end of 2022.
For more key detail
see page 43
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
20
Strategic Management
Our Consumer-Centric
Multi-Category Portfolio
BAT is a leading consumer-centric, multi-category consumer goods business
dedicated to stimulating the senses of adult consumers worldwide. Our portfolio
reflects our commitment to meeting the evolving and varied needs of today’s
consumer who seeks sensorial enjoyment for different moods and moments.
Strategic Portfolio
Our key brands in both the combustible
and non-combustible categories.
This drives focus and investment on
the brands and categories that will
underpin the Group’s future performance.
The strategic portfolio is:
Non-Combustibles
All brands within New Categories and the
strategic traditional oral brands in moist
and snus.
Combustibles
Dunhill, Kent, Lucky Strike, Pall Mall,
Rothmans, Newport (US), Natural American
Spirit (US), Camel (US).
Revenue by product category
£25.8bn
Total revenue
New Categories
Traditional Oral
£1.4bn
£1.2bn
Combustibles
£22.8bn
Other
£0.4bn
l
†
*
)
s
e
b
i
t
s
u
b
m
o
C
-
n
o
N
(
o
i
l
o
f
t
r
o
P
k
s
i
R
-
d
e
c
u
d
e
R
r
u
O
l
s
e
b
i
t
s
u
b
m
o
C
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance
s
e
i
r
o
g
e
t
a
C
w
e
N
Vapour
Handheld, battery-powered
devices that heat a liquid (called
an e-liquid, usually containing
nicotine) and creates a vapour
to be inhaled.
THP
Modern
Oral
Traditional
Oral
THPs do not burn tobacco, so
no smoke (which is a key source
of toxicants) is produced.
Research indicates that by
heating tobacco rather than
burning it, THPs have the
potential to be reduced-risk
compared to smoking.
This is our most recent
innovation across oral products
– offering consumers a
satisfying experience with a
range of different flavours.
Two formulations are available:
one containing lower levels of
tobacco, and one that contains
nicotine but no tobacco.
Traditional Oral products do
contain tobacco, but there is
no burning. There is strong
epidemiological evidence, from
countries such as Sweden,
that switching completely to
snus can reduce risk compared
to smoking.
The Group sold 638 billion
cigarette sticks and 20 billion
OTP (stick equivalents) in
2020. The Group operates
in over 180 markets, with 45
fully integrated cigarette
manufacturing facilities in
43 markets.
BAT Annual Report and Form 20-F 2020
21
27
markets where
our vapour
products are
currently available
20
markets where
our THPs
are currently
available
23
markets where
our modern oral
products are
currently available
5
markets where
our traditional
oral products are
currently available
US specific
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 22
Strategic Management
Our Global Business
To build A Better TomorrowTM, our marketplace analysis delivers insights
regarding consumer trends and segmentation, which ultimately facilitates
our geographic brand prioritisation across over 180 markets. Our business is
divided into four, complementary regions with a balanced presence in both
high-growth emerging markets and highly profitable developed markets.
United States
of America
USA
Americas and
Sub-Saharan Africa
AmSSA
To achieve a step-change in New
Categories, we are building new capabilities
around the world focused on science,
innovation and digital information.
Consumer preferences and technology
are evolving rapidly, and we are staying
ahead of the curve with our digital hubs,
the creation of innovation super centres
and further development of our world-class
R&D laboratories. We are also leveraging
the expertise of our external partners and
are looking forward to exciting results from
our venturing initiative.
Revenue by region
ENA
APME
AmSSA
US
£6.0bn
£4.5bn
£3.8bn
£11.5bn
for more key detail on our
Regional Performance,
see pages 74 to 81
£25.8bn
Total revenue
Our cutting edge
technologies turn consumer
insights into innovative and
outstanding products that
meet their needs.
The US business is
transforming into a New
Categories-oriented business,
fuelled by reinvestments from
the consistently industry-
leading value growth in the
tobacco categories.
Building A Better Tomorrow
is crucial for the Group and the
excellent performance of New
Categories across AmSSA
is proof of the leading role
the region is playing.
Paul Lageweg
Director,
New Categories
Guy Meldrum
President and
CEO (Reynolds
American Inc.)
Luciano Comin
Regional Director,
AmSSA
BAT Annual Report and Form 20-F 2020 23
We were delighted to be included in
The Gartner Supply Chain Top 25 in 2020,
a global report identifying supply chain leaders.
This is the latest external recognition of our efforts
in delivering a world-class supply chain for our
journey towards A Better Tomorrow.
Zafar Khan
Director, Operations
Europe and
North Africa
ENA
Asia-Pacific and
Middle East
APME
Map is representative of general geographic regions and does not
suggest that the Group operates in each country of every region.
We had a strong year across
glo Hyper accelerated THP
ENA, with revenue growth in all
New Categories and remain
resolute in our pursuit of
A Better Tomorrow.
volume across APME and we
have ambitious plans for
2021 and beyond.
Johan
Vandermeulen
Regional Director,
ENA
Michael (Mihovil)
Dijanosic
Regional Director,
APME
180+
markets
150mn
consumers
13.5mn
non-combustible
product consumers
55,000+
employees
139
nationalities
40+
toxicologists
1,500+
R&D specialists
I am very proud of our global
team of world-class scientists
and the research they are doing
to assess and ensure the
performance, efficacy and
safety of our products.
Dr. David O’Reilly
Director, Scientific
Research
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
24
Strategic Management
Our Business Model
Our global business understands our diverse consumers, develops products to satisfy
their preferences and ultimately distributes them across over 180 markets.
Six key enablers support us in turning powerful insights into products that provide
enjoyment to our consumers, while engagement helps our key stakeholders benefit
from our sustainable growth.
IP / Technology
Environmental
Manufacturing
£300mn+
R&D expenditure
7
R&D / Product centre sites
370,000tn
of leaf
2,568 GWh
energy consumed
4.03m
cubic metres of water withdrawn
79
BAT-owned manufacturing facilities
45
cigarette factories
01
Insights
02
Science
03
Innovate
04
Source
05
Manufacture
06
Market
07
Sell
08
Insights
Social
Financial
Human
84,000+
contracted farmers
c30,000
Suppliers
180+
Markets
£600mn+
annual capital expenditure
£426mn
additional investment in New Categories
BBB+/Baa2
credit rating
55,000+
employees globally
1,500+
R&D specialists
A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.
BAT Annual Report and Form 20-F 2020 25
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 page 24
See pages 84 to 88 for
Group Principal Risks
Our reporting in the
following areas includes
information about the
policies and principles
that govern our
approach, due diligence
processes, outcomes
and non-financial
performance indicators:
Environmental matters
pages 48 and 51 to 53
Social matters
pages 48 to 50, 54 to 55
Anti-bribery and anti-
corruption matters
pages 48 and 56 to 57
Employees
pages 58 to 63
Respect for
human rights
pages 48 and 54 to 55
Further details of
our Group policies
and principles
can be found at
www.bat.com
A Better
TomorrowTM for...
As measured by...
Society
Environmental
Social
– 37.4% reduction in Scope 1 and 2
– £41bn tax paid to governments
CO2e emissions (since 2017)
– Over 99% of wood fuel used for
curing from sustainable sources
– 38,000+ human rights farmer
training sessions, with over
390,000 attendances in 2020
Shareholders
Consumers
Employees
– 76% of tobacco hectares with
best practice soil and water
management plans
– 22.5% reduction in water
withdrawn (since 2017)
– 21.4% reduction in waste to
landfill (since 2017)
Financial
Social
– Among world’s top 10% ESG
performers in Dow Jones
Sustainability Index (DJSI)
– 7% dividend growth
(CAGR since 2010)
– 5.5% growth in adjusted diluted
EPS at constant currency in 2020
– @103% operating cash
conversion in 2020@
– 3.3% increase in revenue
(at constant currency)
Financial
Social
– +15% revenue from
New Categories (vs 2019)
– 11m number of outlets
– 13.5m Non-Combustible
– +20 bps in Cigs + THP value
consumers
share with +30 bps in Cigs + THP
volume share (vs 2019)
– 100% adherence to Youth Access
Prevention Guidelines
Human
– 30% reduction in lost workday
cases (vs 2019)
– Proportion of women in
management roles grew to 38%
– Accredited as Global
Top Employer by the Top
Employers Institute
– Employee engagement index 7%
higher than FMCG comparator
group in latest ‘Your Voice’ survey
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 26
Strategic Management
Accelerating the Enterprise
of the Future
Building the Enterprise of the Future is about ensuring we have the
organisational flexibility to implement and operationalise our growth
strategy – simplifying the business and speeding up decision-making.
Quest is an organisational transformation programme, built around five
pillars, designed to deliver the Enterprise of the Future at enhanced speed.
Deliver
Quantum
Unleash
Innovation
Project Quantum is our ongoing
simplification programme that is fuelling
New Category investment and delivery
against our financial guidance.
Across the business, we are looking at
how BAT can become a simpler, faster and
stronger organisation. This will support
our ambition to build A Better TomorrowTM
for employees, consumers, shareholders
and society.
Through restructuring and right-sizing
parts of the business to reflect our new
priorities, improving ways-of-working to
speed up decision-making and simplifying
processes, we are focusing our efforts in a
more targeted way to respond to emerging
opportunities and deliver future growth.
Our New Categories business requires us
to build on our rich history of leveraging our
insights on consumer satisfaction and taste
preference, which enables us to continually
innovate to meet their needs.
Across our portfolio and our supply chain,
we are using data-driven insights and
foresights, and leveraging state-of-the-art
technologies to ensure we are building
the brands of the future. This means
delivering the experiences and the products
consumers want, when they want them.
By combining our existing global talents
with the best skills available externally,
we will execute consumer-led innovation
more quickly, with even better coordination
between our supply chain and R&D.
See page
43
See pages
30 to 39
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance
BAT Annual Report and Form 20-F 2020 27
Empowered
Organisation
Shaping
Sustainability
Technology &
Digital
Our talented teams around the world are
being empowered through a new ethos that
is responsive to constant change, embodies
a learning culture and is dedicated to
continuous improvement.
Attracting and retaining an increasingly
diverse workforce and providing
a welcoming, inclusive working
environment are key drivers of our
transformation journey.
By creating a simpler, more connected
business we will set the context for our
teams and trust their expertise. We will
foster an environment where teams can
challenge ideas. Once in agreement, we will
commit collectively, collaborate and hold
each other accountable to deliver.
See pages
58 to 63
We are moving ourselves from a business
where sustainability has always been
important, to one where it is front and
centre in all that we do.
Our commitment to reduce the health
impacts of our business – by providing
a range of less risky products*† – is
central to our corporate purpose.
We are committed to doing this openly and
transparently, engaging with an ecosystem
of scientists, regulators and policy makers
to ensure our corporate strategy continues
to take account of their views.
We will continue to deliver world-class
science relating to reduced-risk products*†
while advocating for appropriate standards
and regulations. This will continue to be
underpinned by excellence in all other
environmental, social and governance (ESG)
measures.
We will continue to drive digital
transformation to unlock commercial
value across the entire value chain.
Data analytics are being used to ensure
the right decisions are being made at the
right time. Throughout our supply chain and
our corporate functions, we are applying
modern technologies, making analytics
available at the touch of a button and
freeing up valuable time and resources
that can be released and reinvested for
future growth.
We are also providing our people access
to a range of tools and platforms designed
to upskill them in agile ways of working,
innovation and design-thinking – enabling
them to become more productive, connect
more effectively with internal and external
colleagues, solve problems quickly and
spot opportunities.
See pages
44 to 57
See pages
32 to 33
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 28
Strategic Management
Short-Term Deliverables to
Fuel A Better TomorrowTM
Our purpose is to build A Better TomorrowTM by reducing the health impact of our business
through offering a greater choice of enjoyable and less risky products* for our consumers.
To accelerate this, we must become a stronger, simpler and faster organisation, which will
be achieved through the delivery of three short-term priorities.
1
Ensure a Step Change
in New Categories
Performance
Drive Value
From Combustibles
Simplify the
Business
Over the years, consumer
moments that used to be satisfied
by cigarettes have been replaced
by other products.
Our ambition is to increasingly
transition our revenues from
cigarettes to New Categories
over time.
With our unique cross-category consumer
understanding, we are clear there is a huge
opportunity to recapture these moments
with a broader portfolio of products that
are less risky than combustible products.*†
We are clear that any portfolio expansion
will leverage our strengths. We will
maximise and seek to constantly improve
our delivery platforms in Vapour,
THP and Modern Oral, reducing the
health impact and making a positive
environmental contribution.
In order to fund the development of our
New Categories, we will continue to focus
on generating value from our Combustibles
business, driving sustainable increases
in revenue, with volume share and value
share growth.
Our performance is a direct function of
the strength of our brand portfolio. We will
continue to develop and invest in our brands
for equity and future value, by offering
winning brand and product propositions,
enabled by purposeful innovation.
We aim to increase our non-combustible
consumers from 11 million (2019) to
50 million by 2030, driving revenue from
New Categories to at least £5 billion
by 2025.
Revenue growth management is a critical
enabler to unlock future value and our
resource allocation will be focused and
prioritised to deliver better results with
fewer initiatives.
Our ongoing simplification
programme, Project Quantum,
is expected to realise £1 billion of
savings through simplification
and efficiencies by 2022.
Through Quantum we will fundamentally
re-evaluate how we are organised and
reduce management layers to eliminate
duplication and entrenched accountability.
We will create new capabilities and release
valuable funds for further investment in
our growth ambition, ensuring the Group is
stronger, faster and more agile.
We will be steadfast in realising operational
efficiencies, supply chain productivity and a
focus on excellence in our route-to-market.
We will further consolidate our portfolio of
strategic brands and deliver efficiencies
through a much leaner portfolio, with far
fewer stock-keeping units designed to
a margin.
We are building new capabilities around the
world focused on science, innovation, and
digital information. Consumer preferences
and technology are evolving rapidly, and
we are staying ahead of the curve with
our digital hubs, the creation of innovation
super centres, and further development of
our world-class R&D laboratories. We are
also leveraging the expertise of our external
partners, and are looking forward to
exciting results from our venturing initiative.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance
BAT Annual Report and Form 20-F 2020 Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2020
29
for consumers
By responsibly offering enjoyable and
stimulating choices for every mood and
every moment, today and tomorrow.
Our consumers are at the core of
everything we do and our success
is underpinned by addressing their
preferences, offering them a choice
of enjoyable, innovative and less
risky products*† through:
– a wide choice of high-quality
and stimulating products for
every mood and moment;
– brands they can trust that are
manufactured to high-quality
and safety standards;
– reduced-risk alternatives to
combustible products;*†
– transparent, clear and
accurate information, based
on robust science, about the
relative risks; and
– responsible marketing that
doesn’t engage or appeal
to youth.
30
Strategic Management
Tobacco Harm Reduction
Through World-Class Science
Tobacco harm reduction is a public health strategy to minimise the negative health impact
of conventional cigarettes. It recognises the important role that alternative sources of
nicotine with lower health risks offer to smokers who may not otherwise want or choose to
give up. We’re clear that our business is shifting towards a reduced-risk portfolio*†, built on
outstanding products, informed consumer choice, and underpinned by world-class science.
Understanding the
Products and Risks
It’s widely accepted that
most of the harm associated
with tobacco is caused by
inhaling the smoke produced
by combustion.
Products that contain nicotine
but don’t involve burning
tobacco are likely to emit
far fewer – and lower levels
of – toxicants, compared
to conventional cigarettes.
This means they have the
potential to be significantly
less harmful to health.* †
For decades, nicotine has been
used in licensed medicinal
products. However, for harm
reduction to be more effective,
we must create alternatives to
cigarettes that smokers want
to use. Additionally, and despite
a growing body of scientific
evidence regarding the benefits
of reduced-risk products* †,
more research is required.
Assessing the Reduced-
Risk Potential of our
Products*
To achieve tobacco harm
reduction, reduced-risk
assessments need to be
supported by robust science.
That’s why we created our
leading scientific research
programme – and openly share
its findings.
Most non-combustible
products remain relatively
new to the market. This means
they lack the epidemiological
data required to establish
harm reduction potential over
decades of use.
Instead, it’s necessary to take a
weight-of-evidence approach,
based on the emissions,
exposure and risk levels of
each product.
* Our products as sold in the US, including
Vuse, Velo, Grizzly, Kodiak, and Camel
Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to
these products without agency clearance.
The toxicant continuum*1
C onventional
cigarettes
To bacco H eatin g
Pro d ucts (T H P s)
Traditional
oral pro d ucts
V ap our pro d ucts
O ral Pro d ucts
(E-cigarettes)
M o dern
N R T
High
Level of toxicants
Low
Tobacco and nicotine
products that
involve combustion
Tobacco and nicotine
products that involve
no combustion
Nicotine products
that contain no
tobacco and involve
no combustion
Note:
1. Substantially reduced toxicants is not sufficient alone to determine reduced risk.
We use the term Potentially Reduced Risk Products (PRRPs) to cover tobacco and nicotine products that, based on available science,
have been shown to be reduced-risk; are likely to be reduced-risk; or have the potential to be reduced-risk, in each case if switched to
exclusively as compared to continuing to smoke cigarettes.
Our multi-disciplinary risk
assessment framework
Emissions
What is in the
vapour/aerosol?
Exposure
What happens when exposed
to these emissions?
Risk
What is the long-term
health risk?
Behavioural
Sciences
Chemistry
Biological
Sciences
Clinical
Studies
Population
Studies
How do people
use the product?
We observe how
consumers use
the products to
help us replicate
this in the lab.
The results help
us ensure that we
test the products
in a realistic way.
What’s in the
vapour/aerosol?
We look at what
toxicants are in the
vapour/aerosol and
the air in which our
products are used.
We compare the
results to what is in
cigarette smoke.
What does the
vapour/aerosol do
to human cells in
the lab?
We compare this
to the impact that
cigarette smoke
has on human cells.
How does using
the product
impact the
human body?
This involves
studying real
consumers – for
example, by
taking blood or
urine samples
– to understand
what using these
products might
mean for health.
How might the
product affect
population health?
We use a computer
modelling approach
to predict the
impact that the
availability of such
products will have
on the health of
a population.
BAT Annual Report and Form 20-F 2020 31
Scientific evaluation
of risk reduction
to support evidence-based
regulation and provide
consumers with the
information they need to make
informed decisions.
Collaborative
development of
product standards
to ensure a consistent
approach to product
quality and safety across
the industry and build
consumer confidence.
Product development
and innovation
using scientific advances and
new technologies to satisfy
evolving consumer needs
and preferences.
Product
stewardship
to ensure quality and consumer
safety based on robust
science and toxicological
risk assessments.
Vapour
THP
Hand-held battery powered
electronic devices which heat a
liquid formulation (an e-liquid or
sometimes called ‘juice’) – often
containing nicotine – to create
a vapour which can be inhaled.
They don’t contain tobacco.
Tobacco Heating Products
(THP) are hand-held devices
which heat tobacco. All THPs
contain tobacco – this is a
key difference from vapour
products. However, like
vapour products, no burning
takes place, resulting in lower
toxicant levels.
Modern
Oral
Modern oral products, available
both with and without tobacco,
are similar in appearance and
use to snus, an oral smokeless
tobacco product that has
been widely used in Sweden
since the 1800s. There are
decades of research (including
epidemiology) on snus, with
evidence demonstrating it is a
reduced-risk product compared
to using traditional cigarettes.
World-Class Science
for A Better TomorrowTM
For more than 60 years,
research and development
has been a critical part of our
business. The table to the right
highlights how we aim to create
A Better TomorrowTM through
world-class science.
We invest in R&D to deliver
innovations that satisfy
or anticipate consumer
preferences. This helps us
generate business growth
across all our categories.
But the main focus of our
investment is in reduced-risk
products.* †
New Categories
Delivering Consumer
Choice
For tobacco harm reduction to
succeed, smokers need access
to products that deliver nicotine
and an enjoyable experience,
with reduced risks compared to
smoking.* †
That’s why we’re developing
and commercialising alternative
tobacco and nicotine products:
Our New Categories. These don’t
burn tobacco, while delivering
nicotine to the user.
60+
years of R&D
an important part
of BAT for more
than 60 years
100+
scientists
designers, engineers
and tobacco specialists
helped design our THP
95%
fewer toxicants
emitted by our Vype
product, compared
to cigarettes **
1,500
R&D specialists
who predominantly
focus on New
Category products
** This product is not risk-free and contains nicotine, an addictive substance. Comparison of smoke from a scientific standard reference cigarette (approximately 9 mg tar)
and vapour from Vype ePen3 in terms of the average of the nine harmful components the World Health Organization (WHO) recommends to reduce in cigarette smoke.
† Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 32
Strategic Management
Digital Transformation
Unlocking Commercial Value
Digital Transformation across BAT is about leveraging technology to deliver
value for consumers, customers, employees, shareholders and society.
Technology and data are key enablers of A Better TomorrowTM, and their
exponential value is achieved as we ensure the organisation has the skills,
ways of working and culture to fully exploit them.
Our business has delivered exceptional results with
the acceleration of its digital transformation in 2020 and
the opportunities ahead of us are huge. Our focus is to apply
technology and new ways of working that deliver results
faster, unlocking commercial value across the entire
organisation. The pandemic has offered opportunities
to accelerate our digital transformation even faster.
Marina Bellini
Director, Digital and Information
Consumers and Customers
Manufacturing and Supply Chain
Finance, HR and Legal
4.3mn
engagements on social media, improving
our New Categories brands performance
in digital channels – an increase
of 100%+ vs 2019
5,000+
SKUs enabled through end-to-end
automation, compressing reaction
times in a multi-category business
100%+
increase in hours saved through
digital bots and automation
of back-office activities
100+
people newly recruited in data
analytics, digital marketing
technology, cyber, and new
exponential technologies
30%+
Agile delivery of technology
solutions across our
organisation
70%+
senior leaders who have
experienced our new digital
immersion programme
2,900+
new joiners across the
organisation remotely
on-boarded
BAT Annual Report and Form 20-F 2020 33
Unlocking the Value of Technology and Data to Grow
Few companies can claim over 150 million daily consumer interactions and over
11 million retail points of sale. Staying connected to all of them, especially through
digital, ensures better consumer engagement with brands, innovations and services
that can stimulate the senses of new adult generations.
Decision-making
supported by Big Data
& Analytics
Significant investments in
our Marketing Technology has
delivered new capabilities
within Social Listening,
Social Activation, and
Integrated Data Platforms.
– Across the organisation, we
now have access to 90TB
of consumer and other
relevant value chain data
sources, spanning more than
25 markets.
– Over 1,000 users can
now leverage over
30 machine learning
models and dashboards
to aid decision-making on
consumer engagement.
– Advanced analytics and CRM
capabilities are providing
unprecedented opportunities
to develop consumer
journey mapping through
industry-leading marketing
automation systems.
– Personalised communications
delivered to the right consumer
at the right time have enabled
the growth of consumers
in New Categories. This has
contributed to 480,000 new
THP consumers in Japan.
9.8m
consumers
in our database
(2019: 7mn)
Best-in-class
commercial digital
experience
Our integrated consumer
marketing technology
stack provides us with
a Single Consumer
View which captures all
interactions in one place.
Operational excellence
powered by digital
New technologies have
enabled the business
to respond with greater
agility and resilience to
the complexity of our
growing portfolio in
New Categories and the
COVID-19 pandemic.
– A key focus has been creating
a mobile-first, consistent
e-commerce user experience,
and launching a subscriptions
capability to increase
Consumer Lifetime Value.
– Our Direct-to-Consumer
business has been
accelerated through the
deployment of owned
e-commerce sites – taking
the number up to over
40 e-commerce store
fronts worldwide.
– Owned-Retail stores are
being transformed to offer a
seamless digital experience.
– This has been achieved through
global Content Management
Systems, digital touch points,
integrated e-commerce,
and CRM.
– Our new subscription
services capability has
grown by 5x.
– Our powerful business-to-
business technology platform
now enables over 6 million
engagements a month, with
fast deployment of best
practices for better results for
our trade partners.
– We have invested in new
cloud-based digital platforms
to transform our supply chain
which support improved
visibility and prediction of
demand and allows us to plan
concurrently across multiple
supply chain nodes.
– By leveraging artificial
intelligence and machine
learning, we pro-actively
manage to our stock-holding
policies, sourcing, production,
and logistics plans and
quickly adapt to changes in
the environment.
– Cloud technology has
been leveraged as an
accelerator for over 55% of
our processes.
– Our Cyber Security team
use industry-leading tools
and technology. Rapid cyber
risk reduction exercises are
conducted regularly with
advanced internal, and external
testing followed by immediate
remediations. A strong cyber
culture is established within
the organisation, supported by
cyber simulations, awareness
campaigns and customised
training programmes.
@>50%
increase in own
e-commerce revenue
vs. 2019@
@ Denotes phrase, paragraph or similar that
does not form part of BAT's Annual Report
on Form 20-F as filed with the SEC.
200,000
test phishing emails
sent across the whole
organisation to increase
cyber resilience
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 34
Strategic Management
Short-Term Deliverables to Fuel A Better TomorrowTM
Ensure a Step Change in New Categories Performance
Our Vapour
Products*
Vapour products are battery-powered
devices that heat liquid formulations –
e-liquids – to create a vapour which is
inhaled. Most e-liquids contain water,
propylene glycol and glycerol, flavourings
and nicotine, although some e-liquids
don’t contain any nicotine. The products
contain no tobacco and no combustion
takes place.
– Vuse/Vype fastest growing
vapour brand reaching 26% total
vapour value share in the top
5 markets.
– Vuse/Vype value share leader in
four of the top five markets.
– Vuse gained market leadership
in Canada in migration year with
46% value share (+2,220 bps
vs 2019).
– Vuse closed system device
volume share leader in the US.
Toxicology tests
Cigarette vs ePen 2
None^
9%
0%
None†
Mutagenicity (Whole Aerosol)
Cytotoxicity
Oxidative Stress
yH2AX (DNA Damage)
Cigarette = 100%
^ No observed mutagenicity under these test conditions.
† No observed genotoxicity under these test conditions.
It is well accepted within the
public health community that,
while the precise long-term effects
of vaping are unknown, it is
nevertheless substantially safer
than smoking cigarettes.
The Royal Society for
Public Health – 2018
The scientific evidence*
There is growing consensus among many
public health bodies and academics that
vapour products can have a significantly
reduced-risk profile compared to smoking.
In the UK, for example, Public Health
England has published a series of expert
reviews of the latest evidence, drawing
on peer-reviewed literature, surveys and
other reports.
They concluded that “based on current
knowledge, vaping is at least 95% less
harmful than smoking”. This is supported by
a wealth of other evidence reviews, studies
and reports from public health bodies,
regulators and academics in countries
such as Australia, Canada, France and
New Zealand.
27
Number of markets where the Group’s
vapour products are sold
* Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance.
BAT Annual Report and Form 20-F 2020
35
In 2019 we acquired Twisp (in South Africa),
a leading vaping products company. Due to
the restriction in sales of cigarettes and
vapour products in 2020 in South Africa in
response to COVID-19, the Group delayed
activities linked to the development
and sales of Twisp. While we remain
confident of the future potential for the
vapour category, an impairment charge of
£11 million was recognised in 2020 ahead of
the migration of Twisp to Vuse.
The Group’s performance in 2020 was also
supported by the growth of e-commerce,
with Vuse/Vype being the most visited
branded e-commerce site across the
majority of the main vapour markets, and
ranking No.1 for branded search against
competitors. In December, Vuse/Vype had
over 17,500 subscribers (up 5x since January
2020) with the average subscriber lifetime
value equal to 3x that of a traditional
retail customer.
In 2019, we announced the intention
to migrate certain vapour brands
to Vuse, recognising an impairment
charge of £66 million in that year.
Despite the challenges of COVID-19 in
2020, we successfully migrated our vapour
products to Vuse in a number of markets
and will continue with our brand migration
programme during 2021.
Proportion of vapour revenue
by region in 2020
(£m)
US
AmSSA
ENA
APME
Total
2020
£m
2019
£m
383
65
148
15
611
207
43
147
4
401
Regulation and PMTA
The future of tobacco harm reduction
has always depended on robust science,
and ensuring that this is accessible to
audiences outside the scientific community
is critical. This need is growing stronger
than ever – with a number of cases of
acute lung diseases (referred to as EVALI)
reported among vapers in the US in 2019,
consumers want to be clear on the risk
profile of these products. In addition,
consumer perceptions of nicotine are
evolving with many consumers over-
estimating the risks associated with
nicotine generally.
This also demonstrates the importance of
having, and enforcing, a robust and effective
regulatory framework that ensures high
product standards and prevents access
and appeal to youth – things we have long
advocated. Robust science has to be at
the centre of any regulatory development
and engagement.
That’s why we welcomed the US Food and
Drug Administration’s (FDA) previously
announced requirement to submit Pre-market
Tobacco Product Applications (PMTAs).
PMTAs are based on a summary of all
research findings to demonstrate that
the products meet the FDA’s criteria as
“appropriate for the protection of the public
health”. We filed PMTAs for four Vuse
products (and our Modern Oral Velo portfolio)
ahead of the deadline of 9 September 2020
and have continued to work with the FDA
throughout the implementation of this new
regulatory framework. While COVID-19 has
caused some delays, we expect to hear
more on their progress over the course of
2021. Each of our applications consists of
between 100,000 and 150,000 pages, with
over 150 employees contributing to each
one. They represent a major milestone
for us, and include results from numerous
clinical, non-clinical and behavioural
research studies; chemical analyses; and
toxicological reviews of individual ingredients.
Detailed information on product design,
operation and manufacturing is also included.
In the US, we believe all of our Vuse
(and Velo) products will be shown to be
appropriate for the protection of public
health, and we expect to receive progress
updates related to our PMTA submissions
over the course of 2021.
Performance summary
In 2020, our vapour brands Vuse and Vype
performed well across all the top five
vapour markets (US, Canada, Germany, UK
and France which, collectively, represent
over 75% of global industry vapour revenue),
rebounding well from the EVALI crisis in
2019 and the implementation of the US
flavour ban in early 2020.
Total volume of vapour consumables
was up 52% to 344 million units in 2020
(2019: 226 million units, an increase of 19%
on 2018), driving revenue growth of 52% to
£611 million (2019: £401 million, up 26.1%)
or 53% at constant rates of exchange,
accelerating in the second half of the year.
In the US, Vuse Alto drove total revenue
from vapour up 85% to £383 million
(2019: £207 million, up 12% on 2018), or 86%
(2019: up 7%) on a constant currency basis,
in a market that was estimated to be down
13% in volume due to the issues mentioned
earlier. Vuse Alto drove vapour value share,
in the US, to 24.9% for 2020 from 16.6%
for the year ended 31 December 2019,
with volume of consumables 70% higher
(2020: 174 million units; 2019: 103 million
units). Vuse Alto also achieved market
leadership (by volume) for closed system
devices, with over 60% device volume share
in the final quarter of 2020. Vuse is now
the market leader in 15 US states (by value
share) and the Alto variant represents over
85% of the Vuse mix in the US in the final
quarter of 2020, up from 50% in 2019.
We performed well in 2020 and 2019 in the
other top vapour markets, and reinforced
our leadership positions:
– In the UK, total vapour value share of the
category was 36%, compared to 38% in
2019. Vype performed well, with value
share up 350 bps driven by both ePen3
and ePod in 2020 (compared to the full
year 2019) although this was more than
offset by a decline in Ten Motives and the
remainder of the local portfolio;
– In France, vapour value share reached
31.5% in 2020, an increase of over 1,400
bps (versus 2019), driven by ePen3 and
ePod which were launched in 2019;
– In Canada we achieved the value share
leadership position in the year while
simultaneously migrating from Vype to
our global brand Vuse; and
– In Germany, Vype continued to grow
vapour value share, becoming market
leader, increasing 1,430 bps to 50.1% in
2020 (compared to 35.7% in 2019).
Due to the continued success of ePod
and ePen3, Vuse/Vype now holds the No.1
position (by value share) in four of the top
five markets.
In January 2021, we have pilot-launched
our first CBD vaping product, Vuse CBD
Zone. This latest innovation will allow us, for
the first time, to offer adult consumers a
range of high-quality CBD vaping products
from our trusted, global brand, Vuse.
Initially available in Manchester, UK, it will
offer adult smokers and vapers sensorial
enjoyment, as Vuse CBD Zone caters to
a variety of moods and moments in their
busy lifestyles.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 36
Strategic Management
Short-Term Deliverables to Fuel A Better TomorrowTM
Ensure a Step Change in New Categories Performance
Our Tobacco Heating
Products (THPs)*
THPs heat tobacco to generate a nicotine-
containing aerosol, with a tobacco taste,
which the user inhales. Because the
tobacco is heated instead of burned, the
resulting aerosol comprises mainly water,
glycerol, nicotine and tobacco flavours –
dramatically different to cigarette smoke.
The scientific evidence*
By heating tobacco rather than burning it,
THPs have the potential to have reduced
risk compared to smoking. The absence of
burning dramatically changes the nature
of the aerosol. Comparing cigarette smoke
with glo aerosol, the levels of toxicants were
reduced on average by 90-95%.
Our latest clinical trials are the first-ever
of their kind to demonstrate reduced
risk of Tobacco Heating Products.
The results showed switching completely
to glo crossed the biologically significant
threshold, and marker profiles were similar
to cessation.
The three-month results from our long-
term glo clinical study were published in
Nicotine & Tobacco Research. This new
research found that smokers who switched
completely from smoking cigarettes
to using glo substantially reduced their
exposure to certain cigarette smoke
toxicants over three months.
– Device volumes up 33%.
– Consumable volumes up 19%.
– Successful launch of glo Hyper
in April 2020, driving glo to 14%
volume share of category in key
markets (up 30 bps on 2019) –
despite withdrawal of glo Sens.
– Record total nicotine volume
share in Japan at 5.9% driven
by Hyper.
– @E-commerce sales up over
200%, leveraging digital
capabilities and adapting to
COVID-19 challenges.@
– Further market rollouts and
strong innovation pipeline
driving good momentum
into 2021.
Toxicants of interest
Cigarette vs glo
3%
4%
4%
4%
WHO (9 priority toxicants)
FDA (18 priority toxicants
HEALTH CANADA (main 44 toxicants)
FDA (93 harmful and potentially harmful constituents)
Cigarette = 100%
Tests on heated tobacco...
found a reduction of up to 95%
in the number of toxic chemicals
emitted by heated tobacco
compared with combustible
cigarettes..
David Jones
MP and honorary life fellow of Cancer
Research UK
20
Number of markets where the Group’s
Tobacco Heating Products are sold
* Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance.
BAT Annual Report and Form 20-F 2020
37
With COVID-19 having a material impact
on consumer engagement in 2020,
we successfully leveraged our digital
capabilities, adapting our commercial and
marketing campaigns and resulting in a 1.5x
increase in earned social media compared
to 2019, with glo Hyper the highest interest
THP new product launch recorded.
@Our e-commerce channel grew revenue
from THP by over 200% compared to
2019 and is starting to gain critical mass
and scale to be an important driver of our
performance going forward.@
We expect to consolidate glo Hyper’s
success with further market roll-outs
planned in 2021. In addition, continuous
product enhancements in both
consumables and devices will build upon
the performance in the final quarter of
2020 in Japan, Italy, Russia and Romania,
providing momentum for further success
in 2021.
Proportion of THP
revenue by region in 2020
(£m)
US
AmSSA
ENA
APME
Total
2020
£m
2019
£m
1
–
136
497
634
1
–
56
671
728
For many of the toxicants measured, the
levels found in participants were similar to
those in people who stopped using tobacco
completely. The results were presented at
scientific and media events in Japan and
South Korea.
We also welcome an increasing number
of independent reports that are broadly
aligned with our own findings.
For example, a study commissioned by the
UK Department of Health in 2017 found
that people using the two available THPs
on the UK market were exposed to around
50–90% less of the “harmful and potentially
harmful” compounds compared with
conventional cigarettes.
In 2018, a Public Health England report
looked at current research on THPs and,
while highlighting the need for more
research, found that “compared with
cigarettes, heated tobacco products are
likely to expose users and bystanders
to lower levels of particulate matter
and harmful and potentially harmful
compounds. The extent of the reduction
found varies between studies”.
Leading innovation
In 2020, we continued to expand our
portfolio with the launch of glo Hyper and
Neo demi-slims. We went far beyond the
traditional quantitative and qualitative
studies as we radically re-engineered not
just the glo ecosystem, but our entire way
of working.
Our first step was to place consumers at
the centre of the process, with insights
gathered from thousands of consumers in
person, across key markets. Every insight
informed how we optimised the filter feel,
puff satisfaction and flavour sensation.
After over 75,000 prototype sticks, we
landed on an experience that we knew
resonated with target consumers because
it had been built in collaboration with them.
The pivotal breakthrough was in harnessing
our advanced induction heating technology
to unlock record heating times, delivered by
our signature boost feature.
The 150-strong global community of
engineers, product developers, and
operations teams came together across
borders and time zones to build the Hyper
device. It is designed to work with the
new Neo demi-slims range which offer an
elevated taste, with 30% more tobacco and
the widest range of flavours in the market.
Performance summary
The Group’s THP portfolio grew, with
consumable volume up 19% to 10.7 billion
sticks (2019: up 32% to 9.0 billion sticks).
Excluding Sens, THP consumable volume
would have increased 29% in 2020.
This follows the launch in Japan of glo
Hyper in April 2020 (which already
accounts for 50% of the glo portfolio), and
subsequent launches in ENA mainly in
the second half of the year. glo Hyper the
first-to-world THP launched with induction
heating which provides a step change in
consumer satisfaction with 30% more
tobacco, faster heating and a boost button.
This has resulted in conversion rates that
are 50% higher than previous glo launches.
The success of glo Hyper was achieved
despite the impact of COVID-19 restrictions
as the launch and ongoing marketing
campaigns were successfully switched to
digital platforms. This more than offset a
tough comparator as the Group launched
glo Pro, glo Nano and glo Sens in 2019.
Revenue declined 12.9% to £634 million
(2019: up 28.9% to £728 million) with the
decrease in 2020 largely due to the decision
to withdraw glo Sens from the market
during the second half of 2020 (being a
reduction to revenue of £50 million) and
the impact of excise harmonisation in
Japan. The growth in 2019 was due to
the increased volume in that year, partly
due to the launches described earlier.
Excluding the impact of the relative
movements in sterling, at constant rates
of exchange, this was a decrease of
12.7% in 2020 compared to an increase
of 22.7% in 2019.
In Japan, following the launch of glo Hyper,
glo’s total volume share grew 85 bps to
achieve a volume share of 5.9% of total
nicotine, (up from 5.0% in December 2019),
being a category volume share of THP of
19.4% (2019: 19.6%). Temporary revenue
weakness was driven by the withdrawal of
glo Sens and excise harmonisation through
part absorption of excise driven price
increases in October. With glo capturing
over 30% of category growth post excise
increase, we are confident that glo will
return to volume and revenue growth in
Japan in 2021.
In 2020, momentum post glo Hyper launch
in Russia and Ukraine continued through
the second half of the year, with glo volume
share in December 2020 (of cigarettes
and THP) in Russia at 1.4% in December
2020, and glo’s volume share of THP more
than doubling from 7.6% in June 2020 to
15.5% in December 2020. Since the launch
of glo Hyper in pilot cities in Italy, glo has
more than tripled its volume share of
the THP category to 7.8%, with retention
rates doubling.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 38
Strategic Management
Short-Term Deliverables to Fuel A Better TomorrowTM
Ensure a Step Change in New Categories Performance
Our Modern Oral
Products*
In recent years, a new category of
modern oral products has emerged.
These come in the form of nicotine
pouches that are placed under the
lip so that nicotine can be absorbed
by the body.
– Global volume and revenue
growth, up 62% and 57%,
respectively.
– Consolidating modern
oral category leadership in
Scandinavia and growing share
of total oral market.
– US portfolio strengthened by
the acquisition of certain assets
from Dryft with national roll-out
continuing in early 2021.
– Future opportunity in Emerging
Markets as affordable New
Category proposition.
The scientific evidence*
A wealth of epidemiological evidence from
Sweden over many decades shows that use
of snus, a type of traditional oral tobacco, is
substantially less risky than smoking. This has
been confirmed by the US FDA which, in
2019, in response to an application made
by the company Swedish Match, formally
recognised that switching completely from
cigarettes to the snus products assessed
can significantly lower the risks of mouth
cancer, heart disease, lung cancer, stroke,
emphysema and chronic bronchitis.
Already our chemical studies have shown
that our modern oral products have even fewer
and lower levels of toxicants than snus, and
our toxicological studies have shown that the
effect of this is to have even lower toxicological
impact on human cells than snus. We’re
confident that further research will confirm that
consumers of modern oral products will be
exposed to even fewer toxicants than snus
users. Ultimately, we believe that modern
oral products present less risk to users
than cigarettes.
Toxicology tests
Cigarette vs Velo
None*
0%
0%
None
Mutagenicity (toxtracker)
Positive1
Cytotoxicity
100%2
Oxidative Stress
yH2AX (DNA Damage)
Positive1
Positive3
Cigarette = 100%
1. Toxtracker assay (rtkn and bscl2).
2. At equivalent nicotine doses (7.85µg/ml velo vs. 4.34µg/ml cigarette).
3. High content screening.
Smokeless tobacco
products are much cleaner and
less hazardous than cigarettes.
Their use could reduce harm to
smokers if they switched entirely
to these products.
Professor Neal Benowitz
Professor of Medicine at the University
of California, San Francisco
23
Number of markets where the Group’s
modern oral products are sold
* Our products as sold in the US, including Vuse, Velo, Grizzly,
Kodiak, and Camel Snus, are subject to FDA regulation and
no reduced-risk claims will be made as to these products
without agency clearance.
BAT Annual Report and Form 20-F 2020
Our products
Our modern oral products are white in
colour and contain high-purity nicotine,
water and other high-quality food-grade
ingredients, including eucalyptus and pine
tree fibres, flavouring and sweeteners.
Originating in Scandinavia, Velo is now a
leading global brand of nicotine pouches.
These typically appeal to a broader
audience than traditional oral tobacco,
and because of their affordability and
lack of batteries, they can be particularly
popular in low to middle income countries.
For example, our subsidiary in Indonesia has
delivered great results from their expansion
activities in Jakarta. Following a promising
performance in June 2020, the test has
been expanded to 5,000 consumers,
which is being closely monitored to gain
consumer insights.
We are also delivering a step-change in
modern oral manufacturing. Truly living
our ethos, our modern oral factory
in Pécs put together a bold plan to
implement food industry standards for
modern oral manufacturing. This has
enabled us to ensure the availability of
products that comply with regulations in
different countries.
With a cross-functional team across
quality, production, engineering and EHS
teams delivering technical changes and
process improvements, Pécs became
the first site in BAT’s history to obtain
the ISO 22000 certification for food
safety standard.
Performance summary
In 2020, we consolidated our leadership
position in Modern Oral outside the US,
while strengthening our position in the US
with an expanded portfolio.
In 2020, total Group volume of 1.9 billion
pouches was an increase of 62% on 2019,
when volume was 1.2 billion pouches, itself
an increase of 188% on 2018.
Revenue increased 57% to £198 million
(2019: up 267% to £126 million). Excluding
the impact of foreign exchange, this was
an increase of 57% in 2020 and 273%
in 2019, on a constant rates basis.
In ENA, where we are the clear market
leader with 71% volume share of Modern
Oral in the key markets (being Norway,
Sweden, Denmark, Switzerland and
Germany), revenue increased by 59%
(2019: up 234%) and is now over five times
the 2018 levels as the category continued
to take value and volume share from the
traditional oral products as follows:
– In Sweden, we grew our leadership
position in the Modern Oral category
reaching 62% volume share (2019: 56%)
driven by Lyft;
– In Norway, volume share of the total
oral category increased in both years,
reaching 15% in 2020 (2019: 11%);
– In Switzerland, where volume share of the
total oral category reached 53%, up from
44% in 2019;
– In Denmark, where the Group continues
to lead the development of the oral
category, with 75% volume share of the
total oral category, compared to 62% in
2019; and
– In Germany, Velo gained the market
leadership position (by both volume
and value share) accelerating the
growth of modern oral within the total
oral category.
In the US, while growing volume (up 45%
in 2020 following the launch in 2019)
and revenue (up 14% to £10 million, from
£9 million in 2019), the portfolio has been
strengthened by the acquisition (in October
2020) of the nicotine pouch products of
Dryft Sciences, LLC (Dryft). These products
have been rebranded Velo and expands
the US portfolio from 4 to 28 variants, with
representation in the above 6mg nicotine
strength segment. This acquisition marks a
further step in BAT’s societal commitment
to accelerate its transformation journey
to build A Better TomorrowTM. With the
national rollout of Velo branded Dryft
products continuing in early 2021 and
a return to growth in the final quarter
of 2020, we have great momentum for
future success.
PMTAs for all Velo products were
submitted (in the US) ahead of the
9 September 2020 FDA deadline.
39
Pilot schemes in emerging markets are
ongoing with initial encouraging results in
Pakistan and Indonesia. In Kenya, we have
temporarily suspended sales due to local
regulatory challenges and continue to
engage with the local authorities.
We continue to believe that Modern Oral
represents an exciting opportunity to offer
affordable New Category alternatives to
adult nicotine consumers in emerging
markets, given the absence of an
electronic device and a pre-existing ritual
of oral product consumption in a number
of markets.
In line with the simplification agenda, the
Group will continue to migrate the majority
of its Modern Oral portfolio to Velo during
2021, with initial migration plans delayed
due to COVID-19.
In 2020, the Group has revised the reporting
of modern oral volume share to be yearly
average which is reflective of the year’s
performance after periods of initial launch.
In periods of launch, a period end rate
is used to provide users with the exit
share which is more reflective of short-
term movements.
Proportion of modern oral
revenue by region in 2020
(£m)
US
AmSSA
ENA
APME
Total
2020
£m
2019
£m
10
1
185
2
198
9
1
116
–
126
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 40
Strategic Management
Our Traditional Oral
Products
The most common products in
traditional oral are largely moist oral
tobacco popular in the US with the
main brands of Grizzly and Kodiak.
These products are less finely ground
than another traditional oral product
referred to as Swedish-style snus.
Both of these traditional oral products
are available in loose form, as well as
in pre-packed pouches.
Our products
We also sell a range of traditional oral
products, including Swedish-style snus and
American moist snuff, available in loose
tobacco form or as pre-packed pouches.
We have long sold snus in Sweden and
Norway through our Fiedler & Lundgren
business, whose brands include Granit and
Mocca; and in the US we market snus under
the Camel brand. Our American moist
snuff products include our flagship Grizzly
brand, as well as the premium moist snuff
brand Kodiak.
The Modified Risk Tobacco Product
(MRTP) applications for Camel Snus
were discussed by the Tobacco Products
Scientific Advisory Committee (TPSAC)
in September 2018. We continue to work
closely with the FDA, which announced
in December 2020 that it had reopened
the comment period after our filing of
additional information.
Proportion of traditional oral
revenue by region in 2020
(£m)
US
AmSSA
ENA
APME
Total
2020
£m
2019
£m
1,126
1,052
–
34
–
–
29
–
1,160
1,081
Performance summary
In 2020, volume was marginally lower
(down 0.9%) on the prior year (at 8.4 billion
stick equivalents), with 2019 0.6% lower
than 2018.
Total revenue grew by 7.2% to £1,160 million
(2019: up 15% to £1,081 million), driven by
pricing in both 2020 and 2019, particularly
in the US which accounts for 97% of the
Group’s revenue from the category. On a
constant rates basis, this was an increase
in 2020 of 7.7% and 10% in 2019 (driven
by pricing).
In the US, traditional oral volume declined
1.3% in 2020 (2019: down 1.5%). Value share
of moist was down 25 bps and volume
share down 35 bps, after a strong 2019
(value share growth of 80 bps). The 2020
decline was driven by Grizzly which
was impacted by pricing pressures in
the final quarter of 2019 and early 2020.
Utilising revenue growth management
techniques, value share has stabilised in the
second half of 2020. Outside the US, which
accounts for only 3% of Group revenue
from the category, volume was higher by
2.8% in 2020, driven by Sweden where the
Group’s Traditional Oral volume share (as
a proportion of total oral) declined 80 bps
after growing in 2019 by 50 bps. This was
due to the growth in Lundgrens in both
periods which, in 2020, was more than
offset by a decline in the remainder of the
portfolio, notably Granit and the de-listing
of Knekt and the growth of Modern Oral.
BAT Annual Report and Form 20-F 2020 Strategic management
Short-Term Deliverables to Fuel A Better TomorrowTM
Drive Value From Combustibles
41
Our Combustible
Products
We are focused on growing our
strategic brands of Dunhill, Kent, Lucky
Strike, Pall Mall, Rothmans, Newport
(US), Natural American Spirit (US) and
Camel (US) which now account for
66% of our combustible volume.
Our combustibles business is founded
on understanding and meeting the
preferences of adult smokers in all
parts of the world.
Highlights
– Strategic cigarette brands deliver
value share growth of 40 bps.
– Group value share growth of
20 bps.
– Strong pricing, with combustible
price/mix of 7.3%.
Group cigarette value share increased 20
bps in 2020 (2019: up 20 bps), driven by
the US, Mexico, Colombia, Turkey, Russia,
Bangladesh and Japan which offset a
reduction in Indonesia and Saudi Arabia.
In 2020, Group cigarette volume declined
4.6% to 638 billion sticks (2019: 668 billion),
outperforming the total cigarette market
which was estimated to be down between
5.0-5.5% (2019: 3.5-4.0%).
In 2020, cigarette volume grew in Brazil
(where enhanced border security and
restricted population mobility due to
COVID-19 led to an increase in duty paid
volume), in Turkey (driven by Kent and
the local portfolio), and in Bangladesh
(driven by the continued strength of the
local portfolio).
Developed markets have been generally
relatively resilient in 2020 with little
evidence of accelerated downtrading
despite the pressures of COVID-19.
In the US, Group cigarette volume was up
0.5% to 73 billion (2019: 73 billion), due to the
performance of the strategic portfolio. In the
final quarter of the year, we reintroduced
Lucky Strike to the US market, ensuring a
truly global footprint for the brand. This was
against an industry that was estimated to
be up 1.5% driven by reduced consumer
switching to vapour, higher supply chain
inventories (due to the impact of COVID-19
and the timing of price increases) and an
extra selling day, and stronger consumption
trends resulting from the increase in fiscal
stimulus and lower gas prices.
However, due to COVID-19, production or other
supply chain restrictions affected sales in
several markets, including Canada and Mexico.
In South Africa, a total sales ban of tobacco
products came into effect from March 2020,
with sales recommencing in August 2020
following the easing of lockdown restrictions.
While not a significant part of the Group, travel
restrictions due to COVID-19 have impacted our
Global Travel Retail (GTR) business, negatively
impacting Group cigarette and THP volume
by an estimated 1.0%. Furthermore, volume
declined in Indonesia (due to the impact
of tax increases and minimum retail price
compliance) and in Pakistan where illicit trade
grew significantly following excise-led price
increases in prior years.
Group cigarette volume declined 4.7% in
2019 to 668 billion sticks as growth in Japan,
the Middle East, South Africa, Romania and
Poland was more than offset by Russia
(partly due to the one-off stock reduction),
Egypt (largely due to the change in local
taxes impacting Pall Mall), Venezuela (due to
the ongoing macro-economic challenges)
and the impact of market decline in the US,
Indonesia, Pakistan and Ukraine.
Cigarette volume share grew 40 bps
in 2020, driven by Bangladesh, Mexico,
Vietnam, Russia and Turkey which were
partly offset by lower volume share in
Indonesia and Saudi Arabia. In 2019, this
was an increase of 20 bps due to growth
in Japan, Pakistan, Bangladesh, Mexico,
Ukraine and Russia.
Proportion of combustibles
revenue by region in 2020
(£m)
US
AmSSA
ENA
APME
Total
2020
£m
2019
£m
9,926
3,535
9,078
3,992
5,356
5,544
3,935
4,387
22,752 23,001
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
42
Strategic Management
Short-Term Deliverables to Fuel A Better TomorrowTM
Drive Value From Combustibles
The performance was underpinned by the
strategic cigarette brands, with volume
share 30 bps higher in 2020 (2019: up 70 bps
driven by migration in Brazil and Colombia,
or 30 bps excluding migrations):
– Dunhill’s overall volume share was
down 20 bps (2019: stable) as growth
in Romania and Netherlands was more
than offset by declines in Saudi Arabia,
Indonesia, Brazil, South Africa and
Malaysia. Volume was 17% lower (2019:
down 5.5%), largely due to the impact
of the tax increases and minimum
retail price compliance in Indonesia, the
impact of COVID-19 on both South Africa
(where there was a temporary sales
ban in the year) and our GTR business,
and the ongoing challenging operating
environment in Malaysia;
– Kent’s volume share grew 10 bps (2019:
up 10 bps) as growth in Brazil, Saudi
Arabia, Turkey and Russia more than
offset lower volume share in Romania
and Japan. Volume was up 2.0% (2019:
down 1.3%) as growth in Brazil, across
the Middle East (including Saudi Arabia),
Russia and Turkey more than offset lower
volume in Japan;
– Lucky Strike’s volume share grew
10 bps (2019: stable), as growth in
AmSSA (particularly Brazil, Colombia
and Argentina) and in Japan more than
offset lower volume share in Indonesia,
Spain and France. Volume declined
2.0% as the impact of the tax increases
and minimum retail price compliance in
Indonesia, and lower volume in France
and Spain, more than offset higher
volume in Brazil, Japan and Argentina.
Lucky Strike was re-introduced in the
US in the final quarter of 2020;
– Rothmans’ volume share was 20 bps
higher (2019: up 50 bps) as growth in
Brazil, Colombia, New Zealand, Malaysia,
Russia and Ukraine was partly offset by
Pakistan and Turkey. Volume was 6.1%
higher (2019: up 2.5%) as growth in Brazil,
Pakistan and Bulgaria more than offset
lower volume in Ukraine and Turkey; and
– Pall Mall’s volume share was stable
(2019: up 10 bps) as growth in Pakistan,
Australia, Mexico, South Africa, Chile
and Canada was offset by lower volume
share in New Zealand, Saudi Arabia, the
US and Argentina. Volume was down
6.0% (2019: down 6.7%) largely driven by
Pakistan, Saudi Arabia and South Africa.
The Group’s US domestic strategic
combustible portfolio performed well:
– Newport volume share increased 40 bps
(2019: up 40 bps), while volume grew 2.3%
(2019: down 3.9%), with growth in both
the menthol and non-menthol variants;
– Natural American Spirit performed well
with volume share up 10 bps (2019: up 10
bps). Volume was up 6.0% against 2019
(2019: 0.5% increase); and
– Camel’s volume share declined 10 bps in
the US (2019: down 10 bps) with volume
up 1.2% (2019: down 6.0%).
Volume of other tobacco products (OTP)
declined 1.7% to 20 billion sticks equivalent
(2019: 7.1% decline), being 3% of the Group
portfolio (2019: 3%).
Change in cigarette volume share in key
markets (bps)
+40 bps
2020
2019
+40bps
+20bps
Definition: Annual change in cigarette volume share – being
the number of cigarettes bought by consumers of the Group’s
brands in key markets as a proportion of the total cigarettes
bought by consumers in those markets (see page 274).
Change in cigarette value share in key
markets (bps)
In 2020, revenue from combustibles
was down 1.1% at £22,752 million
(2019: £23,001 million, growth of 4.2%).
+20 bps
2020
2019
+20bps
+20bps
Definition: Annual change in cigarette value share – being the
value of cigarettes bought by consumers of the Group’s brands
in key markets as a proportion of the total value of cigarettes
bought by consumers in those markets (see page 274).
45
Number of cigarette factories
in 43 countries
Higher pricing across the Group in 2020,
notably in the US, Russia, Germany,
Canada, Australia, Mexico and Pakistan,
was more than offset by the impact of
lower Group volume, partly related to the
impact of COVID-19 and a translational
foreign exchange headwind of 3.7%.
COVID-19 was estimated to be a headwind
on Group revenue of approximately 2.5%,
largely due to the restrictions in travel
(impacting GTR) and due to the restrictions
imposed in South Africa during the year.
The growth in revenue in 2019 was largely
due to pricing, notably in the US (including
a reduction in discounting), Canada,
Kenya, Mexico, Nigeria and Saudi Arabia,
and an improved geographic mix as the
performance in high value markets such
as Japan, South Africa, Romania and
Australia combined with reduced volumes
in lower value markets such as Pakistan and
Egypt. This more than offset unfavourable
portfolio mix due to the relative growth of
lower value products, such as Rothmans
and Pall Mall, and lower total volume.
After adjusting for the short-term impact
of excise on bought-in goods (impacting
2019 and 2018) and the translational foreign
exchange headwind (2019: tailwind of 0.6%),
adjusted revenue from combustibles at
constant rates of exchange was up 2.8%
to £23,594 million. In 2019, this was an
increase of 4.6%.
BAT Annual Report and Form 20-F 2020
Short-Term Deliverables to Fuel A Better TomorrowTM
Simplify the Business
43
Highlights
– Quantum enabled
£660 million gross savings
through organisational change
and productivity initiatives.
– On track to deliver at least
£1 billion annualised savings
by end 2022.
– Revenue Growth Management
and Marketing Effectiveness
initiatives ready to be deployed.
– In-house ‘Ventures’ business
created and operational.
The savings from Quantum are being used
to fund investment in New Categories,
leveraging new capabilities. We are
attracting new talent from a diverse range
of industries globally, in areas such as:
– IP;
– insights and analytics;
– product innovation;
– design and technology; and
– digital media.
These skills are supporting our work into
foresights beyond nicotine, 21st century
brand building, direct-to-consumer
marketing and e-commerce, and advanced
digital and data analytics.
In addition, in 2020 the increased agility
brought about through Quantum and
our diverse geographic footprint enabled
us to quickly and effectively adapt and
navigate the challenges caused by the
global pandemic.
At the end of 2019 we established our
corporate venturing unit, Btomorrow
Ventures (BTV) and made excellent
progress in 2020. During the course of
the year, BTV made minority investments
in eight small, innovative technology and
consumer businesses, providing us with an
exciting capability ecosystem for the future.
In 2019, we announced ambitious plans
to fundamentally re-evaluate how we are
organised and a redesign of management
layers to eliminate duplication and
entrenched accountability. We called this
Project Quantum – designed to create new
capabilities and release valuable funds for
further investment in our growth ambition,
ensuring the Group is stronger, faster and
more agile.
In 2020, we realised the benefits of the
first phase of Quantum. Alongside greater
organisational speed and agility, Quantum
drove significant cost savings, realising
£660 million of gross savings through
organisational change and productivity
initiatives. However, further work on
core processes and ways of working
simplification is ongoing.
The second phase of Quantum will build on
this success with the organisation ready for
project roll-outs from the beginning of 2021,
covering areas such as:
– further operational efficiency;
– route-to-market focus; and
– supply chain productivity.
The key objective in 2020 was to finalise
the operational design of the second
phase, running pilots in the second half of
the year in a few strategically important
geographies with the aim to use the
learnings to fine-tune the design and
methodology to support a successful wider
roll-out programme in 2021 and beyond.
We are well on track to deliver the target
of £1 billion total annualised cost savings
from Quantum by 2022, in addition to the
benefits from our:
– Revenue Growth Management; and
– Marketing Effectiveness initiatives.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
44
BAT Annual Report and Form 20-F 2020
By moving from a business where
sustainability has always been
important to one where it is front
and centre, in all that we do.
We are committed to a step-change
in our sustainability ambition.
We have a number of stretching
targets, which we are confident will
deliver A Better TomorrowTM for all
our stakeholders. These include:
– increasing our number of
non-combustible product
consumers from 11 million in
2019 to 50 million by 2030;
– achieving carbon neutrality
by 2030 for our own business
activities, and accelerating our
existing environmental targets
to 2025; and
– eliminating unnecessary
single-use plastic and making
all plastic packaging reusable,
recyclable or compostable
by 2025.
for society and the environment 45
Awards and Recognition
Our sustainability efforts and commitment to high standards have
received notable independent recognition over the years, including
the following.
Investor Ratings
Awards and Recognition
Dow Jones Sustainability Indices (DJSI)
We are the only company in our industry listed in the prestigious
World Index, representing the world’s top 10% ESG performers.
We have achieved inclusion in the indices for 19 consecutive years.
Gold Class Sustainability Award
In 2021, we were awarded Gold Class in RobecoSAM’s
Sustainability Yearbook, which showcases the best performing
companies in terms of financially material ESG metrics.
MSCI
We achieved a ‘BBB’ rating in the most recent MSCI ESG Ratings,
which help investors identify and understand financially material
ESG portfolio risks.
Vype UK Product of the Year Award
In early 2020, our Vype ePod won in the e-cigarette category at the
UK Product of the Year awards – the UK’s largest consumer survey
of product innovation.
Best-in-class ISS Score
We achieved the highest rating for the ISS Social Disclosures
QualityScore, which identifies best-in-class sustainability
disclosure practices.
Global Top Employer
We have been recognised as a Global Top Employer for four
consecutive years, acknowledging our commitment to best-in-
class working environments and career opportunities.
Sustainalytics
We achieved a score of 27.8 in the most recent Sustainalytics ESG
Risk Ratings, which give investors insights into financially material
ESG risks in their portfolios.
Financial Times Diversity Leaders Report
We have ranked in the top 10% for two consecutive years.
The report recognises organisations that have achieved a diverse
and inclusive workforce.
Vigeo Eiris
We scored 47% (up by 5pp from 2019) in the most recent Vigeo
Eiris rating. Vigeo Eiris, a rating and research agency, evaluates
organisations’ integration of ESG factors into their strategies,
operations and management.
CRRA Reporting Awards – Openness and Honesty
We won the ‘Openness and Honesty’ award for our 2018
Sustainability Report at the 2020 Corporate Register Reporting
(CRR) Awards – a testament to our approach to transparently
reporting on key ESG challenges.
CDP Climate A-List
Our A-List inclusion for the second year recognises our actions to
cut emissions, mitigate climate risks and contribute to a low-carbon
economy. We are also proud to have achieved A- in CDP Water, and
to be included in Supplier Engagement Leaderboard.
Disability Confident Committed
We achieved certification in 2020 as a Disability Confident
Committed employer under the UK Government’s
accreditation scheme.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 46
Strategic Management
Putting ESG Front and Centre
ESG Enablers
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 Sustainability Agenda is integral to our
evolved Group strategy.
Our Sustainability Agenda reflects our
commitment to reducing the health impact
of our business and excellence across our
other ESG priorities. Our approach is driven
by extensive stakeholder insights, and we
commission an independent review of our
most material ESG topics each year.
Through this robust process, we engage
with a wide range of stakeholders to
understand what matters most to
them, complemented with ongoing risk
monitoring, research and benchmarking.
This approach ensures we keep
pace with emerging topics and
stakeholder expectations.
Outlined here are the priority areas that
form the core of our Sustainability Agenda.
You can read more about how we identify
and prioritise these areas on page 111
of our 2020 ESG Report.
Highlights during the year
– Growth of our New Categories
revenues by 15% to £1.4 billion.
– A 37.4% reduction of our Scope 1
and 2 carbon emissions from our
2017 baseline.
– The first company in the tobacco and
nicotine industry to publish a Human
Rights Report. Aligned to the UN
Guiding Principles, it outlines how we
address human rights impacts across
our business and supply chain.
– Announced new ambitions for zero
child labour and zero forced labour in
our tobacco supply chain by 2025.
H
E
Reducing the HEALTH impact of our business
Consumer
choice
World-class
science
Standards
and regulation
Excellence in
ENVIRONMENTAL
management
Climate change
Water
Biodiversity and afforestation
Waste
S
G
Delivering a positive
SOCIAL impact
Robust corporate
GOVERNANCE
Human rights
Farmer livelihoods
Health and safety
People and culture
Business ethics
Responsible marketing
Regulation and policy
engagement
Creating shared value for
Consumers
Society
Employees
Shareholders
BAT Annual Report and Form 20-F 2020 47
In 2020, we launched our evolved Group strategy focused on
building A Better TomorrowTM for all of our stakeholders. As we set
about future proofing our business, we have developed a set of
ambitious targets that will act as a catalyst for a decade of action.
Our roadmap to A Better TomorrowTM
ESG issue
Our goals
Progress in 2020
H
Reducing the
HEALTH impact
of our business
Reach £5 billion revenue from our
New Category products by 2025
Reach 50 million consumers of
non-combustible products worldwide by 2030
– £1,443 million, up by 15% from previous year
– +3 million consumers of non-combustibles
Excellence in
ENVIRONMENTAL
management
– Climate change
– Water
– Biodiversity
and afforestation
– Waste
Delivering a positive
SOCIAL impact
– Human rights
– Farmer livelihoods
– Health and safety
– People and culture
Robust corporate
GOVERNANCE
– Business ethics
– Responsible
marketing
– Regulation and
policy engagement
E
S
G
Carbon neutral by 2030 for Scope 1 and 2 emissions
Reduce water withdrawn by 35% by 2025
Eliminate unsustainable wood used for tobacco
curing by our contracted farmers
100% of plastic packaging to be reusable,
recyclable or compostable by 2025
Aim for zero child labour and zero forced labour
across our tobacco supply chain by 2025
All our product materials and high-risk indirect service
suppliers to have undergone at least one independent
labour audit within a three-year cycle by 2025
Committed to working to enable prosperous
livelihoods for farmers in our tobacco supply chain
Zero accidents Group-wide
Increase the proportion of women in management
roles to 45%
– 37.4% reduction in Scope 1 and 2 emissions
against 2017 baseline; climate risks scenario
analysis for major tobacco-growing markets
– 22.5% reduction in water withdrawn against
2017 baseline
– Over 99% wood used for tobacco curing
sourced from sustainable sources by our
contracted farmers
– Waste mapping across our value chain
and independent review of our packaging
materials for recyclability; with results
showing 82% of our plastic packaging is
reusable, recyclable or compostable1
– 99.7% of tobacco farms monitored for child labour2
– 93 supplier labour audits conducted on product
materials and high-risk indirect service suppliers
– Over 50% of tobacco grown by our contracted
farmers is from our hybrid tobacco seed varieties,
boosting yields by up to 20%
– 27% reduction in total accidents (vs 2019)
– 38% female representation in management roles
100% adherence to our Standards of Business
Conduct (SoBC), including our Lobbying and
Engagement Policy
100% adherence to our International Marketing
Principles (IMP) and our Youth Access
Prevention Guidelines
– 100% of Group employees completed our
annual SoBC sign-off
– Further strengthened compliance
procedures and internal controls for IMP
– 100% of our markets reported alignment
with YAP Guidelines
See page 57
1. Theoretical ability to be recycled externally assessed. Actual recycling rates may vary across geographies based on local infrastructure.
2. Reported via our Thrive assessments covering BAT contracted farmers and farmers contracted to our strategic third-party suppliers, representing more than 80% of our total tobacco
leaf purchases in 2020.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 48
Strategic Management
ESG Framework
We have a comprehensive suite of policies, principles and standards that
underpin our commitment to high standards of corporate responsibility
and driving excellence in ESG.
Our Sustainability Agenda is supported by
our Group policies and principles that are
endorsed at Board-level and aligned with
international standards.
Our Board has overall responsibility for
our Sustainability Agenda and ESG focus
areas, while the Audit Committee monitors
sustainability and ESG performance,
risks and adherence to our standards.
The Regional Audit and CSR Committee
(RACC) framework underpins the Audit
Committee and provides a flexible channel
for the structured flow of information
through the Group.
Our Management Board, chaired by the
Chief Executive, has overall responsibility
for overseeing the implementation of
Group strategy and policies, including
those relating to ESG. Members of the
Management Board are responsible for
overseeing delivery against ESG targets
for areas under their individual remit.
Key governance channels
– Our Board, the Audit Committee and
RACC reviews of ESG performance.
Read more about the key Board and Audit
Committee activities on pages 100 and 110
– Management-level committees,
including Operations Sustainability
Forum, Supply Chain Due Diligence
Committee and Youth Access
Prevention Governance Committee.
Sustainability: Our policies1
Summary of areas covered
Employment Principles
Standards of Business
Conduct (SoBC)
Environmental 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.
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.
Stakeholder groups
Our People
Our People
Governments and Wider Society
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.
Our People
Consumers
Customers
Suppliers
Health and Safety Policy
Our commitments to applying the highest standards of health and safety.
Supplier Code of Conduct
Standards required of our suppliers worldwide, including business integrity,
anti-bribery and anti-corruption, environmental sustainability, anti-illicit trade
and respect for human rights (covering equal opportunities and fair treatment,
health and safety, prevention of harassment and bullying, child labour and
modern slavery, conflict minerals and freedom of association).
Strategic Framework
for Corporate
Social Investment (CSI)2
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.
International
Marketing Principles
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.
Governments and Wider Society
Our People
Our People
Customers
Suppliers
Governments and Wider Society
Governments and Wider Society
Consumers
Customers
Suppliers
Our People
Group Data Privacy Policy
The manner in which BAT processes personal data about all individuals,
including consumers, employees, contractors and employees of suppliers.
These policies and principles 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.
Notes:
1. Further details of our Group policies and principles can be found at www.bat.com/principles
2. Further details of our Strategic Framework for Corporate Social Investment can be found at www.bat.com/csi
BAT Annual Report and Form 20-F 2020
49
Reducing the Health Impact
of Our Business
At BAT, we have a clear purpose to build A Better TomorrowTM
by reducing the health impact of our business.
H
A list of our key ESG targets
are on page 47
The Key Enablers for Harm Reduction
Consumer choice
Smokers are most likely to switch
to New Category products when
they find one that satisfies their
own preferences.
World-class science
Consumers and regulators want robust
scientific evidence that supports the
quality, safety and reduced-risk potential
of New Category products.
Standards and regulation
Wide availability of New
Category products depends on
having the right regulatory and
market conditions, as well as
high standards and responsible
industry practices.
We are focused on reducing the health
impact of our business through a multi-
category approach. We can do this by
offering consumers the widest range of
enjoyable, less risky products.*†
We are uniquely positioned to deliver
this, with our deep consumer insights,
world-class science and innovation to
put consumers right at the centre of
our transformation.
While we are absolutely committed
to delivering A Better TomorrowTM, we
know we can’t do this alone. Our success
depends on building an acceptance of harm
reduction, with consumers, regulators and
society understanding the reduced-risk
potential of these products.
We strongly believe there are three key
enablers to make this a reality: enabling
consumer choice to meet diverse needs of
consumers, substantiating the reduced-risk
profile of New Category products through
world-class science, and a collaborative
approach to responsible regulation.*†
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. These include vapour products,
tobacco heating products (THPs) and
modern oral products.
Find out more about our New Category products
on pages 34 to 39.
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free
and are addictive.
† Our products as sold in the US, including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no
reduced-risk claims will be made as to these products without agency clearance
World-class Science
The reduced-risk potential of New Category
products needs to be supported by sound
science. We conduct cutting-edge research
to substantiate the reduced risk potential of
our New Category products.
We are gaining significant momentum
with our consumers, as satisfying
consumer needs effectively is a key
indicator of how rapidly we can achieve
A Better TomorrowTM.
Read more about tobacco harm reduction
on pages 30 to 31
Over the last decade, we have built a team
of the best scientific talent. Today, we
have over 1,500 dedicated scientists and
engineers, generating world-class science
and demonstrating the reduced-risk profile
of our New Category products compared
to smoking.*†
We openly share our science on bat-
science.com. To date, we have published
over 90 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.
We know scientifically substantiated risk
profiles for New Category products are
absolutely essential in making tobacco
harm reduction a reality. And, we are proud
to be leading the way with our world-
class science. Our latest clinical trials are
the first-ever of its kind to demonstrate
reduced risk of Tobacco Heating Products.
Driving Innovation
In February 2020, we created Open
Innovation, a new team inside our New
Categories R&D function. The team works
in partnership with BTomorrow Ventures –
the Group’s corporate venture capital unit.
Together, we are building an ecosystem
of partners to help us access world-class
technology and increase collaboration with
start-ups and leading IP inventors.
Our aim is to gain early access to innovative
technologies or products, and enable
greater collaboration or sharing of strategic
IP. To realise that goal, we scout for partners
(including startups) that have technologies
and materials which hold promise for our
product pipeline.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information Other ESG focus areas
In addition to our commitment to
reducing the health impacts of our
business, we also continue to focus on
a wide range of other important ESG
issues, as outlined on pages 51 to 57.
50
Strategic Management
Reducing the Health Impact of Our Business
Continued
Through our Open Innovation teams and
BTomorrow Ventures, we consider how
we can fill technology gaps, integrate
new technologies, and take advantage of
investment opportunities.
Standards and Regulation
We believe a stakeholder-inclusive,
whole-of-society dialogue which includes
regulators, policy makers, consumers and
the industry is key to developing effective
policies that can accelerate tobacco harm
reduction as fast as possible.
Everywhere we operate, we want to see
the standards we hold ourselves to become
the industry benchmark and the basis for
future regulation. That’s why we share our
approach, information and expertise with
industry groups, governmental technical
advisory committees, standards bodies and
other key stakeholders.
To achieve this goal, we engage with task
forces, such as those of the Cooperation
Centre for Scientific Research Relative
to Tobacco (CORESTA), and make
presentations on the global implications of
product standards at conferences, such as
those of the Food and Drug Law Institute
(FDLI), and the Global Tobacco and Nicotine
Forum (GTNF).
We contribute to the development of
international standards by working bodies
such as the British Standards Institute, ISO
and the European Standards Body, CEN,
who we have collaborated with on new
vaping standards.
We support appropriate regulation of New
Category products. In fact, we believe good
regulation is critical for creating a fertile
ground for responsible growth.
We are engaged with stakeholders around
the world to advocate for proportionate
regulation, as outlined under “How we
think New Category products should
be regulated”.
How we think New Category products
should be regulated
1. An evidence-based approach
allowing robust science to lead to greater consumer choice,
quality and confidence.
2. Proportionate regulation
where science-based evidence and risk are understood and
differentiated to guide regulatory policy.
3. Freedom to innovate
to ensure products can evolve to meet changing
consumer preferences.
4. Engagement, dialogue and communication
to ensure regulators and consumers can make
well-informed decisions.
5. Responsible marketing freedoms
that facilitate the acceleration of movement of consumers
from combustible to non-combustible products.
BAT Annual Report and Form 20-F 2020 51
Excellence in Environmental
Management
We have a global footprint and rely on natural resources to run our business.
Securing resources in a climate-resilient supply chain is key to delivering our business
strategy. We are driving environmental excellence for a greener tomorrow.
E
A list of our key ESG targets
are on page 47
CO2e emissions
(in ’000 tonnes)
541
37.4% lower than 2017 baseline
Carbon neutrality
Addressing climate risks and
opportunities across our value chain is
key to the sustainability of our business.
We aim to be carbon neutral by 2030 for
our own business activities.
Eliminating waste
We are addressing the growing global
concern about plastic and other waste.
That includes waste caused by our business
as well as consumer waste. We aim for
100% of plastic packaging to be reusable,
recyclable or compostable by 2025.
2020
2019
2018
541
-30.9%
-7.0%
-2.7%
782
841
Definition: Group Scope 1 and Scope 2 carbon dioxide equivalent
(CO2e) emissions.
Target: Reduce our Scope 1 and 2 CO2e emissions by 30% by
2025 compared to 2017 baseline, and carbon neutrality by 2030.
Water use
(total water withdrawn in mn metres)
4.03
22.5% lower than 2017 baseline
2020
2019
2018
4.03
4.51
-10.8%
-5.3%
4.77
-8.2%
Definition: Group water use in million cubic metres.
Target: Reduce water use to 3.38 mn metres by 2025, 35% lower
than our 2017 baseline.
Recycling
(percentage of waste recycled)
90.7%
2020
2019
2018
90.7
90.5
90.2
Definition: Total percentage of Group waste reused, recycled or
incinerated for energy recovery, against total waste generated.
Target: Recycle 95% or more by 2025 in each year.
Water stewardship
Access to safe water and sanitation is
a fundamental human right. As water
scarcity risks increase with the changing
climate, it is essential to drive water
efficiencies across the value chain.
We aim to reduce the total amount of
water we withdraw for our own business
activities by 35% by 2025.
Protecting biodiversity
Our business now and in the future depends
on biodiversity and natural resources.
In addition, sustainable agricultural practices
help farming communities thrive and
defend against deforestation and other
environmental degradation. We aim to
eliminate all use of unsustainable wood
fuel by our contracted farmers.
Emissions1
Scope 1 CO2e emissions ('000 tonnes)
Scope 2 CO2e emissions ('000 tonnes)
Scope 33 CO2e emissions ('000 tonnes)
Total statutory emissions (Scope 1 and 2 in '000 tonnes)
Intensity (tonnes per £ million of revenue)
20202
342
199
N/A
541
20
2019
396
386
6,781
782
30.4
2018
415
426
6,956
841
32.6
Notes:
All data is calculated on the basis of the Greenhouse Gas (GHG) Protocol Corporate Standard.
1. Scope 1 reporting includes: emissions from energy consumed at our factories and offices (coal, natural gas, woodfuel, diesel and
LPG), emissions from our dry ice expanded tobacco plants, and fuel consumed by our fleet vehicles. 2019 UK BEIS fuel to energy
conversion factors were used in calculations. Scope 2 reporting includes: emissions from 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.
2. 2,200 tonnes of our Group Scope 1 emissions, and 398 tonnes of our Group Scope 2 emissions are from UK-based activities.
Following the closure of our UK factory in late 2019, our UK-based activities in 2020 were limited to non-manufacturing activities,
and included running our offices and trade marketing activities that utilise fleet vehicles.
3. Consolidation and verification of our 2020 Scope 3 data is ongoing to fully align with the GHG Protocol. 2020 data will be reported
in the 2021 Annual Report and Form 20-F. 2017 and 2018 data are restated from previously published figures (8,254 and 7,547,
respectively), as we improved our data collection systems. This includes a greater accuracy for emissions from our purchased goods
and services, and replacing previously used estimates with actuals in a key market. 2017 data is restated as: 6,952.
Energy consumption (million kWh)
From activities for which the Company is responsible
Resulting from the purchase of electricity by the
Company for its own use
2020
1,5724
2019
1,820
2018
1,985
9965
1,054
1,089
Notes:
4. Data reported includes energy from the combustion of fuel and the operation of any facility. Of the total figure reported for the Group, 10 million kWh is from the UK-based activities.
5. Group data reported includes electricity purchased and consumed at our factories and offices, purchased steam and hot water. Our UK-based facilities only purchase electricity and do
not purchase heat, steam or cooling. Of the total figure reported for the Group, 17 million kWh is from the UK-based activities.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 52
Strategic Management
Excellence in Environmental
Management Continued
Addressing the Impacts
of Climate Change
A strengthened climate strategy
Addressing climate risks and opportunities
across our value chain is key to the
sustainability of our business. At the
beginning of this year, we set a bold target:
to achieve carbon neutrality by 2030 for our
Scope 1 and 2 emissions. And we know we
need a step change to deliver this.
We are utilising multiple opportunities,
from on-site renewable energy generation,
to purchasing renewable electricity. We’ve
also started adopting a shadow internal
carbon price to incentivise low-carbon
decision-making in our business.
We have commissioned a detailed climate
scenario analysis to review potential impacts
of global warming in 10 of our major tobacco-
growing markets. These include projected
scenarios in relation to physical changes in
temperature, rain, water-balance and climatic
risks and the potential impacts these will have
on tobacco growing conditions.
In addition, we recognise the importance
of providing consistent and reliable
climate-related information to investors
and other stakeholders. This year, for
the first time, we have included a ‘TCFD
alignment at a glance’ feature in our report,
and have expanded both our management
approach and disclosures. We will fully
align our reporting for 2021 with the
TCFD framework.
Governance of our climate strategy
Our carbon neutrality and other
environmental targets have been endorsed
by our Board. The role of our Board and the
Audit Committee in reviewing climate-related
risks and performance is further outlined on
pages 100 to 116. The Operations Director is
responsible for overseeing delivery against
environmental targets.
Climate-related risks
In early 2020, we updated our Group risk
register to incorporate transitional risks
of climate change as a risk to the Group
to be mitigated, as outlined on page 112
in more detail.
Metrics and targets
We have achieved a 30.9% year-on-year
reduction in our total Scope 1 and 2 carbon
emissions in 2020. In total, these equalled
540,864 tonnes, 37.4% lower than 2017,
our baseline year. Drivers include a 10.6%
reduction in direct energy consumption and
an increase in renewable energy use which
now stands at 26.8% – a 16 pp increase over
2019. We anticipate the return to on-site
working in 2021 may lead to a slight increase
in carbon emissions and energy use next year.
Still, we remain on track for delivering against
our Scope 1 and 2 carbon neutrality target.
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.
Our Scope 3 emissions decreased by
2.4% in 2019 from the 2017 baseline, driven
by a reduction in purchase volume and
decreases in fuel use for tobacco curing.
Find out more on how we are addressing climate
change on pages 41-48 of our 2020 ESG Report.
Governance of our climate risks
Board of Directors
Audit
Committee
Management Board
Operations Sustainability Forum, led by Director, Operations
Group Head
of EHS
Group Head
of Leaf
Group Head
of Supply
Chain
Group
Head of
Manufacturing
Group
Circular
Economy Lead
Head
of ESG
TCFD alignment at a glance
TCFD
Group progress
Governance
Disclose the organisation’s
governance around
climate-related risks
and opportunities.
Strategy
Disclose the actual and
potential impacts of
climate-related risks
and opportunities on the
organisation’s businesses,
strategy, and financial
planning where such
information is material.
Risk management
Disclose how the
organisation identifies,
assesses, and manages
climate-related risks.
– The Board approves environmental targets, including in relation to climate
change, and, with the Audit Committee, reviews climate change risks and
impact on the Group. The Board reviews progress against environmental
targets twice a year.
– The Management Board oversees implementation of climate change and
environmental targets. The Operations Sustainability Forum, led by the
Operations Director, reviews performance on a quarterly basis.
– The Group Risk Committee reviews the impact of acquisitions on climate
change risks.
– Strengthened our climate strategy, focused on the environment, our supply
chain and our people and culture.
– Climate scenario risk assessments conducted to two different climate
scenarios, including a 2-degree or lower scenario.
– Significant climate risks to tobacco-growing conditions identified as a result
of climate change, with a comprehensive action plan to address risks being
developed. Already, BAT has rolled out innovative curing technologies that
reduce carbon emissions to contracted farmers in five countries.
– Modelled material risks to the Group up to 2050 for 10 tobacco-growing
markets, with transition risks being reviewed in 2021.
– Local short- to medium-term risk prevention and mitigation assessments
performed at least twice a year.
– Group Risk Register now includes both physical and transition risks of climate
change as a risk to the Group, reviewed regularly by senior managers.
– Expanded internal environmental reporting tool to capture climate change
physical and transition risks and opportunities.
Metrics and targets
Disclose the metrics and
targets used to assess
and manage relevant
climate-related risks and
opportunities where such
information is material.
– GHG emissions and energy use primary climate change metrics for BAT.
– Other climate-related metrics for water use and waste management.
– Targets to reduce Scopes 1, 2 and 3 emissions, including encouraging supply
chain to set own targets.
– Introduced a shadow internal carbon price to facilitate certain
operational decisions.
BAT Annual Report and Form 20-F 2020
53
Water
We have a long-established approach to
driving water stewardship, across our own
operations and tobacco supply chain.
While our industry is not particularly water
intensive, with the changing climate, water
scarcity is a growing concern around the
world. We need to make informed, risk-
based decisions to effectively manage this
essential natural resource.
We are further strengthening how we
review water risk, across our value chain,
in line with best practice standards.
Driving water stewardship in our
own operations
Through our long-standing environmental
management systems, we have been
steadily decreasing water use and
increasing water recycling for several years.
In 2020, we started further assessing water
risks using the global benchmark Alliance
for Water Stewardship (AWS) standard.
We’ve been steadily decreasing our
water use and increasing water recycling
for several years. In 2020, we achieved
a 10.8% year-on-year reduction in total
water withdrawn, and recycled 15.3%
of our water.
Driving water stewardship in our
supply chain
Due to the variety of locations in which
we source tobacco leaf, only 30% requires
irrigation. However, we encourage drip
irrigation by our contracted farmers to
preserve water sources.
We adopt a comprehensive approach,
assessing water risks, climate impacts and
subsequent water deficits from rainfall.
Our Water Risk Assessment is based on
WRI’s Aqueduct Water Risk Atlas and
is fully incorporated in our Sustainable
Tobacco Programme (STP).
Through our global leaf agronomy centre,
we have developed ‘floating’ systems
for growing tobacco seedlings, based
on hydroponics, that use about 85% less
water per hectare and have the potential to
increase the yield by up to 36% compared
to traditional systems. These have been
successfully introduced to our contracted
farmers in eight countries, and we have
plans to expand to more.
Biodiversity and Deforestation
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.
Preserving natural capital
in tobacco growing
Conserving water, reducing deforestation,
avoiding soil erosion and preserving soil
fertility are all crucial for sustainable
agriculture. We manage these interlinked
issues by developing sustainable soil
management practices and introducing our
contracted farmers to these technologies
in all our leaf operations, appropriate to the
growing conditions.
Sustainable fuels for tobacco curing
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 over 99% was from
sustainable sources.
Afforestation initiatives in farming
communities
We 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 196 million tree saplings
combined. Both are recognised to be
among the largest private sector-driven
programmes in these countries.
Waste
By using resources efficiently and in an
innovative way, and by making decisions
with consideration for the environment, we
can address both our immediate impacts
and the likely pressures on the business in
the future.
We adopt circular economy principles,
which will deliver better products for
our consumers, create efficiencies in
our operations, offer our employees
opportunities to innovate and reduce our
overall environmental impact on the planet.
Innovative product designs
We have reviewed our New Category
products and identified a number of
opportunities to take immediate action.
This includes the removal of silicon end
caps, removal of plastic insert trays,
reduction in cardboard packaging and the
removal of polypropylene overwrap, all of
which we are currently exploring.
A zero-waste mindset across
our operations
We are digitally transforming
manufacturing in order to reduce
tobacco and other waste, lessen
energy usage, limit stoppages to
production and save personnel time.
Digitally monitoring our farms
We are leveraging the power of
technology to enhance and accelerate
our connectivity with our contracted
farmers and farming communities.
Our Farmer Sustainability Management
(FSM) app is a digital platform
that supports the work of our field
technicians as they collect data about
contracted farmers’ agricultural
practices. The app also enables us
to gather information against farm-
level criteria for STP assessments, as
well as monitor progress against our
Thrive programme.
Find out how FSM enables us to work
with farmers in developing local action
plans, including on water stewardship,
in our ESG report, page 118.
Find out how our Thrive programme
enables us to identify and address the
long-term risks that could impact on the
sustainability of agriculture and farmer
livelihoods, in our ESG report, page 117.
This transformation delivers a multitude
of benefits from a 5-10% reduction in
waste, smaller carbon footprint, lower
utility costs and a significant reduction in
costly stoppages, while saving 1,000s of
working hours.
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, 27% of our manufacturing
sites have already achieved zero waste to
landfill and another 27% are recycling at
least 95% of their waste.
Responsible disposal of our New
Category products
We plan to implement take-back schemes
for all our New Category devices by the end
of 2021. Already, we are piloting electronic
device or e-liquid pod return schemes in
France, Japan, Mexico and the UK.
Reducing the environmental impacts
of cigarettes
As we research, develop and manufacture
our products, we continue to look at
opportunities to reduce the environmental
impact of cigarette filters.
Research shows that consumer education
and awareness-raising initiatives are
likely to be some of the most effective
measures. At BAT, we support a number of
such initiatives and education campaigns
that have been effective in reducing
butt littering.
A detailed list of initiatives we support can be found
in our ESG report, pages 57-60
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 54
Strategic Management
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.
S
A list of our key ESG targets
are on page 47
Human Rights
We are committed to respect the human
rights of our employees, the people we
work with and the communities in which
we operate. Our ambitions for 2025 are
for zero child labour and zero forced
labour in our tobacco supply chain.
Farmer Livelihoods
Rural poverty is recognised as a primary
root cause for issues such as child and
forced labour, as well as poor safety and
environmental standards. Enhancing farmer
livelihoods helps tackle such issues and
strengthen our supply chain.
Health and Safety
We are committed to providing a safe
working environment for everyone.
We are committed to employee
wellbeing. Our goal is zero accidents
across the Group.
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 supply chain and this
has been a priority area for us for many years.
The industry-wide Sustainable Tobacco
Programme (STP) focuses on tobacco supplier
due diligence, aligned to international standards.
Our own Thrive programme is focused at the
farm-level and seeks to identify and address the
root causes and long-term challenges around
human rights, including rural poverty.
We complement our farm monitoring and STP
and Thrive assessments by conducting human
rights impact assessments (HRIAs) in selected
countries. HRIAs follow a defined process for
identifying, assessing and responding to actual
and potential human rights impacts, including
the root causes and how they manifest.
People and Culture
An inclusive workplace culture helps
us attract and retain the best people.
This also enables us to continue
transforming our business. Our targets
include increasing the proportion of
women on leadership teams to 40% and
in management roles to 45%.
We conducted HRIAs in India and Indonesia in
2019 and in Mozambique in 2020. Two more
assessments are planned for 2021.
We know that eliminating child labour is a
major challenge for everyone involved in
global agricultural supply chains.
In 2020, child labour incidents were identified
on 0.5% of farms. A total of 1,308 incidents
were identified, the majority of which related
to preparing bales, watering and weeding,
and harvesting and stitching tobacco.
Of these, 98.5% were reported as resolved,
where a remediation plan is implemented
with the farmer that considers the individual
circumstances. Wherever possible, this plan
involves local community or school support.
In a small number of cases, where there is
persistent non-compliance, the farmer’s
contract is not renewed for the next growing
season – this is the case for six outstanding
unresolved incidents. The remaining 13 cases
occurred at the very end of the growing
season, for which a remediation plan was
implemented that will be verified at the start
of the next season. *
* Data refers to hazardous child labour by anyone under the
age of 18 which could be harmful to their health, welfare
or development (for example, handling mechanical
equipment or agrochemicals). Scope of data reported is
outlined on page 47 under footnote 2.
While no incidents of modern slavery were
identified, one third-party supplier reported
identifying five incidents of forced labour-
related non-compliance. In one case a farm
labourer reported being forced to undertake
tasks they hadn’t agreed to, one case related to
unfair deductions from a labourer’s wages and
a further three cases related to withholding of
agreed benefits. All incidents were immediately
investigated and resolved by our supplier as
part of their formal due diligence procedures.
Our training and communications
programmes help to raise farmers’
awareness and increase understanding of
human rights, tailored to the local context.
In 2020, more than 38,000 human rights
training sessions were held, with over
390,000 attendances.
All our other products materials are subject
to annual human rights risk assessments,
and independent audits by Intertek, our
audit partner. In addition, we audit high-
risk indirect service suppliers. In 2020, a
total of 93 supplier audits in 17 countries
were conducted.
Despite delays due to COVID-19 restrictions, we
are pleased that, by year-end, 67% of corrective
actions for issues identified in the audits were
fully completed and verified by Intertek – in
desktop reviews for the moderate issues and
13 on-site follow-up audits for the major issues.
All outstanding actions are in progress and will
be verified by Intertek in the first quarter of 2021.
Our Group-wide policies, procedures and
controls help to substantially mitigate human
rights risks in our own businesses. 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.
We have a defined process to identify
and carefully monitor BAT operations in
countries with a higher risk for human rights
issues. Our businesses in each high-risk
country identified complete a human rights
assessment, and the process is monitored by
our Audit Committee. In 2020, our operations
in 24 countries were identified as high risk.
Further detail on our
approach, our Human
Rights Focus Report and
our Modern Slavery Act
statement are available at
bat.com/humanrights
BAT Annual Report and Form 20-F 2020 55
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 supply chain.
We support our 84,000+ directly-
contracted farmers through our Extension
Services of expert field technicians.
We develop new tobacco seed varieties
that offer greater yields and higher quality,
helping boost farmers’ profits, as well as
introducing them to more efficient farming
technologies that save farmers time
and money.
Read more about our Group risk factors related
to tobacco leaf supply on page 293
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 2020, our leaf operations and
strategic third-party suppliers reported that
93% of their contracted farmers grew other
crops, including fruit, vegetables, wheat,
maize, cotton and soy.
Health and Safety
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.
We are also always working to protect
the health, safety and wellbeing of people
– through the COVID-19 pandemic and
beyond – as well as striving for zero
accidents Group-wide.
We 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.
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.
Overall responsibility for Group health and
safety is held by the Operations Director.
The Talent, Culture and Inclusion Director
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 to 0.21 in 2020 (2019: 0.27).
– 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 to 131 in 2020 (2019: 186).
– Serious injuries and fatalities:
The total number of serious injuries
and fatalities to employees and
contractors under direct supervision
decreased to 36 in 2020 (2019: 37).
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.
We are pleased to report that our actions
are producing improvements. In 2020, total
accidents decreased, to 142, from 194 in 2019.
The number of serious injuries resulting from
attack and assault incidents in TM&D have
declined in 2020 showing the positive impact
of our security initiatives during the last two
years. Road traffic accidents fell by 50%
compared to 2019. We regret to report three
contractor fatalities, up from one in 2019.
In 2020, health and safety at work has
taken on even greater significance.
We have implemented ‘COVID-19-secure’
workplace measures for employees who
are unable to work remotely, and those
in countries where restrictions are not in
place. These measures include regular
cleaning and sanitising of the workplace,
temperature screening, the use of face
masks, one-way systems and signage to
ensure social distancing.
You can read about our Group risk factors related to
workplace health and safety on page 297
Our People and Culture
We focus on providing a fair and inclusive
workplace where all our people can flourish.
Our diversity and inclusion strategy is
embedded across the Group and we have
a range of well-established engagement
channels to listen to, and learn from, the
views of our people worldwide. You can
read more about our ethos, culture and
people on pages 58 to 63.
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 ESG 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 2020,
the Group contributed over £16.6 million in
cash and £5.1 million in-kind for charitable
contributions and CSI projects. This includes
£1.14 million given for charitable purposes by
UK Group companies. Of this, £5.27 million in
cash and £5.04 million in-kind was spent on
community projects aimed at COVID-19 relief.
Our CSI projects are mostly delivered through
partnerships with external stakeholders
including communities, NGOs, governments,
development agencies, academic institutions,
and industry associations.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 56
Strategic Management
Robust Governance
Robust 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.
G
A list of our key ESG targets
are on page 47
Business Ethics
Unethical behaviour can be extremely
damaging to our business. It can also
distort markets, and developing countries
are especially vulnerable to the resulting
economic, social, and political impacts.
We aim for 100% adherence to our
Standards of Business Conduct.
Responsible Marketing
Responsible marketing practices are
crucial for ensuring adult-only consumers
use our tobacco and nicotine products
and that they do not target youth.
We have strict marketing requirements,
and aim for 100% alignment with our
International Marketing Principles.
Regulation and Policy
Engagement
Truly effective regulation needs
cooperation between governments
and industry, and we can contribute
valuable experience and expertise to
policy development.
Business Ethics
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 62 and are available
in 14 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
provides a global compliance framework,
empowering our people to act in a
responsible way.
This programme is led by our Business
Conduct & Compliance Department,
reporting directly to the Director, Legal &
External Affairs and General Counsel.
It provides employees with ways to raise
concerns without fear of retaliation and
assurance that investigations will be fair
and objective.
The Programme 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 290 and 300
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 for example through our
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 consistent
methodology for due diligence of third
parties, complemented by mandatory
mitigation packages for third parties
assessed as medium and high risk.
In 2020, we began a major project to
develop a more integrated, automated IT
solution for the management of third party-
related risks. This project is progressing
well and will be implemented by Group
companies throughout 2021.
We also launched a new M&A Transactions
Compliance Procedure which formalises
and strengthens our approach to risk
mitigation in the context of corporate
acquisitions, disposals and the formation
of joint ventures and also a new Gifts
and Entertainment (G&E) Procedure
which enables the automation of the G&E
approval and record-keeping requirements
set out in our SoBC.
BAT Annual Report and Form 20-F 2020 In 2020, over 26,000 Group company
employees confirmed that they had
complied with our SoBC, disclosed any
conflicts of interest and completed our
annual SoBC e-learning through the
online SoBC portal. Other Group company
employees (approximately 27,000) who do
not have easy online access were given
various options to complete their SoBC
sign-off (including via our SoBC app),
to ensure that everyone could sign-off
safely in light of the COVID-19 pandemic
preventing the usual face-to-face
gatherings in many of our markets.
100% of Group company employees
completed the 2020 SoBC sign-off in one of
the available formats.
To further increase awareness and
accessibility, in 2020 we continued to
promote the adoption of our SoBC app
(first launched in 2019), which provides
easy access to our SoBC, Speak Up
channels, procedures and guidance. As at
31 December 2020, the SoBC app had been
downloaded over 16,500 times.
Information on compliance with our SoBC
is gathered at a regional and global level
and reported to the Regional Audit and CSR
Committees, Corporate Audit Committee
and to the Audit Committee.
Speak Up channels
We encourage anyone working for, or with,
any Group company to raise concerns,
including regarding accounting or auditing
matters, through a variety of channels,
including our independently managed
Speak Up online portal and telephone
hotlines which are available 24 hours a day.
The Speak Up 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. The policy is supplemented by
our SoBC Assurance Procedure and 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.
Our most recent, global ‘Your Voice’
employee survey (2019), 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. The next ‘Your Voice‘
survey will be undertaken in Q2 2021.
Not all contacts made via our SoBC Portal
involve SoBC allegations; some contacts
relate to questions regarding the SoBC
or other matters. There were 554 SoBC
contacts in 2020, representing an 11%
increase on the total number of SoBC
contacts in 2019 (497 contacts).
In the year ended 31 December 2020, 321 of
the 554 SoBC contacts were assessed as
SoBC allegations and reported to the Audit
Committee, representing an 11% decrease
on 2019 SoBC allegations (359).
Of the 321 SoBC allegations reported,
116 were established as breaches and
appropriate action taken (2019: 130).
In 158 cases, an investigation found no
wrongdoing (2019: 179). In 47 cases, the
investigation continued at year-end
(2019: 50), including investigation through
external legal advisers of allegations of
misconduct. The 116 established SoBC
breaches resulted in 54 people leaving BAT
(2019: 80). In 161 of the 321 SoBC allegations
(50%), the person raising the allegation
chose to remain anonymous.
Please refer to the Governance Report for
more information about Board and Audit
Committee oversight and monitoring of
compliance with our SoBC. Our SoBC,
and information on the total number of
incidents reported under it, are available at
bat.com/sobc.
Responsible Marketing
Our International Marketing Principles
(IMP) govern marketing across all our
product categories and require all our
marketing to be responsible, accurate
and not misleading, targeted at adult
consumers, transparent and compliant
with all applicable laws.
Our IMP are applied consistently
everywhere we operate, even when more
stringent than applicable local laws.
Through our long-standing IMP, responsible
marketing is well embedded in the culture
of our organisation and inherent to the way
we operate.
57
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
which took effect from 1 January 2020.
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 2020, 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, thus
formalising and strengthening our existing
compliance procedures in relation to
lobbying and engagement activities.
* Adherence with YAP Guidelines relate to those markets
conducting activities or those markets granted an
exemption from conducting these, in accordance with
the requirements of the Guidelines. Those markets with
exemptions account for less than 6% of our cigarette
brands sales volumes, and 2% of vapour products and
tobacco heating products device and consumables
sales volumes.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 5858
BAT Annual Report and Form 20-F 2020
for employees
By having a diverse range of excellent
people, engaged teams and being a
great place to work.
We enable growth by having a
winning and agile organisation.
Empowering our people to feel
they belong and be their best and
authentic selves will help enable
us to transform the business.
We inspire diverse teams of
committed and engaged people by:
– investing in our people;
– creating a diverse and
inclusive culture;
– developing high-performing
leaders; and
– offering a fulfilling,
rewarding and responsible
work environment.
BAT Annual Report and Form 20-F 2020 59
Ethos
Our purpose is to build A Better TomorrowTM by reducing the health impact of our
business through offering a greater choice of enjoyable and less-risky products
for our consumers.
A key driver to delivering this is our Ethos, which guides our culture and
behaviours across the entire Group. Developed with significant input from our
employees, it ensures an organisation that is future fit for sustainable growth.
These five key principles – bold, fast, empowered, diverse, responsible – underpin
how we deliver on both our purpose and our strategy.
We are
Bold
We are
Fast
We are
Empowered
We are
Responsible
We are
Diverse
– Dream big – with
innovative ideas
– Make tough decisions
quickly and proudly
stand accountable
for them
– Resilient and fearless
to compete
– Speed matters.
– Set the context for
Set clear direction and
move fast
our teams and trust
their expertise
– Keep it simple.
Focus on outcomes
– Learn quickly and
share learnings
– Challenge each other.
Once in agreement,
we commit collectively
– Collaborate and
hold each other
accountable to deliver
– Value different
perspectives
– Build on each others’
ideas, knowledge
and experiences
– Challenge ourselves
to be open-minded
recognising
unconscious bias
– 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
BAT has been exceptionally resilient in what
has been an unusually challenging year. This is
down to the grit and determination of our
colleagues and our culture of high performance
and engagement. We believe that our Ethos is
crucial to our success and a key part of this is our
diversity and inclusion agenda that has always
been very important to us at BAT. Having a
supportive, engaging and inclusive culture where
everyone is treated equally is fundamental to the
continued success of our business.
Hae In Kim
Director, Talent, Culture and Inclusion
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 60
Strategic Management
People and Culture
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 (D&I) strategy, which is built on the following three
pillars and underpinned by an inclusive culture.
Pillar 1
Driving ownership
and accountability
Pillar 2
Building diverse
talent pipelines
Pillar 3
Creating enablers
Ensuring ownership of, and
accountability for, our D&I
strategy across all business
areas and leadership teams
is key to driving progress and
achieving our 2025 ambitions.
Our Director for Talent, Culture and
Inclusion 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.
In 2020, we realigned our D&I
governance structure to ensure clear
accountability for our business leaders
and leadership teams for achieving
our 2025 ambitions. This included
developing a new D&I dashboard and
introducing quarterly reviews by our
Management Board to ensure close
monitoring of progress and plans.
Diversity also remains fully embedded
in our talent review processes and
meetings across all levels of the Group.
Our ‘Diversity Champions’ continue to
be key in driving D&I action plans and
initiatives throughout the organisation.
In 2020, we launched a new D&I
e-learning module to help further
empower our people and increase
their awareness.
We focus on building diverse
talent pipelines at all levels of the
organisation through recruiting,
developing and retaining the
best diverse talent.
Inclusivity is embedded throughout
our recruitment process and we
require all agencies we work with to
provide gender-balanced longlists
of candidates.
Today, we have 33% female
representation on our Board, 15% on
our Management Board and 27% on
our senior leadership teams across
the Group. We also have 139 different
nationalities, from a wide range of
ethnic backgrounds, in management
roles across the Group.
In 2020, we set new D&I ambitions to
achieve by 2025, including:
– Increasing the proportion of women
in senior leadership teams to 40%;
– Increasing the proportion of women
in management roles to 45%; and
– Achieving a 50% spread of
distinct nationalities within key
leadership teams.
Read about our Global Graduate Programme
at www.bat-careers.com/graduates
To realise our diversity
ambitions, we know we
must have enablers in place
that provide a supportive
environment for people to thrive
and realise their full potential.
We provide women and diverse
groups with an opportunity
to connect, engage and share
experiences. Currently, we have 19
affinity networks across all levels
of the Group, including our Women
in BAT UK and our B-United LGBT+
communities. During the COVID-19
pandemic, these networks had an even
more important role to play in keeping
our people connected and supporting
one another.
We work to continually raise
awareness of diversity issues through
campaigns and events that showcase
best practice and provide platforms
for role models to amplify their profiles
across the Group. For example, our
International Women’s Day (IWD)
campaigns have been recognised as
best practice by the IWD Association
for two consecutive years.
BAT Annual Report and Form 20-F 2020 61
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.
Our employer brand and employee value
proposition (EVP) has evolved to tell the
story of today’s BAT. We are focused on
attracting and retaining the capabilities
needed to deliver our global strategy driven
by our purpose of A Better TomorrowTM.
Through strong follower growth across
our social media channels in 2020, we
have extended our brand reach driving
engagement and applications from early
career to experienced hire. We remain
a global Top Employer for the fourth
consecutive year, with special recognition
in 34 countries.
Developing critical capabilities is among
the very highest of the Group’s priorities,
and we are focused on personalised digital
opportunities for upskilling employees.
This includes through our digital learning
platform, The Grid.
In 2020, we also expanded our use of
learning content from our long-standing
content partner, LinkedIn Learning, which
is open to all BAT employees. Our micro-
learning mobile tool, EdApp, is available
to all our Group company employees in
marketing and provides mobile access
to our New Category products learning
portfolio for more than 6,700 marketers and
trade marketing representatives to support
their daily sales visits.
We will continue to make digital learning
a focus and refine our content portfolio
to best address learning needs on an
ongoing basis.
We also launched ‘Leadermeter’ in
2020, a new leadership capability
assessment focused on identifying
employees’ strengths and development
areas. The insights help to identify
further candidates for our development
programmes, such as our Women In
Leadership training.
You can read about our Group risk factor related to
talent on page 292
Inclusive Culture
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,
disability, social class, religion, smoking
habits, sexual orientation or politics.
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,
sexual orientation, age, disability status,
culture or other differences.
In 2020, we participated in a number
of independent reviews, including the
pre-accreditation assessment for the
UK National Equality Standard (NES).
These provide a means to measure our
approach against external benchmarks and
deliver valuable insights into best practice
and areas for improvement. We are
committed to acting on these insights and
achieving full NES accreditation in 2021.
Our other key metrics in this
area include:
Employee retention:
In 2020, total voluntary turnover
of management-grade employees
was 820, representing 6.1% of the total
management population.
Diversity:
Representation of women on senior
leadership teams was 26% in 2018, 27%
in 2019, and 27% in 2020.
Senior managers:
Companies Act 2006
For the purposes of disclosure under
Section 414C(8) of the Companies
Act 2006, the Group had 167 male
and 46 female senior managers as
at 31 December 2020. Senior managers
are defined here as the members of
the Management Board (excluding the
Executive Directors) and the Directors
of the Group’s principal subsidiary
undertakings. The principal subsidiary
undertakings, as set out in the Financial
Statements, represented approximately
72% of the Group’s employees and
contributed over 79% of Group revenue
and 100% of profit from operations
in 2020.
Group diversity as at
31 December 2020
Main Board
Senior Leadership Teams
Total Group Employees
33.3%
66.7%
26.7%
73.3%
31.4%
68.6%
Nationalities represented
Main Board
Global headquarters
Management level globally
Total
8
82
139
12
640
55,329
Male
Female
8
4
Male
Female
469
171
Male
37,945
Female
17,384
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 62
Strategic Management
People and Culture
Continued
Global Top Employer
BAT has been accredited as a Global
Top Employer for the last three
consecutive years.
Financial Times Diversity Leader
BAT has been ranked in the top 10%
of companies for two consecutive
years for achieving a diverse and
inclusive workforce.
We are committed to providing training
and development for employees with
disabilities, and we achieved certification in
2020 as a Disability Confident Committed
employer under the UK government’s
accreditation scheme. We also became
official signatories to the UK Race at Work
Charter for supporting equality and race in
the workplace.
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.
We were proud to be recognised as a
Diversity Leader by the Financial Times in
its Diversity Leaders report for a second
consecutive year. The report recognises
the top 850 companies across 16 European
countries that have achieved a diverse and
inclusive workplace.
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 directly to undertake
permanent and temporary roles.
The Group’s response to the global
COVID-19 pandemic continues to evolve
and we expect the actions we take to
develop over time as the needs of our
people change. We are steadfastly
committed to supporting our workforce
throughout the pandemic and, where face-
to-face meetings have been restricted,
we have utilised virtual meeting forums
and remote working tools to facilitate
engagement and discussion.
These engagement channels are
implemented as appropriate for the
composition of local workforce populations,
at market, business unit, functional or
regional levels. In view of restrictions
in place around the world as a result
of the COVID-19 pandemic, workforce
engagement forums were primarily
conducted through virtual formats for the
majority of the year.
Our Speak Up channels are also available to
our workforce worldwide and are discussed
further on page 57.
Our global ‘Your Voice‘ employee
survey is conducted across the Group
every two years, most recently in 2019.
The results from 2019 demonstrated that we
continued 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 were also significantly
ahead of our FMCG comparator
group in the categories of corporate
responsibility, diversity & inclusion and
talent development.
Our policies and principles*
Employment Principles
Health and Safety Policy
Summary of areas covered
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)
Respect in the work place, including promoting equality and
diversity, preventing harassment and bullying, and safeguarding
employee wellbeing.
Group Data Privacy Policy The manner in which BAT processes personal data about all individuals,
including consumers, employees, contractors and employees
of suppliers.
Stakeholder groups
Our People
Customers
Our People
Suppliers
Our People
Our People
Consumers
Suppliers
Customers
These policies and principles 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
BAT Annual Report and Form 20-F 2020
63
The next ‘Your Voice‘ survey will take
place in Q2 2021 and new results will
serve as the basis for further shaping
the priorities of the organisation.
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, augmented by 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 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 face-
to-face and virtual market and site visits,
discussed further at page 98.
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 108 to 109.
Gender Pay
Since 2018, we have published data relating
to UK gender pay in accordance with
statutory requirements.
We recognise that we have a gender
pay gap, which refers to the percentage
difference between the average pay for
men and women and is not to be confused
with equal pay for equal work.
This situation is not uncommon for a
company of our age and size, where there
are traditionally more men than women in
senior roles. We are strongly committed
to addressing this imbalance, details of
which can be found in our annual Gender
Pay Report.
In line with good equal pay practice, we
have transparent and clearly defined
pay scales for all roles across the Group
worldwide. This approach ensures pay,
bonuses and benefits are consistently
applied and not influenced by factors such
as gender or ethnicity.
You can learn more about our published data relating
to UK gender pay in line with statutory requirements
at www.bat.com/genderpayreport
Rewarding People
Reward is a key pillar in ensuring that we
have the right people to drive the business
forward. Reward is necessarily local and
we strongly support this through global
frameworks to ensure leading edge policies,
processes and technology are available to
all markets.
Base pay rewards core competence relative
to skills, experience and contribution to the
Group, while annual bonuses, long-term
incentives, recognition schemes and ad
hoc incentives provide the right mix to
ensure that sustained high performance
is recognised and rewarded. We also offer
our UK employees the chance to share in
our success via our Sharesave Scheme,
Partnership Share Scheme and Share
Reward Scheme, and operate several
similar schemes for senior management in
our Group companies.
Our approach to rewarding Group
company employees is set out further on
pages 122 to 123. Further information on
the Company’s Remuneration Policy for
Directors can be found on pages 120 to 122.
Our inclusive recruitment process
Step 1
Online application
– We use a global online
recruitments platform for
all applications.
– Candidates undergo an initial
online assessment managed
by an independent provider.
Step 2
CV screening and video
interview
– Unbiased CV screening with
factors such as ethnicity, age
and gender excluded.
– Video interview with
standardised questions
and time frame to give all
candidates an equal edge.
Step 3
Face-to-face assessment
and interview
– Every candidate is assessed
twice, by different BAT
managers, and the scores are
then calibrated.
– Interviews are conducted
according to clear guidelines
for fairness and inclusivity.
Step 4
Hiring and contracting
– Final decision to hire made by
at least two BAT managers
against clear criteria.
– Robust pre-employment
checks and easy-to-
understand contracts.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 6464
BAT Annual Report and Form 20-F 2020
By delivering sustainable
and superior returns.
@We are confident in our growth
outlook and have a proven record of
performance, whatever the external
environment. We aim to deliver:
– 3-5% revenue growth over the
medium term (post COVID-19);
– high-single digit adjusted EPS
growth at constant rates of
exchange (post COVID-19), over
the medium term;
– 65% dividend payout ratio; and
– deleveraging the balance sheet
to around 3x adjusted net debt/
adjusted EBITDA by the end
of 2021@.
BAT Annual Report and Form 20-F 2020for shareholders 65
Financial Performance
Summary
– Revenue growth, driven by New Categories and Combustibles despite the COVID-19
challenges, was offset by currency headwinds;
– Profit from operations was up 10.5% or 4.8% excluding adjusting items and at constant
rates of exchange despite increase in New Category investment of £426 million;
– Diluted earnings per share increased 12.0%. Adjusted diluted earnings per share was up 2.4%,
or 5.5% at constant rates;
– Strong cash generation drove continued deleveraging; and
– Dividend per share was up 2.5% at 215.6p.
Revenue
In 2020, revenue was
£25,776 million, marginally lower (down
0.4%) than 2019. An increase in revenue
from New Categories (up 14.9%) and a
good performance in Combustibles driven
by price mix of 7% in 2020 (compared to
9% in 2019) was more than offset by a
translational foreign exchange headwind of
3.5% due to the relative strength of sterling
(2019: tailwind of 0.6%). Excluding the
impact of currency, the growth in 2020
was due to strong pricing in combustibles,
higher revenue from New Categories (up
15.4% in 2020 and 37% in 2019) and an
increase in revenue from Traditional Oral (up
7.7% in 2020 and 15% in 2019). These more
than offset a 4.6% decline (2019: 4.7%
decline) in cigarette volume.
Revenue in prior periods was affected by
a short-term uplift due to the treatment of
excise on bought-in goods. Excluding this,
and the impact of foreign exchange
referred to above, on a constant currency
basis adjusted revenue was up 3.3% in 2020
(2019: increase of 5.6%).
This was despite an estimated headwind of
2.5% due to COVID-19 in 2020, particularly
affecting South Africa and a number of
other markets across the Group, including
the Group’s Global Travel Retail (GTR)
business.
•
IFRS-GAAP
KPI•
•
Non-GAAP
Revenue
(£m)
£25,776m
-0.4%
2020
2019
£25,776m
-0.4%
£25,877m
+5.7%
Definition: Revenue recognised, net of duty,
excise and other taxes.
In 2020, revenue includes £19,535 million of revenue from the
Strategic Portfolio, an increase of 4% (2019: £18,793 million).
Within the Strategic Portfolio, revenue from New Categories was
£1,443 million (2019: £1,255 million).
•
IFRS-GAAP
KPI•
•
Non-GAAP
Change in adjusted revenue
at constant rates (%)
+3.3%
2020
2019
+3.3%
+5.6%
Definition: Change in revenue before the impact of adjusting
items and the impact of fluctuations in foreign exchange rates.
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
free cash flow (before and after) dividends@.
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. These non-GAAP measures
are explained, defined and reconciled
from the most comparable GAAP metric
on pages 276 to 284 and note 2 in the Notes
on the Accounts.
Reconciliation of revenue to adjusted revenue at constant rates
Revenue
Adjusting items
Adjusted revenue
Impact of exchange
Adjusted revenue at constant rates
2020
Change %
(vs 2019)
£m
2019
Change %
(vs 2018)
£m
25,776
–
25,776
894
26,670
-0.4%
–
-0.2%
–
+3.3%
25,877
(50)
25,827
(144)
25,683
+5.7%
–
+6.2%
–
+5.6%
2018
£m
24,492
(180)
24,312
–
24,312
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 66
Financial Review
Financial Performance Summary
Continued
Profit From Operations
Profit from operations increased by 10.5%
to £9,962 million, compared to a decline
of 3.2% to £9,016 million in 2019. This was
largely driven by Project Quantum (the
Group’s restructuring and efficiency
programme) which delivered gross savings
of £660 million in 2020. Furthermore, while
2020 was impacted by charges in respect
of goodwill impairment (£209 million, largely
in respect of Malaysia; 2019: £172 million
largely related to Indonesia), litigation
charges (mainly in the US) of £487 million
(2019: £236 million) and Quantum costs
(£81 million; 2019: £264 million), 2019 was
also negatively impacted by charges in
respect of the Quebec Class Action in
Canada (£436 million) and the settlement of
an excise dispute in Russia (£202 million).
Raw materials and other consumables
costs decreased 0.3% to £4,583 million
in 2020, following a decline of 1.4% to
£4,599 million in 2019. These decreases
were mainly due to the end of the contract
manufacturing agreement which, due to
excise recognition on bought in products
under that arrangement, led to an increase
(in 2018) in revenue and in raw materials and
other consumables costs.
Employee benefit costs reduction of
14.8% to £2,744 million (2019: up 7.2%
to £3,221 million). The reduction in 2020
includes the operational efficiencies
achieved through Quantum, with the
increase in 2019 largely due to charges
(including redundancy) recognised
in respect of the execution of the
restructuring as part of Quantum.
Depreciation, amortisation and
impairment costs decreased by
£62 million to £1,450 million in 2020
compared to an increase of £474 million
to £1,512 million in 2019. This includes the
amortisation and impairment charges
of £339 million (2019: £481 million)
largely related to the trademarks and
similar intangibles capitalised following
recent acquisitions. The 2020 charge also
•
IFRS-GAAP
KPI•
•
Non-GAAP
•
IFRS-GAAP
KPI•
•
Non-GAAP
Profit from operations
(£m)
£9,962m
+10.5%
Change in adjusted profit from
operations at constant rates (%)
+4.8%
2020
2019
£9,962m
+10.5%
£9,016m
-3.2%
2020
2019
+4.8%
+6.6%
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.
Definition: Change in profit from operations before the impact
of adjusting items and the impact of fluctuations in foreign
exchange rates.
includes Malaysia goodwill impairment of
£197 million due to the ongoing operational
challenges including the impact of illicit trade.
2019 included goodwill impairment charges in
relation to Bentoel in Indonesia (£172 million)
recognised following a change in excise rates
impacting forecast future performance.
Other operating expenses declined
by £184 million to £7,667 million (2019:
increase of £1,183 million to £7,851 million).
An increase in other litigation costs of
£251 million in 2020 compared to 2019
(as described later) was more than offset
by charges in the prior year in respect
of the Quebec Class Action in Canada
(£436 million) and the Russia excise
dispute (£202 million) which did not
repeat. During 2020, increased marketing
investment behind New Categories was
funded in part by Quantum, while the Group
also incurred an estimated £145 million in
additional supply chain costs to maintain
supply as a number of markets experienced
temporary disruption due to COVID-19.
Expenditure on research and
development was £307 million in 2020
(2019: £376 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
£1,403 million in 2020 (2019: £2,114 million).
This includes charges related to:
– impairment of goodwill of £209 million
in 2020 (2019: £194 million) mainly in
respect of Malaysia and Twisp (2020) and
Indonesia (2019);
– trademark amortisation and impairment
(2020: £339 million; 2019: £481 million);
– other litigation costs of £487 million
(2019: £236 million). In 2020, this was
largely in respect of developments in
cases regarding payment obligations
under the state settlement agreements
with Florida, Texas, Minnesota and
Mississippi for brands previously sold to a
third party. A total charge of £400 million
was recognised following a decision in
the Florida court (about which the Group
will continue to pursue indemnification
remedies in a Delaware court) and
following settlement discussions with
other manufacturers and the states
of Texas, Minnesota and Mississippi.
The charge also includes £87 million
(2019: £236 million) which is in respect
of other litigation costs including
Engle progeny;
– restructuring and integration costs of
£408 million (2019: £565 million) partly
related to Quantum which will simplify
the business and create a more efficient
and agile organisation to support the
growth of New Categories; and
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
Adjusted
at CC
£m
Reported
£m
Adjusting
items
£m
Adjusted
£m
2020
2019
4,975
1,472
1,553
1,962
9,962
(1,745)
455
8,672
809
381
65
148
1,403
153
(13)
1,543
5,784
1,853
1,618
2,110
11,365
(1,592)
442
10,215
32
56
178
30
296
(20)
26
302
5,816
1,909
1,796
2,140
11,661
(1,612)
468
10,517
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
BAT Annual Report and Form 20-F 2020 67
•
IFRS-GAAP
KPI•
•
Non-GAAP
•
IFRS-GAAP
KPI•
•
Non-GAAP
Operating margin
(%)
38.6%
Adjusted operating margin
(%)
44.1%
2020
2019
38.6%
34.8%
2020
2019
44.1%
43.1%
Definition: Profit from operations as a percentage
of revenue.
Definition: Adjusted profit from operations as a percentage
of adjusted revenue.
– a credit of £40 million recognised
in relation to the prior year charge
associated with the excise dispute
in Russia.
2019 also included charges in respect
of the Quebec Class Action in Canada
(£436 million) and the settlement of an
excise dispute in Russia (£202 million).
Excluding adjusting items, in 2020
adjusted profit from operations grew by
2.1% to £11,365 million (2019: up 7.6% to
£11,130 million) or 4.8% (2019: up 6.6%)
on a constant currency basis.
Operating Margin
Operating margin in 2020 increased by
380 bps to 38.6% largely due to the net
impact in the periods of a number of
charges (including those related to goodwill
impairment, Quebec, Russia and Quantum)
which depressed 2019’s operating margin
(down 320 bps to 34.8%) as described in
note 3 in the Notes on the Accounts.
In 2020, adjusted operating margin grew
100 bps (2019: up 50 bps). This was driven
by combustibles pricing and the positive
impact of the operating performance in
high margin territories, particularly the
United States which, coupled with cost
management initiatives across the Group
(including Quantum), fuelled the investment
into New Categories.
Net Finance Costs
In 2020, net finance costs were
£1,745 million, an increase of £143 million
on 2019 which, at £1,602 million, were
£221 million higher than 2018. The increase
in 2020 was in respect of a change in
mix of borrowings towards the US dollar
during the year (as the Group issued
bonds totalling US$8.7 billion, €1.7 billion
and £0.5 billion) and the net impact
of the charges incurred in relation to
the redemptions and tender offer to
repurchase certain bonds undertaken in
2020 to de-risk the Group’s future financing
programme. The 2019 increase was 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.
Before adjusting items related to the bond
redemption in 2020 (£142 million being
costs of £157 million offset by fair value
gains of £15 million), interest in respect of
the Franked Investment Income Group
Litigation Order (FIIGLO), as discussed on
page 174 (£21 million; 2019: £28 million), a net
credit of £10 million which largely related
interest in relation to the Russia excise
dispute (2019: charge £50 million), and the
translation impact of foreign exchange,
adjusted net finance costs were 5.9%
higher in 2020 and 5.8% higher in 2019.
The Group’s average cost of debt in 2020
was 3.6%, compared to 3.3% in 2019.
Associates and Joint Ventures
Associates 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, decreased
from £498 million to £455 million primarily
due to the impact of COVID-19, as ITC
experienced unprecedented business
disruption. This more than offset the full
year effect of the lower corporate tax
following the change in rates in India which
came into effect in 2019.
In 2019, this was an increase of 19% to
£498 million largely due to improved
operational performance of ITC in the year
and the benefit from lower corporate tax
following the change in rates in India.
Excluding the effect of adjusting items,
including:
– a £17 million gain in 2020,
(2019: £25 million) arising on the
deemed disposal of part of the Group’s
shareholding in ITC (due to issuances to
employee trusts), partially offset by;
– a £4 million (2019: £ nil) charge being the
Group’s share of charges recognised
by ITC in respect of the cost of leaf
tobacco stocks destroyed in a third-party
warehouse fire; and
– the impact of translational
foreign exchange.
The Group’s share of associates and joint
ventures on an adjusted, constant currency
basis fell 1.2% in 2020, to £468 million.
In 2019, this was an increase on 2018
of 20%.
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
Adjusted
at CC
£m
Reported
£m
Adjusting
items
£m
Adjusted
£m
2019
2018
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
4,511
1,948
1,738
2,150
10,347
(1,385)
387
9,349
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 68
Financial Review
Financial Performance Summary
Continued
Tax
In 2020, the tax charge in the Income
Statement was £2,108 million, compared
to £2,063 million in 2019 and £2,141 million
in 2018.
The effective tax rates in the Income
Statement are therefore a charge of 24.3%
in 2020, 26.1% in 2019 and 25.6% in 2018.
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, the underlying
tax rate for subsidiaries was 24.9% in
2020, 26.0% in 2019 and 26.4% in 2018.
The decrease in underlying tax rate in 2020
largely reflects the impact of Indian tax
reform and mix of profits in the year.
See the section Non-GAAP measures on
page 280 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.
Major taxes paid 2020
(£bn)
£41.1bn
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)
2020
£bn
2019
£bn
32.2
32.4
5.8
2.1
0.3
0.5
0.2
5.8
2.2
0.3
0.5
0.2
41.1
41.4
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.
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 2020
was a charge of £2.1 billion, £2.1 billion in
2019 and £2.1 billion in 2018. Corporation Tax
paid (due to the timing of Corporation
Tax instalment payments which straddle
different financial years) was £2.1 billion
in 2020, £2.2 billion in 2019 and £1.9 billion
in 2018.
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
2020 of £41.1 billion (2019: £41.4 billion,
2018: £39.9 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.
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.
Deferred tax asset/(liability)
Opening balance
Difference on exchange
Changes in tax rates
Other credits/(charges) to the income statement
Other credits/(charges) to other comprehensive income
Other movements
Closing balance
2020
£m
2019
£m
(16,626)
506
133
184
23
–
(15,780)
(17,432)
680
47
(55)
138
(4)
(16,626)
2018
£m
(16,796)
(1,011)
70
304
(7)
8
(17,432)
BAT Annual Report and Form 20-F 2020 69
•
IFRS-GAAP
KPI•
•
Non-GAAP
Diluted earnings per share (EPS)
(p)
278.9p
+12.0%
2020
2019
278.9p
+12.0%
249.0p
-5.4%
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.
•
IFRS-GAAP
KPI•
•
Non-GAAP
Change in adjusted diluted EPS
(%)
+2.4%
2020
2019
+2.4%
+9.1%
Definition: Change in diluted earnings per share before the
impact of adjusting items.
•
IFRS-GAAP
KPI•
•
Non-GAAP
Change in adjusted diluted EPS
at constant rates (%)
+5.5%
2020
2019
+5.5%
+8.4%
Definition: Change in diluted earnings per share before the
impact of adjusting items and the impact of fluctuations in
foreign exchange rates.
Earnings Per share
Profit for the year was £6,564 million, a
12.2% increase compared to £5,849 million
in 2019 (a decline of 5.8% on 2018).
The movement in 2020 was driven by the
improved revenue across Combustibles,
New Categories and Traditional Oral,
operational efficiencies realised through
Quantum and a lower effective tax rate.
Both 2020 and 2019 were impacted by a
number of charges as described earlier
with the improvement in profit for the year
in 2020 and relative underperformance
(versus 2018) in 2019 due to charges in
relation to Quebec and Russia.
Consequently, and after accounting for
the movement in non-controlling interests
in the year, basic earnings per share were
12.1% higher at 280.0p (2019: 249.7p,
2018: 264.0p). After accounting for the
dilutive effect of employee share schemes,
diluted earnings per share were 278.9p,
12.0% higher than 2019 (2019: 249.0p,
2018: 263.2p).
Earnings per share are impacted by
the adjusting items discussed earlier.
Adjusted diluted EPS, as calculated in note
7 in the Notes on the Accounts, was up
against the prior year by 2.4% at 331.7p,
with 2019 ahead of 2018 by 9.1% at 323.8p.
Adjusted diluted EPS at constant rates
would have been 5.5% ahead of 2019 at
341.4p, with 2019 up 8.4% against 2018.
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 215.6p per ordinary share of 25p, payable
in four equal quarterly instalments of 53.9p
per ordinary share in May 2021, August
2021, November 2021 and February 2022.
This represents an increase of 2.5% on
2019 (2019: 210.4p per share, up 3.6%) and
a payout ratio, on 2020 adjusted diluted
earnings per share, of 65.0% (2019: 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.
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.
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 2020 and 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 320 and 321.
The discussion of 2018 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 2018 metrics is contained in the Group’s Annual Report on Form
20-F 2019, which is available at bat.com/annualreport and has been filed with the SEC.
Information contained in pages 34 to 37, pages 43 to the first column on page 50 and
from the heading ‘Retirement benefit schemes’ on page 50 to page 51 of the Annual
Report on Form 20-F 2019 are accordingly incorporated by reference into this Annual
Report on Form 20-F 2020 only to the extent such information pertains to the Group’s
financial condition and results of operations for the fiscal year ended 31 December 2018.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 70
Financial Review
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 and
Transformation 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 2020, the
average centrally managed debt maturity
was 9.9 years (2019: 9.1 years) and the
highest proportion of centrally managed
debt maturing in a single rolling 12-month
period was 16.4% (2019: 18.6%).
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
2020, the relevant ratio of floating to fixed
rate borrowings was 7:93 (2019: 18:82).
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.
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.
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.
During 2020, in light of the uncertainty
and volatility in the external markets, the
Group has de-risked future financing
requirements by:
– accessing the debt capital markets,
raising a total of US$8.7 billion in the US
market, and €1.7 billion and £0.5 billion
in the European market (in aggregate
£8.9 billion);
– repurchasing and redeeming £3.1 billion
of debt maturing in 2021 and 2022,
reducing the ‘tower’ of debt due for
repayment in 2022;
– refinancing its £6 billion revolving
credit facility consisting 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). The facility no longer contains
a financial covenant. Subsequent to the
year-end, in February 2021, the Group
extended £2.85 billion of the 364-day
tranche from March 2021 to March
2022 and £2.85 billion of the five-year
tranche from March 2025 to March 2026
(with £3 billion of this tranche remaining
available until March 2025). As at
31 December 2020, the facility remains
undrawn; and
– signing bilateral bank facilities to
act as a back stop contingency, with
total facilities remaining available at
31 December 2020 of £3.4 billion and
which were undrawn at that date.
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
2020, there was no commercial paper
outstanding (2019: £1,056 million).
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 2020, net cash generated from operating
activities increased by £790 million to
£9,786 primarily due to the higher profit
from operations coupled with favourable
working capital movements (notably driven
by the favourable timing of MSA payments
in the US) and higher dividends from the
Group’s associate ITC. These were partially
offset by the payment (in 2020) of the
settlement agreed in 2019 in respect of the
excise dispute in Russia (£205 million), US
litigation (including £169 million in respect
of the Florida judgment described earlier)
and working capital movements driven by
COVID-19 of £131 million.
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 MSA payment (£1.4 billion) in respect of
2018 (but 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.
Net cash used in investing activities
In 2020, net cash used in investing activities
increased by £144 million to £783 million
(2019: £639 million), largely due to a net
outflow of £159 million from short-term
investment products, including treasury
bills (2019: £148 million net inflow) partly
offset by a reduction in purchases
of property, plant and equipment of
£153 million.
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 2020, the Group invested £648 million,
a decrease of 20% on the prior year
(2019: £807 million).
BAT Annual Report and Form 20-F 2020 The Group expects gross capital
expenditure in 2021 of £700 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 £7,897 million in 2020
(2019: £8,593 million outflow), with the
outflow in each year largely driven by the:
– dividend payments (2020: £4,745 million,
up 3.2%; 2019: £4,598 million, up 5.8%,
with the growth in both years driven by
the higher dividend per share);
– interest paid (2020: £1,737 million, up
8.5%; 2019: £1,601 million), with the
increase in 2020 driven by charges in
relation to the refinancing programme in
the year; and
– net movement in borrowings.
The Group repaid borrowings of £10.6 billion
in 2020, including £3.1 billion as part of the
Group’s liquidity management strategy to
de-risk future financing. This was largely
offset by new borrowing of £9.8 billion
which included £8.9 billion raised during the
refinancing programme.
In 2019, the Group repaid £5.6 billion
of borrowings. This 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. This more than
offset the inflow from new borrowings in
the year of £4.2 billion, including the four
bonds issued (totalling US$3.5 billion or
£2.7 billion) in September 2019, following
the shelf registration in the US in that year.
Please refer to note 22 in the Notes
on the Accounts for further details.
Free cash flow (before and after
dividends paid to shareholders)@
Free cash flow (before dividends paid to
shareholders), as defined on page 282, was
£7,295 million, an increase of 11.9% on the
prior year (2019: down 15% to £6,519 million;
2018: £7,684 million). The increase in 2020
was driven by the growth in net cash
generated from operations described
earlier and lower net capital expenditure
(2020: £605 million; 2019: £774 million).
These were partially offset by higher
interest payments largely due to the impact
of the refinancing programme undertaken
in the year.
Summary cash flow
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 financing activities
Differences on exchange
Increase/(decrease) in net cash and cash equivalents
2020
£m
11,567
351
(2,132)
9,786
(783)
(7,897)
(253)
853
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)
@Reconciliation of net cash generated from operating activities to free cash flow
before and after dividends paid to shareholders@
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 (before dividends paid to shareholders)
Dividends paid to shareholders
Free cash flow (after dividends paid to shareholders)
2020
£m
9,786
(136)
(1,759)
(605)
9
–
7,295
(4,745)
2,550
2019
£m
8,996
(157)
(1,550)
(774)
4
–
6,519
(4,598)
1,921
2018
£m
10,295
(142)
(1,533)
(845)
(93)
2
7,684
(4,347)
3,337
71
2019 was impacted by the timing of the
2018 MSA payment (brought forward to 2017)
which impacts the comparator period and
more than offsets the enhanced delivery
across the remainder of the Group in 2019.
After payment of dividends to shareholders,
free cash flow was £2,550 million
(2019: £1,921 million; 2018: £3,337 million).@
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 was largely in line with 2019 at 98%
(2019: 100%). 2019 was down on 2018
(2018: 111%) as 2018 was positively impacted
by the timing of the MSA payments in the
prior year.
@Operating cash flow conversion ratio
(based upon adjusted profit from
operations) was ahead of 2019 at 103%
(2019: 97%). 2019 was a decline 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 the timing difference,
operating cash flow would have been over
95% in each of the review years, at 103%
in 2020, 97% in 2019 and 100% in 2018,
reflecting the Group’s ability to deliver
cash from the operating performance
of the business. See page 281 for further
information on this measure.@
Restricted cash
Cash and cash equivalents include
restricted amounts of £878 million
(2019: £445 million) due to subsidiaries in
CCAA protection (as described in note 28
in the Notes on the Accounts), as well as
£455 million (2019: £182 million) principally
due to exchange control restrictions,
including amounts of £141 million (2019: £nil)
where the underlying restrictions are
expected to be short-term in nature.
@ Denotes phrase, paragraph or similar that does not form
part of BAT's Annual Report on Form 20-F as filed with
the SEC.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 72
Financial Review
Other
Borrowings and Net Debt
Total borrowings (which includes lease
liabilities) declined to £43,968 million in
2020 (2019: £45,366 million) largely due to
the net repayment of borrowings in the
year, driven by the cash flow generated by
the business after the payment of dividends
to shareholders in the period. The value of
borrowings at the balance sheet date are
also impacted by the relative movement
of sterling against other currencies,
particularly the US dollar and the euro.
In 2020, this was a tailwind of £219 million
compared to a tailwind of £1,566 million
in 2019. 2019 was also impacted by the
recognition of lease liabilities under IFRS
16 (£607 million), which are included in
‘borrowings’.
Total borrowings includes £790 million
(31 December 2019: £848 million) in respect
of the purchase price adjustments related
to the acquisition of Reynolds American Inc.
As discussed on page 70, 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 2020, was
£40,241 million (2019: £42,574 million;
2018: £44,351 million), with the movement
in net debt largely due to the lower
borrowings, increased cash and cash
equivalents and a foreign exchange
benefit of £69 million, primarily due to the
movement of the US dollar against sterling
(2019: £873 million tailwind).
@The movement in net debt also includes
the free cash flow before dividends
earned in the year (2020: £7,295 million;
2019: £6,519 million) as described on page
71. This is partly offset by dividends paid
to owners of the parent of £4,745 million
(2019: £4,598 million).@
Adjusted Net Debt
to Adjusted EBITDA@
The Group uses adjusted net debt to
adjusted EBITDA, as defined on page 283,
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 2020, the ratio of
adjusted net debt to adjusted EBITDA was
3.3 times, representing an improvement
from 3.5 times at the end of 2019, itself an
improvement from 4.0 times at the end
of 2018.
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 2020, due to the relative movement in the
US dollar against sterling, the sterling value
of adjusted net debt declined by £46 million.
Excluding the impact of foreign exchange
on the Group’s reported results, adjusted
net debt to adjusted EBITDA declined 0.3x
in 2020 (2019: decline 0.4x).
Refer to page 283 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 8.2%
(2019: 7.1%) with the movement due to the
higher profit from operations and lower
average net assets, largely driven by the
translational foreign exchange reducing
average capital employed (due to the
relative value of sterling to the Group’s
operating currencies, including the
US dollar).
On an adjusted basis, as defined on page
284, including dividends from associates
Reconciliation of total borrowings to adjusted net debt@
Total borrowings (including lease liabilities)
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 Reynolds American Inc.
debt
Adjusted net debt
(518)
172
(3,139)
(242)
40,241
(790)
39,451
2020
£m
2019
£m
2018
£m
43,968
45,366
47,509
(527)
384
(2,526)
(123)
(647)
269
(2,602)
(178)
42,574
44,351
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 9.0%
in 2019 to 9.6% in 2020. This was partly
due to the higher adjusted profit from
operations in the year and translational
foreign exchange described earlier.
In 2019, the growth in adjusted ROCE from
8.3% in 2018 to 9.0% was partly due to the
higher adjusted profit from operations in
the year and foreign exchange tailwinds
reducing average capital employed largely
due to the relative value of US dollar
to sterling.@
Retirement Benefit Schemes
The Group’s subsidiary undertakings
operate defined benefit and defined
contribution schemes including post-
retirement healthcare schemes.
Benefits provided through defined
contribution schemes are charged
as an expense as payments fall due.
The liabilities arising in respect of 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 present total value of funded scheme
liabilities as at 31 December 2020 was
£12,223 million (2019: £11,726 million), while
unfunded scheme liabilities amounted
to £1,147 million (2019: £1,135 million).
The schemes’ assets declined to
£11,860 million in 2019, partly due to the
pension buy-in in the UK (discussed on
page 189) and increased to £12,576 million
in 2020, due to improved asset returns
related to actuarial gains in the year.
After excluding unrecognised scheme
surpluses of £16 million (2019: £28 million),
the overall net liability for all pension and
healthcare schemes in Group subsidiaries
amounted to £810 million at the end of
2020, compared to £1,029 million at the
end of 2019. 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.
(848)
41,726
(944)
43,407
@ Denotes phrase, paragraph or similar that does not form
part of BAT's Annual Report on Form 20-F as filed with
the SEC.
BAT Annual Report and Form 20-F 2020 73
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 85 and pages 295
to 301.
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 287 for a
summary of the contractual obligations
as at 31 December 2020.
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.
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 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
There were no material changes to the
accounting standards applied in 2020 from
those applied in 2019.
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.
Foreign exchange rates
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. Actions undertaken during
2020 to derisk future funding requirements,
as previously described, provide further
assurance with regards to the Group’s
financial viability.
During 2020, COVID-19 has demonstrated
the Group’s ability to navigate the
uncertainties arising through operational,
economic and societal volatility.
Such challenges have been met through
the Group’s geographic diversity and ability
to flex operations. This, together with
the ability to generate cash from trading
activities, the performance of the Group’s
Strategic Portfolio and its leading market
positions in a number of countries, 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, 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.
Australian dollar
Brazilian real
Canadian dollar
Euro
Indian rupee
Japanese yen
Russian rouble
South African rand
US dollar
Average
2020
2019
2018
2020
2019
1.862
6.616
1.720
1.125
95.097
137.017
92.844
21.099
1.284
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
1.771
7.100
1.741
1.117
99.880
141.131
101.106
20.079
1.367
1.885
5.329
1.718
1.180
94.558
143.967
82.282
18.525
1.325
Closing
2018
1.809
4.936
1.739
1.114
88.916
139.733
88.353
18.321
1.274
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 74
Regional Review
US
United States
Winning in vapour with a robust
combustible market.
Guy Meldrum
President and CEO (Reynolds American Inc.)
Volume
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
Vapour (mn 10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
* Other includes MYO/RYO.
Revenue
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
2020
units
73
–
73
vs 2019
%
+0.5%
–
+0.5%
–
174 +69.7%
–
162 +45.0%
-1.3%
8
2019
units
vs 2018
%
2018
units
73
–
73
103
–
112
8
-6.0%
–
-6.0%
-6.2%
–
–
-1.5%
77
–
77
109
–
–
8
2020
£m
vs 2019
%
vs 2019
(adj
at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj
at cc)
%
9,926 +9.3% +9.9% 9,078 +8.6% +3.8%
383 +85.1% +86.1%
207 +12.4% +7.4%
1 +0.0% +0.5%
-7.7% -11.7%
10 +13.5% +14.1%
n/m
+17.1% +11.9%
394 +81.9% +82.9%
1,126 +7.0% +7.6% 1,052 +14.5% +9.5%
26 -21.2% -27.1%
11,473 +10.6% +11.2% 10,373 +9.2% +4.4%
27 +4.6% +5.1%
1
9
217
n/m
Profit from operations/Operating margin
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
Profit from operations
Operating margin (%)
+12.8% +15.5% 4,410
+10.1% +6.4%
4,975
43.4% +90 bps +190 bps 42.5% +30 bps +90 bps
Revenue by category
+45 bps 7
Cigarette value
share change
Owned
manufacturing
(inc R&D) sites
Combustibles
New Categories
Traditional Oral
Other
4,921
Number
of employees
Key Markets
Our products are available in all regions
of the US
Revenue and Profit
from Operations
In 2020, reported revenue increased
10.6% to £11,473 million, with 2019 up 9.2%
to £10,373 million. Excluding the impact of
translational foreign exchange, this was an
increase of 11.2% in 2020 (2019: up 4.4%).
This was driven by pricing in both cigarettes
and Traditional Oral in both years, the
continued growth in New Categories (in
both Vapour and Modern Oral) and an
increase in cigarette volume in 2020 (up
0.5%, compared to a decline of 6.0% in
2019) as discussed on page 75.
Reported profit from operations rose by
12.8% to £4,975 million in 2020 (2019: up
10.1% to £4,410 million). This was driven
by increased revenue in both years and
from the ongoing efficiency programmes
(Quantum) and initiatives including
marketing spend effectiveness. In 2020,
these more than offset higher marketing
investment and charges recognised in the
year in respect of developments in cases
regarding payment obligations under the
state settlement agreements with Florida,
Texas, Minnesota and Mississippi for brands
previously sold to a third party. A total of
£400 million was recognised following a
decision in the Florida court (about which the
Group will continue to pursue indemnification
remedies in a Delaware court) and following
settlement discussions with other
manufacturers and the states of Texas,
Minnesota and Mississippi. Adjusted profit
from operations increased by 15.5%
(2019: 6.4%) on a constant currency basis.
New Categories
In 2020, vapour revenue (being the Vuse
brand) was up 85.1% to £383 million (2019:
up 12.4% to £207 million). This was a growth
of 86.1% (2019: 7.4% increase), at constant
rates of exchange.
Following industry product concerns in
2019 and the implementation of flavour
regulations, Vuse consumable volume
recovered to grow 69.7% in 2020 (2019:
decline 6.2%), driving total value share up
to 24.9% from 16.6% for the year ended
31 December 2019.
BAT Annual Report and Form 20-F 2020 75
The Alto variant was the driving force of this
growth and, in the final quarter of 2020, now
represents over 85% of Vuse revenues in the
US, up from 50% in 2019.
Industry vapour volumes were down 13.1%
in 2020, following a period of rapid growth.
While industry volume was up 36% in
2019, the industry was impacted in the
second half of 2019 by the EVALI crisis and
implementation of the flavour regulations in
early 2020. However, sequential recovery in
the second half of 2020 provides momentum
into the coming periods.
In Modern Oral, revenue from the Velo brand
increased 13.5% in 2020, or 14.1% at constant
rates of exchange, following its launch in
the second half of 2019 (2019: £9 million)
with volume up 45%. In October 2020, the
portfolio has been strengthened by the
acquisition of the nicotine pouch products of
Dryft Sciences, LLC (Dryft). These products
have been rebranded Velo and expands the
US portfolio from four to 28 variants, with
representation in the above-6mg nicotine
strength segment. With the national rollout of
Velo-branded Dryft products continuing in early
2021 and a return to growth in the final quarter
of 2020, we have great momentum for 2021.
PMTAs were submitted ahead of the
9 September 2020 deadline for four Vuse
products (Alto, Solo, Ciro and Vibe) and for
Velo modern oral products and we expect
to hear more on their progress over the
course of 2021.
Combustibles
Combustibles revenue grew 9.3%
to £9,926 million (2019, up 8.6% to
£9,078 million), being an increase of 9.9%
(2019: 3.8% higher) at constant rates of
exchange. The growth was driven by
strong pricing (with four price increases
announced in 2020), positive brand mix
and the impact of our revenue growth
management programme. We continue to
experience no acceleration in downtrading.
Volume was up 0.5% to 73 billion sticks
(2019: 73 billion; 6.0% decline) benefiting
from a good performance from the
strategic portfolio while Lucky Strike was
reintroduced in the final quarter of the year.
This was in an industry that was estimated
to be up 1.5% (2019: down 5.3%) due to
reduced consumer switching to vapour
(compared to 2019), higher supply chain
inventories (in response to COVID-19 and
the timing of price increases), an extra
selling day and more resilient consumer
demand resulting from the increase in fiscal
stimulus and lower gas prices.
Value share of cigarettes increased 45 bps
(2019: up 30 bps). This performance was
driven by our premium brands Newport and
Natural American Spirit. Total volume share
increased 10 bps (2019: 10 bps decline) as
growth in both years from the strategic
portfolio (up 20 bps in both 2020 and 2019)
was not matched by the remainder of
the portfolio.
The Group continues to monitor the
regulatory developments, yet does not
believe there is any significant impact of such
restrictions on the Group’s operations at this
time. The FDA’s “2020 Unified Agenda” did
not progress the potential regulations with
regards to menthol in tobacco products or
restrictions on nicotine levels in tobacco
products. The Group has a long-standing
track record of managing regulatory shifts
and in the event of regulatory change we
remain confident in our ability to navigate
that environment successfully.
Traditional Oral
Traditional Oral revenue grew 7.0% (or 7.6%
at constant rates of exchange), driven by
strong pricing in both years, which more
than offset lower volume (down 1.3% in
2020, and 1.5% in 2019). Following a strong
performance in 2019, when value share
of moist oral grew 80 bps, in 2020 this
declined 25 bps largely driven by Grizzly,
which was impacted by pricing pressures
in the final quarter of 2019 and early 2020.
Utilising revenue growth management
techniques, value share has stabilised in the
second half of 2020.
The MRTP applications for Camel Snus
remains under review having been
discussed by the TPSAC in September
2018. We continue to work closely with the
FDA, which announced in December 2020
that it had reopened the comment period
after our filing of additional information.
Delivering on our
New Categories
The US business is transforming into
a New Categories-oriented business,
fuelled by reinvestments from the
consistent, industry-leading value
growth in the tobacco categories.
This involves a major brand-building
effort focused on the two global brands,
Vuse in Vapour and Velo in Modern Oral,
improved trade execution at the point
of sale and accelerated development of
digital capabilities. This is underpinned
by R&D and scientific expertise which,
as well as ensuring product quality
and stewardship, have enabled us to
comply with the extensive FDA PMTA
requirements in 2020 and establish a
future product pipeline.
The acquisition of certain Dryft Modern
Oral assets, completed in Q4 2020,
enables a significant expansion of the
Velo product range into the high-growth
>6mg nicotine segment, and into
multiple new flavours – the next step in
the transformation journey.
+82%
Revenue growth in
New Categories
Availability of
New Categories
in the Region
Our Strategy in Action
Vuse in the US
Vuse has achieved very strong growth in 2020, with
consumable volume up 70%, achieved despite the
decline in the vapour industry, which has recovered
only gradually since its major decline in Q4 2019
following the EVALI crisis.
Vuse growth has been particularly strong since
June, following the amelioration of COVID-19 related
supply constraints earlier in the year. Since June,
Vuse has been by far the fastest growing brand in
vapour, both in devices (achieving >60% volume
share in Q4 2020) and in cartridges, with value share
growth in the second half of the year of 500 bps.
With cartridge volume and value share growing
strongly, Vuse is the market leader (by value) in
15 States. The drive to continue and build on this
growth is ongoing while also meeting the extensive
FDA PMTA requirements.
In this environment, new Vuse Single pod and Quad
pods were launched in December 2020, together
with progressive improvements in digital and
e-commerce capabilities.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 76
Regional Review
AmSSA
Americas and Sub-Saharan Africa
Operational resilience despite
COVID-19 impacting a number of
markets.
Luciano Comin
Regional Director
Volume
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
Vapour (mn 10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
* Other includes MYO/RYO.
Revenue
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
2020
units
vs 2019
%
2019
units
vs 2018
%
147
2
149
-3.9%
-1.7%
-3.8%
+118%
31
–
–
19 +142%
–
–
152
2
154
14
–
8
–
-3.1%
-8.2%
-3.1%
+191%
n/m
n/m
–
2018
units
157
2
159
5
–
–
–
2020
£m
vs 2019
%
vs 2019
(adj
at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj
at cc)
%
3,535 -11.4% +1.3% 3,992 +2.7% +8.5%
65 +52.8% +58.6%
–
–
–
1 -49.8% -47.3%
66 +51.3% +57.1%
–
–
171 -24.3% -7.2%
43 +120% +117%
n/m
n/m
n/m
n/m
44 +119% +116%
n/m
n/m
225 +10.2% +13.1%
3,772 -11.5% +1.4% 4,261 +3.6% +9.2%
–
1
–
–
Profit from operations/Operating margin
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
+29.0%
-22.0% +10.0%
1,553
41.2% +1,290bps -160 bps 28.3% -930 bps +30 bps
-2.5% 1,204
Profit from operations
Operating margin (%)
Revenue by category
+30 bps 27
Cigarette value
share change
Owned
manufacturing
(inc R&D) sites
Combustibles
New Categories
Traditional Oral
Other
15,873
Number
of employees
Key markets
Argentina, Brazil, Canada, Chile, Colombia,
Mexico, Nigeria, South Africa
Revenue and Profit
from Operations
In 2020, reported revenue declined 11.5%
to £3,772 million (2019: 3.6% increase
to £4,261 million), largely driven by a
translational foreign exchange headwind
due to the relative strength of sterling
against a number of currencies, particularly
the Brazilian real, Chilean peso, Mexican
peso and the South African rand.
Excluding the translational headwind,
on a constant currency basis, revenue
grew by 1.4% in 2020 (2019: increase of
9.2%). Combustibles pricing and growth
in New Categories more than offset the
impact of COVID-19 which was a drag
on performance as a number of markets
implemented temporary restrictions
in response to the pandemic, with
South Africa in particular restricting the
production and sale of tobacco products for
a period of five months.
Reported profit from operations grew
29.0% to £1,553 million, largely from the
absence of the £436 million charge in
the prior period in relation to the Quebec
Class Action. Excluding the adjusting
items in both periods, adjusted profit
from operations fell 2.5% on a constant
currency basis, as the growth in adjusted
revenue was more than offset by the
impact of COVID-19 which led to supply
restrictions in South Africa noted above and
additional supply chain costs elsewhere
(estimated to be £57 million) to manage the
operational volatility.
As disclosed in note 8 in the Notes on
the Report and Accounts, the Group
expects the performance of South Africa
to recover in 2021. While the impact of the
pandemic in 2020 is a trigger to assess
the carrying value of goodwill in South
Africa (£552 million), the Group’s ongoing
financial delivery would have to decline by
a further 20% before an impairment were
to be recognised. This was not deemed
to be a reasonably possible scenario and
accordingly, no impairment was recognised
in 2020.
BAT Annual Report and Form 20-F 2020 77
New Categories
In 2020, New Categories revenue grew
51.3% to £66 million (2019: up 119% to
£44 million) driven by the growth of vapour
in both years.
The Group gained leadership of the vapour
category in Canada with total value share
up 2,220 bps (compared to 2019) to 46%
in 2020. Growth continued to be driven
by the growth of the ePod variant and
was supported by the migration to Vuse
from Vype.
This was partially offset by a restrained
performance in South Africa where sales
of vapour products were suspended,
alongside those of cigarettes, between
March and August 2020 as part of the
country’s COVID-19 response.
Since the lifting of the sales suspension, our
revenues have started to recover. While the
Group remains confident of the potential
of Vapour in South Africa, an impairment
charge of £11 million in respect of the
acquisition of Twisp (in 2019) has been
recognised ahead of the migration to Vuse.
Pilot schemes for Modern Oral in
emerging markets are ongoing. After initial
encouraging results in Kenya, we have
temporarily suspended sales due to local
regulatory challenges and continue to
engage with the local authorities.
We continue to believe that Modern Oral
represents an exciting opportunity to offer
affordable New Category alternatives to
adult nicotine consumers in emerging
markets, given the absence of an
electronic device and a pre-existing ritual
of oral product consumption in a number
of markets.
Combustibles
Combustibles revenue fell 11.4% to
£3,535 million (2019: 2.7% growth to
£3,992 million). A translational foreign
exchange headwind impacted both years
with revenue, on a constant currency basis,
up 1.3% in 2020 and 8.5% in 2019.
Combustibles pricing in both years, and
value share growth of 30 bps (2019: 20 bps),
more than offset combustibles volume
decline of 3.8% in 2020 and 3.1% in 2019.
The lower volume in 2020 was largely due
to industry-wide contractions following
the impact of COVID-19 in a number
of markets, particularly from the sales
suspension in South Africa, but also from
temporary periods of supply disruption
in other markets such as Mexico and
Argentina. This was partially offset by an
increase in duty paid cigarette volume in
Brazil as COVID-19-related lockdowns and
increased border security led to a reduction
in illicit trade.
In contrast, the volume decline in 2019 was
largely due to the continued difficult trading
in Venezuela, market contraction in Canada
and illicit trade growth in Brazil – which
was partly offset by higher volume in South
Africa as a result of reduction, in that year,
of illicit trade.
Delivering on our
New Categories
Exceptional performance in New
Categories is due to a focus on a high-
performance vapour device platform
(ePod) combined with a consumer
calibrated portfolio of unique flavours.
Our performance is enabled by bespoke
technology and creative execution
via a series of limited-edition devices
that resonate with consumers seeking
personal expression.
Excellence in execution drove sales
primarily through own channels
(online/retail) supported by exclusive
availability on digital platforms
which sustained demand in the
pandemic when traditional retail was
temporarily suspended.
Underpinning this is transformation of
our capabilities in managing own retail,
building own e-commerce with relevant
consumer benefits while constantly
screening new avenues to reach adult
consumers directly via other partners’
solutions.
+51%
Revenue growth in
New Categories
Availability of
New Categories
in the Region
Our Strategy in Action
Vapour in Canada
The rise of Vype/Vuse to the number 1 vapour
brand in Canada in less than three years
demonstrates an offer that resonates with the
consumer. The migration to Vuse fuelled this with
the introduction of award-winning iconic pack
expression that set Vuse apart on the shelf and
conveyed the breadth of flavours on offer.
Meeting consumers’ growing demand for new
sensorial experiences saw the deployment of
a pipeline of unique flavours brought to life via
creative technologies.
Our retail presence provided a foundation for scale
to developing direct consumer engagement / offers,
while our e-commerce revenue growth is attributed
to going beyond a transactional relationship by
offering subscription, delivery and personalisation.
Faced with constant regulatory changes, we
have responded with speed and agility to ensure
consumer retention.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 78
Regional Review
ENA
Europe and North Africa
A strong year with revenue
growth in all New Categories.
Johan Vandermeulen
Regional Director
Volume
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
Vapour (mn 10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
* Other combustibles includes MYO/RYO.
Revenue
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
2020
units
vs 2019
%
2019
units
vs 2018
%
220
16
236
-4.2%
-2.5%
-4.1%
230
17
247
-6.3%
-7.9%
-6.4%
133 +23.0%
3.3 +203%
1,667 +55.6%
+2.8%
1
108
+44%
1.1 +334%
+157%
+8.3%
1,071
1
2018
units
246
18
264
75
–
414
1
2020
£m
vs 2019
%
vs 2019
(adj
at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj
at cc)
%
5,356 -3.4% +0.5% 5,544 -0.7% +3.0%
148 +0.4% +0.2%
136 +143% +159%
185 +58.5% +59.3%
469 +46.7% +49.6%
34 +16.2% +14.2%
135 -31.6% -31.7%
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%
+1.4% +5.0%
5,994
-1.6% +2.1% 6,090
Profit from operations/Operating margin
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
Profit from operations
Operating margin (%)
+19.0%
-13.4% +3.3%
-2.4% 1,649
1,962
32.7% +560 bps -160 bps 27.1% -460 bps -60 bps
Revenue by category
Combustibles
New Categories
Traditional Oral
Other
21
Owned
manufacturing
(inc R&D) sites
FLAT
Cigarette value
share change
23,785
Number
of employees
Key markets
Algeria, Belgium, Bulgaria, Czech Republic,
Denmark, Egypt, France, Germany, Italy,
Kazakhstan, Morocco, Netherlands,
Poland, Romania, Russia, Spain, Sweden,
Switzerland, Turkey, Ukraine, UK
Revenue and Profit
from operations
Reported revenue declined 1.6% in
2020 (2019: up 1.4%) as good pricing
in Combustibles and growth in New
Categories revenue (2020: +47%, 2019:
+91%) in both years was more than offset
by lower combustible volume (down 4% in
2020 and 6% in 2019) and a translational
foreign exchange headwind of 3.7%
(2019: 1.3% headwind).
Excluding adjusting items (that affected
2019 and 2018) and the impact of currency,
revenue grew 2.1% on an adjusted constant
rates basis (2019: up 5.0%).
Reported profit from operations increased
19%, largely due to the absence of the
£202 million charge in respect of the
Russian excise dispute that impacted the
prior year (2019: down 13%). Excluding the
impact of currency and adjusting items
(in respect of Quantum, the factory
rationalisation programme and the 2019
charges in Russia related to an excise
dispute), adjusted profit from operations
at constant rates was down 2.4% in 2020
(2019: up 3.3%), as the higher revenue (at
constant rates of exchange) and Quantum
cost savings (in 2020) were more than
offset by higher investment behind New
Categories of over £200 million, compared
to 2019.
New Categories
In 2020, revenue from Vapour was
marginally higher (up 0.4%, compared to
growth of 29.2% in 2019). This was largely
driven by higher consumable volume (up
23.0%, 2019: 44% higher), despite the
impact of COVID-19 on our vape stores,
with the higher volume partly offset by
marketing investment to drive consumer
activation, which is recognised as a
deduction to revenue in line with IFRS 15.
BAT Annual Report and Form 20-F 2020 79
Vype grew across the region and saw
record Vapour value shares as the Group
consolidated value leadership positions in
the key markets of France and Germany.
In the UK, the Group maintained its
value leadership position as Vype’s
good performance was moderated by a
reduction in Ten Motives and the remainder
of the local portfolio.
In 2020, THP volumes tripled and revenue
more than doubled driven by the launch of
glo Hyper in a number of markets across
the region and the continued progress of
glo Pro. This builds on the growth in 2019
(volume up over 330% and revenue 200%
higher). glo continued to increase volume
share in key THP markets including in
Russia where glo volume share reached
1.4% (in December 2020), doubling its
volume share of the THP from 7.6% in
June 2020 to 15.5% in December 2020.
Furthermore, since the launch of glo
Hyper in pilot cities in Italy, glo has more
than tripled its volume share of category
to 7.8% (December 2020), with retention
rates doubling.
In 2020, Modern Oral revenue grew 59%, led
by 56% volume growth and a contribution
from positive price/mix. This follows 2019
where revenue and volume were up 234%
and 157%, respectively.
Delivering on our
New Categories
We are resolute in our pursuit of the
opportunities in New Categories in ENA.
In 2020, we are the leader in Vapour in
ENA. Vype is the number one closed
systems brand in the key markets of
the UK, France, Germany and Poland.
This was fuelled by strong performances
of both product platforms, Vype ePen3
and Vype ePod. The Vype-to-Vuse
migration is under way and is planned to
be completed in 2021.
Also in 2020, we introduced glo Hyper in
Russia, the second largest THP market in
the world, expanding to more than 150 of
the largest cities in Russia in the second
half of the year. This has been delivered
by highly differentiated digital and direct
to consumer activation, with excellent
results across the major cities.
During 2020, new product launches
across innovative flavours and
packaging solutions have consolidated
our leadership position in 14 out of the
17 Modern Oral markets where we are
present, with the fastest growing brand
in the remaining three markets.
In both years, the Group continued to grow
its volume share of the total oral category in
more established markets such as Sweden
and Norway, while also building the overall
category, and our volume share of Modern
Oral itself, in Denmark and Switzerland.
The decline in combustible volume in 2020
was despite higher volume in Turkey (driven
by Kent and the local portfolio) as this
was more than offset by industry volume
contraction in a number of markets, partly
due to COVID-19.
In January 2021, we have pilot-launched
our first CBD vaping product, Vuse CBD
Zone. This latest innovation will allow us, for
the first time, to offer adult consumers a
range of high-quality CBD vaping products
from our trusted, global brand, Vuse.
Initially available in Manchester, UK, it will
offer adult smokers and vapers sensorial
enjoyment, as Vuse CBD Zone caters to
a variety of moods and moments in their
busy lifestyles.
Combustibles
In 2020, revenue was down 3.4% compared
to a decline of 0.7% in 2019. Good price/mix
in both years (up 5% in 2020 and 9% in 2019)
was more than offset by the impact of
lower combustible volume of 4.1% in 2020
(and 6.4% in 2019) and the foreign exchange
headwind described earlier.
At constant rates of exchange, revenue
increased 0.5% (2019: 3.0%).
+47%
Revenue growth in
New Categories
Availability of
New Categories
in the Region
The decrease in combustible volume in
2019 was driven by lower volume in Russia
(due to stock movements), 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).
Cigarette value share was in line with 2019
(2019: marginally higher than 2018), with
cigarette volume share up 30 bps largely
driven by Russia and Turkey, partly offset
by lower volume share in France, Spain,
Netherlands, Denmark, Switzerland and
the UK. The movement in 2019 was mainly
driven by Ukraine, Russia, Italy, Poland,
Romania and Spain.
In 2020, menthol bans were introduced in
Turkey, the UK and the EU. The Group has
a long-standing track record of managing
regulatory shifts and has successfully
navigated the menthol ban in combustibles
with an increase in consumer retention
across the nicotine delivery product range
as consumers have either migrated to our
New Category portfolio or switched to non-
menthol combustible products.
Our Strategy in Action
United Kingdom
Just five years after launching Vype in the UK,
we have achieved value share leadership in the
category. A third of our revenue in the UK is now
coming from Vapour products.
Vype increased its value share of closed systems to
26% (2019: 20%), driven by the successful launch of
ePod and continued success of ePen as the market
transitions following the menthol ban.
Our ambitions are driven by:
– the continued development of closed systems; and
– success in e-commerce, which emerged during
2020. This benefited from an overhaul of the user
experience and introduction of a subscription
model, ensuring we provide a range of offers
that are attractive to both our consumers and
the Group.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 80
Regional Review
APME
Asia-Pacific and Middle East
Launch of glo Hyper drives
volume growth in THP.
Michael (Mihovil) Dijanosic
Regional Director
Volume
Cigarettes (bn sticks)
Other (bn sticks eq)*
Combustibles (bn sticks)
New Categories:
Vapour (mn 10ml/pods)
THP (bn sticks)
Modern Oral (mn pouches)
Traditional Oral (bn sticks eq)
* Other combustibles includes MYO/RYO.
Revenue
Combustibles
New Categories:
Vapour
THP
Modern Oral
Total New Categories
Traditional Oral
Other
Revenue
2020
units
198
2
200
vs 2019
%
-7.3%
+3.3%
-7.2%
2019
units
vs 2018
%
213
2
215
-3.7%
+1.5%
-3.7%
6 +385%
-6.5%
7
n/m
86
–
–
1
n/m
8 +20.1%
n/m
3
n/m
–
2018
units
221
2
223
–
7
–
–
2020
£m
vs 2019
%
vs 2019
(adj
at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj
at cc)
%
3,935 -10.3% -7.7% 4,387 +3.4% +4.4%
2
15 +255% +260%
497 -26.0% -27.1%
n/m
n/m
514 -24.0% -25.0%
–
–
-1.3% -0.4%
4 +906% +902%
671 +23.2% +16.8%
–
–
675 +23.9% +17.5%
–
-3.5% -6.9%
4,537 -11.9% -9.9% 5,153 +5.6% +5.6%
–
88
–
91
–
–
Profit from operations/Operating margin
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
2019
£m
vs 2018
%
vs 2018
(adj at cc)
%
-16.0%
+7.9%
-7.3% 1,753
1,472
32.4% -160 bps +110 bps 34.0% -410 bps +90 bps
-5.7%
Profit from operations
Operating margin (%)
Revenue by category
+10 bps 24
Cigarette value
share change
Owned
manufacturing
(inc R&D) sites
Combustibles
New Categories
Traditional Oral
Other
10,750
Number
of employees
Key markets
Australia, Bangladesh, Indonesia, Japan,
Malaysia, Middle East (inc KSA), New Zealand,
Pakistan, South Korea, Taiwan, Vietnam
Revenue and Profit
from Operations
Reported revenue declined 11.9%
to £4,537 million (2019: up 5.6% to
£5,153 million). The decline in 2020 was
largely driven by lower cigarette volume
(which fell 7.3%) partly due to the negative
impact of COVID-19 on GTR and other
markets in the region and the impact of
excise increases and minimum pricing
in Indonesia. Revenue in 2020 was also
impacted by the excise harmonisation of
THP in Japan and a £50 million charge in
respect of the withdrawal of glo Sens.
In contrast, the growth in 2019 was due to
pricing in a number of markets and growth
in New Categories revenue, which more
than offset a decline in cigarette volume
of 3.7%.
Excluding the impact of translational
foreign exchange, in 2020 revenue on a
constant currency basis at constant rates
of exchange fell 9.9% (2019: grew 5.6%).
Reported profit from operations decreased
16.0% to £1,472 million, as the impact of
COVID-19 in a number of markets including
GTR, the recognition of costs related
to the ongoing factory rationalisation
programme (principally in Southeast Asia),
an impairment in goodwill in respect of
the Group’s performance in Malaysia
(£197 million) and unfavourable foreign
exchange movements more than offset
the efficiencies realised through Quantum.
In 2019, this was a decrease of 5.7% to
£1,753 million as higher profit in Japan and
the Middle East was more than offset
by Bangladesh and Malaysia and an
impairment charge in respect of Indonesia
goodwill (£172 million).
Excluding adjusting items and the impact of
translational foreign exchange, in 2020 adjusted
profit from operations at constant rates of
exchange fell 7.3% (2019: increased 7.9%).
BAT Annual Report and Form 20-F 2020 81
New Categories
Total revenue from New Categories
declined 24.0% to £514 million (2019:
increase of 23.9% to £675 million).
This was driven by THP as consumable
volume declined 6.5% to 7.4 billion sticks
(2019: up 20.1% to 7.9 billion). The launch of
glo Hyper (the first-to-world THP that uses
indu ction heating technology to provide
a step change in consumer satisfaction,
driven by 30% more tobacco, faster heating
and a boost button) was more than offset
by excise harmonisation impacting the
industry and by a strong comparator period
that included the launch of glo Pro, glo
Nano and glo Sens.
THP revenue declined 26% (or 27%
excluding the impact of currencies) largely
due to the excise harmonisation in Japan
and a £50 million charge to revenue in
respect of the withdrawal of glo Sens in the
year. glo Sens was launched in 2019 and did
not perform to expectations.
In Japan, the largest THP market in the
world, glo’s volume share increased to 5.9%
in December 2020, up 85 bps compared
to December 2019, driven by glo Hyper’s
launch in April 2020.
Combustibles
Revenue from combustibles fell 10.3%
to £3,935 million (2019: up 3.4% to
£4,387 million), or by 7.7% (2019: up 4.4%)
at constant rates of exchange. Pricing in
Australia and Pakistan was more than
offset by a 7.2% decline in combustible
volume. Higher volume in Bangladesh was
more than offset by the impact of COVID-19
in a number of markets, notably within GTR,
an increase in local taxes and the minimum
retail price compliance in Indonesia, and the
continued increase in illicit trade in Pakistan
(following an excise-led price increase
in 2019).
Value share increased 10 bps, with volume
share up 55 bps, as volume share gains
(including in Bangladesh, Japan, Pakistan
and Malaysia) more than offset losses in
Saudi Arabia and Indonesia.
The increase in revenue 2019 was largely
due to pricing in a number of markets,
including Saudi Arabia, Japan, Australia,
Pakistan and New Zealand, which
more than offset the 3.7% decrease in
cigarette volume.
Delivering on our
New Categories
Acceleration of the learning agenda
in APME has taken place through the
roll-out of a digital pilot model which
enables in-depth, real-time consumer
insights generation and development
of the optimal marketing mix. This has
recently been deployed successfully
with the launch of Velo in Indonesia.
We have ambitious expansion plans for
2021 and beyond, prioritising consumer
and commercial opportunities, to
support the Group’s ambition to deliver
a step change in New Categories with
category leadership within Modern
Oral across APME. This is supported by
a regulatory engagement roadmap to
unlock opportunity markets.
Our Strategy in Action
Digital Transformation
-24%
Revenue growth in
New Categories
Marketing Technology capabilities were enhanced
to broaden and deepen our understanding of
consumers, enabling detailed consumer profiling,
personalised consumer journeys and improved
conversion – leading to the acquisition of c.250k new
consumers into glo.
Real-time performance tracking has also been
integrated within the digital ecosystem, which has
enabled faster and more agile insight-led decision-
making. The digital-first approach has accelerated
the e-commerce agenda which has so far seen
significant improvement in e-commerce traffic
(up 290%), device sales (up 225%) and revenue
contribution (up 320%) in 2020.
Availability of
New Categories
in the Region
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 82
Engaging With Our Stakeholders
Engaging With
Our Stakeholders
We recognise that civic participation is an essential component
of being a responsible business and ensuring that appropriate policy
is implemented. Our employees are committed to participating in
the policy process in a transparent and open manner, in compliance
with all laws and regulations of the markets in which we operate.
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.
The quality of our people is a major
reason why our Group continues to
perform well. 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 2020
What matters to
our stakeholders
How we respond
– Consumer panels, focus groups
and interviews
– Product testing
– Consumer care helplines
– Responsible advertising
and marketing
– Pack inserts/product leaflets
– Real-time digital platforms
– Clinical trials
– Annual General Meeting
– Investor relations programme
– Institutional shareholder meetings
– Capital Markets Days
– Investor roadshows
– Results announcements
– Annual Report & Form 20-F
– ESG Report
– Stock exchange announcements
– Shareholder information on website
– Director market and site visits
– Virtual forums
– Employee town halls
– Global and regional webcasts
– ‘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 to 43 and 98
Read more
pages 97, 117 to 119
Read more
pages 62, 63, 98 and 122
– Product harm, addiction and
social considerations
– Product quality
– Affordability and price
– Ingredients/nicotine levels
– Plastics/post-consumption
product waste
– COVID-19 impacts
– Business performance
– ESG Agenda
– Corporate governance
– Strength of Group leadership
– Board succession planning
– Reward
– Career development
– Diversity and inclusion
– Corporate responsibility
– Health and safety
– Business ethics
– Development of innovative
products
– Product stewardship, quality and
safety standards
– Clear and accurate
product information
– Regular dialogue and
communications with shareholders
– Robust corporate governance
– Enhanced ESG reporting
– Continual improvement of our
Delivery with Integrity programme
– International Marketing Principles
– Circular economy strategy
– Our range of enjoyable and
innovative products
– Product quality and safety standards
– International Marketing Principles
– Extensive communications and
virtual engagement with employees
worldwide during the pandemic
– Board review of and feedback on
workforce engagement
– Training and
development programme
– Diversity & Inclusion Strategy
– Delivery with Integrity programme
Strategic
impact
Principal risk
impact
New Categories
Combustibles
New Categories
Combustibles
Simplification
New Categories
Combustibles
Simplification
– Market size reduction /
consumer downtrading
– Inability to develop, commercialise
and deliver New Categories
– Significant excise increases
– Solvency and liquidity
– Injury, illness or death in the
– Foreign exchange rate exposures
– Disputed taxes, interest and penalties
work place
– Geopolitical tensions
– Litigation
– Market size reduction /
consumer downtrading
BAT Annual Report and Form 20-F 2020 83
Suppliers
Customers
Governments
and wider society
UK Companies Act:
Section 172(1) Statement
Effective relationships with farmers,
suppliers of tobacco leaf, product
materials and indirect services are
essential to an efficient, productive
and secure supply chain.
Our customers include retailers,
distributors and wholesalers who
are essential for driving growth
and embedding responsible
marketing practices.
We seek to be part of the debate that
shapes the regulatory environment
in which we operate, and to work
collaboratively to develop joint
solutions to common challenges.
– Ongoing farmer support, training
and monitoring by our Extension
Services of expert field technicians
– Sustainable Tobacco Programme
assessments, reviews and meetings
– Supplier reviews/audits
– Supplier Voice survey and dialogue
– Strategic partnerships
– Ongoing dialogue,
contract discussions and
account management
– Customer Voice survey
– Audits and performance reviews
– Sales calls and visits by
trade representatives
– Business-to-business programmes
– Face-to-face meetings and
ongoing dialogue
– Submissions to government and
advisory committees
– Multi-stakeholder collaborations
and partnerships, such as the
Eliminating Child Labour in Tobacco
Growing Foundation
– External Scientific Panel
– Sustainability Stakeholder Panel
– Community investment programmes
Read more
pages 3, 48, 53 to 55 and 99
Read more
pages 3, 57 and 99
Read more
pages 35, 44 to 57 and 99
– Productivity/quality/cost
– Sustainable agriculture
– Farmer livelihoods
– Human rights
– Health and safety
– Climate change/
environmental impacts
– COVID-19 impacts
– Route-to-market planning
– Contingency planning
– Cost, price and quality
– Stock availability
– Consumer buying behaviour
– Youth access prevention
– COVID-19 impacts
– Product regulation
– Tax/excise/illicit trade
– Responsible marketing
– Public health impacts
– Human rights
– Climate change/
environmental impacts
– COVID-19 impacts
– Supplier Code of Conduct
– Thrive sustainable agriculture and
farmer livelihoods programme
– Leaf operational standards for PPE
and child labour prevention
– Farmer Extension Services support
and training
– COVID-19 support
– Customer loyalty programmes
– Standards of Business Conduct
and incentives
(SoBC)
– Global Youth Access Prevention
(YAP) Guidelines
– COVID-19 support
– Delivery with Integrity
– Carbon neutrality target
– Human rights and climate
impact assessments
– Corporate Social Investment (CSI)
– COVID-19 support and
vaccine development
New Categories
Combustibles
Simplification
New Categories
Combustibles
Simplification
New Categories
Combustibles
– Inability to develop, commercialise
– Inability to develop, commercialise
and deliver New Categories
– Geopolitical tensions
and deliver New Categories
– Geopolitical tensions
– Significant excise increases
– Market size reduction/
consumer downtrading
– 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 97 to 99 and 117 to 119
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 95 to
96 mandates consideration of
these factors and other relevant
matters as a critical part of
delegated authorities.
Examples of some of the
ways that these factors have
shaped Group strategy and
initiatives during the year are
illustrated in the table to the left.
Illustration of how these factors
have been taken into account
in Board decision-making and
strategy development during
the year is provided on pages 100
to 101.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 84
Group Principal Risks
Group Principal 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 18
to 19, and 24 to 26. 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 114 to 115.
This section should also be read in the context
of the cautionary statement on page 318.
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 288 to 306.
Assessment of Group Risk@
During the year, the Directors carried out
a robust assessment of the principal risks,
uncertainties and emerging risks facing the
Group, including those that could impact
delivery of its strategic objectives, business
model, future performance, solvency or liquidity.
During the first half of 2020, the Board assessed
that it was appropriate to include COVID-19
as a Group principal risk as reported in the
Half-year Report, however as new working
practices are implemented to reflect the
current operating environment and associated
risks are incorporated into existing Group risks,
the Group no longer maintains COVID-19 as
a principal risk (please see Group risk factors ,
page 294 for further information). The Group’s
current principal risks remain broadly
unaltered compared to 2019 with regards
to marketplace, excise and tax, operations,
regulation and litigation risks, and continue to
reflect the challenging external environment.
The viability statement below provides a
broader assessment of long-term solvency
and liquidity. The Directors considered a
number of factors that may affect the resilience
of the Group. Except for the risk ‘injury, illness
or death in the workplace’ the Directors also
assessed the potential impact of the principal
risks that may impact the Group’s viability.
Time frame
Short-term
Medium-term
Long-term
Strategic impact
New Categories
Combustibles
Simplification
Key Stakeholders
Consumers
Society
Employees
Shareholders
Considered in viability statement@
Yes
No
@ 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 revision of the UK Corporate Governance Code. Whilst 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 considers it
possible to form a reasonable expectation as to the Group’s longer-term viability (that it will be able to continue in operation and meet
its liabilities as they fall due) is three years.
In making this assessment of the Group’s prospects, the Board considered the Group’s strong cash generation from operating
activities, access to external sources of financing (including the removal, in 2020, of any financial covenants over such facilities) and
ability to manage the impact of COVID-19. In doing so, the Board recognised the Group’s ability to utilise its geographic footprint and
integrated operating model to minimise the impact of the pandemic on the Group’s performance.
This assessment included a robust review of the Group’s operational and financial processes, (which cover both short-term financial
forecasts and capacity plans) and the principal risks (as indicated on pages 85 to 88) that may impact the Group’s viability. These are
considered, with the mitigating actions, at least once a year. The assessment included a reverse stress test of the core drivers of the
Group’s performance to determine the impact of the risks (individually and in aggregate) whilst recognising that, from 2020, no external
financial covenant exists with regards to the Group’s financing facilities. The reverse stress testing did not identify any individual risk,
based upon a prudent annual forecast, that would, if arising in isolation and without mitigation, impact the Group’s viability within
the 3 year confirmation period. Furthermore, the Board recognised that even if all the principal risks arose simultaneously, given the
underlying strong free cash flow generation before the payment of dividends (2020: £7.3 billion), the Group would be able to undertake
mitigating actions to meet the liabilities as they fall due.
The Board noted that the Group has access to a £6 billion credit facility (2020: undrawn), US (US$4 billion) and Euro (£3 billion)
commercial paper programmes (2020: £nil outstanding) and £3.4 billion of bilateral agreements (2020: undrawn) which may be utilised
to support the Group’s ability to operate.
However, the Group is subject to uncertainties with regards to regulatory change and litigation, 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 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.
BAT Annual Report and Form 20-F 2020
85
Risks
Competition from illicit trade
Increased competition from illicit trade and illegal products – either local duty evaded, smuggled, counterfeits, or non-
regulatory compliant.
Time frame
Strategic impact
Key Stakeholders
Considered in viability statement@
Short/Long-term
New Categories
Combustibles
Society
Yes
Impact
Erosion of goodwill, with lower volumes and reduced profits.
Reduced ability to take price increases.
Investment in trade marketing and distribution is undermined.
Counterfeit New Categories products and other illicit products
could harm consumers, damaging goodwill, and/or the category
(with lower volumes and reduced profits), potentially leading to
misplaced claims against BAT and further regulation.
Mitigation activities across all categories@
Dedicated Anti-Illicit Trade (AIT) teams operating at global and
country levels; internal cross-functional levels; compliance
procedures, toolkit 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
and a forensic and compliance team) work 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
Key Stakeholders
Considered in viability statement@
Medium-term
New Categories
Combustibles
Society
Yes
Impact
Erosion of brand value through commoditisation and the inability to
launch innovations, differentiate products, maintain or build brand
equity and leverage price.
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.
EU Directive on single-use plastics could result in increased
operational costs and/or adverse impact on sales volume and profit.
Mitigation activities@
Engagement and litigation strategy coordinated and aligned
across the Group to drive a balanced global policy framework for
combustibles and New Categories.
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 of New Categories.
Development of an integrated regulatory strategy that spans
conventional combustibles and New Categories.
Training and capability programmes for End Markets to upskill Legal
and External Affairs managers on combustible and New Categories
product knowledge.
Direct access to online portal providing latest position and advocacy
material for End Market engagement on combustibles and
New Categories.
Please refer to pages 307 to 310 for details of tobacco and nicotine regulatory
regimes under which the Group’s businesses operate.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
86
Group Principal Risks
Group Principal 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
Strategic impact
Key Stakeholders
Considered in viability statement@
Long-term
New Categories
Combustibles
Simplification
Consumers
Yes
Impact
Failure to deliver Group strategic imperative, 2025 growth ambition
(previously 2024) and 2030 consumer targets.
Mitigation activities@
Focus on product stewardship to ensure high-quality standards
across portfolio.
Potentially missed opportunities, unrecoverable costs and/or
erosion of brand, with lower volumes and reduced profits.
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.
Brand Expression, which sets out how our brand expresses
itself (including through its logo, name, product, packaging etc.)
deployed to lead End Markets via activation workshops and best
practices shared.
Generating sufficient IP to develop competitive and
sustainable products.
Accelerating digital and consumer analytics along with data
management platforms for enhanced methodologies, insight
generation and line of sight across the Group.
R&D is accredited to ISO9001 standard and laboratories are
accredited to ISO17025 for key methods.
Market size reduction and consumer down-trading
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
Key Stakeholders
Considered in viability statement@
Short/Medium-term
New Categories
Combustibles
Consumers, Shareholders,
Yes
Impact
Volume decline and portfolio mix erosion leading to
lower profitability.
Funds to invest in growth opportunities are reduced.
Mitigation activities@
Geographic spread mitigates impact at Group level.
Close monitoring of portfolio and pricing strategies across
combustibles and New Categories, 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 trade and
significant excise increases or structure changes.
New Category growth and multi category approach.
Litigation
Product liability, regulatory or other significant cases (including investigations) may be lost or settled resulting in a material loss or
other consequence.
Time frame
Strategic impact
Key Stakeholders
Considered in viability statement@
Long-term
New Categories
Combustibles
Shareholders
Yes
Impact
Damages and fines, negative impact on reputation, disruption
and loss of focus on the business.
Consolidated results of operations, cash flows and financial
position could be materially affected, in a particular fiscal quarter
or fiscal year, by region or country, by an unfavourable outcome or
settlement of pending or future litigation, criminal prosecution or
other contentious action.
Inability to sell products as a result of patent infringement action
may restrict growth plans and competitiveness.
Please refer to note 27 in the Notes on the Accounts for details of contingent liabilities
applicable to the Group.
Mitigation activities@
Consistent litigation and patent management strategy across
the Group.
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.
Delivery with Integrity compliance programme.
BAT Annual Report and Form 20-F 2020
87
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
Strategic impact
Key Stakeholders
Considered in viability statement@
Long-term
New Categories
Combustibles
Consumers, Society
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 leading to lower profitability.
Mitigation activities@
Formal pricing and excise strategies, including Revenue Growth
Management using a data science-led approach, with annual risk
assessments and contingency plans across all products.
Pricing, excise and trade margin committees in markets, with
global support.
Engagement with relevant local and international authorities where
appropriate, in particular in relation to the increased risk to excise
revenues from higher illicit trade.
Portfolio reviews to ensure appropriate balance and coverage
across price segments.
Monitoring of economic indicators, government revenues
and the political situation.
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
Key Stakeholders
Considered in viability statement@
Short/Medium-term
New Categories
Combustibles
Shareholders
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 restated 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
Key Stakeholders
Considered in viability statement@
Medium-term
New Categories
Combustibles
Simplification
Society, Employees
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
88
Group Principal Risks
Group Principal 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
Key Stakeholders
Considered in viability statement@
Short/Medium-term
New Categories
Combustibles
Shareholders
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 £6bn
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 workplace
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
Key Stakeholders
Considered in viability statement@
Short-term
New Categories
Combustibles
Simplification
Employees
No
Impact
Serious injuries, ill health, disability or loss of life suffered by
employees and the people who work with the Group.
Exposure to civil and criminal liability and the risk of prosecution
from enforcement bodies and the cost of associated legal costs,
fines and/or penalties.
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.
Disputed taxes, interest and penalties
Mitigation activities@
Risk control systems in place to ensure equipment and infrastructure
are provided and maintained.
EHS strategy aims to ensure that employees at all levels receive
appropriate EHS training and information.
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 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
Key Stakeholders
Considered in viability statement@
Short/Medium-term
New Categories
Combustibles
Simplification
Shareholders
Yes
Impact
Significant fines and potential legal penalties.
Disruption and loss of focus on the business due to diversion
of management time.
Impact on profit and dividend.
Mitigation activities@
End market tax committees.
Internal tax function provides dedicated advice and guidance,
and external advice sought where needed.
Engagement with tax authorities at Group, regional and
individual market level.
Please refer to note 27 in the Notes on the Accounts for details
of contingent liabilities applicable to the Group.
The Strategic Report was approved by the Board of Directors on 16 February 2021 and signed on its behalf by Paul McCrory, Company Secretary.
BAT Annual Report and Form 20-F 2020
89
Governance
Chairman’s Introduction
on Governance
By living and breathing the
BAT Ethos, together we have
delivered strong results in these
difficult times, whilst retaining
focus on our corporate purpose of
building A Better Tomorrow.
Dear Shareholder
The Group’s governance framework
continued to operate effectively in 2020
as the Group navigated the extraordinary
challenges presented by COVID-19.
Maintaining our business delivery has only
been achieved through the resilience and
enterprising spirit of our people across the
world. Their unwavering commitment to
maintaining our high standards in difficult
circumstances has been exceptional.
By living and breathing the BAT Ethos,
together we have delivered strong results in
these difficult times, whilst retaining focus
on our corporate purpose of building A
Better TomorrowTM.
Board succession
After conducting a thorough selection
process in 2020, the Nominations
Committee recommended to the Board
the appointment of Luc Jobin as my
successor. Our Senior Independent Director
discusses this process in the Nominations
Committee report.
I am delighted that the Board has named
Luc as the incoming Chairman. Luc brings
with him significant financial, regulatory
and consumer business experience. He has
been an outstanding Non-Executive
Director, providing consistent support,
insight and constructive challenge through
the development of BAT’s strategy. I am
sure that BAT will go from strength to
strength with Luc as Chairman and Jack
Bowles as Chief Executive Officer.
The Board welcomed two new Non-
Executive Directors in 2020. Karen Guerra
joined the Board in September, bringing
varied international experience and
focus in marketing and consumer goods.
Darrell Thomas, who has extensive US,
financial and regulatory experience, joined
the Board in December. Our new Non-
Executive Directors complement the
balance of expertise and perspectives of
our already diverse Board.
Culture and values
The Board recognises its role in shaping
and overseeing the Group’s culture and
values, and supports our executive team
in embedding the new BAT ethos. I am
confident our ethos will serve to guide
and empower our organisation in years
to come, and play a key part in promoting
sustainable growth.
Acting with integrity is an important part
of our ethos, and the Board ensures that
integrity remains a key area of focus.
You can read about our Group Standards of
Business Conduct (SoBC) and Delivery with
Integrity programme on pages 56 to 57.
Our Board takes very seriously any non-
compliance with our SoBC or with our
legal obligations. In January this year, we
welcomed the UK’s Serious Fraud Office’s
(SFO) announcement that it had closed the
investigation of suspicions of corruption in
the conduct of business by the Company,
its subsidiaries and associated persons,
which commenced on 1 August 2017.
BAT remains committed to the highest
standards in the conduct of its business
and, as previously reported, through
external legal advisers we continue to
cooperate with relevant authorities.
Stakeholder engagement
Effective engagement with our
shareholders, our people and our wider
stakeholders is important to the Group’s
long-term sustainable success.
In 2020, the Board thoroughly reviewed
how we engage with all key stakeholders,
how we are kept informed of stakeholder
perspectives, and the impact of
engagement. This review is discussed
on page 98. During the year we also
considered the impact of COVID-19 on our
stakeholders, and the steps taken across
the Group to support them where possible.
Engagement with shareholders by the
Executive Directors and management
significantly increased during 2020.
Our engagement programme was
adapted to make full use of digital
interaction, enabling more extensive
shareholder communication despite
COVID-19 restrictions.
The Executive Directors and I regularly
update the Board on our own dialogue
with shareholders to ensure the whole
Board understands their perspectives.
In 2020, key topics raised by shareholders
and discussed by the Board included
business transformation, New Categories
strategy, performance, ESG targets,
impact of COVID-19, deleveraging, capital
allocation and regulatory developments.
Our Remuneration Committee Chairman
also engaged with shareholders on
executive remuneration in the lead up
to our 2020 AGM.
My fellow Board members and I look
forward to further dialogue with our
shareholders ahead of our 2021 AGM.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 90
Governance
Chairman’s Introduction on Governance
Continued
Internal controls
The Group is subject to US compliance
obligations under NYSE rules and US
securities laws for ‘foreign private issuers’.
In 2020, our Audit Committee continued
to play 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
115 to 116.
Looking ahead
The Board’s leadership and continued
support for delivery of the Group’s
ambitious sustainability agenda will be
critical in the coming years.
As an important part of our corporate
purpose to build A Better TomorrowTM
for all of our stakeholders, the Board
will closely monitor Group performance
against its harm reduction agenda and
revised environmental targets, including to
achieve carbon neutrality by 2030. You can
read about our approach to monitoring
performance against ESG targets and our
progress in 2020 on pages 46 to 47.
In response to consistent stakeholder focus
on climate change and how effectively
we as a business take action to address
it, we have introduced climate-related
disclosure elements as recommended by
the Taskforce on Climate-related Financial
Disclosures (TCFD) in our 2020 reporting,
set out at page 52. Our reporting for 2021
will fully align to the TCFD framework.
Moving forward, with Luc’s substantial
business experience in North America,
and expertise in strategic transformation,
governance and regulation, I have full
confidence in his ability to lead the Board
effectively in its oversight of our strategy,
growth and sustainability.
On behalf of the Board, I confirm that
we believe that this combined Annual
Report and Form 20-F is fair, balanced
and understandable and presents the
information necessary to assess the
Company’s position, performance,
business model and strategy.
Richard Burrows
Chairman
Our people
The safety and wellbeing of all our people
was a top priority for the Board in 2020 and
this will remain a top priority going forward.
In addition to the operational measures
we have overseen to ensure this, staying
connected with and listening to our staff
has been a meaningful way for the Board
to lend its support during the pandemic.
We have engagement channels in place
across the Group to ensure the Board
maintains regular and effective dialogue
with our people worldwide through our
chosen engagement methodologies.
Throughout 2020, the Board assessed the
impact of COVID-19 on our staff worldwide.
In recognition of the commitment and
resilience shown by our people in the face
of the pandemic, the Board collectively
wrote to all staff worldwide to express
the Board’s appreciation for their efforts
to keep the business operating effectively
and to emphasise that staff safety and
wellbeing remains our priority.
In January 2020, I was joined by Luc
Jobin and Jerry Fowden on a visit to our
US marketing operations in Atlanta, and
factory and R&D operations in Winston-
Salem, which gave us the opportunity to
meet with members of Reynolds American
management in person. As global events
unfolded, and face-to-face meetings
became increasingly restricted, our
Executive Directors led a series of virtual
forums to connect regularly with regional,
local and functional teams.
We also continued to review feedback
across the range of the Group’s workforce
engagement channels. You can read more
about the Board’s workforce engagement
activities on page 98.
Board efficacy
The Board adapted well to the disruption
caused by the pandemic. We transitioned
to virtual board meetings in March 2020,
holding a total of ten meetings in the year
(four more than scheduled), allowing us to
maintain close oversight of the unfolding
impact of COVID-19 on our people and
operations. The Board maintained a highly
responsive and dynamic relationship with
management and staff throughout the year.
Board efficacy is evaluated in detail
annually. This year, an internal evaluation
of the Board, its Committees and each
individual Director was conducted.
Having considered the output of this
year’s evaluation, discussed on page 104,
the Board considers that it continues
to function effectively and its working
relationships with its Committees continue
to be sound.
BAT Annual Report and Form 20-F 2020 Governance
Throughout the year ended
31 December 2020, we applied
the Principles of the UK Corporate
Governance Code 2018.
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.
Pages noted opposite refer to particular
discussion on the application of Principles of
the Code in this Annual Report and Form 20-F.
For 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
91
Board Leadership and
Company Purpose
Principle
A. Long-Term Sustainable Success
B. Purpose, Values and Culture
C. Resources and Control Framework
D. Shareholder and Stakeholder Engagement
E. Workforce Engagement, Policies and Practices
pages 2 to 73, 82, 83, 89 to 101
pages 2 to 19, 58 to 63, 89, 90, 95 to 96
pages 4 to 9, 22 to 28, 84 to 88, 110 to 116
pages 82, 83, 89 to 99, 117 to 119
pages 58 to 63, 90, 98, 122
Division of
Responsibilities
Principle
F. Leadership of the Board
G. Board Composition and Division of Responsibilities
H. Role and Commitment of Non-Executive Directors
I. Board Support
pages 89 to 102
pages 92, 93, 102, 103
pages 102 to 103
pages 90, 102 to 104
Composition,
Succession, Evaluation
Principle
J. Board Appointments, Succession and Diversity
K. Board Skills and Experience
L. Board Evaluation
pages 89, 105 to 109
pages 89 to 93, 104 to 108
page 104
Audit, Risk,
Internal Control
Principle
M. Internal and External Audit Functions
N. Fair, Balanced and Understandable Assessment
O. Risk Management and Internal Controls
pages 112 to 116
pages 115 and 140
pages 84 to 88, 90, 101, 110 to 116
Remuneration
Principle
P. Remuneration Policies and Practices
Q. Development of Policy on Remuneration
R. Judgement and Discretion
pages 117 to 139
pages 117 to 139
pages 117 to 139
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.
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.
The UK Corporate Governance Code 2018 is available at
www.frc.org.uk
Certain exceptions to these requirements apply to the Company
as a foreign private issuer. For details of the significant differences
between the NYSE requirements and the Company’s practices,
please see page 315.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 92
Governance
Board of Directors
As at 16 February 2021
Richard Burrows
Chairman (75)
Luc Jobin
Chairman
Designate (61)
Jack Bowles
Chief Executive
(57)
Tadeu Marroco
Finance and
Transformation
Director (54)
Nationality: Irish
Appointed: Chairman since November
2009; Non-Executive Director since
September 2009.
Experience: Richard was Chief
Executive of Irish Distillers, Co-
Chief Executive of Pernod Ricard,
Governor of the Bank of Ireland and is
a Fellow of the Institute of Chartered
Accountants of Ireland. Prior to joining
the Board, Richard was Governor of
the Bank of Ireland. Richard previously
served as Chairman of the National
Development Corporation, President
of the Irish Business and Employers
Confederation, Chairman of the
Scotch Whisky Association, Chairman
of Craven House Capital plc and
as Senior Independent Director of
Rentokil Initial plc.
Relevant skills and contribution to
the Board: Richard has considerable
consumer goods, international
business and financial experience,
ranging from leading successful
branded manufacturing and service
businesses to banking and financial
services roles. He is an experienced
non-executive director and brings a
variety of perspectives.
External appointments: Supervisory
Board member and Chairman of the
Remuneration Committee at
Carlsberg A/S.
Nationality: Canadian
Appointed: Chairman Designate from
1 March 2021; Non-Executive Director
since July 2017.
Experience: 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. Previously, he was Executive
Vice President of Power Corporation
of Canada (an international financial
services company) from 2005 to 2009.
Luc was Chief Executive Officer of
Imperial Tobacco Canada from 2003
to 2005 and Executive Vice President
and Chief Financial Officer from 1998
to 2003. Luc previously served as an
independent Non-Executive Director
of Reynolds American Inc. from 2008
until its acquisition by the Group.
Relevant skills and contribution
to the Board: Luc brings significant
financial, regulatory and M&A
experience to the Board, together with
extensive North American knowledge
and experience of enterprise
transformation and consumer and
customer businesses.
External appointments: Independent
Director of Hydro-Quebec and Gildan
Activewear Inc.
Nationality: French
Appointed: Chief Executive since
April 2019; Executive Director since
January 2019.
Experience: Jack 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. He became Chief Operating
Officer in 2017 and Chief Executive
Designate in November 2018, before
being appointed to the Board in
January 2019.
Relevant skills and contribution to
the Board: Jack brings significant
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.
This enables him to effectively lead
the Group and deliver our ambition to
build A Better TomorrowTM.
External appointments: No
external appointments.
Nationality: Brazilian
Appointed: August 2019
Experience: Tadeu joined the Group
in Brazil in 1992 and joined the
Management Board as Director,
Business Development in 2014, later
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. As Finance and Transformation
Director, Tadeu’s role includes
leadership of the design and delivery
of the Group’s QUEST transformation
programme to accelerate delivery of
Group strategy.
Relevant skills and contribution
to the Board: Tadeu brings broad
experience gained in various national,
regional and global finance and
general leadership roles, through
his previous roles across the Group.
These experiences make Tadeu
particularly well-placed to contribute
to the Group’s transformation and
broader strategic agenda.
External appointments: No
external appointments.
Sue Farr
Non-Executive
Director (64)
Jerry Fowden
Non-Executive
Director (64)
Karen Guerra
Non-Executive
Director (64)
Nationality: British
Appointed: February 2015
Experience: Sue’s extensive career
includes Director, Strategic and
Business Development of Chime
Group and 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.
Relevant skills and contribution
to the Board: Sue contributes
considerable expertise in relation to
marketing, branding and consumer
issues, which are key areas of focus for
the Board.
External appointments: Non-
Executive Director and Chair of the
Remuneration Committee of Accsys
Technologies PLC; Non-Executive
Director of Helical plc; and Non-
Executive Director of Unlimited Group.
Nationality: British
Appointed: September 2019
Experience: Jerry 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.
Relevant skills and contribution to
the Board: 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.
External appointments: Chairman
of Primo; Non-Executive Director
and Chair of the Compensation and
Human Resources Committee of
Constellation Brands, Inc.
Nationality: British
Appointed: September 2020
Experience: Karen has held a variety
of executive roles, including President
and Director General of Colgate
Palmolive France, and Chairman
and Managing Director of Colgate
Palmolive UK Limited. She was
formerly a Non-Executive Director
of Electrocomponents p.l.c., Davide
Campari-Milano S.p.A, Paysafe PLC,
Inchcape PLC, Samlerhuset BV and
Swedish Match AB.
Relevant skills and contribution
to the Board: Karen brings valuable
international experience, particularly
in marketing, sales and consumer
goods insight to the Board.
External appointments: Non-
Executive Director of Amcor p.l.c.
Dr Marion
Helmes
Non-Executive
Director (55)
Nationality: German
Appointed: August 2016
Experience: Marion’s extensive
career includes Chief Financial Officer
positions at Celesio, Q-Cells and
ThyssenKrupp Elevator Technology
and, more recently, she has
served as a member of a variety of
supervisory boards.
Relevant skills and contribution to
the Board: 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 experience as a member of
various supervisory boards enables
Marion to bring a range of insights to
the Board’s discussions.
External 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.
and Supervisory Board member of
Siemens Healthineers AG.
BAT Annual Report and Form 20-F 2020 93
Audit Committee
Nominations Committee
Remuneration Committee
Committee Chairman
Executive Director
Non-Executive Director
Darrell Thomas
Non-Executive
Director (60)
Nationality: American
Appointed: December 2020
Experience: Darrell is currently Vice
President and Treasurer for Harley-
Davidson, Inc., having previously
held several senior finance positions
including Interim Chief Financial
Officer for Harley-Davidson, Inc.,
Chief Financial Officer for Harley-
Davidson Financial Services, Inc.
and Vice President and Assistant
Treasurer, PepsiCo, Inc. Prior to joining
PepsiCo, Inc. Darrell had a 19-year
career in banking with Commerzbank
Securities, Swiss Re New Markets,
ABN Amro Bank and Citicorp/Citibank
where he held various capital markets
and corporate finance roles.
Relevant skills and contribution
to the Board: Darrell brings extensive
US, financial and regulatory
experience to the Board.
External appointments: Vice
President and Treasurer for Harley-
Davidson, Inc.; Board member of
Sojourner Family Peace Center, Inc.
Holly Keller
Koeppel
Non-Executive
Director (62)
Savio Kwan
Non-Executive
Director (72)
Nationality: American
Appointed: July 2017
Experience: Up until April 2018,
Holly was a Senior Advisor to Corsair
Capital LLC, where she had previously
served as Managing Partner and
Co-Head of Infrastructure from 2015
until her retirement in 2017. From 2010
to 2015, she served as Co-Head of
Citi Infrastructure Investors and
prior to 2010 she held financial and
executive management roles with
American Electric Power Company,
Inc. and Consolidated Natural Gas
Company. Holly previously served
as an independent Non-Executive
Director of Reynolds American Inc.
from 2008 until its acquisition by
the Group.
Relevant skills and contribution
to the Board: Holly’s extensive
international operational and financial
management experience in a range of
industry sectors enables her to make
important contributions to the Board.
External appointments: Non-
Executive Director of Vesuvius plc;
Director and Chair of the Governance
Committee of AES Corporation;
Director of Arch Coal Inc.
Nationality: British
Appointed: January 2014
Experience: During his extensive
career Savio 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.
Relevant skills and contribution to
the Board: 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.
External 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 Non-Executive Director
and Advisory Board member of
Homaer Financial.
Dimitri
Panayotopoulos
Senior
Independent
Director (69)
Nationality: Greek/British
Appointed: Senior Independent
Director since April 2020;
Non-Executive Director
since February 2015.
Experience: Dimitri 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.
Relevant skills and contribution
to the Board: 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.
External appointments: Senior
Adviser at The Boston Consulting
Group; Advisory Board member
of JBS USA; Board Member of IRI;
Board Member of North Atlantic
Acquisition Corporation.
Attendance at Board meetings in 20201
Name
Richard Burrows
Jack Bowles
Tadeu Marroco
Sue Farr2(a)
Jerry Fowden
Karen Guerra3(a)
Dr Marion Helmes
Luc Jobin2(b)
Holly Keller Koeppel
Savio Kwan2(c)
Dimitri Panayotopoulos
Darrell Thomas3(b)
Kieran Poynter3(c)
Director since
Scheduled4
Ad hoc
Attended/Eligible to attend
2009
2019
2019
2015
2019
2020
2016
2017
2017
2014
2015
2020
2010-2020
6/6
6/6
6/6
6/6
6/6
2/2
6/6
5/6
6/6
6/6
6/6
0/0
2/2
4/4
4/4
4/4
3/4
4/4
1/1
4/4
3/3
4/4
3/4
4/4
0/0
2/2
Notes:
1. Number of meetings in 2020: The Board held 10 meetings in 2020, four of which were ad hoc and convened at short notice, to review: (1)
revolving credit facilities; (2) filing of the Company’s Annual Report and Form 20-F with the US SEC; (3) the Group’s response to the impact of
COVID-19 and other topics; and (4) succession planning for the role of Chairman.
2. (a) Sue Farr did not attend the second ad hoc meeting in March due to prior commitments; (b) Luc Jobin did not attend the meeting in April
due to prior commitments and was recused from the ad hoc meeting in October which discussed succession planning for the role of
Chairman; and (c) Savio Kwan did not attend the first ad hoc meeting in March due to prior commitments. Directors that are unable to attend
Board or Committee meetings have the opportunity to provide their comments to the Chairman in advance of the meeting.
3. Composition: The Board of Directors is shown as at the date of this Annual Report and Form 20-F; (a) Karen Guerra joined the Board on her
appointment as a Non-Executive Director on 14 September 2020; (b) Darrell Thomas joined the Board on his appointment as a Non-Executive
Director on 7 December 2020. There were no scheduled or ad hoc meetings following his appointment during the remainder of 2020; and (c)
Kieran Poynter retired as a Non-Executive Director at the conclusion of the Company’s Annual General Meeting on 30 April 2020.
4. Number of meetings in 2021: Six Board meetings are scheduled for 2021.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 94
Governance
Management Board
As at 16 February 2021
Jack Bowles
Chief Executive
(57)
See page 92 for
full biography
Tadeu Marroco
Finance and
Transformation
Director (54)
See page 92 for full
biography
Jerome Abelman
Director, Legal &
External Affairs
and General
Counsel (57)
Nationality: American
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 Reynolds
American Inc. from February 2016
until July 2017.
Marina Bellini
Director,
Digital and
Information (47)
Nationality: Italian/Brazilian
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 Comin
Regional Director,
Americas and
Sub-Saharan
Africa (51)
Nationality: Italian/Argentinian
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.
Michael
Dijanosic
Regional Director,
Asia Pacific and
Middle East (49)
Nationality: Australian
Michael was appointed Regional
Director for Asia-Pacific and Middle
East in September 2020 and joined the
Management Board at the same time.
Previously, he was Area Director for
Asia-Pacific and Global Travel Retail.
Michael joined BAT in 1999 and has
held several senior roles in the Group
including General Manager (Papua
New Guinea and Cambodia) and
Regional Manager, Asia-Pacific.
Zafar Khan
Director,
Operations (48)
Hae In Kim
Director, Talent,
Culture &
Inclusion (47)
Paul Lageweg
Director, New
Categories (51)
Nationality: Pakistani
Zafar was appointed Director,
Operations in February 2021
and became a member of the
Management Board at the same
time. Previously, he was Group Head
of New Categories Operations where
he was responsible for successfully
embedding an end-to-end supply
chain for our New Category products
to support their accelerated growth
across the world. Zafar joined BAT
in 1996 and has held several senior
roles in the Group including Regional
Head of Operations Asia Pacific &
Middle East, Group Head of Plan,
Service & Logistics, Regional Head of
Plan and Service for Western Europe
and Head of Operations, Bangladesh.
Nationality: Korean
Hae In joined the Management
Board as Director, Talent and Culture
Designate in January 2019 and
became Director, Talent and Culture
in April 2019. Her role title changed
to Director, Talent, Culture and
Inclusion in November 2020. 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.
Nationality: Dutch
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 Meldrum
President and
CEO, Reynolds
American Inc.
(49)
Dr David O’Reilly
Director,
Research and
Science (54)
Johan
Vandermeulen
Regional Director,
Europe and North
Africa (53)
Kingsley
Wheaton
Chief Marketing
Officer (48)
Nationality: New Zealand
Guy was appointed President and
CEO of Reynolds American Inc.
in September 2020, having joined
the Management Board as Regional
Director, Asia-Pacific and Middle
East in January 2019. Previously he
was Area Director, Australasia Area.
Guy joined the Group in 1993 and has
held several senior roles in the Group
including Area Director, North Asia
Area and Marketing Director, Russia.
Nationality: British
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.
Nationality: Belgian
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.
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.
BAT Annual Report and Form 20-F 2020 Leadership and Purpose
Leadership Overview
95
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.
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 & Accounts and Form 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
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 the Company Secretary.
The key activities of the Board in 2020 are set out on pages 100 to
101. These are discussed under the Group’s strategic priorities of
Driving Value from Combustibles, Step Change in New Categories
and Simplifying the Business, and in the areas of Financial and
Risk, ESG and People.
The Board’s strategic priorities for 2020 are identified within
the key performance indicators set out on page 9. During 2020,
oversight of the impact of COVID-19 and the Group’s response
was also a key activity for the Board.
The Board considers stakeholder interests in its decision-making
on an ongoing basis. Examples of how the Board considers 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 100
to 101.
During the year, the Board also devotes considerable attention
to Group corporate governance, including internal control and
compliance matters.
How our governance framework supports our strategy
As part of our internal controls framework, the Board has
delegated certain authorities to executive management through
the 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 96.
The statement of matters reserved for the Board
is available at bat.com/governance
Board oversight of M&A transactions
See page 272
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.
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 Chairman of each Committee provides a full briefing 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 in 2019 to align
with the Code.
Board Committees
Board
Audit
Committee
See pages
110 to 116
Nominations
Committee
Remuneration
Committee
See pages
105 to 109
See pages
117 to 139
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 94.
Guy Meldrum was appointed as President and CEO, Reynolds
American Inc., and Michael Dijanosic was appointed Regional
Director, Asia-Pacific and Middle East, with effect from
1 September 2020. Ricardo Oberlander stepped down from the
Management Board with effect from 31 August 2020.
Zafar Khan was appointed as Director, Operations with effect from
1 February 2021. Alan Davy stepped down from the Management
Board with effect from 31 January 2021.
Primary Management Board responsibilities include:
– Developing Group strategy for the Group’s product portfolio for
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
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 96
Leadership and Purpose
Our Culture and Values
Shaping and Overseeing Culture
Our Board shapes and supports the Group’s culture and ethos.
We launched the new BAT ethos in 2020 (set out in full on page 59),
which was developed with significant employee input. Its aim is
to guide our culture and behaviours across the Group, enabling an
organisation that is future fit for sustainable growth.
Monitoring Culture
Having considered the Group’s culture in a range of contexts during
the year (including those illustrated below), our Board is satisfied
that our culture is aligned with the Group’s purpose, strategy
and ethos, and reflected consistently in our workplace policies
and practices.
We are
Bold
We are
Fast
We are
Empowered
We are
Diverse
We are
Responsible
We believe our ethos empowers our people and fosters a vibrant,
rewarding and responsible work place. Its focus on diversity and
inclusion enables better understanding, connectivity and insights
across our business. Our purpose, set out on page 19, also requires
new and diverse perspectives, skills, and management styles, and a
culture where these can thrive.
The strength of our culture and ethos has been demonstrated by
the exceptional resilience of our people and their responsiveness
to meeting the challenges presented by COVID-19. Our Board is
committed to supporting Jack, Tadeu and our Management Board
in continuing to embed the BAT ethos in every area of our business.
Our Group Statement of Delegated Authorities (SoDA) aims to
empower people at the right level of our organisation and promote
high levels of accountability and ownership. 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 in the Group. The SoDA supports
our Board members in managing their responsibility for promoting
the success of the Company, in line with their directors’ duties.
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), which we review and
update regularly. Compliance with our SoBC, in letter and spirit, is
mandatory for all our people worldwide.
Our SoBC holds everyone responsible for compliance, and every
line manager across our business must act as a role model for
high standards of behaviour. The SoBC includes our Speak Up
policy, reflecting the range of Speak Up channels for raising any
concerns in confidence (anonymously if preferred) and without fear
of reprisal. The SoBC also includes our Lobbying and Engagement
policy, 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 kept updated on SoBC allegations.
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 56 to 57
During 2020, Board oversight and monitoring of culture was
supported by the Board’s annual review of the Group culture
dashboard. This dashboard presents a series of insights measured
over time across the organisation, including diversity at different
levels, employee engagement, leadership stability, employee
retention and turnover, business conduct, Speak Up, and health &
safety.
Outside of the boardroom, the Directors typically participate in
regular market and site visits, giving them direct experience of our
organisational culture in context. In 2020, COVID-19 impacted the
Directors’ travel programme. However, the market and site visits
that took place early on in the year were supplemented by virtual
forums later in 2020. Board engagement with the workforce across
our Group is discussed further on page 98.
Board focus on culture in 2020
Non-Executive Director visit
United States
In January 2020, Richard
Burrows, Luc Jobin and
Jerry Fowden met with
representatives from our US
business, visited marketing
operations in Atlanta, Georgia
and toured the RJ Reynolds
Tobacco Company factory and
R&D operations in Winston-
Salem, North Carolina.
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 ethos; and talent
strategy for accelerating
business transformation,
including building diverse
talent pipelines.
Board review
Enterprise of the future
Assessing the accelerators
required to drive the Group’s
ambition and evolve a
future fit, interconnected
organisation, through delivery
of transformation, unleashing
innovation, organisational
empowerment and shaping
sustainability, enabled by
digital capabilities.
Board oversight
Staff safety, wellbeing
and support
Considering the impact of
COVID-19 on staff across
the Group and reviewing
strategies for securing a
safe environment for staff
continuing to work on-site
where necessary, effective
connectivity for staff working
remotely, and supporting
staff wellbeing.
Board review
Group workforce engagement
Review of Group workforce
engagement mechanisms,
feedback received from
engagement channels across
the Group, actions taken
in response to workforce
feedback, and considering
areas for future focus.
Read more on page 98.
Board Oversight
Keeping connected during
the pandemic
Oversight of an extensive
range of dynamic internal
communications and virtual
engagement by Executive
Directors and management
with staff across the Group,
to help staff feel connected
and supported during the
pandemic and to recognise
their resilience.
BAT Annual Report and Form 20-F 2020 97
Board Engagement
With Stakeholders
Our Directors value engagement with our shareholders and wider
stakeholders to understand their views and inform the Board’s
decision-making, strategy development and risk assessment.
Shareholder and Investor Engagement
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.
Annual investor relations programme
A global engagement programme is conducted annually with
shareholders, potential investors and analysts. This is led by the
Chairman and Executive Directors, supported by the Investor
Relations team which was expanded in 2020. During the year, there
was a significant increase in shareholder engagement, particularly
by Executive Directors and management, with greater frequency of
communications and an emphasis on ESG strategy.
In view of COVID-19 restrictions, our engagement programme was
adapted to leverage digital interaction, enabling more of investor
contacts through a broader range of event formats (roadshows,
fireside chats, presentations, video and audio webcast). In total,
463 investor engagement activities were conducted in 2020
entirely through digital formats.
The Executive Directors presented our Full and Half-Year
results and pre-close statements, with investor Q&A calls.
Presentations and transcripts are published on bat.com. In March
2020, 645 internal and external participants attended our Capital
Markets Day, successfully adapted to webcast format, including
a record 250 investors and market analysts across the US, UK,
Europe and South Africa. At our Capital Markets Day, Jack Bowles
launched our corporate purpose to build A Better TomorrowTM and
presented our new ESG targets. Management Board members
presented on business transformation and the event concluded
with live Q&A with the investment community.
In 2020, market roadshows were held in the UK, US, South Africa
and Europe for existing and prospective shareholders, covering
the majority of our share capital. With COVID-19 focusing investor
attention on sustainable dividends and ESG, management hosted
roadshows for income funds and ESG investors. Topics discussed
at market roadshows included our transformation progress,
COVID-19 response, regulatory change, capital allocation
priorities and ESG strategy. Two investor perception studies were
commissioned in 2020, providing comprehensive feedback from
107 investors on our engagement and ESG strategy.
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 receives
regular updates from the Head of Investor Relations and our
brokers on key issues raised by shareholders and on share price
performance. Shareholder perspectives considered by the Board
during 2020 included business transformation, New Categories
strategy, performance, ESG targets, impact of COVID-19,
deleveraging, capital allocation and regulatory developments.
The Board discusses key issues raised and takes shareholder
feedback into account in developing Group strategy.
Annual General Meeting
Our AGM is an opportunity for further shareholder engagement, for the
Chairman to set out progress and for the Board to answer questions.
Our 2020 AGM was held whilst the UK Government’s COVID-19 ‘Stay
at Home’ measures were in force, which prohibited public gatherings
of more than two people. Given those restrictions, our 2020 AGM was
convened with a minimum quorum of two shareholders in accordance
with the Company’s Articles of Association and other shareholders
were not permitted to attend. Shareholders were given the opportunity
to submit questions about the business of the AGM in advance of
the meeting and responses to the queries received were published at
www.bat.com/agm. Details of our 2021 AGM are set out on page 343.
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
Investor relations calendar 2020
February
March
April
May
June
July
August
September
October
November
December
FY 2019
Preliminary
Announcement
Roadshows
Conferences
Pre-AGM
Statement
& AGM
Pre-Close
Trading
Update
Half-Year
Report
Pre-Close
Trading
Update
Capital
Markets
Day
London,
US & South
Africa; Pre-
AGM & Exec
remuneration
Income
Fund; US;
Europe
London
US &
South
Africa
Hedge
Funds
ESG
Global
Consumer
Canada
Consumer
Global
Consumer
Global
Consumer
Global
Consumer;
US & Europe
ESG &
Global
Consumer
Extensive one-to-one engagement with shareholders throughout 2020
Update on 2020 AGM voting results
All resolutions were passed at the Company’s AGM held on 30 April 2020 with
the requisite majority of votes. However, we acknowledge the minority vote
against received in relation to the 2019 Directors’ Remuneration Report and the
resolution to renew the Directors’ authority to allot shares.
Directors’ Remuneration Report
We have engaged with a number of shareholders that voted against this
resolution to understand their position and perspectives on the management
of executive pay and, in particular, within the evolving market context.
The Remuneration Committee has discussed the feedback in detail and the
matters raised by shareholders remain under active consideration in 2021.
Renewal of Directors’ Authority to Allot Shares
Whist we recognise that some shareholders are unable to support an
allotment authority at the level sought, this level of authority continues to be
supported by the majority of our shareholders and is in line with prevailing
UK market practice and the UK Investment Association’s share capital
management guidelines.
Although there is no present intention to exercise this authority, the Board
continues to consider 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 will keep market practice in this area under review.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 98
Leadership and Purpose
Board Engagement With Stakeholders
Continued
Wider Stakeholder Engagement
Our People
A broad range of stakeholders are important to the Group at local,
regional and functional levels. Key stakeholders 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.
Our key stakeholders are set out on pages 82 to 83, with an
overview of their importance to our long-term sustainable success,
what matters to them, and how we engage and respond. Our Board
conducted a review of key stakeholders in 2020. This included
how engagement is conducted across the Group, stakeholders’
perspectives, and how the Board is kept informed of those
perspectives where engagement is not at Board level. During the
year, the Board also considered the impact of COVID-19 across our
key stakeholders.
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.
Following its review, our Board remains satisfied that there is
effective and well-established engagement with the Group’s
key stakeholders which enables the Board to understand their
perspectives. The Board will continue to monitor the ongoing
effectiveness of our Group’s stakeholder engagement.
Read more about our key business stakeholders and how we engage
Pages 82 to 83 and 117 to 119
Where the Board does not engage directly with our stakeholders,
it is kept updated so Directors maintain an effective understanding
of what matters to them and can draw on these perspectives,
including in Board decision-making and strategy development.
Examples of how the Board engaged with wider stakeholders and
maintained its understanding of their interests during the year
follow below.
Consumers
Our consumers are at the core of everything we do. Consumer-
led innovation and product science are central to achieving our
purpose of building A Better TomorrowTM. We believe that our
multi-category approach is the most effective way to appeal to the
diverse preferences of adult consumers worldwide.
The Board is regularly briefed by the Executive Directors and
senior management on product performance across all portfolio
categories and how product offerings continue to evolve to
satisfy adult consumer preferences across our New Categories
and traditional portfolios. In 2020, the Board was updated on how
product roll-out plans and consumer activations were adapted to
accelerate digital engagement and e-commerce platforms have
been enhanced to respond to challenges presented by COVID-19
and enable continued consumer engagement.
Through its strategy sessions in 2020, the Board reviewed
how consumer insights, product preferences and the Group’s
approach to scientific product stewardship support delivery of
superior product pipelines and a step-change in New Categories
performance. The Board also discussed opportunity spaces to
recapture consumer moments and needs beyond nicotine.
Read more about our approach to engaging with consumers
Pages 29 to 43 and 82
The Board keeps up-to-date on 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, discussed further on pages 62 to 63.
Director market visits and other engagement forums in 2020*
5
Events with
Directors
6
Events with
Directors
5
Events with
Directors
5
Events with
Directors
11
Events with
Directors
US
AmSSA
Centre
ENA
APME
* Total virtual or face-to-face events by location/central function
in 2020 that one or more Directors attended.
Matters reserved for the Board include responsibility for
understanding the views of our global workforce and review of
the effectiveness of workforce engagement mechanisms, in
accordance with the Code.
The Board adopts a combination of workforce engagement
mechanisms in line with the Code. Given the spread, scale and
diversity of the Group’s workforce, the Board continues to consider
it effective to use the established channels referred to above.
These channels, combined with Group-wide reporting structures
to capture workforce feedback, cover all Group company
employees and individuals contracted on a fixed-term basis to
undertake permanent roles worldwide. Focus and action areas
reviewed by the Board are then cascaded to our workforce.
Engagement across our organisation has been a top priority during
COVID-19. The Board reviewed our workforce engagement channels
across the Group and consolidated feedback from across those channels
in 2020. The overarching themes from this feedback were business
transformation, New Categories, and staying connected. The Board
reviewed the actions taken by management in response, particularly on
staff health and wellbeing and effective team connectivity.
Our Directors also take the opportunity to engage directly with
people across our organisation. In January 2020, Richard Burrows,
Luc Jobin and Jerry Fowden met with representatives from our
US business, visited marketing operations in Atlanta, Georgia
and toured the RJ Reynolds Tobacco Company factory and R&D
operations in Winston-Salem, North Carolina.
During the year our Executive Directors led a series of virtual
market visits and other forums to connect regularly with regional,
local and functional teams, participated in our internal global
news channel BATV, and presented global, functional and market
webcasts including discussions on strategy, performance, culture
and business outlook, with live Q&A.
Read more about workforce engagement across our Group
Pages 62, 63, 82 and 122
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 58 to 63 and 82 to 83. Information regarding the effect of that
regard is provided on pages 100 to 101.
BAT Annual Report and Form 20-F 2020 99
Suppliers
Our relationships with suppliers and contracted 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 2020, the Board was regularly updated on the impact of
COVID-19 on our operations and supply chain, mitigating actions
taken to avoid resulting supply chain disruption, and initiatives
to support suppliers in responding to the impact of COVID-19.
These included earlier payment arrangements for suppliers facing
cash flow issues.
The Board reviewed key elements of the Group’s tobacco sourcing
strategy, nicotine supply chain, and sourcing footprint. The Board
was also updated on the Group’s approach to managing ESG
across the tobacco supply chain, including environmental
management, deforestation monitoring, and the Group’s THRIVE
programme which responds to insights from engagement with our
contracted farmers and third-party tobacco suppliers.
The Board reviewed the annual Modern Slavery Statement,
including actions taken to address the risk of human rights issues
across our subsidiary operations and supply chains. The Board also
gave approval to the Company’s first Conflict Minerals Report prior
to filing with the US SEC, which details due diligence undertaken
to determine the origin of minerals at risk of being sourced in
conditions of conflict.
Read more about how we engage with our suppliers and farmers
Pages 3,48, 53 to 55 and 83
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 route to market strategies and
developments in the global retail environment.
In 2020, focus areas for Board updates included the impact of
COVID-19 on retailers, wholesalers and distributors and how
markets were adapting to maintain their engagement with
customers, including through setting up field force virtual
store visits, boosting e-commerce capabilities and innovative
distribution models to enable stock pick-ups.
The Audit Committee also reviews the Group’s Youth Access
Prevention activities and action plans annually.
Read more about how we engage with our customers
Pages 3, 57 and 83
Governments and Wider Society
We believe tobacco harm reduction can only be solved by
collaboration, and that only through collaborative effort can
effective regulation be developed to enable real consumer choice
whilst still serving tobacco-related public health objectives.
The Board is briefed on scientific engagement with regulators,
public health bodies, and scientific communities. In 2020, this
included updates on engagement with regulators on a potential
COVID-19 vaccine being developed by our US bio-tech subsidiary,
Kentucky BioProcessing, discussed further on page 3.
At every regular Board meeting, the Board reviews a report
from our Legal & External Affairs Director covering regulatory
engagement, anti-illicit trade initiatives, litigation and compliance.
The Board is also briefed on evolving product regulation through
strategy sessions and briefings from the Chief Executive.
The Board endorsed new Group environmental targets in 2020,
including to accelerate achievement of existing 2030 targets to
2025 and attain carbon neutrality by 2030. The Board also reviewed
the Group’s progress against those targets during the year.
The Audit Committee reviews the Group’s ESG performance
annually, including our investment in community and charitable
initiatives under the Group’s Strategic Framework for Corporate
Social Investment. It is also updated on engagement with tax
authorities on material Group tax matters. The Non-Executive
Directors regularly attend the Corporate Audit Committee and
Regional Audit & CSR Committees, where societal and community
perspectives at regional and local levels are discussed. The Audit
Committee also reviews feedback from these Committees.
The Chairman is a member of a number of forums enabling
engagement with the UK Government on topics such as global
trade, Brexit and cyber security. These include the Confederation
of British Industry, the Multinational Chairman Group and the
Whitehall & Industry Group. The Chairman also participates in the
Global Leadership Foundation (GLF), a stakeholder network helping
developing countries improve governance.
Read more about our engagement with governments and wider society
Pages 35, 44 to 57 and 83
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 82 to 83.
Information regarding the effect of that regard is provided on pages 100 to 101.
Sustainability Stakeholder Panel
To enhance its understanding of what matters to our stakeholders, the
Board maintains annual Non-Executive Director participation in meetings
with our Sustainability Stakeholder Panel.
The Panel is formed of key opinion leaders in the areas of tobacco harm
reduction, environment, human rights and business ethics. It was
established in 2016 to provide independent and objective feedback on our
ESG agenda, priorities and our ESG Report.
In November 2020, Richard Burrows, Luc Jobin and Savio Kwan, with
members of senior management, held a virtual conference with the
Panel to review key business and strategic developments in relation to
our corporate purpose and sustainability agenda, insights on evolving
ESG issues that could impact our wider stakeholders, and approach to
accelerating delivery of our ESG agenda.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 100
Leadership and Purpose
Board Activities
in 2020
1
Step Change in
New Categories
Performance
Drive Value
From Combustibles
Simplify the
Business
Continued investment and development of
New Categories to accelerate growth is a
strategic focus of the Board’s agenda.
Driving value from combustibles is a core
priority for the Board, to deliver today and
build A Better TomorrowTM.
The Board understands our business is enabled
by simplifying our structures, embracing digital
transformation, and rigorous cost management.
Activities in 2020
Activities in 2020
Activities in 2020
– reviewing implementation of the first
phase of the Quantum transformation
project, and the design and objectives
of a further phase of the Quantum
project to deliver operational efficiencies,
route-to-market focus and supply chain
productivity, enabling release of funds
for reinvestment;
– assessing the accelerators
required to deliver the Group’s 2025
ambition and evolve a future fit,
interconnected organisation;
– reviewing the Group’s digital strategy,
including progress of the Group’s
digital transformation agenda, risk
management and cyber security; and
– oversight of progress across the Group
to transition certain Modern Oral
product brands to Velo and certain
vapour product brands to Vuse, as
part of the Group’s focus on fewer,
stronger and global brands across all
product categories.
– reviewing Group strategy to accelerate
New Category growth and its
implementation across the Group;
– reviewing Group strategy to drive
value from combustibles and its
implementation across the Group;
– reviewing Group combustible product
performance, trading environment,
competitor landscape and the impact
of COVID-19 and national lock-downs on
performance across the Group;
– reviewing combustible product
portfolios, innovation pipeline and roll-out
plans, including to respond to the impact
of COVID-19;
– reviewing the impact of COVID-19 on the
Group’s combustible products supply
chain, the Group’s factory operations
and steps taken to deliver continuity of
supply; and
– reviewing the Group’s leaf strategy to
source leaf and tobacco components
to deliver sustainable value and
superior products, and the Group’s
tobacco sourcing footprint and key
supplier partnerships.
– reviewing New Categories product
performance, trading environment and
competitor landscape;
– reviewing New Categories product
portfolios, innovation pipeline and roll-out
plans, including roll-out plan adaptation in
response to COVID-19;
– reviewing the impact of COVID-19 on the
New Categories supply chain and steps
taken to deliver continuity of supply;
– reviewing key aspects of the Group’s
nicotine supply chain, leaf strategy and
sourcing footprint to support a step
change in New Categories;
– reviewing the Group’s approach to
product stewardship and science
underpinning development of New
Categories products;
– reviewing the New Categories product
environment, with particular focus on
evolving product regulation in the US; and
– oversight of the structure, resources and
key objectives for the Group’s corporate
venture capital unit, ‘BTomorrow
Ventures’, established to enhance value
creation in New Categories through
innovative and agile relationships with
venture capital partners.
Examples of how the Board considered stakeholders, the environment,
corporate reputation, and the long-term impact of decisions
A Better TomorrowTM
A Better Tomorrow
The Board reviewed and endorsed the evolution
of the Group’s strategy, presented at pages 18
The Board reviewed and endorsed the evolution
to 19, with sustainability front and centre, and
of the Group’s strategy, presented at page
a clear corporate purpose to build A Better
[*], with sustainability front and centre, and
TomorrowTM for the Group’s stakeholders.
a clear corporate purpose to build A Better
The evolution of the Group’s strategy reflects
Tomorrow for all our stakeholders. The evolution
the Board’s understanding of the global impact
of the Group’s strategy reflects the Board’s
of our business, stakeholder perspectives,
understanding of the global impact of our
our evolving societal responsibilities, and the
business, our evolving societal responsibilities,
importance of high standards of integrity.
and the importance of high standards
of integrity.
Key stakeholder
perspectives taken
Key stakeholders
into account
Shareholders/
Bondholders
Shareholders/
Bondholders
Consumers
Consumers
Customers
Customers
Suppliers
Suppliers
Our people
Our people
Governments and
Governments and
wider society
wider society
Digital strategy
Digital strategy
The Board endorsed the Group’s digital strategy,
to accelerate digital capabilities across the
The Board endorsed the Group’s digital strategy,
organisation. The strategy focuses on efficient
to accelerate digital capabilities across the
ways of working, agile supply chains and
organisation. The strategy focuses on efficient
enhanced consumer and customer connections,
ways of working, agile supply chains and
including through innovation in product
enhanced consumer and customer connections,
activation and e-commerce, while maintaining
including through innovation in product
a stable, effective and secure technology
activation and e-commerce, whilst maintaining
environment and continuing to respond to the
a stable, effective and secure technology
impact of COVID-19.
environment and responding to the impact of
COVID-19.
Key stakeholder
perspectives taken
Key stakeholders
into account
Shareholders/
Bondholders
Shareholders/
Bondholders
Consumers
Consumers
Customers
Customers
Suppliers
Suppliers
Our people
Our people
Governments and
Governments and
wider society
wider society
BAT Annual Report and Form 20-F 2020 101
Financial and Risk
Environmental, Social
and Governance
People
The Board pays close attention to Group
performance and financial matters, internal control,
and integrity of reporting and risk management.
The Board emphasises that our strategy, business,
and product portfolio be sustainable for the long
term and meet our evolving societal responsibilities.
The Board shapes and oversees the Group’s culture
and ethos. Setting the ‘tone from the top’ is an
important part of the Board’s role.
Activities in 2020
Activities in 2020
Activities in 2020
– approval of Group budget and oversight
of resource allocation activities, to
support strategy execution;
– reviewing Group financial performance
– reviewing the evolution of Group strategy,
placing ESG front and centre of Group
activities, approving new ESG targets and
reviewing performance;
against key performance metrics, current
outlook and COVID-19 impact throughout
the year, key challenges and opportunities
for growth in each region;
– assessing the impact of COVID-19 on
Group operations, Group business
continuity structures and plans to
manage the Group’s response;
– approving the appointment of Luc Jobin
as Chairman Designate and then to
succeed Richard Burrows as Chairman of
the Board, the appointment of two new
Non-Executive Directors, and changes
to Management Board composition,
on the recommendation of the
Nominations Committee;
– reviewing Group half-year results, trading
updates, year-end results and the Annual
Report and Form 20-F;
– reviewing Group stakeholders,
engagement methods, stakeholders’
perspectives, and the Group’s response;
– determining Group viability for reporting
purposes taking into account current
position and principal risks;
– reviewing compliance with Group
financing principles, including liquidity,
capital allocation and adjusted net debt/
EBITDA;
– reviewing the Group’s revolving credit
facilities, planned refinancings and the
Group’s debt issuance programmes;
– reviewing Group cash flow performance
and opportunities to optimise the balance
sheet to enable ongoing investment while
reducing the carrying value of debt;
– reviewing the Group Risk Register, Group
risk appetite in the context of its strategic
objectives, emerging risks to the Group,
and Group insurance coverage;
– reviewing the impact of foreign exchange
on financial performance and measures
taken to mitigate foreign exchange risks;
– reviewing share price performance and
investor and broker perspectives; and
– reviewing financial performance of the
associates of the Group periodically.
– reviewing Group regulatory engagement
activities and evolving global
product regulation;
– reviewing health and safety performance
for the preceding year, targets for the
coming year and action plans;
– approving the annual Modern Slavery
Act statement and the Company’s first
conflict minerals report;
– reviewing updates on compliance
matters, including investigations,
allegations of misconduct, reports
from Speak Up channels, and progress
of the Group’s ‘Delivery with Integrity’
programme; and
– reviewing the status of litigation
proceedings involving Group companies,
including updates on the Canadian
Companies’ Creditors Arrangement
Act (CCAA) process in relation to Group
subsidiary Imperial Tobacco Canada, Fox
River and Kalamazoo River proceedings,
and claims brought by Reynolds
American dissenting shareholders
following acquisition of the remaining
shares in Reynolds American.
– monitoring corporate culture and its
alignment with the Group’s purpose,
ethos and strategy;
– reviewing the Group’s talent strategy,
diversity and inclusion agenda, and
progress against their objectives;
– considering the impact of COVID-19 on
the Group’s workforce and reviewing
strategies for securing safe on-site
environments, effective connectivity
for remote working, and for supporting
staff wellbeing;
– considering feedback from the Group’s
workforce engagement mechanisms;
– reviewing Speak Up mechanisms and the
reports arising from them;
– 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;
– approving revisions to Non-Executive
Director fees;
– reviewing the funding positions relating
to the Group’s retirement benefit
schemes; and
– reviewing the outcomes of the evaluation
of the effectiveness of the Board and its
Committees in 2020.
Budget and resource allocation
The Board approved the 2021 budget,
weighing the balance between long-term
corporate and consumer benefits of New
Categories investment and continued portfolio
development with our commitment to
significant deleveraging. The budget design
enables evolution of our growth model through
development of our portfolios in tobacco,
nicotine and beyond to meet evolving consumer
preferences and encompasses our commitment
to robust product stewardship, research and
collaborative innovation to meet those needs.
Key stakeholder
perspectives taken
into account
Shareholders/
Bondholders
Consumers
Customers
Suppliers
Our people
Governments and
wider society
New ESG targets
The Board approved new ESG targets to: have
50 million consumers of non-combustible
products by 2030; achieve carbon neutrality
by 2030; and to bring forward existing 2030
environmental targets to 2025, together
reflecting the Board’s commitment to reducing
the health and environmental impacts of our
business. These targets take into account the
emphasis placed by our external stakeholders
on the importance of addressing the health
impacts of smoking, responding to climate
change, and maintaining high standards of
environmental management.
Key stakeholder
perspectives taken
into account
Shareholders/
Bondholders
Consumers
Customers
Suppliers
Our people
Governments and
wider society
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 102
Governance
Division of Responsibilities
This section sets out the roles, and effective division of responsibilities, between
the Chairman, Executive Directors 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.
The responsibilities of the Chairman,
Executive Directors and Senior
Independent Director are available at
www.bat.com
Chairman
– Leadership of the Board
– Ensures Board effectiveness
– Facilitates Directors’ contributions
– Sets the Board agenda
– Interfaces with shareholders
– Ensures effective
shareholder engagement
– Representational duties on behalf
of the Company
Non-Executive Directors
– Oversee Group strategy and
resource allocation
– Scrutinise and hold to account
performance against objectives
– Monitor Group performance
– Oversee systems of control and
risk management
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
– Review management proposals and
– Intermediary for other Directors
provide strategic guidance
– Bring external perspective and
effective challenge to management
– Available to meet with shareholders
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
Finance and
Transformation Director
– Leadership of the Group in respect
of financial matters
– Enables planning and execution of Group
financial objectives and strategies
– Leadership of the design and delivery
of the Group’s QUEST transformation
programme to accelerate delivery of
Group strategy
Non-Executive Director meetings
– The Non-Executive Directors, led by the Chairman, meet prior to or following Board meetings on a regular basis.
Additional meetings led by the Chairman are scheduled in the Board calendar without the Executive Directors present.
– 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.
BAT Annual Report and Form 20-F 2020 103
Board Efficacy
The Board adapted well to the disruption caused by the pandemic,
transitioning to virtual board meetings in March 2020. The Board
evaluation for 2020 noted that this format worked well and
that Board meetings are considered to be chaired effectively.
The support of the Company Secretariat in enabling the Board to
function effectively was also noted in the Board evaluation.
The Chairman facilitates constructive board relations, supporting
the effective contribution from Non-Executive Directors and a
culture of openness and debate. The Chairman seeks a consensus
at board meetings but, if necessary, decisions are taken by majority
decision. 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 2020.
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 in 2017 following the acquisition of Reynolds
American Inc. (Reynolds American) and pursuant to the Agreement
and Plan of Merger with Reynolds American, the Board has
determined each of them to be independent Directors, having
taken into account their respective periods of service on the board
of Reynolds American 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.
The Board considers that it includes an appropriate combination of
Executive and Non-Executive Directors.
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. The Board assesses
the significance of any additional external appointment notified
by a Director, supported by the Company Secretary.
During 2020, the Board was not notified of any new significant
external appointments for consideration and approval.
Board Induction For New Non-Executive Directors
Darrell Thomas was appointed to the Board on 7 December
2020 and will complete his Non-Executive Director induction
early in 2021.
Darrell’s induction programme comprises a
comprehensive series of briefings with Board
members, senior management, the Company’s
external auditors and external advisers,
including specific focus on accounting
and reporting matters.
Darrell’s induction programme
will be reported in the Annual Report
and Form 20-F for 2021.
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, other senior executives and outside advisors.
Non-Executive Directors regularly attend meetings of the Group’s
Regional Audit and Corporate and Social Responsibility Committees
and Corporate Audit Committee to gain a better 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 meet with our Sustainability Stakeholder Panel by
rotation to keep up to date with wider stakeholder perspectives.
As part of the Board’s review of workforce engagement in 2020, it
received a recap on its obligations under the UK Corporate Governance
Code to monitor the effectiveness of engagement channels. The Board
also revisited directors’ duties under Section 172 of the UK Companies
Act 2006 through its review of key stakeholder engagement in 2020.
During the year, the Audit Committee was updated on stakeholder
expectations for climate change reporting, proposals to reform the UK
audit market and the UK Financial Reporting Council, and revisions to UK
auditing standards and their impact.
The Chairman meets with each Non-Executive Director individually
towards the end of each year, to discuss their individual training and
development plans.
Board Induction
All Directors receive a thorough and personalised induction on
joining the Board.
Karen Guerra completed her Non-Executive Director induction
programme in Q4 2020 following her appointment to the Board
on 14 September 2020.
Due to COVID-19 restrictions, Karen’s induction was conducted
through virtual meetings, and included sessions with the Chairman,
Senior Independent Director and the Executive Directors and
a comprehensive series of briefings with Management Board
members and other senior management covering the Group’s
strategy, business regions, product portfolios, ESG agenda,
shareholder and wider stakeholder engagement programmes
and stakeholder perspectives, evolving regulation, corporate
governance, directors’ duties and treasury, risk, and legal matters.
Karen also had one-to-one sessions with the Company’s external
audit partner and, in view of her appointment to the Remuneration
Committee, with our UK and US remuneration consultants
on the executive and wider remuneration landscape and
corporate governance.
When COVID-19 restrictions permit, Karen’s induction will
be extended to include a visit to our Global R&D Centre in
Southampton to meet with scientists and product developers,
and attend New Categories ‘look and feel’ exploration sessions.
Luc Jobin is currently participating in a broad, personalised
induction to the role of Chairman and his induction programme
will be reported in the Annual Report and Form 20-F for 2021.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 104
Composition, succession, evaluation
Board Effectiveness
Review Process
The performance and effectiveness of the Board, its Committees,
the Executive and Non-Executive Directors and the Chairman were
evaluated internally in 2020, facilitated by the Company Secretary.
An external evaluation of the Board, its Committees and the
Directors was conducted in 2019, facilitated by Independent
Audit Limited.
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.
The evaluations were conducted through a series of detailed
questionnaires and all participants were requested to provide
commentary to support their assessments.
All Directors (except for Karen Guerra, who had just joined the
Board, and Darrell Thomas, who joined the Board after the
evaluation) participated in the evaluation process, assessing the
Board, the Committees of which they were a member or regularly
attended in 2020, 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 the Company Secretary for the Board and
each Committee. The Board and Committees then reviewed and
discussed their respective reports and identified action areas for
2021 taking into account the evaluation findings.
The Chairman received reports from the Company Secretary
on the performance and effectiveness of all Executive and Non-
Executive Directors (other than himself) in 2020 and he provided
individual feedback to each Director.
The Senior Independent Director received a report from the
Company Secretary 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.
2020 Evaluation: Outcomes and Actions
The Board considers that it, its Committees and its Directors, continue to
function effectively and that the working relationships between the Board
and its Committees continue to be sound.
Leadership and culture
The Board recognised the outstanding effort of the Executive
Directors throughout the challenges presented by COVID-19.
Directors appreciated the regularity of frontline feedback to
the Board as the pandemic unfolded. The Executive Directors
are recognised as being open and participative with both the
investment community and the Board, and are acknowledged
to have fostered a cultural shift to a more dynamic tone of
communication across the organisation.
The range of grassroots feedback from employee engagement
provided to the Board is considered to have facilitated its
oversight of organisational culture, in response to the action
identified in the 2019 evaluation.
Action for 2021
– Board review of Nominations Committee analysis of strategic
profile and capabilities required of future Non-Executive
Directors in the context of Group strategy.
Strategy
The Board regarded the communication of the evolved Group
strategy to be well articulated by the Executive Directors.
The Executive Directors’ energy in driving the Group’s purpose and
ethos throughout the organisation was considered by the Board
to be unifying and to set the stage for execution.
The 2020 Board strategy sessions were well received and seen
as a key forum for Non-Executive Directors to contribute to the
development of Group strategy.
In response to actions identified in the 2019 evaluation, the Board
looked at industry trends as part of its review of the Group’s digital
strategy. The Remuneration Committee also continued its review
of the reward strategy to support its ongoing effectiveness,
including management pay comparator group benchmarking.
Action for 2021
– Additional time to be reserved on the Board agenda for deep
dives on strategic objectives and review of major initiatives.
Risk management
The Board’s monitoring of key risks and oversight of compliance is
considered to be effective. In response to actions identified in the
2019 evaluation, the Board reviewed Group business continuity
planning and management structures in the context of monitoring
the Group’s response to COVID-19. The Audit Committee also
conducted detailed reviews of technology and risk topics.
Action for 2021
– Further enhance the Board’s understanding of strategic
opportunities and risks presented by evolving technologies.
Dynamics and information
Board and Committee meetings are considered to be chaired
effectively, with Company Secretariat support well regarded.
In response to actions identified in last year’s evaluation, and
to enable effective virtual Board meetings in a COVID-19
context, a greater emphasis was placed on focused pre-
read and presentation materials. The fully virtual meeting
format is viewed to have worked well for the Board given the
operational constraints.
Action for 2021
– Further emphasis in the Board agenda on market analysis,
competititor performance, and emerging issues.
Composition and succession
Overall diversity, skills, and experience of Board composition was
viewed to have progressed well in 2020, despite disruption caused
by COVID-19, with potential for Board expertise to be augmented
further in strategic capabilities such as digital.
The Chairman succession process was considered to
have been full and inclusive, involving all Board members.
Nominations Committee oversight of executive talent
management is well regarded and considered effective.
Action for 2021
– Strategic analysis of the profile, skills and experience required
of Non-Executive Directors for future Board succession planning
to be conducted by the Nominations Committee.
BAT Annual Report and Form 20-F 2020 Composition, Succession, Evaluation
Nominations Committee
105
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, in relation
to the Board, independence;
– 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;
– making recommendations to the Board on suitable candidates
for appointments to the Board, the Management Board and
Company Secretary, 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 109.
Key Activities in 2020
– Identifying a successor to the Chairman and recommending to
the Board the appointment of Luc Jobin as Chairman Designate
from 1 March 2021, and to succeed Richard Burrows as Chairman
from the conclusion of the 2021 AGM. This process was led by
the Senior Independent Director and his report on this process is
set out on page 106.
– Making recommendations to the Board in respect of Non-
Executive Director and Board Committee appointments,
including appointment of Karen Guerra as a Non-Executive
Director and to the Remuneration and Nominations Committees
and Darrell Thomas as a Non-Executive Director and to the Audit
and Nominations Committees, discussed further on page 107.
– Making recommendations to the Board to appoint a new
President and CEO of Reynolds American Inc. and a new Regional
Director, Asia-Pacific and Middle East to the Management
Board, with effect from 1 September 2020 as set out at page 95.
– Overseeing the Group’s diversity & inclusion agenda, how
this underpins the Group’s strategic priorities for talent and
culture, and progress across the Group in driving ownership and
accountability for diversity and inclusion, building diverse talent
pipelines and creating enablers across the organisation.
– Making recommendations to the Board in relation to Directors’
annual appointment and re-election at the AGM, discussed
further on page 107.
– Reviewing the Executive Directors’ and Management Board
members’ annual performance assessments and assessing the
progress of development plans for candidates for Management
Board roles.
– Reviewing the Group’s talent and culture strategic priorities,
their alignment to Group strategy, and progress in the core
focus areas of attracting the best talent, investing in leaders,
leadership for change and empowering the organisation.
– Reviewing the Committee’s effectiveness in 2020, following the
Committee evaluation process, discussed further on page 104.
Richard Burrows
Chairman of
the Nominations
Committee
Nominations Committee current members
Richard Burrows (Chairman)
Sue Farr
Jerry Fowden
Karen Guerra
Dr Marion Helmes
Luc Jobin
Holly Keller Koeppel
Savio Kwan
Dimitri Panayotopoulos
Darrell Thomas
Attendance at meetings in 20201(a), 2(a)
Name
Member since
Scheduled
Ad hoc
Attended/Eligible to attend
Richard Burrows
Sue Farr
Jerry Fowden
Karen Guerra2(b)
Dr Marion Helmes
Luc Jobin1(b)
Holly Keller Koeppel
Savio Kwan
Dimitri Panayotopoulos
Darrell Thomas2(c)
Kieran Poynter2(d)
2009
2015
2019
2020
2016
2017
2017
2014
2015
2020
2010
2/2
2/2
2/2
0/0
2/2
2/2
2/2
2/2
2/2
0/0
1/1
3/3
3/3
3/3
3/3
3/3
2/2
3/3
3/3
3/3
0/0
0/0
Notes:
1. Number of meetings in 2020: (a) the Committee held five meetings, three of which were ad
hoc; and (b) Luc Jobin was recused from the ad hoc meeting in October and part of the ad
hoc meeting in September which discussed succession planning for the role of Chairman.
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; (b) Karen Guerra became a member
of the Committee on 14 September 2020 on her appointment as a Non-Executive Director;
(c) Darrell Thomas became a member of the Committee on 7 December 2020 on his
appointment as a Non-Executive Director. There were no scheduled or ad hoc Committee
meetings following his appointment during the remainder of 2020; and (d) Kieran Poynter
ceased to be member of the Committee on his retirement from the Board with effect from
30 April 2020.
3. Other attendees: the Chief Executive, the Director, Talent, Culture & Inclusion, and Group
Head of Talent & Organisation Effectiveness regularly attend meetings by invitation but are
not members.
Nominations Committee terms of reference
The Committee’s terms of reference align with the requirements
of the Code. No changes were made to the Committee’s terms
of reference in 2020.
For the Committee’s terms of reference
see bat.com/governance
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 106
Composition, Succession, Evaluation
Chairman Succession
Dimitri
Panayotopoulos
Senior Independent
Director
Chairman Succession Report
In February 2020, the Company announced its intention for Richard
Burrows to retire from the Board at or prior to the Company’s 2021
AGM, and that Richard would continue leading the Board until then.
The selection process for Richard’s successor was initially led by
Kieran Poynter, our Senior Independent Director until his retirement
from the Board on 30 April 2020. I first worked alongside Kieran,
to ensure an effective transition, and then took over leadership
of the process in view of my succeeding Kieran as Senior
Independent Director.
Throughout this process, our Nominations Committee, comprising
all of the Non-Executive Directors, has been supported by our
Talent, Culture & Inclusion Director and by the Company Secretary.
In addition, the Committee has sought input from our Chief
Executive and Finance Director where appropriate.
Spencer Stuart1 and Korn Ferry2 were engaged as independent
search consultancies to support the process. Both firms are
well-established, specialist executive search consultants with
experience in chair recruitment. Engaging two independent
consultancies assisted the Nominations Committee in conducting
a fully international selection process, taking in a wide range of
candidates, and informed by a breadth of market perspectives.
At the start of the selection process, a set of objective criteria were
defined for the role, including the experience, competencies and
personal attributes required to fulfil the role of chair and to lead
the Board as the Group accelerates its transformation towards
delivering A Better TomorrowTM.
The role criteria demanded a range of key experience and skills,
including CEO and transformation leadership experience, North
American market and consumer sector experience, and a strong
understanding of the challenges, complexities and governance of
highly regulated industries.
The role criteria also emphasised the importance of attributes such
as an inclusive and collaborative leadership style, strong strategic
and commercial acumen, and ability to constructively challenge.
The role criteria were re-assessed and validated during the process
in view of evolution of the Group’s strategy, as presented in the
Company’s Annual Report and Form 20-F for 2019.
During the selection process, the Nominations Committee
reviewed a long list of candidates and individual briefing reports
against the role criteria, before defining an initial shortlist of
candidates. The shortlist was further reviewed and updated in the
course of the process to take account of new candidate availability.
All Nominations Committee members participated in a series of
meetings with external and internal shortlisted candidates, giving
thorough consideration to their skills, experience and diversity of
attributes. In addition, the Executive Directors met with external
and internal shortlisted candidates and provided their input to
the Committee. The Nominations Committee benchmarked the
skills, experience and attributes of Luc Jobin against a strong list
of external and internal candidates identified and assessed during
the process, and against the role criteria. Luc was recused from the
process from the time at which he was identified as a candidate.
In October 2020, I chaired a meeting of the Committee (with Luc
recused) at which we decided to recommend Luc’s appointment
as Chairman Designate, and then as Chairman, to the Board.
The Board unanimously concluded that Luc’s experience of
enterprise transformation, extensive North American knowledge
and cross-industry credentials made him the right candidate to
succeed Richard as Chairman of the Board.
The Board determined Luc to be independent on his appointment
to the Board in 2017 following the acquisition of Reynolds American,
and that he continues to be independent in accordance with
the UK Corporate Governance Code. In determining Luc to be
independent, the Board has taken into account his prior period
of service as an independent non-executive director of Reynolds
American. In making this appointment, the Board also took into
account Luc’s external appointments and other professional
commitments. The Board assessed Luc to be fully able to commit
to the role of Chairman, which includes spending time as necessary
in London and representing the Board internationally.
The Board unanimously considers Luc to be ideally placed to lead
the Board. He is known for his judgement, integrity and inclusive
style and has provided consistent support, insight and constructive
challenge during the development of the Group’s evolved strategy
over the past three years.
The Board recognises and is grateful for the valuable contribution
Richard has made to the Company during his distinguished tenure
and we look forward to welcoming Luc as our new Chairman
following our 2021 AGM.
Dimitri Panayotopoulos
Senior Independent Director
Notes:
1. Spencer Stuart & Associates Limited is an independent executive search consultancy compliant with the Standard and Enhanced Code of Conduct for
Executive Search Firms. Spencer Stuart has no connections with the Company or its Directors other than in respect of provision of executive search services.
2. Korn Ferry (UK) Limited is an independent executive search consultancy compliant with the Standard and Enhanced Code of Conduct for Executive Search
Firms. 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.
BAT Annual Report and Form 20-F 2020 Nominations Committee
Continued
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. 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.
The Nominations Committee is also responsible for identifying
candidates for Board positions and ensuring that all appointments are
made on merit, against objective criteria, and with due regard for our
Board Diversity Policy discussed on page 109. This process includes a
full evaluation of candidates’ attributes and how these would augment
the Board’s mix of skills, expertise and knowledge, and involves
interviews with a range of candidates.
The Nominations Committee applied these principles in identifying
and recommending Luc Jobin for appointment as Chairman and
Karen Guerra and Darrell Thomas for appointment as Non-Executive
Directors. External executive search consultancies are generally used to
support chair and non-executive director appointments, in accordance
with the UK Corporate Governance Code. In 2020, this was the case for
the selection processes leading to the appointment of Luc as Chairman
Designate, then as Chairman, and to the appointment of Karen as a
Non-Executive Director.
The Committee’s approach to succession planning for the Executive
Directors and other members of senior management is set out below.
Non-Executive Director appointments
The Committee led the selection process resulting to the appointment
of Karen Guerra to the Board as a Non-Executive Director on
14 September 2020.
This process involved interviews with a range of external candidates
involving all the Nominations Committee members, with thorough
consideration given to their skills, expertise, diversity of attributes and
their fit with the role criteria which included a specific requirement for
a proven track record in consumer goods industries to complement
the Board’s existing expertise. This selection process was supported
by Spencer Stuart1, an independent executive search consultancy
compliant with the Standard and Enhanced Code of Conduct for
Executive Search Firms.
Karen brings a range of valuable international experience to the Board,
particularly in marketing and consumer goods, and previously held a
variety of executive roles including President and Director General of
Colgate Palmolive France and Chairman and Managing Director of
Colgate Palmolive UK. Her biography is set out on page 92.
The Committee also led the selection process resulting in the
appointment of Darrell Thomas to the Board as a Non-Executive
Director on 7 December 2020. As part of the selection process,
interviews were undertaken involving all Nominations Committee
members. Thorough consideration was given to a range of external
candidates, their skills, expertise, diversity of attributes and their fit
with the role criteria, which included specific requirements for strong
financial and regulatory expertise.
Darrell brings extensive US business experience, along with financial
and regulatory affairs expertise, and is currently Vice President and
Treasurer for Harley-Davidson, Inc. His biography is set out on page 93.
Board retirements
Kieran Poynter retired from the Board with effect from the conclusion of
the Company’s 2020 AGM. Richard Burrows will step down as Chairman
and will retire from the Board with effect from the conclusion of the
Company’s 2021 AGM, having served as a Director for just over 11 years.
Note:
1. Spencer Stuart & Associates Limited has no connections with the Company or its Directors
other than in respect of provision of executive search services.
107
While the Code generally limits the tenure of the Chairman to nine years
from first appointment, as noted in the Company’s Annual Report and
Form 20-F for 2019, the Board considered that Mr Burrows continuing
as Chairman for a limited time to facilitate effective succession planning
to be in the best interests of shareholders.
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. 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 to 30 days per year.
Annual General Meeting 2021
With the exception of Richard Burrows, the Company will be
submitting all eligible Directors for re-election and, in the case
of Karen Guerra and Darrell Thomas, 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 2021 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.
The format for the 2021 AGM will be contingent on applicable UK
Government health and safety restrictions in place at that time.
Executive succession planning
As part of the Nominations Committee’s responsibility to oversee
the development of a pipeline of diverse, high-performing senior
management, it reviews succession plans and talent pools at short
and longer-term time horizons for the Executive Directors, other
Management Board members, and certain other members of senior
management. In 2020, these succession planning activities reinforced
the importance of enhancing strategic capabilities and diversity in the
talent pipeline.
The Board regularly reviews Group talent development more broadly,
including progress on our talent and culture strategic priorities to:
– attract the best talent, including development of a strong
employer brand and engagement with strategic talent pools;
– invest in leaders and enable leadership for change, guided
by the BAT capabilities and skills framework. This emphasises
development of digital and other strategic capabilities and
is complemented by the Group’s global talent exchange
programme; and
– empower the organisation, by continuing to embed the BAT
ethos across the Group, maintaining clear accountabilities and
reducing organisational layers, supported by toolkits and training.
Our talent and culture strategic priorities are underpinned by our Group
diversity and inclusion agenda, discussed on page 108. Progress in 2020
against our objective to develop a pipeline of diverse, high-performing
senior managers is set out on page 109.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 108
Composition, Succession, Evaluation
Nominations Committee
Continued
Balance and Diversity
The Board appreciates the benefits of diversity in all of its forms,
within its own membership and at all levels across our organisation.
Our Non-Executive Directors come from a broad range of industry
and professional backgrounds, with varied experience and
expertise aligned to the Group’s strategic agenda.
Biographies of the Directors, including a summary of their skills,
experience and contribution brought to the Board are set out on
pages 92 to 93.
The Hampton-Alexander Review sets 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 33.3% of our Board and 15.4% of our
Management Board. Our Board’s ambition to progress towards
further gender diversity is set out in our Board Diversity Policy,
discussed on page 109.
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 two
of our Directors are from a BAME background.
Diversity and Inclusion Agenda
Our diversity and inclusion agenda focuses on the core areas
of driving ownership and accountability, building diverse talent
pipelines and creating enablers.
In the context of our talent and culture strategic priorities, the
Board has oversight and monitors progress of our Group diversity
and inclusion agenda. In 2020, this included:
– a review of the Group’s diversity and inclusion ambitions to 2025,
with focus on diversity of experience, and enhanced gender and
geographic representation, particularly in senior teams;
– updates on initiatives such as the Women in STEM programme,
Women’s Returners Programme and unconscious bias
awareness; and
– an overview of plans for enhanced talent mapping and voluntary
declaration of diverse identities where permissible, aligned with
recommendations set out in the Parker Review.
Our Strategic Report discusses our diversity & inclusion agenda
and initiatives further, and provides details on the representation
of women and different nationalities in our workforce, and in our
senior manager population on pages 58 to 63.
Balance at 31 December 2020
Balance of Non-Executive Directors
and Executive Directors
Length of tenure of
Non-Executive Directors
Nationality of Directors
Chairman
Executive Directors
Independent Non-
Executive Directors
1
2
9
0–3 years
4–6 years
7+ years
5
4
1
US
Brazilian
French
British
Canadian
German
Greek
Irish
2
1
1
4
1
1
1
1
Directors: Ethnicity balance
Directors: Gender balance
Senior Management† and their
direct reports: Gender balance
White
BAME*
10
2
Male
Female
8
4
Male
Female
88
27
* Applying the Parker Report guidelines.
† Senior Management comprises the Management Board and Company Secretary in
accordance with the UK Corporate Governance Code.
BAT Annual Report and Form 20-F 2020 109
Board Diversity Policy
We believe that talent is our competitive advantage and
diversity is a critical component of our success, providing better
understanding, connectivity and insight to our consumers and our
employees. ‘We are diverse‘ is one of the five core elements of the
BAT Ethos, set out on page 59.
Our commitment to promoting diversity across our organisation
is also reflected in our Group Employment Principles, discussed
further on pages 62 to 63. Diversity is taken into consideration in
determining the composition of our Board and Management Board,
through the application of our Board Diversity Policy.
Our Board Diversity Policy is aligned with the BAT Ethos. Our 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 background, geographical origin,
gender, age, any disability, sexual orientation, religion, skills,
experience, education and professional background, perspectives
and thinking styles.
Objectives and Progress Update
The objectives of our Board Diversity Policy and progress against
these objectives in 2020 are set out below.
Objective
Progress in 2020
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
across genders for appointment to the Board.
Maintaining at least 30% female Board
representation, with the ambition of progressing
towards further gender balance.
Giving preference, where appropriate, to
engagement of executive search firms accredited
under the Standard and Enhanced Codes of Conduct
for Executive Search Firms.
Oversight of the development of a pipeline
of diverse, high-performing potential
Executive Directors, Management Board
members and other senior managers.
– The Nominations Committee has regard to diversity in its broadest
sense, including attributes such as gender, race, ethnicity, cultural and
social backgrounds, and other personal attributes, when undertaking
these activities.
– 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.
– The representation of women on the Board was 33.3% as at 31 December
2020 (2019: 27.3%) and remains so currently. Non-Executive Director
succession planning takes into account the Board’s ambition to further
improve gender diversity.
– The executive search firms engaged to provide executive search services
to support Board succession planning in 2020 were accredited under the
Standard and Enhanced Codes of Conduct for Executive Search Firms.
– The representation of women on the Management Board was 15.4%
as at 31 December 2020 (2019: 15.4%) and remains so currently.
Management Board succession planning takes into account the ambition to
progress towards improved gender diversity.
– Emphasis is placed on building diverse talent pools at all levels of the
organisation through recruiting, developing and retaining diverse and high-
performing talent.
– In 2020, 43% of the Group’s external management recruits were women
(2019: 45%), including 30% into senior leadership roles (2019: 24%),
supporting continued introduction of strategic capabilities to drive business
transformation. The Women in Leadership programme has been supporting
the development of female employees across the Group for the last seven
years. The Group also participates in various external initiatives to support
diversity of high-potential managers.
– Please refer to pages 58 to 63 for further information about the Group’s
Diversity and Inclusion agenda.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 110
Audit, Risk, Internal Control
Audit Committee
Holly Keller Koeppel
Chairman of the
Audit Committee
Audit Committee current members
Holly Keller Koeppel (Chair)
Luc Jobin
Jerry Fowden
Darrell Thomas
Attendance at meetings in 2020
Attended/Eligible to attend
Name
Member since
Scheduled1(a)
Ad hoc
Holly Keller Koeppel2(a),(b)
Jerry Fowden2(a),(b)
Luc Jobin1(b), 2(a),(b),(e)
Kieran Poynter2(a),(d)
Darrell Thomas2(a),(c)
2017
2019
2019
2012-2020
2020
5/5
5/5
4/5
2/2
0/0
0/0
0/0
0/0
0/0
0/0
Notes:
1. Meetings in 2020: (a) the Committee held five meetings in 2020; and (b) Luc Jobin did not
attend the meeting in April due to prior commitments.
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 24 and
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. Each member of the Committee has recent and relevant financial
experience in accordance with the UK Corporate Governance Code 2018. The members of
the Committee as a whole have competence relevant to the sectors in which the Group
operates; (b) Holly Keller Koeppel, Jerry Fowden and Luc Jobin are each designated as
an audit committee financial expert in accordance with applicable US federal securities
laws and NYSE listing standards; (c) Darrell Thomas became a member of the Committee
on 7 December 2020 on his appointment as a Non-Executive Director. There were no
scheduled or ad hoc Committee meetings following his appointment during the remainder
of 2020; (d) Kieran Poynter ceased to be member of the Committee on his retirement from
the Board with effect from 30 April 2020; and (e) Luc Jobin will cease to be a member of the
Committee on his appointment as Chairman.
3. The Finance and Transformation 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.
4. 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
The Committee’s terms of reference align with the requirements
of the Code. No changes were made to the Committee’s terms
of reference in 2020.
For the Committee’s terms of reference
see www.bat.com/governance
Introduction
I would like to introduce you to the 2020 Audit Committee report,
setting out the Committee’s role and our activities during the year.
Maintaining a strong control environment in the midst of a
global pandemic has been critical, and is an area where we
have had continuing oversight as our business response to
COVID-19 evolves.
We scrutinised key elements of our business continuity planning
and implementation in 2020, and risks arising from the pandemic.
The Committee placed particular emphasis on safeguarding our
people and understanding the impact of rapid operational changes.
We regularly reviewed the Internal Audit plan in light of COVID-19,
ensuring it remains risk-focused, flexible and responsible.
The Committee maintained rigorous oversight of SOx compliance,
particularly in view of the challenges this year, including
remote working.
In the context of external reporting, the Committee carefully
considered the Group’s approach to clearly explaining the impact
of COVID-19 on the Group’s operations and financial performance.
We were also pleased to welcome Darrell Thomas to the
Committee in December.
Our activities during the year, including on climate change and
human rights, are presented in further detail 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
judgements 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 to the
Board 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 2020
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;
BAT Annual Report and Form 20-F 2020 111
– the steps taken to validate the Group’s ‘going concern’
– contingent liabilities, provisions and deposits in connection
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;
– 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, including the purchase or early
redemption of Group debt, current facilities and financing needs;
– 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’;
– the Group’s Risk Register, including prioritisation and
categorisation of Group risks, and mitigating factors in relation to
those risks;
– specific risks, and their mitigations, including in relation to ESG,
climate change and impact of COVID-19 on existing Group risks;
– regular reports from the Group Head of Internal Audit on
the 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 2021 internal audit plan and progress against the 2020 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 and sustainable agriculture & rural communities,
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 104.
Further specific matters considered by the Committee
in relation to the financial statements:
– implementation of interest rate benchmark reforms: addressing
the impact of replacing Interbank Offered Rates with alternative
rates (see note 22 in the Notes on the Accounts), and reviewing
the impact on Group accounting policies resulting from the
Group’s early implementation of the second phase of IASB
amendments to IFRS 9 (Financial Instruments). This follows the
Group’s early adoption of the first phase of IASB amendments to
IFRS 9 in its FY 2019 financial statements.
Significant accounting judgements considered by the
Committee in relation to the 2020 financial statements:
– the Group’s significant tax exposures: reviewing updates on
corporate tax matters and reports from the Group Head of Tax
on the status of the Franked Investment Income Group Litigation
Order (FII GLO) and issues in various markets. These included tax
disputes in Brazil, 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);
with ongoing litigation: Imperial Tobacco Canada: the
Committee reassessed the accounting treatment in respect
of all other ongoing tobacco-related litigation to which Group
subsidiary Imperial Tobacco Canada (ITCAN) is a defendant
and confirmed that it continued to be appropriate to make no
provision in respect of that litigation, 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 continued to be
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 continue to 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 confirmed 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 assessments: the Committee considered
the accounting treatment applicable to tax credits arising from
the settlement of excise and VAT assessments in relation to
Group operations in Russia between 2015 and 2017 for additional
production volumes that took place prior to local excise tax
increases, the charge for which was previously treated as an
adjusting item in the 2019 Accounts. The Committee concurred
with management’s proposed treatment of those credits (see
note 3 in the Notes on the Accounts). The Committee also
considered the accounting treatment applicable to a Russian VAT
refund claim which the Committee assessed should be treated
as an adjusting item (see note 3 in the Notes on the Accounts);
Reynolds American Companies: the Committee considered and
endorsed management’s approach to accounting for the Master
Settlement Agreement and the Engle class-action and progeny
cases (see note 27 in the Notes on the Accounts); and
VAT on social contributions in Brazil: the Committee assessed
the accounting treatment applicable to claims made by Group
subsidiary BAT Brazil for refunds of VAT on social contributions
made in Brazil (see note 27 in the Notes on the Accounts);
– foreign exchange and hyperinflation: as the Group has
operations in certain jurisdictions with severe currency
restrictions where foreign currency is not readily available,
including in hyperinflationary territories such as Venezuela, 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 assessments of the carrying value
of intangibles, including goodwill. The Committee specifically
considered the impact of COVID-19 on business performance
and the carrying value of intangibles, including in relation to the
Twisp business in South Africa (acquired by the Group in 2019)
for which an impairment of intangibles, including goodwill,
was recognised (see note 8 in the Notes on the Accounts).
The Committee also reviewed the Group’s overall business in
South Africa, and concluded that no impairment to goodwill
or other intangibles was required, taking into account trading
performance since COVID-19 related restrictions on the sale of
tobacco and vapour products were lifted in September 2020.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 112
Audit, Risk, Internal Control
Audit Committee
Continued
Impairment review – Malaysia: the Committee reviewed the
carrying value of goodwill for the Group’s business in Malaysia
and concurred with management’s assessment that, due to the
ongoing difficult trading environment, an impairment charge of
£197 million was appropriate.
Impairment review – US Business: the Committee assessed
there was no requirement to revise the impairment previously
recognised for the acquired brand VapeWild (see note 3 in the
Notes on the Accounts), and no requirement to recognise an
impairment for other US business brands including Natural
American Spirit.
Impairment review – New Categories: the Committee further
assessed there was no requirement to revise the impairment
previously recognised relating to rationalisation of certain New
Categories brands, in view of the deferral of some local market
migrations due to COVID-19.
Impairment review – Imperial Tobacco Canada (ITCAN): the
Committee concluded that, despite the ongoing proceedings
(including the CCAA process) in respect of Group subsidiary
ITCAN, there was no indication of impairment to goodwill.
– Quantum transformation project: the Committee assessed
the accounting treatment applicable to project implementation
costs with a charge of £81 million recognised in 2020 and treated
as an adjusting item (see note 3 in the Notes on the Accounts);
– Tender offer for repurchase and early redemption of
outstanding debt instruments: the Committee reviewed the
accounting treatment applicable to the repurchase and early
redemption of £3.1 billion of outstanding bonds and concurred
with management’s judgement to treat the upfront charge to
the income statement, reflecting the upfront premium paid
to bondholders to tender, unwinding of derivatives, and other
fees connected to the bond repurchase and redemption, as an
adjusting item.
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 56 to 57) 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 2020 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 management’s activities to ensure ongoing
compliance with US Sarbanes-Oxley Act of 2002 (SOx)
(discussed further at pages 115 to 116);
– the Group’s approach to maintaining a strong control
environment during the COVID-19 pandemic, taking into account
the shift to remote working, operations in business continuity
mode, and the impact of COVID-19 on implementation of the
Internal Audit plan;
– assessing risks relating to the COVID-19 pandemic and its
impact on the Group, with particular focus on the key themes
of supply chain contingency sourcing, Group preparedness
for continuation of factory capacity and remote working for
office-based staff, and financial preparedness in relation
to the Group‘s liquidity and funding position, and assessing
emerging risks anticipated in transitioning to a new normal
working environment;
– risk in relation to climate change and its impact on the Group, to
ensure robust processes are in place to manage both physical
and transitional climate change risks (in compliance with the
Green Finance Strategy published by the UK Government in July
2019 setting out expectations for listed companies to disclose in
accordance with TCFD recommendations), and recognition of a
new risk relating to climate change in the Group’s Risk Register;
– assessing risks related to ESG and impact on the Group,
to ensure appropriate internal standards, strategic plans,
governance, monitoring and reporting mechanisms are in place
to identify emerging issues, meet external expectations and align
with recognised international standards, and incorporation of
ESG factors into existing Group risks;
– 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;
– the report on the effectiveness of the Company’s risk
management system;
– risks associated with continued 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, including 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 and sanctions controls
and compliance programme; and
– the status of the ongoing Canadian CCAA proceedings under
which Group subsidiary ITCAN filed for protection in March
2019 following the judgment of the Quebec Court of Appeal in
the Quebec Class Action lawsuits (see note 27 in the Notes on
the Accounts).
For further information please refer to the Group Principal risks on
pages 84 to 88 and the Group risk factors on pages 288 to 306
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 considers it to be in the
best interests of the Company’s shareholders for KPMG to remain
as auditors for the following financial year.
The Committee will continue to monitor this, taking into account
the effectiveness and independence of the auditors and the best
interests of shareholders, and will ensure that an audit tender is
conducted no later than in respect of the 2025 financial year in
accordance with applicable law and regulations.
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 2020.
BAT Annual Report and Form 20-F 2020 113
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
own work;
– results in the external auditors acting as a manager or employee
of any Group company; or
– 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.
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 2020 is provided in note 3(c)
in the Notes on the Accounts and is summarised as follows:
Services provided by KPMG firms and associates 2020
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
2020
£m
18.6
0.5
8.5
27.6
0.5
–
–
–
0.5
2019
£m
15.8
0.4
8.5
24.7
0.5
–
–
–
0.5
Note:
In 2020, non-audit fees paid to KPMG amounted to 1.8% of the audit and audit-related
assurance fees paid to them (2019: 2.0%). All audit and non-audit services provided
by the external auditors in 2020 were pre-approved by the Committee.
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 2020. 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 2021 AGM.
The Committee Chairman, Finance and Transformation 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 114
Audit, Risk, Internal Control
Audit Committee
Continued
FRC Audit Quality Review
The UK Financial Reporting Council (FRC) Audit Quality Review
(AQR) team selected the audit of the Group’s financial statements
for the year ended 31 December 2019 for review as part of their
annual inspection of audit firms. The AQR covered the audit work
at Group level and included goodwill and indefinite life trademarks
impairment analysis, the Group audit team’s oversight of the work
of the component auditors for contingent liabilities arising from
litigation in Canada, provisions and contingent liabilities arising
from other litigation, communications with the Committee and
matters relating to planning, completion, ethics and quality control.
The Committee reviewed and discussed the scope of the AQR,
the AQR report conclusions and the actions that will be taken
in response to the AQR findings with KPMG. Whilst none of the
findings were regarded by the Committee as significant, some
matters were identified as requiring limited improvement and the
Committee is satisfied with the responses implemented by KPMG
in the audit of the Annual Report and Accounts for 2020.
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 84 to 88.
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 its framework 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 and other risks to the
Group, 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 likelihood and, where applicable, incorporated
into the Group’s Risk Register with appropriate mitigating activities.
Emerging risks are kept under regular review by the Committee,
prior to Board consideration.
With the support of the Committee, the Board also conducts an
annual review of the effectiveness of the Group’s risk management
and internal control systems. This review covers all material
controls including financial, operational and compliance controls
and risk management systems.
Audit and Corporate Social Responsibility (CSR) Committee
framework
The Group’s Regional Audit and CSR Committee framework
underpins the 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. In addition, 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, and global programmes, processes 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, functional, 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. Risks are assessed and prioritised at three levels by reference
to their impact (high/medium/low) and likelihood (probable/
possible/unlikely). During 2020, the Group’s risk management
process was digitalised through deployment of an enterprise
resource management system across the Group.
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. Functional and regional
risk registers are reviewed regularly by the relevant Regional
Audit & CSR Committee or the Corporate Audit Committee, as
appropriate. DRBU and market risk registers are reviewed as part of
local Risk & Controls meetings.
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 and assess 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.
During the first half of 2020, the Board assessed that it was
appropriate to include COVID-19 as a Group principal risk as
reported in the Company’s 2020 half-year report. However, as new
working practices are implemented to reflect the current operating
environment, and associated risks are incorporated into existing
Group risks, the Group no longer maintains COVID-19 as a principal
risk. The Group’s current principal risks remain broadly unaltered
from 2019.
The Board also considered the Group Viability Statement
see page 84 of the Strategic Report@
For more information on risks see the Group Principal Risks
on pages 84 to 88 and the Group risk factors on pages 288 to 306
BAT Annual Report and Form 20-F 2020 115
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 specific control deficiencies
and the action being taken to address them; and
– review and confirm that 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 Audit 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).
Internal Audit function
The Group’s Internal Audit function is responsible for carrying out
risk-based audits of Group companies, business units, and global
processes. A separate Business Controls Team provides advice and
guidance on controls to the Group’s businesses.
The Group’s Internal Audit function works to a rolling 18-month
audit plan, prioritising principal risk areas aligned to the Group’s
Risk Register. During 2020, the Internal Audit plan was kept
under regular review with the Committee to enable audit
reprioritisation in view of COVID-19 and resulting constraints, such
as travel restrictions.
In 2020, internal audits covered various markets, Group
manufacturing facilities and leaf buying operations, New
Categories, supply network and retail operations, functional
transformation programmes, global business services, and IT
infrastructure, cyber security and data protection. The Committee
considered internal audit findings and action plans established to
address any issues identified.
The Committee has approved the Internal Audit plan for 2021
and assessed its alignment with the Group’s Risk Register and
coverage of risks to the Group. The strategic priorities for Internal
Audit underpin the design of the Internal Audit plan for 2021, with
emphasis on New Categories and innovation in ways of working,
whilst maintaining thorough coverage of core business activities,
lines of defence and IT controls. The Internal Audit plan for 2021
takes account of anticipated continued COVID-19 travel restrictions
into 2021, and balances remote fieldwork and use of data analytics
with focused site visits. 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 noted below.
The Committee reviews the effectiveness of the Group’s internal
audit function annually. In 2020, this included a review of progress
on the Internal Audit plans to implement the recommendations
arising from the external quality assessment of Internal Audit
conducted by PwC LLP in 2019. The Committee also approved
an updated Internal Audit Charter, aligned to the Internal Audit
strategy. The Committee considers the Internal Audit function to
be effective and to have the necessary resources to enable it to
fulfil its mandate.
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 the UK Corporate Governance
Code, 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.
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 annual and half-year 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 Chair participated in the 2020 Annual Report
and Form 20-F drafting and review processes, and engaged with
the Finance and Transformation 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 and Transformation 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 116
Audit, Risk, Internal Control
Audit Committee
Continued
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 2020
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 and Transformation 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 2020, 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 and Transformation 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 2020.
Annual review
The Financial Reporting Council’s ‘Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting’
provides guidance in relation to issues of risk and internal control
management and related reporting.
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 2020.
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 compliance programme are
discussed on pages 56 to 57.
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 reports of SoBC allegations, including details of
the channels through which allegations 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 2020 is set out on page 57.
The SoBC and information on the total number of SoBC contacts
and SoBC allegations reported in 2020 (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
2020 is provided at page 57
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 2020 was £4,851,616 (2019: £4,466,171)
as follows:
Reynolds American Companies reported political contributions
totalling £4,851,616 (US$6,229,475) for the full year 2020 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 Reynolds American Companies
are assessed and approved in accordance with Reynolds
American’s policies and procedures to ensure appropriate
oversight and compliance with applicable laws.
In accordance with the US Federal Election Campaign Act,
Reynolds American 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 Reynolds American 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 2020, Reynolds American Companies incurred expenses,
as authorised by US law, in providing administrative support to
the PAC.
No other political contributions were reported.
BAT Annual Report and Form 20-F 2020 Remuneration Report
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 2020 and why
3. Executive Directors’ Remuneration for the Year Ended
31 December 2020
4. Executive Directors’ Remuneration for the Upcoming Year
5. Chairman and Non-Executive Directors’ Remuneration
for the Year Ended 31 December 2020
6. Directors’ Share Interests
7. Other Disclosures
8. The Remuneration Committee and Shareholder Engagement
120
124
125
131
132
133
136
137
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 2020 which sets out our role and
work during this year, during which we welcomed Karen Guerra to the
Committee. The report contains:
– a summary of the current Directors’ Remuneration Policy, approved
at the 2019 AGM; and
– the Annual Remuneration Report, explaining how the Remuneration
Policy has been implemented during 2020, and how it will be
implemented in 2021.
When the Committee met in early 2020, the COVID-19 outbreak was
in its very early stages, it had not been declared a pandemic and the
magnitude of the impact it would have across the world was not yet
apparent. Along with many other organisations, we now find ourselves
in a very new and challenging operating environment.
The impact of COVID-19 on our organisation in 2020 has been
significant and wide ranging. We are tremendously proud of how the
Group’s employees have responded in the face of unprecedented
circumstances and widespread disruption, demonstrating resilience
and continued focus on delivering growth while rapidly adjusting to
new ways of working across our business.
In line with our Ethos, the Group’s response to the COVID-19 pandemic
has been focused on looking after our people and protecting their
health, safety and wellbeing while acting swiftly to support those in
the communities in which we operate. Even in light of the widespread
disruption caused by the COVID-19 pandemic, the Group has not
entered furlough arrangements or made redundancies as a result
of the pandemic, nor do we have plans to do so. We are committed
to emerging stronger from the pandemic through our focus on our
people, consumers and customers around the world.
117
Remuneration and strategy
Our Directors’ Remuneration Policy was approved in April 2019
with significant support from our shareholders. The Remuneration
Committee has focused this year on ensuring that the Remuneration
Policy is fully implemented together with reviewing alignment to
the Company’s long-term strategy delivery through our incentive
schemes. Our focus is to ensure that the Remuneration Policy enables
the Company to:
– attract and retain top quality talent in the global marketplace;
– promote and 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
– incorporate best practice policy features into its remuneration
strategy while maintaining policy elements which remain
appropriate for the Company.
The Committee considers these objectives carefully when reviewing
executive and Group-wide remuneration matters, to ensure there
is an appropriate balance between market competitiveness, pay for
performance, fairness and sustainability.
Our talent attraction landscape is global and has become increasingly
diverse as the Group’s business continues to transform. It is essential
that we have the right framework and practices in place to attract
talent globally. In this context, geographic differences in pay levels
present challenges for the Group, considering the international
mobility of the global senior talent pool. As a substantial part of our
business is based in the US, the significant pay differential between
the US market and the UK continues to be a specific challenge which
we continue to keep under close review.
The Committee looks to ensure that the performance metrics
for 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, we have engaged with our largest shareholders regarding
the focus and orientation of the short-term incentive (STI) scheme and
following this engagement, the Committee has decided to make some
important changes to the performance metrics for 2021. The changes
are made with the aim of reflecting our corporate purpose in the
Group’s remuneration strategy and our commitment to reduce the
health impact of our business as part of our A Better TomorrowTM
agenda. These take into account shareholder feedback and focus on
harm reduction as a key area to deliver sustainable growth for the
future, as follows:
– The introduction of a new metric ‘New Categories Revenue’, with
a 20% weighting attached to it. This metric is aligned with our
transformation ambitions and stated targets and will measure
future growth in our New Categories business, further details are
provided on page 277.
– The ‘Group share of key markets’ metric is retained, with Tobacco
Heating Products (THP) share performance now included for major
markets and consequently the weighting will be adjusted from 10%
to 15%.
– The 'deleveraging excluding foreign exchange' metric is retained
with the weighting adjusted from 30% to 35%.
– The 'adjusted profit from operations' metric is retained with the
current weighting of 30%.
– Consequently, the ‘adjusted revenue growth from the strategic
portfolio’ metric will be removed from the International Executive
Incentive Scheme (IEIS) to allow for an increased weighting for
measures of performance in New Categories.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 118
Remuneration Report
Annual Statement on Remuneration
Continued
These changes to performance metrics will apply to the STI scheme
in operation for the Executive Directors and the Group’s wider
management population. Importantly they will ensure that non-
combustibles performance is embedded in 35% of the total short-
term incentive scheme opportunity.
These results are reflected in the outcomes for the Group’s STI, the
IEIS, for which the corporate result across the four measures (Group’s
share of key markets, adjusted revenue growth from the strategic
portfolio, adjusted profit from operations and deleveraging excluding
foreign exchange) was 71.1%.
These changes will also ensure the Group has a consistent STI
footprint globally to provide focus and alignment with Group strategy
and to promote effective engagement and collaboration across its
global management population. These are set out in full on page 122.
We consider the changes to the IEIS to be a first step to reflect the
Group’s transformation agenda in our remuneration plans. We will
continue to appraise our remuneration plans and alignment to our A
Better TomorrowTM agenda during 2021 as we prepare a new Directors’
Remuneration Policy for 2022.
Stakeholder engagement
The Board takes its corporate responsibilities very seriously.
Our programme of shareholder and wider stakeholder engagement in
2019 contributed to re-shaping our Directors’ Remuneration Policy and
this dialogue continued in 2020 in relation to implementation of the
Remuneration Policy for the Executive Directors.
The Committee recognises the complexity of the world in which
we operate, never more so than in the current market context.
Engagement with shareholders and stakeholders often gives rise
to varied and conflicting perspectives, as has been our experience
during 2020. Following the Company’s AGM held in April 2020, we
acknowledged the vote of 38.06% against the Director’s Remuneration
Report in our voting results announcement. We have engaged with
a number of shareholders that voted against this resolution to
understand their position and perspectives on the management of
salary increases and executive pay within the current market context in
particular. The Committee has discussed the feedback received in detail
and the matters raised by shareholders have remained under active
consideration as we reviewed Group performance in 2020.
As mentioned above, we have recently engaged with our largest
shareholders regarding the STI scheme metrics for 2021 and
shareholder feedback has helped to shape the focus and orientation
of the scheme for the year ahead, with a particular focus on the
Group's transformation.
I would like to thank our shareholders and wider stakeholders for their
feedback, and we will maintain dialogue on our Remuneration Policy
and practices.
Group performance
Our incentive plans are closely aligned to our strategy and the
performance metrics underpinning those incentive plans align with
the key performance indicators set out in the Strategic Report.
The Group has delivered a strong performance for 2020 in what has
proven to be an exceptionally challenging environment arising from
the COVID-19 pandemic. Stretching performance targets for 2020
were set by the Committee prior to the COVID-19 outbreak being
declared a pandemic and have remained unchanged for the Directors
for the 2020 performance period.
The Group has delivered significant combustibles and THP volume
share gains of 33bps over performance in 2019 together with a strong
performance in adjusted revenue growth at constant rates of 7.0%
from the Strategic Portfolio, including growth in New Categories
revenues at constant rates of 15.4%. The Group has delivered growth
in adjusted profit from operations at constant rates of 4.8% and
continued to make progress with its deleveraging (excluding foreign
exchange) ambition with a full year performance of 0.33x. In addition,
the Group has delivered a compound annual growth rate in adjusted,
diluted EPS of 5.5% at current rates through the three year 2018 to
2020 period @and a corresponding operating cash flow conversion
ratio of 104.2% at current rates over the same period@.
The 2018 Long-Term Incentive Plan (LTIP) award, based on results
across relative Total Shareholder Return (TSR), adjusted diluted
EPS, adjusted revenue growth at constant rates and the operating
cash flow conversion ratio, will vest in March 2021 at 52.6%.
The Remuneration Committee has considered the vesting result and
concluded that this is an accurate reflection of the strong, sustained
underlying performance of the Group in challenging and volatile
market conditions. It also reflects, through the relative TSR measure,
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 64% lower than
the face value of the 2018 awards at grant.
Following the determination of the outcomes for both the 2020
IEIS and 2018 LTIP, the Committee considered the results against
the underlying performance of the Group and considered that the
outcomes were a fair reflection of performance and no adjustments
were required. In addition, share price fluctuations are reflected
throughout the directors’ remuneration, in the vesting and holding
periods as well as their individual shareholdings. The performance
of our key metrics that delivered the IEIS and LTIP remuneration
outcomes are summarised on page 124.
Executive Director remuneration
The Committee has given very careful consideration to the total
remuneration positioning of the Executive Directors in the context
of their current positions relative to the market, development in their
roles, individual performance and the level of pay increases for UK
employees generally, together with the expectations of shareholders
with respect to the management of executive pay. Pay increases for
UK employees are expected to range between 0% and 7%, based on
performance in the prior year, with the average of employee increases
falling within the 2.6% to 3.0% range.
The Remuneration Committee has decided that the salary increase
for the Chief Executive will be 3%, which is within the range to be
applied to the majority of employees. The increase has been awarded
to recognise the leadership of the Chief Executive in 2020, where Jack
Bowles has led the Group to deliver a strong financial performance
through an intense period of disruption while continuing to progress
with the transformation agenda of the Group. The Group has delivered
productivity improvements and savings through Quantum and
has continued to establish new capabilities as part of the A Better
TomorrowTM agenda while safeguarding the organisation through
skilful management in a time of crisis. Consequently, with effect from
1 April 2021 Jack Bowles’ salary will be £1,325,610.
Mr Marroco’s salary increase was considered by the Committee
following the recent extension of his responsibilities, which are both
material and permanent. In order to accelerate the delivery of the
transformation agenda and the realisation of our corporate purpose,
the scope of Mr Marroco’s role has been expanded to become Finance
and Transformation Director as set out on page 92 of the report.
In addition to his role as Finance Director, Mr Marroco has been
asked to design and deliver a strategic initiative which will accelerate
the delivery of the Group’s strategy and ambitions as part of the
A Better TomorrowTM agenda. The associated scope is broad and
multifunctional in nature, with the principal objective of accelerating
the Group’s transformation to become a multi-category business.
We believe the accountabilities of this new role go significantly
beyond those that would normally be associated with the Finance
Director position.
BAT Annual Report and Form 20-F 2020 119
Mr Marroco will oversee five cross-functional and interconnected
workstreams (the Group’s innovation, organisation, sustainability,
digital and productivity strategies), the orchestration of which will
accelerate the Group’s imperatives of combustible value growth,
a step change in New Categories performance and a simpler and
smarter organisation. The commercial aspirations include the growth
of New Categories revenues to £5 billion by 2025 and the growth
of new non-combustibles consumers from 13.5m to 50m by 2030.
In addition, the leadership structure reporting to Mr Marroco has
been substantially expanded in light of his enlarged role. In the past,
the Group has established a standalone role within the executive
team to lead these initiatives; the integration with Mr Marroco’s
current responsibilities is viewed as a stronger proposition in order to
accelerate delivery.
Following consultation with some of our largest shareholders,
the Committee has considered how to address this expansion of
responsibilities. We are pleased that shareholders have acknowledged
the substantive changes to Mr Marroco's role and the significance of
this change for the Group's transformation agenda. We have taken
feedback from shareholders into account in deciding to implement a
two-step salary increase for Mr Marroco, as follows:
– A 4% increase from 1 October 2020, the date upon which Mr
Marroco assumed these new responsibilities, that results in a
base salary of £803,400, with no further increase in salary in April
2021; and
– An increase from 1 April 2022 equal to the average increase for
UK employees plus 3%, subject to continued development and
sustained performance in role.
This staged approach will enable the Committee to monitor sustained
performance, together with market developments.
At the time of Mr Bowles’ and Mr Marroco’s appointments, the
Committee set remuneration at a level to reflect that these were
their first Executive Director appointments, and significantly below
the level for the previous incumbent in each role and in the wider
market. As previously communicated, the Committee intends to
keep their remuneration positioning under review, to ensure their
remuneration progresses in line with development and performance
such that it may be brought more closely into line with the market
over time. The Committee may determine it appropriate to award
increases above the average for UK employees in the future but within
the range of increases for the wider UK population, subject to the
performance and development of the Executive Directors in their roles
and taking into account pay considerations for our wider workforce.
The adjustments to salary for Mr Marroco are consistent with these
principles and this approach is consistent with how the remuneration
of employees across the Group is reviewed as they develop and
progress in their roles.
Incentive plan awards from 2021
The basis for awards made under the LTIP in 2021 will follow the
Company’s 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 Committee is satisfied that maintaining this established
practice will result in awards which are in proportion with previous awards
made to the Executive Directors and the Committee retains discretion to
review formulaic LTIP outcomes at vesting.
Pay and transparency
The Committee is acutely aware of continued debate in relation to
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 workforce.
This report includes our CEO-to-employee pay ratio for the 2020
financial year. We have continued to use calculation method A, using
total full-time remuneration for all UK employees, which we believe to
be the most robust and comprehensive means of assessment and is
also reflective of shareholder preferences.
The Group’s CEO-to-employee pay ratio for 2020 was 66:1 at the median
level, reflecting the diversity of our business footprint and employee
population across the UK. Further details can be found on page 130.
In March 2021, we will be publishing data relating to UK Gender Pay in
line with the statutory requirements. Following a review of the data
prior to publication, the Committee noted that while men and women
are rewarded equally for similar roles, the Group does have a ‘gender
pay gap’ as defined by 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
in this area. These are explained further on pages 108 and 109 and in
our Gender Pay Report and our work with the diversity and inclusion
agenda will continue to broaden in 2021 as we now start the data
gathering exercise for ethnicity pay data.
As a result of our continued focus we have seen an increase in the
proportion of women in our upper pay quartile in 2020, from 27%
to 29%, contributing towards a 6% improvement in our mean pay
gap. On the other hand, the combination of a higher number of men
recruited into senior roles during the April to April reporting period and
more women recruited into junior roles in 2020 has led to our median
pay gap widening slightly from 33% to 35%. We are confident that this
is only a short-term development and, as we develop and nurture our
female talent into more senior, higher-paid roles, we expect to see an
improvement over the longer term.
Other initiatives in 2020
Building on its work during 2019, the Committee has continued to
review the Group’s remuneration strategy and related practices
for its wider workforce. In this transformative period for the Group,
there has been significant change in our talent attraction landscape
and capability requirements, and the Committee recognises the
importance of flexibility in our remuneration practices to remain agile
and adaptive to changes in our business.
The Committee has undertaken a focused review of our pay
comparator group to ensure it reflects the Group’s increasingly diverse
capability requirements in the international talent marketplace. As a
result of this review, a new comparator group will be implemented
throughout the Group for 2021 which we believe is better suited to
support our talent attraction and retention ambitions. Changes to the
pay comparator group will apply to the Executive Directors and the
Group’s wider management population.
Following a detailed review of the Group’s legacy defined benefit
pension arrangements in the UK and a programme of consultation
with employees, the defined benefit pension arrangements in the UK
closed to future accrual in 2020. This means there is now an aligned,
consistent defined contribution retirement benefit arrangement in
place for all UK employees.
Our focus in 2021
The annual report on remuneration details remuneration in 2020
and the decisions made by the Remuneration Committee during
this period and will be put forward for an advisory vote at the 2021
AGM. The Board places great value on the direct engagement and
feedback from our shareholders and wider stakeholders on our
Remuneration Policy and practices and I look forward to continuing
this dialogue in 2021.
Dimitri Panayotopoulos
Chairman, Remuneration Committee
16 February 2021
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 120
Remuneration Report
Annual Statement on Remuneration
Continued
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 2020.
Directors’ Remuneration Policy summary: our remuneration strategy
The 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. The Directors’ Remuneration Policy is kept under regular review to ensure alignment
with business strategy and 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 consideration several 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.
– Defined Contribution (“DC”) benefits – Executive Directors are eligible to receive a pension
benefit equivalent to a maximum of 15% of base salary as a contribution into the British
American Tobacco UK Pension Plan or, as alternative provision, they can opt for either
a cash allowance or accrual in a DC unfunded arrangement. The Company contribution
rate is aligned with the benefit available to our wider UK population where the default
contribution rate is 15%, comprising of a core 10% contribution rate and an additional 5%
contribution on a matching basis to an employee’s pension contribution.
BAT Annual Report and Form 20-F 2020 121
Short-term incentives (STI)
– To incentivise the attainment of
Opportunity
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
remuneration to attract and retain high
calibre individuals to deliver the Group’s
long-term strategy.
– Chief Executive – Maximum 250%; on-target 125%.
– Finance and Transformation 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 2020 can be found on page 126 and for 2021 on page 131;
– 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.
Long-term incentives (LTIP)
– To put in place a combination of
Opportunity
measures with appropriately stretching
targets around the long-term strategy
delivery that provides a balance relevant
to the Company’s business and market
conditions as well as alignment between
Executive Directors’ and shareholders’
interests.
– 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 and Transformation Director.
Operation
– LTIP awards vest only to the extent that:
– To facilitate the appointment of senior
– the performance conditions are satisfied at the end of the three-year performance
high calibre individuals required to deliver
the Groups’ long-term strategy, and
to promote the long-term success of
the Company.
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 2018-2020 performance period are detailed on page 127
and for the awards to be granted in 2021 are detailed on page 132;
– 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.
Shareholding requirements
– To strengthen the alignment between
Executive Directors are required to hold shares in the Company:
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.
– 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 and Transformation 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 122
Remuneration Report
Annual Statement on Remuneration
Continued
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.
– All-employee share schemes are the Partnership Share Scheme, 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.
How the Policy Addresses the Factors Set Out in the UK Corporate Governance Code 2018:
Our remuneration principles and the key elements of the Directors’ Remuneration Policy align with the UK Corporate Governance Code
2018 requirements, 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 remunerate our Executive Directors in accordance with high standards of governance while
mitigating, as far as possible, reputational and other risks arising from remuneration 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,
ensuring that poor performance is not rewarded. Further detail on short and long-term incentive plan awards are detailed on pages 126
and 127.
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 Our 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 62, 63, 82 and 98.
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 remuneration, 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.
and experience.
– Supported by unbiased processes and tools.
Transparent
– Clear policies, openly communicated.
– Individual total reward package statements form part of regular
annual cycle.
Aligned to shareholder interests
– Competitive employment cost base and incentives that align the
interests of employees with those of shareholders.
BAT Annual Report and Form 20-F 2020 123
Fixed remuneration
Salary
– Salary is a key element of 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 are provided to employees based on local market practice.
– Under the UK Defined Contribution arrangements, the Company contributions for all UK employees is 10% of base salary rising to a maximum
of 15% on a matching basis. For managers in senior management roles, the total contribution to the British American Tobacco UK
Pension Plan (“Plan”) is automatically restricted to £4,000 per annum in line with the UK government’s Tapered Annual Allowance (where
the £4,000 per annum restriction was effective from April 2020 having reduced from £10,000 per annum). The balance of any Company
contributions due above this £4,000 limit is paid as a cash allowance or, alternatively, paid into the Defined Contribution Unapproved Unfunded
Retirement Benefits Scheme. Employees can choose to opt out of the restriction and have all the Company contribution paid into the Plan.
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. 1,700
employees), including Executive Directors.
– Incentive opportunities for the 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 during the following year.
– 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.
Functional incentive schemes – in operation for employees in non-corporate functions, 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
Long-term incentive schemes are designed to reward and retain our senior talent while aligning the interests of leaders with those of our
shareholders. From 2020, we have moved from a single LTI plan to a segmented approach by grade as set out below.
Restricted Share Plan (RSP) – globally aligned plan for managers at eligible grades in senior management roles (c. 575), excluding
Executive Directors. Aligns scheme participants with the success of the Group through its share price.
– Opportunity levels are defined globally for each eligible grade.
– No performance conditions apply to awards.
– Awards are typically granted in March of each year, and vest in full following the end of the three-year vesting period provided the
participant remains an employee of the Group on the vesting date.
– Dividend-equivalent payments are paid on shares vesting.
Performance Share Plan (PSP) – discretionary plan for our most senior managers (c. 170), including Executive Directors, which rewards
their contribution to the long-term global performance of the Company.
– Opportunity levels are defined globally for each eligible grade.
– Awards vest only to the extent that the performance conditions are satisfied at the end of the three-year performance period.
– 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 Partnership Share Scheme, the
Sharesave Scheme and the Share Incentive Plan – all of which are HMRC-approved plans, which are designed to incentivise employees
by giving them an opportunity to build shareholdings in the Company.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 124
Remuneration Report
Annual Statement on Remuneration
Continued
2 Overview of What Our Executive Directors Earned in 2020 and Why
What our Executive Directors earned in 2020 – @audited@
Single figure for Executive Directors
Jack Bowles
Tadeu Marroco1
Fixed Pay
Salary
Taxable benefits
Pension
Total Fixed Pay
Variable Pay
Short-term incentives
Long-term incentives2,3
Other emoluments4
Total Variable Pay
Total Remuneration
2020
£’000
1,259
592
189
2,040
2,238
786
3
3,027
5,067
2019
£’000
1,175
277
216
1,668
2,824
642
4
3,470
5,138
2020
£’000
775
152
116
1,043
1,046
508
18
1,572
2,615
2019
£’000
301
80
46
427
560
512
–
1,072
1,499
Notes:
1. 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 for 2019 reflect
remuneration received while an Executive Director of the Company.
2. The 2018 LTIP award is due to vest on 26 March 2021 for Jack Bowles and Tadeu Marroco based on completion of the three-year performance period on 31 December 2020. The value shown is
based on the average share price for the three-month period ended 31 December 2020 of 2,701p. 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.
3. Long-term incentives shown for 2019: in accordance with the UK Directors’ Remuneration Report Regulations, estimates for the values of the vesting 2017 LTIP awards were given in the
Annual Report on Remuneration for the year ended 31 December 2019; these amounts have been re-presented to show the actual market value on the date of vesting in 2020.
4. In the Annual Report on Remuneration for the year ended 31 December 2019, life insurance was included within the ‘Other emoluments’ remuneration item in the single figure table. For the
Annual Report on Remuneration for the year ended 31 December 2020, life insurance has been included within the ‘Taxable benefits’ remuneration item. The figures for 2019 in the table above
have been restated to reflect this change.
Further information in respect of this remuneration can be found in Section 3 on page 125.
How this aligns to performance
Short-term incentives for the performance period ended in 2020
Performance summary:
Chief Executive: corporate performance – 177.8% of salary
Finance and Transformation Director: corporate performance – 135.1% of salary
Group share of Key Markets
+33 bps growth over 2019
Adjusted profit from operations (APFO)
at constant rates of exchange +4.8% growth
Adjusted revenue growth from the Strategic Portfolio at
constant rates of exchange
+7.0% growth
Deleveraging (excluding foreign exchange)
0.33x at constant rates of exchange
Long-term incentives for the three-year performance period ended in 2020
Vesting at 52.6%
Total shareholder return (TSR)
20 out of 23 in FMCG comparator group 2018–2020
Adjusted diluted earnings per share (EPS) growth
5.5% CAGR at current rates of exchange
Adjusted diluted earnings per share (EPS) growth
8.5% CAGR at constant rates of exchange
Adjusted revenue growth
4.1% CAGR at constant rates of exchange
Adjusted operating cash flow conversion ratio
104.2% ratio over the performance period
0% achievement
(0% of award vesting out of possible 20%)
25% achievement
(4.9% of award vesting out of possible 20%)
75% achievement
(15.0% of award vesting out of possible 20%)
64% achievement
(12.7% 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), deleveraging (excluding foreign exchange), adjusted revenue growth from Strategic Portfolio
at constant rates of exchange, adjusted diluted EPS, adjusted revenue and adjusted operating cash flow conversion ratio are non-
GAAP measures used by the Remuneration Committee to assess performance. Please refer to pages 276 to 285 for definitions of these
measures @and a reconciliation of these measures to the most directly comparable IFRS measure where applicable.@
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2020 125
3 Executive Directors’ Remuneration for the Year Ended 31 December 2020
Total remuneration for the year ended 31 December 2020 – @audited@
Salary
Taxable benefits2
– car allowance
– health insurance
– life insurance3
– tax advice
– use of Company driver
– home and personal security4
– tax & social security5
– 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 126)
Long-term incentives6,7
LTIP vesting percentage (% of maximum)
LTIP value to vest
Dividend equivalent8
Total long-term incentives (page 127)
Total pension-related benefits (page 128)
Other emoluments3
Share Reward Scheme (value of ordinary shares awarded)
Sharesave Scheme (face value of discount on options granted)
Total other emoluments
Total remuneration
Jack Bowles
Tadeu Marroco1
2020
£’000
1,259
2019
£’000
1,175
2020
£’000
775
2019
£’000
301
20
15
19
65
85
155
220
13
592
71.1%
1,119
1,119
2,238
54.2%
641
145
786
20
13
15
30
61
6
122
10
277
96%
1,412
1,412
2,824
69.9%
540
102
642
189
216
3
–
3
5,067
4
–
4
5,138
20
13
8
30
55
14
-
12
152
71.1%
523
523
1,046
54.2%
414
94
508
116
3
15
18
2,615
8
5
1
34
30
–
–
2
80
96%
280
280
560
69.9%
431
81
512
46
–
–
–
1,499
Notes:
1. 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 for 2019 reflect
remuneration received while an Executive Director of the Company.
2. 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.
3. In the Annual Report on Remuneration 2019, life insurance was included within the ‘Other emoluments’ remuneration item in the single figure table. For the Annual Report on Remuneration
2020, life insurance has been included within the ‘Taxable benefits’ remuneration item. The figures for 2019 in the table above have been restated to reflect this change.
4. Figure for home and personal security for Jack Bowles for 2020 relates to necessary security improvements to his residence. As noted in point 2 above, this amount has been grossed up for
UK tax purposes.
5. Amount for Jack Bowles relates to tax equalisation payments made during the year ended 31 December 2020.
6. The 2018 LTIP award is due to vest on 26 March 2021 based on completion of the three-year performance period on 31 December 2020. The value shown is based on the average share
price for the three-month period ended 31 December 2020 of 2,701p. The LTIP vesting figures above reflect awards made to Jack Bowles and Tadeu Marroco prior to being appointed
as Executive Directors.
7. LTIP award shown for 2019: the values disclosed in the Annual Report on Remuneration for the year ended 31 December 2019 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 27 March 2020 of 2,734p.
8. 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 2019 have been restated on this basis.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 126
Remuneration Report
Annual Statement on Remuneration
Continued
Short-Term Incentives for the Year Ended 31 December 2020
STI performance measures, weightings and results for year ended 31 December 2020 – @audited@
STI: performance measure and target 2020
Description of measure 2020
Actual performance 2020
Group’s share of Key Markets
(growth over prior year)
Weighting: 10%
Threshold: 0 bps growth over 2019
Maximum: 10 bps growth over 2019
Global volume share in key markets
grew by 33 bps.
Strategic Report: Delivering our
strategy – A Better Tomorrow
for Consumers
The Group’s volume share in its Key Markets
accounts for around 80% of the volume of
the Group’s subsidiaries. The Group’s share
is calculated from data as independently
measured by retail audit agencies and
scanner sales to consumers, or from
estimated shipment share. The Group’s
volume share is re-based as and when the
Group’s Key Markets change or when retail
audit agency product improvements result
in the re-statement of data. When re-basing
does occur, the Company will also restate
historical data and provide fresh comparative
data on the markets.
Payout
(maximum)
10% (10%)
Adjusted revenue growth from the
Strategic Portfolio
(growth over prior year)
Weighting: 30%
Threshold: 3% growth over 2019
Maximum: 6% growth over 2019
Adjusted profit from operations
(APFO) (growth over prior year)
Weighting: 30%
Threshold: 4.0% growth over 2019
Maximum: 6.5% growth over 2019
Deleveraging (excluding
foreign exchange)
Weighting: 30%
Threshold: 0.20x reduction
versus 2019
Maximum: 0.40x reduction
versus 2019
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 278 for the detailed
description of the Strategic Portfolio.
APFO is the adjusted profit from operations
at constant rates of exchange for the year
ended 31 December 2020. Please refer
to page 279 for the detailed description
of APFO.
Deleveraging (excluding foreign exchange)
refers to the reduction in Adjusted Net Debt
to Adjusted EDITDA during the year ended
31 December 2020, assessed at constant
rates of exchange.
Adjusted revenue from the Strategic
Portfolio grew by 7.0%.
30% (30%)
Strategic Report: Delivering our
strategy – A Better Tomorrow
for Shareholders
APFO growth over the prior year of
4.8%.
11.6% (30%)
Strategic Report: Delivering our
strategy – A Better Tomorrow
for Shareholders
Deleveraging (excluding foreign
exchange) was 0.33x.
19.5% (30%)
Strategic Report: Delivering our
strategy – A Better Tomorrow
for Shareholders
71.1% (100%)
STI outcome for year ended 31 December 2020
Jack Bowles
Tadeu Marroco
Notes:
1. Malus and clawback provisions apply.
Available STI award as
% of base salary
STI award achieved
as % of maximum
opportunity
STI award achieved
% of base salary
STI award achieved
£’000
(Value shown in
Single Figure Table)1
250%
190%
71.1%
71.1%
177.8%
135.1%
2,238
1,046
2. 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.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2020 127
Long-Term Incentives (LTIP) for the Year Ended 31 December 2020
LTIP performance measures, weightings and results for the year ended 31 December 2020 – @audited@
LTIP: performance measure
Relative TSR1
Relative to a peer group of international
FMCG companies
Weighting: 20%
EPS growth at current rates
of exchange
Compound annual growth in adjusted
diluted EPS measured at current rates
of exchange
Weighting: 20%
EPS growth at constant rates
of exchange
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 rates of exchange
Weighting: 20%
Total vesting level as a percentage of
maximum opportunity
Description of measure and target for 2018 LTIP
Performance period 1 January 2018 – 31 December 2020
2018–2020 LTIP target
Threshold
Maximum
2018–2020 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
Result achieved Vesting percentage
Ranked 20
out of 23
0%
(out of maximum
of 20%)
5.5% CAGR
4.9%
(out of maximum
of 20%)
2018–2020 LTIP target
Threshold
Maximum
At CAGR of 5%, 3% vests
At CAGR of 10%, 20% vests
2018–2020 LTIP target
Threshold
Maximum
At CAGR of 3%, 3% vests
At CAGR of 5%, 20% vests
2018–2020 LTIP target
Threshold
Maximum
Ratio of 85%, 3% vests
Ratio of 95%, 20% vests
8.5% CAGR
15.0%
(out of maximum
of 20%)
4.1% CAGR
12.7%
(out of maximum
of 20%)
104.2% ratio
20%
(out of maximum
of 20%)
52.6%
Notes:
1. Relative TSR: the constituents of the FMCG peer group are listed on page 132.
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 2018, 2019
and 2020.
LTIP outcome for year ended 31 December 2020
Number of ordinary
shares subject
to award
Vesting % achieved
(based on 2018–2020
performance period)
Number of
ordinary shares
to vest
Value of ordinary
shares to vest1
£’000
Dividend equivalent
payment on
vesting2
£’000
Total value to vest
£’000
(Value shown in
Single Figure Table)
Jack Bowles3
Tadeu Marroco3
43,785
28,248
54.2%
54.2%
23,731
15,310
641
414
145
94
786
508
The 2018 LTIP awards granted to Jack Bowles and Tadeu Marroco were made prior to their appointments as Executive Directors, therefore
the vesting date is 26 March 2021 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 2020 of 2,701p.
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 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.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 128
Remuneration Report
Annual Statement on Remuneration
Continued
Executive Directors’ pension entitlements and accruals for the year ended 31 December 2020 – @audited@
Pension values
Jack Bowles
Tadeu Marroco
Total
Total Defined Contribution (DC) fund value as
at year-end 31 December 2020 £’000
Defined Contribution (DC)
Unapproved Unfunded
Retirement Benefit Scheme
(UURBS)1
British American Tobacco UK
Pension Plan
884
636
1,520
351
181
532
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 2020, a WACD of
3.6% has been used.
Jack Bowles
The total Company contribution to the DC arrangements over the period 1 January to 31 December 2020 was £189,034. Of this, £4,171 was
paid to the British American Tobacco UK Pension Plan and £184,863 was credited to the DC UURBS. These total amounts are based on a
Company contribution rate of 15% of salary per annum.
Tadeu Marroco
The total Company contribution paid to the DC arrangements over the period 1 January to 31 December 2020 was £116,374. Of this, £4,171
was paid to the funded British American Tobacco UK Pension Plan and £112,203 was credited to the DC UURBS. These total amounts are
based on a Company contribution rate of 15% of salary per annum.
Notes:
1. No excess retirement benefits have been paid to or are receivable by an Executive Director or former Executive 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.
BAT Annual Report and Form 20-F 2020 129
2020
n/a
n/a
Other Information Relating to Chief Executives’ Remuneration for the year Ended 31 December 2020
Chief Executives’ pay – comparative figures 2011 to 2020
Year
2018
2019
2016
2014
2015
2013
2012
2017
2011
Chief Executives’
‘single figure’ of total
remuneration (£’000)
Paul Adams1
(to 28 February 2011)
Nicandro Durante2
(to 1 April 2019)
Jack Bowles
(from 1 April 2019)
Annual bonus (STI)
paid against maximum
opportunity (%)
Paul Adams1
(to 28 February 2011)
Nicandro Durante2
(to 1 April 2019)
Jack Bowles
(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 Bowles
(from 1 April 2019)
5,961
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
5,589
6,340
6,674
3,617
4,543
8,313
10,244
8,651
3,054
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
3,512
5,067
100
100
n/a
100
100
n/a
n/a
85.0
n/a
n/a
87.1
n/a
n/a
81.3
n/a
n/a
49.2
n/a
n/a
73.2
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
46.0
n/a
n/a
97.2
n/a
n/a
96.1
n/a
n/a
100
n/a
n/a
50
96
n/a
n/a
70.5
69.3
n/a
n/a
71.1
n/a
n/a
n/a
69.9
54.2
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.
Total shareholder return (TSR) performance:1 1 January 2011 to 31 December 2020
450
400
350
300
250
200
150
100
50
0
Bristish American Tobacco
FTSE 100
l
i
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 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
Dec 20
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 2011 through to 31 December 2020 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
130
Remuneration Report
Annual Statement on Remuneration
Continued
Annual change in remuneration of Directors’ and employees
The following table shows the percentage change in the Directors’ remuneration measured against a comparator group comprising the UK
employee population across all UK entities (2020: 2,764 individuals; 2019: 2,980 individuals). This comparator group is considered to be the most
appropriate group due to the limited number of employees employed under BAT plc contracts outside of the Director group. In addition, 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.
Executive Directors
Non-Executive Directors
Year-on-year percentage change in pay
Average
UK-based
Employee
Chief
Executive2
Finance and
Transformation
Director3
Dr
Marion
Helmes
Sue
Farr
Jerry
Fowden4
Luc
Jobin
Holly
Koeppel
Savio
Kwan
Dimitri
Panayotopoulos5
Kieran
Poynter6
Karen
Guerra7
Darrell
Thomas8
3%
1%
4%
(9%)
2%
2% 198%
2%
3%
2%
21% (66%)
n/a
66%
(19%)
(100%)
(77%)
240% (79%)
(82%)
(84%)
(88%)
(100%)
n/a
n/a
n/a
(5%)
(11%)
(33%)
–
–
–
–
–
–
–
–
–
–
Salary/
Fees
Taxable
Benefits9
Short-
term
Incentive
Notes:
1. The data for the UK-based employees comparator group are made up as follows as at 1 November 2020: (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 Chief Executive figures for 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. The increase in taxable benefits relates to security and tax equalisation payments made in the year ended
31 December 2020.
3. The Finance and Transformation Director figures for salary, taxable benefits and short-term incentives for 2019 are calculated based on Ben Stevens’ remuneration for the period 1 January to
4 August 2019 and Tadeu Marroco’s remuneration for the period 5 August to 31 December 2019.
4. Increase in fees for Jerry Fowden is due to the 2019 fee figure representing the period 1 September 2019 to 31 December 2019 only.
5. From May 2020 Dimitri Panayotopoulos started receiving the Senior Independent Director fee resulting in the fee increase displayed in the table above.
6. The decrease in fees and taxable benefits for Kieran Poynter is a result of the figures for 2020 representing the period 1 January 2020 to 30 April 2020 only.
7. Karen Guerra was appointed as a Non-Executive Director effective 1 September 2020, therefore no percentage change in fees and taxable benefits is displayed.
8. Darrell Thomas was appointed as a Non-Executive Director effective 7 December 2020, therefore no percentage change in fees and taxable benefits is displayed.
9. Decrease in taxable benefits for Finance and Transformation Director is related to reduction in use of Company driver in 2020. Decreases in taxable benefits for Non-Executive Directors is
reflective of the significant reduction in travel and attendance of business functions due to COVID-related restrictions.
Chief Executive Pay Ratio Disclosure
The below table reflects the Chief Executive pay ratio when compared to employees at the 25th, median and 75th percentile of the
Group’s UK workforce for years 2019 and 2020. The table also includes the salary and total remuneration figures for the employees at each
percentile for 2020.
Year
20192,3
20204,5
Employees remuneration for 2020
Salary
Total Remuneration
Method 25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
Option A
Option A
144:1
103:1
25th percentile
£33,905
£49,345
86:1
66:1
Median
£53,087
£76,702
36:1
29:1
75th percentile
£91,773
£176,272
Notes:
1. Option A uses the total full-time equivalent remuneration for all UK employees for the financial year ended 31 December 2020 and has been used to calculate the ratio as this is viewed to be
the most robust and comprehensive means of assessment and is also reflective of shareholder preferences.
2. Total pay and benefits for 2019 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 Chief Executive for 2019 are based on the single figure calculation on page 97 of the 2019 Annual Report. The Chief Executive 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 are based on the workforce as at 1 November 2020 and include the annualised income for the earnings period 1 January 2020 to 31 December 2020.
5. Total pay and benefits for the Chief Executive are based on the single figure calculation on page 124.
6. Total pay and benefits for the workforce is calculated as far as possible on the same basis as the Chief Executive 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.
7. 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 Chief Executive single
figure calculation.
8. For hourly paid employees who are not full time, total pay and benefits have been pro-rated based on full-time employee hours.
9. For employees who have joined part way through the year, pro rata income has been used to provide a full year figure.
The figures above show that there has been a significant reduction in the Chief Executive pay ratio across all quartiles from 2019 to 2020.
BAT Annual Report and Form 20-F 2020 131
The reduction is primarily a consequence of three elements of the Chief Executive remuneration package reducing from 2019 to 2020
and these are pension, short-term incentive and long-term incentive. It should also be noted that the 2019 pay ratio was calculated
based on a blended figure combining the remuneration of Nicandro Durante and Jack Bowles for their respective periods in the role.
Pension – the 2019 Chief Executive pension figure included the cost of Nicandro Durante’s defined benefit pension plan. Jack Bowles’
pension contribution is 15% of annual salary in line with the wider UK workforce.
Short-term incentive – the outcome for the 2019 short-term incentive plan was 96.1% which has reduced to 71.1% for 2020.
Long-term incentive – the outcome for the 2016 LTIP award, for which the performance period ended 31 December 2019, was 69.9% which
has reduced to 54.2% for the 2018 LTIP award which completed the three year performance period on 31 December 2020. Furthermore,
the figure for 2019 included income from awards made to Nicandro Durante at Chief Executive award levels. The figure for 2020 includes
only income from awards made to Jack Bowles prior to his appointment to Executive Director.
The Company believes the median pay ratio for 2020 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 competitive compensation 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 122 and 123.
4 Executive Directors’ Remuneration for the Upcoming Year
Base salary for 2021
The Remuneration Committee has determined the following salaries for the Executive Directors.
Executive Directors – salaries
Jack Bowles
Tadeu Marroco1
Notes:
1. The 4% base salary increase for Tadeu Marroco was effective from 1 October 2020 (see page 119 for further details).
Benefits and pension
No changes have been made to the provision of benefits or pension for 2021.
Base
salary from
1 Apr 2021
£
1,325,610
803,400
Percentage
change
%
Base
salary from
1 Apr 2020
£
3% 1,287,000
4%
772,500
Short-term incentives for 2021
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:
2021 STI metrics & weightings
Group share of key markets1
New Categories revenue2
Adjusted profit from operations
Deleveraging excluding foreign exchange
Total
15%
20%
30%
35%
100%
Notes:
1. Group share of key markets will include THP performance for all major markets (markets included are Japan, South Korea, Italy, Czech Republic, Ukraine and Russia). A description of the metric
can be found on page 274.
2. Further details of the metric can be found on page 277.
Further detail is included in the description of the STI measures for the year ended 31 December 2020 on page 126.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 132
Remuneration Report
Annual Statement on Remuneration
Continued
Long-term incentives for 2021
The Chief Executive and Finance and Transformation Director will be granted an LTIP award equal to a maximum of 500% of salary and
400% of salary, respectively. The performance measures and weightings for the LTIP award to be granted in 2021 will remain unchanged
from those for 2020 awards. The measures and targets for 2021 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:
Altria Group
Anheuser-Busch InBev
Campbell Soup
Carlsberg
Coca-Cola
Colgate-Palmolive Japan Tobacco
Danone
Diageo
Heineken
Imperial Brands
Johnson & Johnson Nestlé
Kellogg
Kimberly-Clark
LVMH
PepsiCo
Pernod Ricard
Philip Morris International
Mondelēz International
EPS growth at current rates of exchange
5%–10% compound annual growth in adjusted diluted EPS over the performance period
EPS growth at constant rates of exchange
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 rates of exchange
Procter & Gamble
Reckitt Benckiser
Unilever
% of award
vesting
at maximum
% of award
vesting
at threshold
20
3
20
20
20
20
3
3
3
3
Total
100
15
5 Chairman and Non-Executive Directors’ Remuneration for the Year Ended 31 December 2020 – @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 2020 together with comparative figures for 2019.
Chairman
Richard Burrows
Non-Executive Directors
Sue Farr
Dr Marion Helmes
Jerry Fowden
Luc Jobin3
Holly Keller Koeppel4
Savio Kwan
Karen Guerra (from 14 September 2020)
Darrell Thomas (from 7 December 2020)
Dimitri Panayotopoulos
Kieran Poynter (up to 30 April 2020)
Total
Base fee1
£’000
Chair/Committee
membership fees1
£’000
Taxable benefits2
£’000
Total remuneration
£’000
2020
2019
2020
2019
2020
2019
2020
2019
714
695
96
96
96
96
96
96
29
–
124
44
1,487
94
94
32
94
94
94
–
–
94
94
1,384
–
26
26
26
26
53
26
8
–
53
9
253
–
26
26
9
26
51
26
–
–
52
64
280
77
-
3
17
16
23
10
–
–
3
–
149
137
4
13
5
77
125
61
–
–
24
1
447
791
122
125
139
138
172
132
37
–
180
53
1,889
832
124
133
45
197
270
181
–
–
170
159
2,111
Notes:
1. 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.
2. Benefits: the Chairman’s benefits in 2020 comprised: health insurance and ‘walk-in’ medical services £16,000 (2019: £15,000); the use of a Company driver £48,000 (2019: £81,000); home
and personal security in the UK and Ireland £11,000 (2019: £14,000); and commuting flights to London £2,000 (2019: £23,000). 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.
3. 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 2020 this
amount was CAD$151,395.00 (£86,112.85) (2019: CAD$150,228.96 (£87,450.72)).
4. Deferred Compensation Plan for Directors of Reynolds American Inc. (DCP): as a former outside director of Reynolds American Inc. Holly Keller Koeppel participated in the DCP under which she elected to defer
payment of a portion of her Reynolds American retainers and meeting attendance fees to a Reynolds American stock account. Following the acquisition of Reynolds American 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.
5. The Non-Executive Directors’ fees structure 2020 is set out in the table overleaf.
BAT Annual Report and Form 20-F 2020 133
Fees from 1 May 2020
£
Fees to 30 April 2020
£
96,850
41,500
40,950
14,100
–
12,500
40,950
14,100
94,500
37,800
39,950
13,750
–
12,200
39,950
13,750
Base fee
Senior Independent Director – supplement
Audit Committee: Chairman
Audit Committee: Member
Nominations Committee: Chairman
Nominations Committee: Member
Remuneration Committee: Chairman
Remuneration Committee: Member
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 2019, the Chairman’s fee was increased from
£698,000 to £718,940 from 1 April 2020.
With effect from 28 April 2021, Luc Jobin’s fee as Chairman will be £670,000.
The fees for Non-Executive Directors are scheduled to be reviewed in April 2021 with any changes being effective from 1 May 2021.
6 Directors’ Share Interests
Summary of Directors’ share interests – @audited@
Ordinary shares
held at
31 Dec 2020
Unvested awards subject to
performance measures and
continued employment
(LTIP)
Unvested awards
subject to
continued
employment only
(DSBS)
Unvested
interests
(Sharesave)
Total ordinary
shares subject
to outstanding
scheme interests
Total of all interests
in ordinary shares at
31 Dec 2020
Outstanding scheme interests 31 Dec 2020
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
Darrell Thomas4
Karen Guerra
217,518
54,360
19,000
–
10,000
4,500
45,236
8,416
7,455
3,300
2,000
2,478
443,446
178,243
91,874
45,404
–
890
535,320
224,537
752,838
278,897
19,000
–
10,000
4,500
45,236
8,416
7,455
3,300
2,000
2,478
Notes:
1. Jack Bowles: ordinary shares held include 685 held by the trustees of the BAT Share Incentive Plan (SIP).
2. Tadeu Marroco: ordinary shares held include 1,114 held by the trustees of the SIP.
3. Changes from 31 December 2020: (a) Jack Bowles: acquisition of 13 ordinary shares on 5 February 2021 as a result of reinvestment of dividend income under the SIP; acquisition of 69
ordinary shares on 5 February 2021 as a result of reinvestment of dividend income under the Share Plan Account (SPA); and acquisition of 437 ordinary shares on 5 February 2021 as a result
of reinvestment of dividend income under the Deferred Shares Bonus Scheme (DSBS). (b) Tadeu Marroco: purchases of five ordinary shares on 8 January 2021 and five ordinary shares on
5 February 2021 under the SIP; acquisition of 21 ordinary shares on 5 February 2021 as a result of reinvestment of dividend income under the SIP; acquisition of 21 ordinary shares on 5 February
2021 as a result of reinvestment of dividend income under the SPA; and acquisition of 134 ordinary shares on 5 February 2021 as a result of reinvestment of dividend income under the DSBS.
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, Holly Keller Koeppel and Darrell Thomas 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 Reynolds American Inc. and a participant in the Deferred Compensation Plan for
Directors of Reynolds American (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 25,125.91 DSUs (31 December 2020: 24,653.11 DSUs).
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 134
Remuneration Report
Annual Statement on Remuneration
Continued
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 table below.
Jack Bowles
Tadeu Marroco
No. of eligible
ordinary shares
held at
31 Dec 2020
265,539
77,341
Value of eligible
ordinary shares
held at
31 Dec 20201
£m
Actual
percentage (%)
of base salary at
31 Dec 2020
Shareholding
requirements
(% of base salary
31 Dec 2020)
Compliant
with shareholding
requirement
7.2
2.1
558.7
260.7
500%
400%2
Yes
See note 2
In accordance with the UK Corporate Governance Code 2018, the Remuneration Committee introduced from 2019 a new post-
employment shareholding requirement whereby Executive Directors are required to hold shares equivalent to 100% of current
shareholding requirements for two full years following the date of their departure with a sale restriction mechanism in place for this
period. The Directors’ Remuneration Policy came into effect on 26 April 2019, following approval by shareholders at our AGM.
Ben Stevens is compliant with the post-employment shareholding requirement for the year ended 31 December 2020.
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 2020 of 2,708p.
2. 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 increased to 400% in 2020.
3. 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.
4. 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 2020.
BAT Annual Report and Form 20-F 2020 135
Executive Directors’ outstanding scheme interests – @audited@
Plan At 1 Jan 2020
Awarded
in 2020
Lapsed
in 2020
Exercised/
released
in 2020
At
31 Dec 2020
Exercise
price
(p)
End of
performance
period
Date from which
exercisable or
shares released
Jack Bowles
Tadeu Marroco
LTIP1
LTIP2
LTIP3
LTIP3
DSBS
DSBS
DSBS
DSBS
Sharesave
Sharesave
LTIP1
LTIP2
LTIP3
LTIP3
DSBS
DSBS
DSBS
DSBS
Sharesave
Sharesave
Sharesave
26,463
43,785
176,532
–
8,997
12,064
26,192
–
–
–
21,109
28,248
36,057
–
7,177
7,783
13,233
–
495
266
–
–
–
–
223,129
–
–
–
53,618
–
–
–
–
–
113,938
–
–
–
24,388
–
–
624
7,966
–
–
–
–
–
–
–
–
–
6,354
–
–
–
–
–
–
–
–
–
–
18,497
–
–
–
8,997
–
–
–
–
–
14,755
–
–
–
7,177
–
–
–
495
–
–
–
43,785
176,532
223,129
–
12,064
26,192
53,618
–
–
–
28,248
36,057
113,938
–
7,783
13,233
24,388
2,689.50
–
–
–
–
–
–
–
–
–
3,003.00
–
–
–
–
–
–
–
31 Dec 19
31 Dec 20
31 Dec 21
31 Dec 22
31 Dec 19
31 Dec 20
31 Dec 21
31 Dec 22
–
–
31 Dec 19
31 Dec 20
31 Dec 21
31 Dec 22
31 Dec 19
31 Dec 20
31 Dec 21
31 Dec 22
–
3,026.00
1 May 20
266
624
–
–
1 May 21
1 May 25
27 Mar 20
26 Mar 21
28 Mar 24
30 Mar 25
27 Mar 20
26 Mar 21
28 Mar 22
30 Mar 23
–
–
27 Mar 20
26 Mar 21
28 Mar 22
30 Mar 25
27 Mar 20
26 Mar 21
28 Mar 22
30 Mar 23
1 May 20
1 May 21
1 May 25
Notes:
1. Details of the performance condition for the LTIP awards granted in 2017 (which vested during 2020), and of achievement against that condition in the period to 31 December 2019,
were set out in the Annual Report on Remuneration for the year ended 31 December 2019.
2. Details of the performance condition attached to 2018 LTIP awards, and of achievement against that condition in the period to 31 December 2020, are set out on page 127.
3. Details of the performance condition attached to 2019 and 2020 LTIP awards are set out on page 136.
Further details in relation to scheme interests granted during the year ended 31 December 2020
Proportion of award vesting
for threshold performance
(%)
Price per
ordinary share
at award1
Face value
of award
£’000
Ordinary
shares awarded
Plan
Performance
period
Date from which
exercisable or
shares released
Jack Bowles
Tadeu Marroco
LTIP2
DSBS
LTIP2
DSBS
223,129
53,618
113,938
24,388
2,633p
5,875
2,633p
3,000
15 2020–2022
n/a
n/a
15 2020-2022
n/a
n/a
30 Mar 25
30 Mar 23
30 Mar 25
30 Mar 23
Notes:
1. The price per ordinary share is the price used to determine the number of ordinary shares subject to the awards, which is calculated as the average of the closing mid-market price of an
ordinary share over the three dealing days preceding the date of grant.
2. Details of the performance condition attached to these LTIP awards are set out below.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 136
Remuneration Report
Annual Statement on Remuneration
Continued
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 rates of exchange
Compound annual growth in adjusted diluted
EPS measured at current rates of exchange
EPS growth at constant rates of exchange
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 2019
LTIP awards granted in 2020
1 January 2019–31 December 2021
1 January 2020–31 December 2022
Weighting
Threshold
Maximum
Weighting
Threshold
Maximum
20%
20%
20%
20%
20%
At median,
3% of
award vests
At upper
quartile, 20% of
award vests
At 5%
CAGR, 3% of
award vests
At 5%
CAGR, 3% of
award vests
At 3%
CAGR, 3% of
award vests
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%
20%
20%
20%
20%
At median,
3% of
award vests
At 5%
CAGR, 3% of
award vests
At upper
quartile,
20% of
award vests
At 10% CAGR,
20% of
award vests
At 5%
CAGR, 3% of
award vests
At 10% CAGR,
20% of
award vests
At 3%
CAGR, 3% of
award vests
At 5% CAGR,
20% of
award vests
At 85%,
3% of
award vests
At 95%,
20% of
award vests
7 Other Disclosures
There were no payments to past Directors or for loss of office.
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
2020
£m
2,744
8
2
4,745
2019
£m
3,221
13
2
4,598
% change
-14.8
-38.5
0
3.2
Notes:
1. Total remuneration of Group employees: this represents the total employee remuneration costs for the Group, set out on page 166 within note 3(a) in the Notes on the Accounts.
2. Total dividends: this represents the total dividends paid in 2020. For further details please refer to page 71.
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 2020
– by the issue of new ordinary shares;
– 70,859 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;
Sharesave Scheme;
– a total of 936,103 Sharesave Scheme options over ordinary
– 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.
shares in the Company were outstanding at 31 December 2020,
representing 0.04% 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 2025 at option prices ranging from 2,291p
to 4,056p.
BAT Annual Report and Form 20-F 2020
137
8 The Remuneration Committee and Shareholder Engagement
Remuneration Committee current members
Dimitri Panayotopoulos (Chairman)
Sue Farr
Karen Guerra
Dr Marion Helmes
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 schemes 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
The Committee’s terms of reference align with the requirements of the UK Corporate Governance Code 2018.
No changes were made to the Remuneration Committee’s terms of reference in 2020.
For the Remuneration Committee’s terms of reference see:
www.bat.com/governance
Attendance at meetings in 20201
Name
Dimitri Panayotopoulos
Sue Farr
Karen Guerra2(b)
Marion Helmes
Savio Kwan
Member
since
2015
2016
2020
2019
2016
Attendance/
Eligible to attend
Scheduled
Attendance/
Eligible to attend
Ad Hoc
4/4
4/4
2/2
4/4
4/4
2/2
2/2
1/1
2/2
2/2
Notes:
1. Number of meetings in 2020: the Committee held six meetings in 2020, 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; and (b) Karen Guerra became a member of the Committee on 14 September 2020 on her appointment as a Non-Executive Director.
3. Other attendees: the Chairman, the Chief Executive, the Director, Talent, Culture and Inclusion, 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. PwC LLP: as one of the Remuneration Committee’s remuneration consultants appointed in January 2020, they attended meetings of the Remuneration Committee in 2020. As one of
the founding members of the Remuneration Consultants Group (RCG), PwC LLP 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.
5. Meridian: as one of the Remuneration Committee’s remuneration consultants appointed in January 2020, they attended meetings of the Remuneration Committee in 2020.
6. Deloitte: provided general advice on remuneration up to 1 February 2020 but did not attend any meetings of the Remuneration Committee in 2020.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 138
Remuneration Report
Annual Statement on Remuneration
Continued
Remuneration Committee advisers during 2020
Independent
external advisers Services provided to the Remuneration Committee
Deloitte LLP
General advice on remuneration matters up to 1 February 2020.
PwC LLP1
Meridian
Herbert Smith
Freehills LLP
KPMG LLP
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.
General advice on remuneration matters including market
trends, shareholder engagement perspectives and comparator
group analysis.
Advice in respect of share plan regulations is provided to the
Company and is available to the Remuneration Committee.
Specified procedures to assist in the assessment of the
calculations of the STI bonus and LTI outcomes and future targets.
Fees
2020: £9,500
2019: £76,000
2020: £126,013
2020: $49,537
Other services provided
to the Company
Tax, corporate finance and
consulting services to Group
companies worldwide.
Tax, corporate finance and
consulting services to Group
companies worldwide
excluding the US.
Consulting services to Group
companies in the US.
Fees relate to advice
given to the Company.
2020: £28,000
2019: £28,000
General corporate legal and tax
advice principally in the UK.
Audit and tax services and
other non-audit services.
Note:
1. PwC LLP also provides other international services and international tax advice such as tax return services including for certain globally mobile directors. The Remuneration Committee
advisory team is not involved in any other services PwC provides to the Group.
Regular work programme 2020
The Remuneration Committee:
– reviewed the Chairman’s fee from 1 April 2020 with specific reference to the level of salary increases awarded to UK employees;
– reviewed salaries for the Executive Directors to take effect from 1 April 2020, taking into account market positioning and the level of
salary increases awarded to UK employees. The Remuneration Committee Chairman has led a programme of shareholder engagement
in relation to these matters;
– reviewed salaries for members of the Management Board and the Company Secretary from 1 April 2020, taking into account market
positioning and the level of salary increases awarded to UK employees;
– assessed the achievement against the targets for the 2019 STI award and set the STI targets for 2020;
– reviewed updates on achievement against the performance measures, including for the six months ended 30 June 2020 for the STI 2020
and for outstanding LTIP awards;
– assessed the achievement against the performance conditions for the vesting of the LTIP 2017 award, determined the contingent level
of LTIP awards for March 2020 and reviewed the associated performance conditions;
– reviewed the STI performance measures and targets for 2021;
– assessed the achievement against the targets for the 2019 Share Reward Scheme and set the targets for the 2020 award;
– reviewed the Annual Statement and the Annual Report on Remuneration for the year ended 31 December 2019 prior to its approval by
the Board and subsequent proposal to shareholders at the Company’s AGM on 30 April 2020;
– analysed the 2020 AGM voting results relating to remuneration resolutions and reviewed market trends in the context of that annual
general meeting season and corporate governance developments in the UK and the US;
– monitored the continued application of the Company’s shareholding guidelines for the Executive Directors and members of the
Management Board; and
– reviewed the Remuneration Committee’s effectiveness following the Board and Committee evaluation process, discussed further
on page 104.
BAT Annual Report and Form 20-F 2020 139
Other activities in 2020
The Remuneration Committee:
– approved the remuneration package in respect of the appointment of Luc Jobin as Chairman Designate from 1 March 2021 and then
as Chairman from the conclusion of the Company’s 2021 AGM, with specific consideration of market positioning;
– reviewed the terms of appointment and associated remuneration, and terms of termination of employment, in connection with
Management Board changes during the year;
– completed a detailed review of the Group’s legacy defined pension arrangements in the UK. Consultation with impacted employees
in respect of proposals to close UK defined benefit arrangements to future accrual concluded in March 2020 and the Group’s legacy
defined pension arrangements in the UK were closed to future accrual with effect from 30 June 2020;
– reviewed elements of the Group’s workforce remuneration strategy and their alignment with Executive Directors’ remuneration and,
more broadly, their alignment with the Group’s culture, with specific focus on pay comparator groups for Executive Directors, the
Management Board and management grade employees across the Group;
– approved changes to the methodology for calculating the share of market read for the STI volume share metrics in a limited number
of markets, based on market changes and reporting capabilities; and
– reviewed the UK gender pay report for 2019 for applicable UK Group companies prior to publication in March 2020.
Voting on Remuneration and Engagement With Shareholders
At the AGM on 30 April 2020, shareholders considered and voted on the 2019 Directors’ Remuneration Report as set out on the table
below. No other resolutions in respect of Directors’ remuneration or incentives were considered at the 2020 AGM. Further information
regarding shareholder engagement in relation to remuneration matters is set out in the Annual Statement on Remuneration on page 118
and in the discussion of Board engagement with shareholders on page 97.
Approval of Directors’ Remuneration Report¹
Percentage for
Votes for (including discretionary)
Percentage against
Votes against
Total votes cast excluding votes withheld
Votes withheld³
Total votes cast including votes withheld
2020 AGM
61.94
1,081,334,586
38.06
664,416,231
1,745,750,817
3,859,408
1,749,610,225
The Directors’ Remuneration Policy was approved by shareholders at the 2019 AGM. A summary of this Policy is on pages 120 to 123 of this
Remuneration Report 2020.
Approval of Directors’ Remuneration Policy²
Percentage for
Votes for (including discretionary)
Percentage against
Votes against
Total votes cast excluding votes withheld
Votes withheld³
Total votes cast including votes withheld
2019 AGM
92.63
1,641,331,721
7.37
130,661,885
1,771,993,606
1,820,757
1,773,814,363
Notes:
1. Directors’ Remuneration Report: does not include the part of the Remuneration Report containing the Remuneration Policy (see note 2 below).
2. Directors’ Remuneration Policy: was approved by shareholders at the 2019 AGM held on 25 April 2019 and is set out in full in the 2018 Annual Report on Remuneration.
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 16 February 2021 and signed on its behalf by:
Dimitri Panayotopoulos
Chairman, Remuneration Committee
16 February 2021
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 140
Governance
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 Parent 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 accounting standards in conformity
with the requirements of the Companies Act 2006 and applicable
law and have elected to prepare the Parent Company financial
statements in accordance with UK Accounting Standards,
including FRS 101 Reduced Disclosure Framework. In addition, the
Group financial statements are required under the UK Disclosure
Guidance and Transparency Rules to be prepared in accordance
with International Financial Reporting Standards adopted pursuant
to Regulation (EC) No 1606/2002 as it applies in the European Union
(“IFRSs as adopted by the EU”). 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 Parent Company
and of their profit or loss for that period. In preparing each of the
Group and Parent 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 international accounting
standards in conformity with the requirements of the Companies
Act 2006 and International Financial Reporting Standards
adopted pursuant to Regulation (EC) No 1606/2002 as it applies
in the European Union and IFRS as issued by the IASB (“IFRSs as
adopted by the EU”);
– for the Parent Company financial statements, state whether
applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the Parent
Company financial statements;
– assess the Group and Parent 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 Parent 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 Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent 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.
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.
This responsibility statement has been approved and is signed by
order of the Board by:
Richard Burrows
Chairman
16 February 2021
Tadeu Marroco
Finance and
Transformation Director
British American Tobacco p.l.c.
Registered in England and Wales No. 3407696
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report
on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2020
141
Independent Auditor’s Report
To the Members of British American Tobacco p.l.c.
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 2020 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 Statement, and the related notes, including the
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
2020 and of the Group’s profit for the year then ended;
– the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with
the requirements of the Companies Act 2006;
– 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 to the extent applicable.
Additional opinion in relation to IFRS 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
international accounting standards in conformity with the requirements of the Companies Act 2006, has also applied International
Financial Reporting Standards as issued by the International Accounting Standards Board (IASB).
In our opinion, the Group financial statements have been properly prepared in accordance with IFRS 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 6
financial years ended 31 December 2020. 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 2019), 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, and we do not provide a separate opinion on these matters.
Goodwill and trademarks with indefinite lives impairment analysis – arising from the Reynolds American Inc. acquisition in 2017
Refer to pages 111 to 112 (Audit Committee report), page 158 (accounting policy) and pages 179 to 184 (financial disclosures).
Risk vs 2019:
The risk:
Subjective assessment: As a result of the 2017 acquisition of Reynolds American Inc. (“Reynolds American”), the Group, as at 31 December
2020 has goodwill and trademarks with indefinite lives of £32,719 million and £68,839 million, respectively (2019: goodwill of £33,761 million
and trademarks with indefinite lives of £71,032 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 evaluating: (i) the budgeted revenue used in the analysis of
the recoverability of trademarks with indefinite lives and goodwill allocated to the Reynolds American cash-generating unit; and (ii) any
impact of the potential menthol ban on budgeted revenue or the discount rate for the Newport indefinite lived trademark and goodwill
allocated to the Reynolds American 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 have 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: Evaluating the processes and controls within the goodwill and other intangible assets process, including
controls over the development of the budgeted revenue and assessment of the impact of the potential menthol ban on the assumptions
listed above;
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 142
Financial Statements
Independent Auditor’s Report
Continued
Benchmarking and assessing assumptions: Analysing Reynolds American’s budgeted revenue 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 other than a potential federal menthol ban. 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 related cash flow forecast or the discount rate, by examining broker and analyst reports, industry reports, media reports, academic and
scientific studies, and regulatory changes proposed in the U.S. Food and Drug Administration agenda and the U.S. government agendas;
Historical comparisons: Challenging the reasonableness of the assumptions, particularly budgeted revenue, by comparing the historical
projections to actual results to assess the Group’s ability to accurately forecast;
Sensitivity analysis: Performing sensitivity analysis on the budgeted revenue to assess its impact on the Group’s determination that the
fair value of the Reynolds American goodwill and trademarks with indefinite lives exceed their carrying value; 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 Reynolds American acquisition.
Our results:
We found the conclusion that there is no impairment of trademarks with indefinite lives and goodwill arising from the Reynolds American
acquisition to be acceptable (2019: acceptable).
Contingent liabilities arising from litigation in Canada
Refer to page 111 (Audit Committee report), page 161 (accounting policy) and pages 234 to 236 and 245 (financial disclosures).
Risk vs 2019:
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 2020 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 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 Canadian litigation.
The effect of these matters is that, as part of our risk assessment, we determined that the potential exposure to litigation requires 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.
Our procedures included:
Control design and operation: Evaluating the processes and controls within the legal exposure 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 Canadian litigation;
Enquiry of lawyers: Reading letters received directly from the Group’s external and internal legal counsel that evaluated the current status
of the Canadian legal proceedings. We also inquired of internal legal counsel to evaluate their basis for conclusions in their letter; 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 in order to challenge Imperial’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 (2019: acceptable).
Recoverability of parent Company’s investment in subsidiaries
Refer to page 266 (accounting policy) and page 267 (financial disclosures). Risk vs 2019:
The risk:
Low risk, high value: The carrying amount of the parent Company’s investments in subsidiaries is £27,995 million (2019: £27,908 million)
which represents 77% (2019: 80%) 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 parent Company’s direct investments, representing 100% (2019: 100%) of the total investment
balance with the relevant subsidiary’s 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 (2019: acceptable).
BAT Annual Report and Form 20-F 2020 143
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 (2019: £420 million), determined with reference to a
benchmark of Group profit before taxation. This represents 4.7% (2019: 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 (2019: £50 million) by reference to component materiality.
This is lower than the materiality we would otherwise have determined by reference to Company net assets and represents 0.15% of the
Company’s net assets (2019: 0.15%).
In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold,
performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account
balances add up to a material amount across the financial statements as a whole. Performance materiality for the Group was set at
75% (2019: 75%) of materiality for the financial statements as a whole, which equates to £315 million (2019: £315 million). We applied this
percentage in our determination of performance materiality because we did not identify any factors indicating an elevated level of risk.
Performance materiality for the parent company was set at 75% (2019: 75%) of materiality for the financial statements as a whole, which
equates to £37.5 million (2019: £37.5 million). We applied this percentage in our determination of performance materiality because we did
not identify any factors indicating an elevated level of risk.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £20 million
(2019: £20 million) in addition to other identified misstatements that warranted reporting on qualitative grounds.
Scope of our audit
The Group operates three shared service centres (2019: 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 (2019: 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 £50 million to £200 million (2019: £35 million to £235 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 13 components (2019: 12), using a materiality ranging from
£40 million to £70 million (2019: £35 to £70 million) assigned by the Group audit team. Specified audit procedures have been performed
at 2 components (2019: 3) using a materiality of £40 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 2019.
The work on 33 of the 38 components (2019: 33 of the 38 components) was performed by component auditors and the rest, including the
audit of the Parent Company, was performed by the Group team.
The percentages of the Group’s revenue, the total profits and losses that make up the 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
84%
(83% 2019)
5%
7%
Group profit before tax
78%
(73% 2019)
Group total assets
95%
(96% 2019)
3%
3%
1%
76%
79%
3%
5%
18%
13%
55%
57%
92%
92%
Full scope for Group audit purposes 2020
Audit of one or more account balances 2020
Specified risk-focused audit procedures 2020
Full scope for Group audit purposes 2019
Audit of one or more account balances 2019
Specified risk-focused audit procedures 2019
Residual components
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 144
Financial Statements
Independent Auditor’s Report
Continued
The remaining 16% (2019: 17%) of total group revenue, 22% (2019: 27%) of group profit before taxation and 5% (2019: 4%) of total group
assets is represented by 295 (2019: 300) reporting components, none of which individually represented more than 2% (2019: 5%) of any
of total Group revenue, Group profit before taxation 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.
Due to the travel restrictions imposed as a result of COVID-19, the Group team performed a virtual site visit for one component location
in the United States for the purpose of performing a detailed file review. In addition, the Group team performed virtual site visits for the
shared service centres in Costa Rica, Malaysia and Romania, as well as performing a virtual site visit for a further one component location
in United States for business understanding and risk assessment purposes.
In 2019 the Group team visited two component locations in 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, as well as visiting a further
two component locations in Brazil and Mexico for business understanding and risk assessment purposes.
In addition, the Group audit team held an audit risk planning and strategy virtual conference which in-scope component auditors
attended. Further to these visits and conference, 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.
4 Going concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the
Company or to cease their operations, and as they have concluded that the Group’s and the Company’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”).
We used our knowledge of the Group, its industry, and the general economic environment to identify the inherent risks to its 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.
We also considered less predictable but realistic second order impacts, such as the impact COVID-19 and the erosion of customer or
supplier confidence, which could result in a rapid reduction of available financial resources.
We considered whether these risks could plausibly affect the liquidity in the going concern period by comparing severe, but plausible
downside scenarios that could arise from these risks individually and collectively against the level of available financial resources indicated
by the Group’s financial forecasts.
We considered whether the going concern disclosure in note 1 to the financial statements gives a full and accurate description of the
Directors’ assessment of going concern.
Our conclusions based on this work:
– we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements
is appropriate;
– we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to events or
conditions that, individually or collectively, may cast significant doubt on the Group’s or Company’s ability to continue as a going
concern for the going concern period;
– we have nothing 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 the going concern period, and we found the going concern disclosure in note 1 to be acceptable; and
– the related statement under the Listing Rules set out on page 73 is materially consistent with the financial statements and our
audit knowledge.
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 above conclusions are not a guarantee that the Group or the Company
will continue in operation.
5 Fraud and breaches of laws and regulations – ability to detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or
pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:
BAT Annual Report and Form 20-F 2020 145
– Enquiring of directors, the Audit Committee, and internal audit whether they have knowledge of any actual, suspected or alleged fraud,
and inspection of policy documentation as to the Group’s high-level policies and procedures to prevent and detect fraud, including the
internal audit function, and the Group’s channel for “whistleblowing”.
– Reading Board, Audit Committee, Remuneration Committee, Nominations Committee, Transactions Committee, Corporate Committee
and Committees of the Board’s minutes.
– Considering the International Executive Incentive Scheme and performance targets for senior management.
– Using analytical procedures to identify any unusual or unexpected relationships.
We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit.
This included communication from the group to component audit teams of relevant fraud risks identified at the Group level and request to
component audit teams to report to the Group audit team any instances of fraud that could give rise to a material misstatement at group.
As required by auditing standards, and taking into account possible pressures to meet profit targets, we perform procedures to address
the risk of management override of controls, in particular the risk that Group and component management may be in a position to
make inappropriate accounting entries and the risk of bias in accounting estimates. On this audit we do not believe there is a fraud risk
related to revenue recognition as the revenue model is non-complex with no material estimation or manual intervention, revenue is
disaggregated between a significant number of End Markets and remuneration targets are based on Group performance rather than End
Market performance.
We did not identify any additional fraud risks.
In determining the audit procedures we took into account the results of our evaluation and testing of the operating effectiveness of the
Group-wide fraud risk management controls.
We also performed procedures including:
– Identifying journal entries to test from a Group perspective based on risk criteria and comparing the identified entries to supporting
documentation. These included those posted to revenue accounts, those approved by an individual not authorized to approve postings,
those posted to accounts that contain significant estimates and period-end adjustments and those posted to accounts which could
drive certain key metrics such as the bonus calculation.
– Identifying journal entries to test for components based on risk criteria and comparing the identified entries to supporting
documentation. These included those posted to revenue accounts with senior management referenced in the description, users who
only posted one entry for the fiscal year and those posted with an unusual combination.
– Assessing significant accounting estimates for bias.
Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations
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, 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.
As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s
procedures for complying with regulatory requirements.
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 to component audit teams of relevant laws and regulations identified
at the Group level, and a request for component auditors to report to the group team any instances of non-compliance with laws and
regulations that could give rise to a material misstatement at group.
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, taxation legislation and pension 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. We identified the
following areas as those most likely to have such an effect: health and safety, anti-bribery and corruption, money-laundering, sanctions,
environmental protection legislation, food and drug administration, data privacy, competition and contract legislation recognising the
financial and regulated nature of the Group’s activities. 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. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not
detect that breach.
For the criminal investigations into allegations of misconduct by the governmental authorities’ matters discussed in note 27 we performed
inquiries, obtained legal confirmations and assessed disclosures against our understanding from legal correspondence.
Context of the ability of the audit to detect fraud or breaches of law or regulation
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 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 146
Financial Statements
Independent Auditor’s Report
Continued
In addition, as with any audit, there remained a higher risk of non-detection of fraud, as these may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement.
We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws
and regulations.
6 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.
Disclosures of emerging and principal risks and longer-term viability
We are required to perform procedures to identify whether there is a material inconsistency between the directors’ disclosures in respect
of emerging and principal risks and the viability statement, and the financial statements and our audit knowledge.
Based on those procedures, we have nothing material to add or draw attention to in relation to:
– the directors’ confirmation within the viability statement on page 84 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 group principal risks disclosures describing these risks and how emerging risks are identified, 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.
We are also required to review the viability statement, set out on page 84 under the Listing Rules. Based on the above procedures, we
have concluded that the above disclosures are materially consistent with the financial statements and our audit knowledge.
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 Company’s longer-term viability.
Corporate governance disclosures
We are required to perform procedures to identify whether there is a material inconsistency between the directors’ corporate governance
disclosures and the financial statements and our audit knowledge.
Based on those procedures, we have concluded that each of the following is materially consistent with the financial statements and our
audit knowledge:
– 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;
– the section of the annual report describing the work of the Audit Committee, including the significant issues that the Audit Committee
considered in relation to the financial statements, and how these issues were addressed; and
– the section of the annual report that describes the review of the effectiveness of the Group’s risk management and internal
control systems.
We are required to review the part of Corporate Governance Statement relating to the Group’s compliance with the provisions of the UK
Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects.
BAT Annual Report and Form 20-F 2020 147
7 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.
8 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 140, 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 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 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.
9 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 the 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 the further matters we are required to state to them in
accordance with the 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.
Jeremy Hall (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
16 February 2021
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 148
Financial Statements
Report of Independent Registered
Public Accounting Firm
To the Shareholders and Board of Directors of British American Tobacco p.l.c.
This page is intentionally left blank
BAT Annual Report and Form 20-F 2020 149
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BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 150
Financial Statements
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(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
2020
£m
25,776
(4,583)
445
(2,744)
(1,450)
188
(3)
(7,667)
9,962
(1,745)
455
8,672
(2,108)
6,564
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
6,400
164
6,564
5,704
145
5,849
6,032
178
6,210
7
7
280.0p
278.9p
249.7p
249.0p
264.0p
263.2p
Note:
1. Revenue is net of duty, excise and other taxes of £39,172 million, £39,826 million and £38,553 million for the years ended 31 December 2020, 2019 and 2018, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
BAT Annual Report and Form 20-F 2020 Group Statement of
Comprehensive Income
Profit for the year
Other comprehensive (expense)/income
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
Net investment hedges
– net fair value (losses)/gains
– 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 gains/(losses)
– surplus recognition
Associates – share of OCI, net of tax
Tax on items that will not be reclassified
151
For the years ended 31 December
Notes
2020
£m
6,564
2019
£m
5,849
(2,997)
(2,597)
(3,216)
(2,967)
(257)
90
(16)
(163)
(98)
44
55
105
10
(34)
(26)
(246)
53
21
(18)
(115)
56
(507)
(582)
(7)
7
75
5
6(f)
11
11
5
6(f)
2018
£m
6,210
3,099
3,868
(58)
17
(472)
(236)
(38)
18
115
138
4
6
(33)
Total other comprehensive (expense)/income for the year, net of tax
Total comprehensive income for the year, net of tax
(2,942)
3,622
(3,723)
2,126
3,214
9,424
Attributable to:
Owners of the parent
Non-controlling interests
The accompanying notes are an integral part of these consolidated financial statements.
3,474
148
3,622
2,000
126
2,126
9,239
185
9,424
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 152
Financial Statements
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
26,609
(3,555)
40,234
63,902
258
64,160
(3,012)
–
6,486
6,400
3,474
6,400
148
164
3,622
6,564
(3,012)
86
(2,926)
(16)
(2,942)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
7
–
–
(33)
–
–
–
–
–
–
88
–
(7)
(33)
88
2
–
(4,747)
–
(4,747)
–
–
–
–
–
–
(141)
–
17
–
282
(33)
88
2
–
(4,747)
(141)
(17)
17
4
62,955
–
–
–
614
–
–
–
26,618
–
–
–
(6,600)
(17)
–
4
42,041
(17)
–
4
62,673
Balance at 1 January 2020
Total comprehensive (expense)/income
for the year comprising:
Profit for the year
Other comprehensive (expense)/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 new shares issued
– treasury shares used for share
option schemes
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 2020
24
18(e)
23
The accompanying notes are an integral part of these consolidated financial statements.
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)
–
5,190
5,704
2,000
5,704
126
145
2,126
5,849
(3,190)
(514)
(3,704)
(19)
(3,723)
(32)
–
–
–
–
–
115
–
(32)
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(e)
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.
BAT Annual Report and Form 20-F 2020 153
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
26,602
(3,392)
36,935
60,759
222
60,981
–
614
–
26,602
(9)
(3,401)
(29)
36,906
(38)
60,721
3,090
–
3,090
6,149
6,032
117
9,239
6,032
3,207
24
–
–
–
–
–
–
–
–
–
–
–
–
–
4
–
–
–
–
–
614
–
–
–
26,606
(22)
–
–
–
–
–
–
–
(333)
–
222
185
178
7
–
–
–
(38)
60,943
9,424
6,210
3,214
(22)
121
4
–
121
–
(22)
121
4
(4,463)
–
(4,463)
–
–
(163)
(4,463)
(163)
(139)
(11)
(6)
38,557
(139)
(11)
(6)
65,444
–
–
–
244
(139)
(11)
(6)
65,688
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
The accompanying notes are an integral part of these consolidated financial statements.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 154
Financial Statements
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
16 February 2021
31 December
2020
£m
2019
£m
Notes
8
9
10
11
12
13
14
15
16
13
14
15
17
18(a)
18(b)
18(c)
18(c)
18(d)
19
11
12
20
21
15
19
20
21
15
115,343
5,060
1,796
714
534
242
22
367
124,078
5,998
79
3,721
242
430
3,139
13,609
3
13,612
137,690
614
26,618
(6,600)
42,041
62,673
282
62,955
39,927
1,524
16,314
387
1,064
41
59,257
4,041
868
598
9,693
278
15,478
137,690
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
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
BAT Annual Report and Form 20-F 2020 Group Cash Flow Statement
Notes
3(b)
13
3(d)
Profit from operations
Adjustments for
– depreciation, amortisation and impairment costs
– increase in inventories
– decrease/(increase) in trade and other receivables
– decrease in receivables related to the charge in respect of the Quebec Class Actions
– increase/(decrease) in Master Settlement Agreement payable
– (decrease)/increase 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
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 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
17
The accompanying notes are an integral part of these consolidated financial statements.
155
For the years ended 31 December
2020
£m
9,962
1,450
(144)
300
–
369
(320)
(96)
–
46
11,567
351
(2,132)
9,786
48
(511)
44
(244)
(343)
184
39
–
(783)
(1,737)
(26)
(164)
9,826
(283)
(18)
(10,633)
(4,745)
17
(136)
2
(7,897)
1,106
(253)
853
2,035
2,888
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
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 156
Financial Statements
Notes on 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 international accounting standards in conformity with the
requirements of the Companies Act 2006@, and in accordance with
International Financial Reporting Standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union
(EU) (‘IFRS as adopted by the EU’). International Financial Reporting
Standards as adopted by the EU @and international accounting
standards in conformity with the requirements of the Companies
Act 2006@ differ 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.
In performing its going concern assessment, management
considered forecasts and liquidity requirements within the going
concern period.
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 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
– 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 American) 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 16 February 2021.
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.
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.
BAT Annual Report and Form 20-F 2020 157
1 Accounting Policies Continued
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.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report
on Form 20-F as filed with the SEC.
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.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 158
Financial Statements
Notes on Accounts
Continued
1 Accounting Policies Continued
The Group has exposures in respect of the payment or recovery
of a number of taxes. With effect from 1 January 2019, the Group
adopted the requirements of IFRIC 23 Uncertainty over Income Tax
Treatments which 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 with estimated amounts determined based on the most
likely amount or expected value, depending on which method is
expected to better predict the resolution of the uncertainty. 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.
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 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.
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.
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 applied the modified retrospective
approach with no restatement of prior periods, as permitted by
the Standard.
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.
With effect from 1 January 2021, Global software solutions will be
amortised on a straight-line basis over periods not exceeding 13
years. The revision in useful economic life is a result of ongoing
use of Global software solutions due to the extension of third-
party supplier support. In 2021 and 2022, the estimated impact
of this change in accounting estimate is a reduction in annual
amortisation expense of £26 million and, in 2023, a reduction in
annual amortisation expense of £12 million.
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.
The Group took 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, and to not apply the recognition and
measurement requirements of IFRS 16 to short-term leases (leases
of less than 12 months maximum duration) or leases of low-value
assets. Except for property-related leases, non-lease components
have not been separated from lease components.
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.
BAT Annual Report and Form 20-F 2020 159
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 2019, the Group early adopted the
phase one Amendments to IFRS 9 and IFRS 7 regarding Interest
Rate Benchmark Reform. The Amendments provide 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.
In addition, with effect from 1 January 2020, the Group has early
adopted the phase two Amendments which provide a practical
expedient for financial assets and financial liabilities that are
modified, or have existing contractual terms activated that change
the basis for determining the contractual cash flows, as a result
of Interest Rate Benchmark Reform, such that the change to the
contractual cash flows is applied prospectively by revising the
effective interest rate. The impact on the Group’s profit or equity
from these amendments was not material.
1 Accounting Policies Continued
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
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.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 160
Financial Statements
Notes on 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 and financial assets at fair value through other
comprehensive income.
– 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.
BAT Annual Report and Form 20-F 2020 161
1 Accounting Policies Continued
Dividends
With effect from 1 January 2018, the Company has moved to four
interim quarterly dividend payments, and, as referred to in note
18 (e), from 2019 the Company and Group recognise the interim
dividend in the period in which it is paid.
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 and @operating cash flow conversion ratio@, all of which are
before the impact of adjusting items and which are reconciled from
revenue, profit from operations, diluted earnings per share and
@cash conversion ratio@.
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 are not expected to have a material
effect on reported profit or equity or on the disclosures in the
financial statements.
@ Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report
on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 162
Financial Statements
Notes on Accounts
Continued
2 Segmental Analyses
The chief operating decision maker, the Management Board, reviews adjusted profit from operations at constant currencies to evaluate
segment performance and allocate resources to the overall business. The Management Board also reviews at constant currencies
external adjusted revenues, which are included within adjusted profit from operations. 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. Transactions between Group
subsidiaries are conducted on arm’s length terms in accordance with appropriate transfer pricing rules and Organisation for Economic
Cooperation & Development (OECD) principles. 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 ‘Reynolds 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 Reynolds 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. To the extent any such financial
information provided in these financial statements relates to the US business or RAI (and/or the Reynolds Group), it is provided as an
explanation of the US business’s or RAI’s (and/or the Reynolds Group’s) primary US GAAP based financial statements and information.
The following table shows 2020 revenue and adjusted revenue at current rates, and 2020 revenue translated using 2019 rates of exchange.
The 2019 figures are stated at the 2019 rates of exchange.
Adjusted
Revenue
Constant
rates
£m
11,536
4,644
4,321
6,169
26,670
Translation
exchange
£m
(63)
(107)
(549)
(175)
(894)
Adjusted
Revenue
Current
rates
£m
11,473
4,537
3,772
5,994
25,776
Adjusting
items
Current
rates
£m
–
–
–
–
–
2020
Revenue
Current
rates
£m
11,473
4,537
3,772
5,994
25,776
Adjusted
Revenue
£m
Adjusting
items
£m
10,373
5,153
4,261
6,040
25,827
–
–
–
50
50
2019
Revenue
£m
10,373
5,153
4,261
6,090
25,877
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. From 2020 onwards, such arrangements have been discontinued or are immaterial such that no adjustments have been
made in 2020.
In 2020, the translation exchange in AMSSA was driven by the depreciation of key currencies against the pound sterling including the
Brazilian real.
BAT Annual Report and Form 20-F 2020 163
2 Segmental Analyses Continued
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
Adjusting
items
£m
9,495
4,882
4,111
5,824
24,312
–
–
–
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 2020 profit from operations and adjusted profit from operations at current rates, and 2020 adjusted profit from
operations translated using 2019 rates of exchange. The 2019 figures are stated at the 2019 rates of exchange.
Adjusted*
segment
result
Constant
rates
£m
Translation
exchange
£m
Adjusted*
segment
result
Current
rates
£m
5,816
1,909
1,796
2,140
11,661
(1,612)
465
3
468
10,517
(32)
(56)
(178)
(30)
(296)
20
(26)
–
(26)
(302)
5,784
1,853
1,618
2,110
11,365
(1,592)
439
3
442
10,215
Adjusting*
items
£m
(809)
(381)
(65)
(148)
(1,403)
(153)
13
–
13
(1,543)
(2,493)
63
(2,430)
322
2020
Segment
result
Current
rates
£m
4,975
1,472
1,553
1,962
9,962
(1,745)
452
3
455
8,672
(2,108)
6,564
2019
Adjusted*
segment
result
£m
Adjusting*
items
£m
Segment
result
£m
5,036
2,059
1,842
2,193
11,130
(1,522)
470
3
(626)
(306)
(638)
(544)
(2,114)
(80)
25
–
473
10,081
25
(2,169)
(2,501)
438
4,410
1,753
1,204
1,649
9,016
(1,602)
495
3
498
7,912
(2,063)
5,849
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 164
Financial Statements
Notes on Accounts
Continued
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
Adjusting*
items
£m
(626)
(306)
(638)
(544)
(2,114)
(80)
25
–
473
10,081
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
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
2018
Adjusting*
items
£m
Segment
result
£m
Adjusted*
segment
result
£m
4,511
1,948
1,738
2,150
10,347
(1,385)
384
3
387
9,349
(505)
(90)
(194)
(245)
(1,034)
4
32
–
32
(998)
(2,364)
223
4,006
1,858
1,544
1,905
9,313
(1,381)
416
3
419
8,351
(2,141)
6,210
* 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.
Adjusted profit from operations at constant rates of £11,661 million (2019: £11,032 million; 2018: £10,924 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:
2020
2019
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
205
170
137
266
778
(1)
(3)
(16)
(7)
(27)
204
167
121
259
751
272
274
34
119
699
476
441
155
378
1,450
2019
258
163
137
216
774
391
182
35
130
738
649
345
172
346
1,512
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
154
105
101
143
503
289
22
115
109
535
443
127
216
252
1,038
United States
APME
AMSSA
ENA
United States
APME
AMSSA
ENA
BAT Annual Report and Form 20-F 2020 165
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
23,594
1,449
615
636
198
1,165
462
26,670
Adjusted
Revenue
Constant
rates
£m
22,892
1,214
392
693
129
1,036
541
25,683
Translation
exchange
£m
Adjusted
Revenue
Current
rates
£m
Adjusting
items
Current
rates
£m
(842)
(6)
(4)
(2)
–
(5)
(41)
(894)
Translation
exchange
£m
59
41
9
35
(3)
45
(1)
144
22,752
1,443
611
634
198
1,160
421
25,776
Adjusted
Revenue
Current
rates
£m
22,951
1,255
401
728
126
1,081
540
25,827
–
–
–
–
–
–
–
–
Adjusting
items
Current
rates
£m
50
–
–
–
–
–
–
50
2020
Revenue
Current
rates
£m
22,752
1,443
611
634
198
1,160
421
25,776
2019
Revenue
Current
rates
£m
23,001
1,255
401
728
126
1,081
540
25,877
Adjusted
Revenue
£m
Adjusting
items
£m
22,951
1,255
401
728
126
1,081
540
25,827
50
–
–
–
–
–
–
50
Adjusted
Revenue
£m
Adjusting
items
£m
21,892
917
318
565
34
941
562
24,312
180
–
–
–
–
–
–
180
2019
Revenue
£m
23,001
1,255
401
728
126
1,081
540
25,877
2018
Revenue
£m
22,072
917
318
565
34
941
562
24,492
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:
Revenue is based on location of sale
External revenue
2020
£m
188
United Kingdom
2019
£m
178
2018
£m
184
All foreign countries
2019
£m
2018
£m
2020
£m
2020
£m
2019
£m
Group
2018
£m
25,588
25,699
24,308
25,776
25,877
24,492
Intangible assets
Property, plant and equipment
Investments in associates and joint ventures
United Kingdom
All foreign countries
2020
£m
487
344
8
2019
£m
492
333
8
2020
£m
114,856
4,716
1,788
2019
£m
118,295
5,185
1,852
2020
£m
115,343
5,060
1,796
Group
2019
£m
118,787
5,518
1,860
The consolidated results of the Reynolds Group 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 the Reynolds Group, inclusive of the sales made
to fellow Group companies, in 2020, 2019 and 2018 was £11,481 million, £10,417 million and £9,506 million, respectively. The majority of
sales are to customers based in the US. Non-current assets attributable to the operations of the Reynolds Group were £105,549 million
(2019: £109,186 million).
The main acquisitions comprising the goodwill balance of £43,319 million (2019: £44,316 million), included in intangible assets, are provided
in note 8. Included in investments in associates and joint ventures are amounts of £1,724 million (2019: £1,794 million) attributable to the
investment in ITC Ltd. Further information is provided in notes 5 and 10.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 166
Financial Statements
Notes on Accounts
Continued
3 Profit From Operations
Enumerated below are movements in costs that have impacted profit from operations in 2020, 2019 and 2018. 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 computer software
– impairment of goodwill (note 3(h))
Property, plant and equipment – depreciation and impairment
2020
£m
2,277
194
182
91
2,744
2020
£m
360
129
209
752
1,450
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
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
Gains and losses recognised on disposal of property, plant and equipment are included within depreciation and impairment of property,
plant and equipment.
Additionally, impairment costs resulting from obsolete machines in relation to downsizing and factory rationalisation as mentioned
in note 3(e) are reported as part of depreciation and impairment of property, plant and equipment.
In 2018, the Group recognised an impairment charge of £110 million in respect of the operations in Venezuela mentioned in note 3(h).
BAT Annual Report and Form 20-F 2020
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-term leases
Expenses relating to leases of low-value assets
Gains arising from sale and leaseback transactions
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
167
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
2020
£m
121
(29)
(3)
10
1
(1)
–
–
8.7
9.9
18.6
0.2
18.8
8.5
0.5
–
–
0.5
–
9.5
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
The total auditor’s remuneration to KPMG firms and associates included above are £28.1 million (2019: £25.2 million; 2018: £25.2 million).
Under SEC regulations, the remuneration to KPMG firms and associates of £28.1 million in 2020 (2019: £25.1 million; 2018: £25.2 million)
is required to be presented as follows: audit fees £27.5 million (2019: £24.7 million; 2018: £24.7 million), audit-related fees £0.5 million
(2019: £0.4 million; 2018: £0.4 million), tax fees £nil million (2019: £nil million; 2018: £nil million) and all other fees £0.1 million (2019: £0.1 million;
2018: £0.1 million). Audit related fees are in respect of services provided to associated pension schemes. All other fees are in respect of
other assurance services provided over information derived from the financial information systems subject to audit or over the controls
over those systems.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 168
Financial Statements
Notes on Accounts
Continued
3 Profit From Operations Continued
Total research and development costs including employee benefit costs and depreciation are £307 million (2019: £376 million;
2018: £258 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).
(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 Reynolds 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 and included a method to determine future adjustments from 2015 forward. R.J. Reynolds Tobacco Company has received
US$285 million in credits, which was 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. In the first quarter of
2020, certain conditions set forth in the 2017 and 2018 agreements were met for those 10 states. In addition, in August 2020, 24 states, the
District of Columbia and Puerto Rico agreed to settle NPM disputes related to claims for the period 2018-2022. 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). Reynolds Group’s
operating subsidiaries’ expenses and payments under the MSA and the State Settlement Agreements for 2020 amounted to
US$3,572 million (2019: US$2,762 million; 2018: US$2,741 million) in respect of settlement expenses and US$2,848 million (2019:
US$2,918 million; 2018: US$917 million) in respect of settlement cash payments. In 2020, R.J. Reynolds Tobacco Company recognised
additional expenses, included above, under the state settlement agreements in the states of Mississippi, Florida, Texas and Minnesota.
R.J. Reynolds Tobacco Company recognised US$241 million of expense for payment obligations to the State of Florida for the ITG Brands,
LLC acquired brands from the date of divestiture, June 12, 2015, as a result of an unfavourable judgment. In addition, R.J. Reynolds Tobacco
Company recognised US$264 million related to the resolution of claims against it in the States of Texas, Minnesota and Mississippi for
payment obligations to those states for the ITG Brands, LLC acquired brands from the date of divestiture. Finally, R.J. Reynolds Tobacco
Company settled certain related claims with Phillip Morris USA under the state settlement agreements in the states of Mississippi, Texas
and Minnesota for US$8 million. Additional information related to the resolution of these claims is included in note 27.
(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. These costs represent additional expenses incurred that are not related to the normal business and day-
to-day activities. These initiatives include a review of the Group’s manufacturing operations, and the costs associated with Quantum,
being a review of the Group’s organisational structure announced in 2019 to simplify the business and create a more efficient, agile and
focused company.
BAT Annual Report and Form 20-F 2020 169
3 Profit From Operations Continued
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
2020
£m
91
151
166
–
408
2019
£m
364
63
145
(7)
565
2018
£m
176
48
145
(6)
363
The adjusting charge in 2020 relates to the ongoing restructuring costs associated with the implementation of revisions to the Group’s
operating model, mainly in relation to Quantum. 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 the
Netherlands, Hungary, Russia and APME.
Also, in 2020, as a consequence of a reduction in volumes due to the significant increase in excise in Indonesia, the Group has announced
a restructuring programme which includes the partial closure of the factory operations in Indonesia. As a result of this decision, a
£69 million impairment has been recognised in respect of machinery. This impairment charge relates to some of the machinery in use as
well machinery held for future use which, following the significant recent changes in consumer preferences, is not expected to be brought
in to manufacturing in the future.
The adjusting charge in 2019 relates to the ongoing restructuring costs associated with the implementation of revisions to the Group’s
operating model, mainly in relation to Quantum. 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 Reynolds American 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.
(f) Amortisation and impairment of trademarks and similar intangibles
Acquisitions in previous years have resulted in the capitalisation of trademarks and similar intangibles, including those which are
amortised over their expected useful lives, which do not exceed 20 years. The amortisation and impairment charge of £339 million
(2019: £481 million; 2018: £377 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, which included the 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 170
Financial Statements
Notes on Accounts
Continued
3 Profit From Operations Continued
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 £70 million at 31 December 2020 (2019: £73 million). Based on the Funding Agreement, £3 million has been paid in 2020,
which includes legal costs of £1 million (2019: £35 million, including legal costs of £3 million; 2018: £30 million, including legal costs of
£5 million).
(h) Other adjusting items
Included within ‘other operating expenses’
In 2020, the Group incurred £447 million (2019: £874 million; 2018: £294 million) of other adjusting items which have been adjusted within
‘other operating expenses’.
The charge in 2020 primarily includes £487 million (2019: £236 million; 2018: £178 million) of litigation costs. In 2020, this was largely in
respect of charges following the development in cases regarding payment obligations under the state settlement agreements with
Florida, Texas, Minnesota and Mississippi for brands previously sold to a third party. The Group recognised a charge of £188 million in the
period for a final judgment of a case in the Florida court. The Group continues to pursue indemnification remedies in a Delaware court
for payments made to Florida as a result of this judgment, as explained in note 27. During 2020, the Group also recognised a provision
of £212 million related to the settlement discussions with other manufacturers and the states of Texas, Minnesota and Mississippi for
payment obligations related to these brands in prior years. In 2020, the charge also includes £87 million predominantly related to other
litigation costs including Engle progeny litigation.
Also included in 2020, is a credit of £40 million recognised in relation to the prior year charge associated with the excise dispute in Russia,
of which, £14 million is offset in the adjusting items included in taxation (note 6(d)).
In 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 sought to retrospectively apply the legislation to the
years 2015 to 2017. BAT SpB submitted an appeal to the Federal Tax Services (FTS) objecting to the findings. 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 in 2019. The Group also recognised an interest charge of £50 million (note 4(b)).
Also, in 2019, a charge of £436 million was incurred in respect of the Quebec class actions as explained in note 27.
Included within ‘depreciation, amortisation and impairment’
During 2020, the Group impaired the goodwill arising from Malaysia amounting to £197 million, goodwill arising from the acquisition of
Twisp of £11 million and goodwill arising from the acquisition of Blue Nile of £1 million, as explained in note 8(e).
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(e).
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 monetary gain due to hyperinflation accounting under IAS 29 of £45 million
within net finance costs (note 4(b)).
(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.
As explained in note 27, the Group recognised £58 million (2019: £86 million; 2018: £nil) in respect of a tax case in Brazil. In 2019 and
2018, 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.
BAT Annual Report and Form 20-F 2020 4 Net Finance Costs
(a) Net finance costs/(income)
Interest expense
Interest expense on lease liabilities
Facility fees
Interest and fair value related to early repurchase of bonds (note 4(b))
Interest related to adjusting tax payables (note 4(b))
Venezuela hyperinflation (note 4(b))
Fair value changes on derivative financial instruments and hedged items
Exchange differences
Finance costs
Interest under the effective interest method
Finance income
Net finance costs
171
2018
£m
1,592
1
13
–
41
(45)
(154)
1
1,449
(68)
(68)
1,381
2020
£m
1,605
26
23
142
11
–
(217)
205
1,795
(50)
(50)
1,745
2019
£m
1,676
32
10
–
80
–
367
(479)
1,686
(84)
(84)
1,602
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.
In October 2020, the Group completed a tender offer to repurchase sterling-equivalent £2,653 million of bonds, including £24 million
of accrued interest. Following this, in November 2020, the Group also completed a ‘make-whole’ bond redemption exercise of sterling-
equivalent £462 million of bonds, including £6 million of accrued interest. Further details on the tender offer and ‘make-whole’ redemption
exercise are provided in note 22. Other costs directly associated with the early repurchase of bonds, including the premium paid, have
been treated as adjusting items, as detailed in note 4(b).
(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 2020, the Group incurred additional interest costs of £157 million and fair value gains of £15 million in relation to the early repurchase
of bonds.
In addition, the Group recognised interest on adjusting tax payables of £11 million (2019: £80 million; 2018: £41 million), which included
interest of £21 million (2019: £28 million; 2018: £25 million) in relation to the Franked Investment Income Group Litigation Order (FII GLO)
(note 6(b)) and a net credit of £10 million (2019: charge of £50 million, 2018: charge of £12 million) in respect of the excise dispute (note 3(h))
and withholding tax in Russia.
In 2018, the Group recognised a monetary gain of £45 million related to the application of hyperinflationary accounting in Venezuela (note 3(h)).
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 172
Financial Statements
Notes on Accounts
Continued
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
2020
Group’s
share
£m
1,983
591
(2)
589
(125)
464
(9)
455
Total
£m
7,001
2,006
(6)
2,000
(421)
1,579
(30)
1,549
2019
Group’s
share
£m
2,158
704
(2)
702
(196)
506
(8)
498
Total
£m
7,581
2,386
(7)
2,379
(666)
1,713
(27)
1,686
2018
Group’s
share
£m
2,058
630
(3)
627
(201)
426
(7)
419
Total
£m
7,235
2,128
(8)
2,120
(678)
1,442
(24)
1,418
Enumerated below are movements that have impacted the post-tax results of associates and joint ventures in 2020, 2019 and 2018.
(a) Adjusting items
In 2020, the Group’s interest in ITC Ltd. (ITC) decreased from 29.46% to 29.42% (2019: 29.57% to 29.46%; 2018: 29.71% to 29.57%) 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 £17 million (2019: £25 million; 2018: £22 million), which is treated as a deemed partial disposal and included in the
income statement.
In 2020, ITC recognised a charge in respect of the cost of leaf tobacco stocks destroyed in a third-party warehouse fire, the Group’s share
of which was £4 million.
In 2018, ITC 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.
(b) 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
2020
Group’s
share
£m
2019
Group’s
share
£m
2018
Group’s
share
£m
455
(98)
(34)
323
498
419
(115)
7
390
(38)
6
387
BAT Annual Report and Form 20-F 2020 5 Associates and Joint Ventures Continued
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
173
2020
Total
£m
7,001
2,000
1,549
(450)
1,099
2019
Total
£m
7,581
2,379
1,686
(365)
1,321
2018
Total
£m
7,235
2,120
1,418
(110)
1,308
ITC
£m
4,892
1,930
1,495
(450)
1,045
ITC
£m
5,556
2,322
1,646
(365)
1,281
ITC
£m
5,072
2,059
1,373
(110)
1,263
Others
£m
2,109
70
54
–
54
Others
£m
2,025
57
40
–
40
Others
£m
2,163
61
45
–
45
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 174
Financial Statements
Notes on Accounts
Continued
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
2020
£m
38
38
–
2,387
2,369
18
2,425
(317)
(184)
(133)
2,108
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
(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 23 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 gave permission for a number of issues to
be appealed in two separate hearings. The first, in February 2020, concerned the time limit for bringing claims. HMRC sought to challenge
existing case law. In November 2020 the Supreme Court handed down its judgment. The Supreme Court agreed to partially overturn
existing case law but introduced a new test for determining whether claims of this type are in time. The case has been remitted to the
High Court to apply that new test to the facts. The second hearing was heard in December 2020 and concerned issues relating to the type
of claims BAT is entitled to bring. Judgment following the second December hearing is expected in 2021. 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.
The net £0.9 billion held by the Group is higher than the current value of the claim referred to above. 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 £21 million for the 12 months to 31 December 2020 (2019: £28 million;
2018: £25 million) accruing on the balance, which was also treated as an adjusting item.
BAT Annual Report and Form 20-F 2020 175
6 Taxation on Ordinary Activities Continued
(c) Factors affecting the taxation charge
The taxation charge differs from the standard 19% (2019: 19%; 2018: 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% (2019 and 2018: 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 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
Additional net deferred tax (credits)/charges
£m
8,672
(455)
8,217
2020
%
2018
%
2019
%
£m
7,912
(498)
7,414
£m
8,351
(419)
7,932
1,561
19.0
1,409
19.0
1,507
19.0
368
142
20
155
(22)
5
18
(133)
(6)
2,108
4.5
1.7
0.3
1.9
(0.3)
0.1
0.2
(1.6)
(0.1)
25.7
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
(d) Adjusting items included in taxation
In 2020, adjusting items in taxation included a net credit of £35 million mainly relating to the release of a provision regarding the
application of overseas withholding tax, the revaluation of deferred tax liabilities arising on trademarks recognised in the Reynolds
American acquisition in 2017 due to changes in US state tax rates and the excise dispute in Russia (note 3(h)).
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 Reynolds American 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 Reynolds American 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.
(e) Tax on adjusting items
In addition, the tax on adjusting items, separated between the different categories, as per note 7, amounted to £287 million
(2019: £373 million; 2018: £199 million). The adjustment to the adjusted earnings per share (note 7) also includes £8 million (2019: £17 million;
2018: £6 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.
2020
£m
(5)
23
18
2019
£m
(7)
138
131
2018
£m
(8)
(7)
(15)
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 176
Financial Statements
Notes on Accounts
Continued
7 Earnings Per Share
2020
2019
Weighted
average
number of
shares
m
Earnings
£m
Earnings
per share
pence
Earnings
£m
Weighted
average
number of
shares
m
Earnings
per share
pence
Earnings
£m
Weighted
average
number of
shares
m
2018
Earnings
per share
pence
Basic earnings per share (ordinary
shares of 25p each)
Share options
Diluted earnings per share
6,400
–
6,400
2,286
9
2,295
280.0
(1.1)
278.9
5,704
–
5,704
2,284
7
2,291
249.7
(0.7)
249.0
6,032
–
6,032
2,285
7
2,292
264.0
(0.8)
263.2
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.
Notes
3(e)
Earnings
£m
6,400
408
2020
Earnings
per share
pence
280.0
17.8
2019
Earnings
per share
pence
249.7
24.7
Earnings
£m
5,704
565
Earnings
£m
6,032
363
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
Effect of early repurchase of bonds
Tax effect of early repurchase of bonds
Effect of interest on FII GLO settlement and other
Tax effect of interest on FII GLO settlement
and other
Effect of retrospective guidance on WHT
Adjusted earnings per share (basic)
(64)
(2.8)
3(f),(h)
548
24.0
(3.4)
(0.6)
–
–
(1.7)
0.6
–
21.2
(4.5)
(0.9)
6.2
(1.4)
0.5
5(a)
3(h)
3(h)
6(d)
3(h),4(b)
3(h)
6
4(b)
4(b)
6(d)
(77)
(13)
–
–
(40)
14
–
487
(104)
(21)
142
(32)
11
(4)
(42)
7,613
Basic
2018
Earnings
per share
pence
264.0
15.9
(3.6)
16.5
(3.4)
(1.4)
–
–
–
–
2.8
8.0
(1.9)
(3.5)
–
–
1.8
(101)
675
(115)
(25)
436
(124)
202
(16)
–
236
(50)
(49)
–
–
80
(4.4)
29.6
(5.0)
(1.1)
19.1
(5.4)
8.9
(0.7)
–
10.3
(2.2)
(2.2)
–
–
3.5
(83)
377
(78)
(32)
–
–
–
–
65
184
(44)
(79)
–
–
41
(0.2)
(1.8)
333.0
–
–
7,418
–
–
324.8
–
55.0
6,801
–
2.4
297.6
BAT Annual Report and Form 20-F 2020 177
Diluted
2018
Earnings
per share
pence
263.2
15.8
(3.6)
16.4
(3.4)
(1.4)
–
–
–
–
2.8
8.0
(1.9)
(3.4)
–
–
1.8
Notes
3(e)
Earnings
£m
6,400
408
2020
Earnings
per share
pence
278.9
17.7
2019
Earnings
per share
pence
249.0
24.7
Earnings
£m
5,704
565
Earnings
£m
6,032
363
(64)
(2.8)
3(f),(h)
548
23.9
5(a)
3(h)
3(h)
6(d)
3(h),4(b)
3(h)
6
4(b)
4(b)
6(d)
(77)
(13)
–
–
(40)
14
–
487
(104)
(21)
142
(32)
11
(4)
(42)
7,613
(3.4)
(0.6)
–
–
(1.7)
0.6
–
21.2
(4.5)
(0.9)
6.2
(1.4)
0.5
(0.2)
(1.8)
331.7
(101)
675
(115)
(25)
436
(124)
202
(16)
–
236
(50)
(49)
–
–
80
(4.4)
29.5
(5.0)
(1.1)
19.0
(5.4)
8.8
(0.7)
–
10.3
(2.2)
(2.2)
–
–
3.5
(83)
377
(78)
(32)
–
–
–
–
65
184
(44)
(79)
–
–
41
–
–
7,418
–
–
323.8
–
55
6,801
–
2.4
296.7
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
Effect of early repurchase of bonds
Tax effect of early repurchase of bonds
Effect of interest on FII GLO settlement and other
Tax effect of interest on FII GLO settlement
and other
Effect of retrospective guidance on WHT
Adjusted earnings per share (diluted)
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 178
Financial Statements
Notes on Accounts
Continued
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 (gains)/losses on disposal of property, plant and
equipment, held-for-sale assets, partial/full termination of IFRS
16 leases, and sale and leaseback
Tax and non-controlling interests on disposal of property, plant
and equipment, held-for-sale assets, partial/full termination of
IFRS 16 leases, and sale and leaseback
Effect of gains on disposal of businesses, non-current
investments and brands
Tax on gains on disposal of businesses, non-current investments
and brands
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 (gains)/losses on disposal of property, plant and
equipment, held-for-sale assets, partial/full termination of IFRS
16 leases, and sale and leaseback
Tax and non-controlling interests on disposal of property, plant
and equipment, held-for-sale assets, partial/full termination of
IFRS 16 leases, and sale and leaseback
Effect of gains on disposal of businesses, non-current
investments and brands
Tax on gains on disposal of businesses, non-current investments
and brands
Issue of shares and change in shareholding in associate
Headline earnings per share (diluted)
2020
Earnings
per share
pence
Earnings
£m
2019
Earnings
per share
pence
Earnings
£m
Earnings
£m
Basic
2018
Earnings
per share
pence
6,400
280.0
5,704
249.7
6,032
264.0
465
20.3
(74)
(3.3)
(26)
(1.1)
8
–
0.3
–
518
(79)
7
(1)
–
–
(17)
6,756
–
(0.7)
295.5
–
(25)
6,124
22.7
(3.5)
238
10.3
(65)
(2.8)
0.3
(11)
(0.5)
–
–
–
(1.1)
268.1
4
0.2
(10)
(0.4)
2
(22)
6,168
0.1
(1.0)
269.9
2020
Earnings
per share
pence
Earnings
£m
2019
Earnings
per share
pence
Earnings
£m
Earnings
£m
Diluted
2018
Earnings
per share
pence
6,400
278.9
5,704
249.0
6,032
263.2
465
20.3
(74)
(3.3)
(26)
(1.1)
8
–
0.3
–
518
(79)
7
(1)
–
22.5
(3.4)
238
10.3
(65)
(2.8)
0.3
(11)
(0.5)
–
–
4
0.2
(10)
(0.4)
–
(17)
6,756
–
(0.7)
294.4
–
(25)
6,124
–
(1.1)
267.3
2
(22)
6,168
0.1
(1.0)
269.1
BAT Annual Report and Form 20-F 2020 179
2020
Total
£m
121,364
(2,577)
118,787
(3,079)
142
75
116
–
(459)
(239)
118,344
(3,001)
115,343
2019
Total
£m
126,125
(2,112)
124,013
(4,654)
148
77
13
–
(466)
(344)
121,364
(2,577)
118,787
Goodwill
£m
Computer
software
£m
Trademarks
and
similar
intangibles
£m
Assets in
the course of
development
£m
44,316
44,316
(824)
–
36
–
–
–
(209)
1,207
(780)
427
(3)
–
–
–
127
(121)
(8)
75,726
(1,797)
73,929
(2,252)
–
39
103
23
(338)
(22)
43,319
43,319
1,307
(885)
422
73,598
(2,116)
71,482
115
115
–
142
–
13
(150)
–
–
120
120
Goodwill
£m
Computer
software
£m
Trademarks
and
similar
intangibles
£m
Assets in
the course of
development
£m
46,163
46,163
(1,676)
–
23
–
–
–
(194)
44,316
44,316
1,101
(698)
403
(2)
–
–
–
134
(105)
(3)
1,207
(780)
427
78,736
(1,414)
77,322
(2,976)
–
54
7
30
(361)
(147)
75,726
(1,797)
73,929
125
125
–
148
–
6
(164)
–
–
115
115
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
(b) Goodwill
Goodwill of £43,319 million (2019: £44,316 million) is included in intangible assets in the balance sheet of which the following are the
significant acquisitions: Reynolds American £32,719 million (2019: £33,761 million); Rothmans Group £4,591 million (2019: £4,704 million);
Imperial Tobacco Canada £2,304 million (2019: £2,335 million); ETI (Italy) £1,474 million (2019: £1,396 million) and ST (principally Scandinavia)
£1,111 million (2019: £1,048 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 APME.
During 2020, the Group recognised a goodwill impairment charge of £209 million (2019: £194 million) as explained in note 8(e)(iv) below.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 180
Financial Statements
Notes on Accounts
Continued
8 Intangible Assets Continued
(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 Reynolds American
with indefinite lives amounting to £68,839 million (2019: £71,032 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 cashflow 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 Reynolds American
£2,260 million (2019: £2,590 million). On 20 October 2020, the Group acquired the formulations, brands, associated know-how and other
relevant assets owned by Dryft Sciences, LLC, relating to its white nicotine pouch products, these have been accounted as trademarks
with a value of £103 million (see note 23).
In 2020, due to the migration to Vuse and difficult trading conditions in South Africa and the delisting of certain brands in Belize, the Group
recognised an impairment charge of £18 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 did 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 withdrew the VapeWild products from the market in
September 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.
(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
£513 million (2019: £516 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 £6 million of future contractual commitments (2019: £4 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, US, Malaysia, Peru and South Africa markets and the Global
Travel Retail (GTR) business.
(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 horizon 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 8.29% and 9.01%,
and long-term growth rates of 1%, 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 Reynolds American, the brand budgets used in the value-in-use calculations have been
incorporated into the budget information used in the impairment testing of the Reynolds American goodwill.
BAT Annual Report and Form 20-F 2020 181
8 Intangible Assets Continued
(iii) Cash-generating units and information on goodwill impairment testing
In 2020, goodwill was allocated for impairment testing purposes to 19 (2019: 21) individual cash-generating units – one in the United States
(2019: two), six in APME (2019: five), seven in AMSSA (2019: seven) and five in ENA (2019: seven).
Due to initiatives to simplify the business and improve the effectiveness and the efficiency of the Group as a globally integrated enterprise,
£555 million of goodwill arising from the Rothmans acquisition allocated to the UK Exports cash-generating unit has been transferred
to the Europe cash-generating unit and a portion of goodwill amounting to £235 million has been transferred from the Singapore cash-
generating unit to a newly created Global Travel and Retail (GTR) cash-generating unit. The effective date for both transfers was 1 January
2020. The transfer of the UK Exports cash-generating unit and the 2019 impairment of goodwill arising from the Quantus/Highendsmoke
acquisition (refer to note 8(e)(iv)) resulted in the ENA cash-generating units reducing to five. The number of cash-generating units in APME
increased to six with the addition of the newly created GTR and Eastern Tobacco (note 23(a)) cash-generating units and the removal of
Indonesia as a cash-generating unit due to the 2019 impairment (note 8(e)(iv)). In addition, the cash-generating units in the United States
have reduced by one as a result of the impairment of goodwill in VapeWild (note 8(e)(iv)).
Cash-generating unit
Reynolds American
Canada
Europe
South Africa
Australia
Singapore
Malaysia
Other
Total
2020
Pre-tax
discount
rate
%
2019
Carrying
amount
£m
Pre-tax
discount rate
%
7.6
19.1
6.2
11.5
7.9
9.6
10.3
7.4
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
Carrying
amount
£m
32,719
2,304
5,639
552
756
356
232
761
43,319
Included within ‘Other’ above is goodwill arising on various acquisitions that have been allocated to multiple cash-generating units which are insignificant. The pre-tax
discount rate represents the weighted average pre-tax discount rate.
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 Reynolds American 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 3% (2019: 4%) in years 2 to 10, including 1% inflation (2019: 2% inflation), after which
a total growth rate of 1% (2019: 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. For recent acquisitions and start-up ventures the detailed financial budget is expanded
to reflect the medium-term plan of the country or market management spanning five years or beyond.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 182
Financial Statements
Notes on Accounts
Continued
8 Intangible Assets Continued
As a result of difficult trading conditions, the above assumptions were amended to reflect the short to medium-term plans of the country
or area management spanning up to a period of five years for the South Africa, GTR, Peru and Malaysia cash-generating units.
In South Africa, where there was a five-month sales ban, the forecast cash flows were reduced to reflect the recovery after the ban was
lifted and the growth rate was reduced from 1% to -1%. Following the application of a reasonable range of sensitivities, there was no
indication of impairment. For the South Africa cash-generating unit headroom to reduce to £nil, the forecast cash flows would need to
reduce by a further 20% in each forecast year or the pre-tax discount rate would need to increase by 4%. Management believe that the
post-ban recovery will continue in South Africa and therefore both scenarios are not considered by management, at this stage, to be
reasonably possible.
For GTR, due to difficult trading conditions as a consequence of the COVID-19 pandemic, the growth rate was reduced from 1% to 0%.
Following the application of a reasonable range of sensitivities, there was no indication of impairment. For the GTR cash-generating unit
headroom to reduce to £nil, the forecast cash flows would need to reduce by a further 44% in each forecast year or the pre-tax discount
rate would need to increase by 5.1%. Management believes that the duty free business will recover and therefore both scenarios are not
considered, at this stage, to be reasonably possible.
In Peru, due to difficult trading conditions as a consequence of the COVID-19 pandemic, the growth rate was reduced from 1% to 0%.
As a result, the Peru cash-generating unit is sensitive to reasonable possible changes in assumptions as outlined in the table below.
As a result of the merger with Rothmans in 1999, the Group recognised goodwill attributable to the business in Malaysia, measured
at MYR2,357 million (approximately £429 million) under IFRS. Difficult trading conditions, including high incidence of illicit trade and
downtrading, are now expected to negatively impact forecast operating cash flows and have resulted in the Group recognising an
impairment charge of £197 million in 2020. This partial impairment reduces the carrying value of goodwill to £232 million.
In addition, during the year, the Group has impaired in full the goodwill arising from the acquisitions of Twisp in South Africa and Blue Nile
in Sudan due to difficult trading conditions in these markets. This has resulted in the recognition of impairment charges of £11 million and
£1 million, respectively.
The table below shows the headroom and the impairment charge that would be recognised if the assumptions used in the value-in-use
calculation were changed:
Cash-generating unit
Malaysia1
Peru2
Carrying
amount of
CGU
£m
Headroom
£m
Increase in
discount
rate1,2
£m
Decrease in
cash flows1,2
£m
1% increase
in terminal
decline
£m
Impairment charge
278
185
–
12
(28)
(15)
(28)
(28)
(20)
(15)
Notes:
1. Malaysia: reasonably possible changes in key assumptions that would result in additional impairment would be a 1.4% increase in the pre-tax discount rate, a 10% decrease each year in
forecast cash flows or a 1% increase in terminal decline.
2. Peru: reasonably possible changes in key assumptions that would result in impairment would be a 1.4% increase in the pre-tax discount rate, a 20% decrease in forecast cash flows reflecting
a permanent loss in volumes arising from the COVID-19 pandemic or a 1% increase in terminal decline.
With the exception of the Malaysia and Peru cash-generating units, following the application of a reasonable range of sensitivities to all
the cash-generating units, and after reflecting the impairments above, 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 had 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 had been prepared to take into account the expected decline in revenue and the
impact this would have on net revenue, operating profit and cash flows. The extent of the significant increase in excise was such that the
forecast cash flows did not support the carrying value of goodwill and therefore the goodwill of £172 million was fully impaired in 2019.
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 at that time. However, as explained in note 3(e), in 2020, a £69 million impairment has been
recognised in respect of machinery held by the Indonesian business.
As explained in note 8(c) above, in addition to the impairment of trademarks and similar intangibles, in 2019 the goodwill associated
with the acquisitions of VapeWild and Quantus/Highendsmoke (note 23) was fully impaired amounting to £12 million and £10 million,
respectively.
BAT Annual Report and Form 20-F 2020 183
8 Intangible Assets Continued
(v) Impairment testing – Reynolds American
Goodwill relating to Reynolds American 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
cigarettes. Management recognise 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.
During 2020, the FDA issued the Unified Agenda that did not progress the potential regulations with regards to menthol in tobacco
products or restrictions on nicotine in tobacco products. The Group continues to monitor the regulatory developments but does not
believe there is any significant impact of such restrictions on the Group’s operations at this time. The Group has a long-standing track
record of managing regulatory shifts and in the event of regulatory change the Group remains confident in its ability to navigate that
environment successfully.
Since 2018, having considered the combination of the risk of implementation and impact of any change in regulations, the Group has not
recognised any impairment on either the Newport brand or the Reynolds American 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.
The carrying amounts for Reynolds American goodwill and Newport were £32,719 million and £29,248 million, respectively (2019: £33,761 million
and £30,179 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 Reynolds American 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, a growth rate of 1% has been
assumed for Reynolds American goodwill and 1% for Newport and a pre-tax discount rate of 7.6% (2019: 7.3%) and 8.3% (2019: 8.6%), respectively.
The excess of value-in-use earnings over the carrying values (headroom) of the Reynolds American goodwill and the 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.
Assumptions
Decrease in revenue by
Increase in pre-tax discount rate by
Reynolds
American
goodwill
%
Newport
%
5.6
1.1
16.2
2.4
For Reynolds American goodwill, the change in revenue assumption is based on combustibles revenue in the five-year forecast reducing
by 5.6% in each year and assumes that other assumptions are not changed. Due to the increased risk of uncertainty around the long-
term implications of the COVID-19 pandemic several cash flow forecasts were prepared. The Group, for the purposes of preparing
the impairment analysis, used conservative pricing assumptions and reduced the terminal value growth rate from 2% in 2019 to 1%.
Such assumptions have been used for the purposes of impairment analysis only and do not reflect management’s assessment of the
potential performance of the Reynolds American cash-generating unit, which is expected to substantially exceed such assumptions.
However, by using these conservative assumptions (including the reduction in terminal value growth compared to 2019), revenue would
have to underperform the Group’s impairment model by 5.6% per annum (2019: 13.4%). This is not deemed by management, due to the
pricing potential, to be a reasonably possible scenario.
For Newport, the change in revenue assumption is based on the Newport revenue in the five-year forecast reducing by 16.2% in each year
and assumes that other assumptions are not changed.
(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 -2.3% and a pre-tax discount rate of 19.1% (2019: 19.1%) 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 20.5% in
each year and assumes that other assumptions are not changed.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 184
Financial Statements
Notes on Accounts
Continued
8 Intangible Assets Continued
Assumptions
Decrease in revenue by
Increase in pre-tax discount rate by
Canada
goodwill
%
20.5
10.1
The £2,304 million of goodwill relating to ITCAN on the Group’s balance sheet at 31 December 2020 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.
9 Property, Plant and Equipment
(a) Overview of property, plant and equipment, including right-of-use assets
1 January
Cost
Accumulated depreciation and impairment
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
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
1,503
(427)
1,076
(38)
–
2
–
84
(38)
(5)
–
(7)
–
1,518
(444)
1,074
785
(229)
556
(25)
67
–
1
14
(118)
(1)
(11)
–
–
798
(315)
483
5,795
(2,974)
2,821
(150)
–
40
–
427
(313)
(184)
–
(9)
–
5,807
(3,175)
2,632
215
(71)
144
(4)
36
–
–
–
(62)
–
(7)
–
–
217
(110)
107
921
–
921
(55)
459
–
(525)
–
(36)
–
–
–
764
–
764
2020
Total
£m
9,219
(3,701)
5,518
(272)
103
501
1
–
(531)
(226)
(18)
(16)
–
9,104
(4,044)
5,060
BAT Annual Report and Form 20-F 2020 185
2019
Total
£m
8,654
(3,488)
5,166
610
5,776
(282)
162
616
6
–
(521)
(174)
(27)
(32)
(6)
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
1,108
1,108
1,108
(51)
566
–
(695)
(7)
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
921
–
921
9,219
(3,701)
5,518
9 Property, Plant and Equipment Continued
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
Refer to notes 3(b) and 3(e) for more information on property, plant and equipment impairments.
As of 31 December 2020, the Group owns freehold property amounting to £1,074 million (2019: £1,076 million), representing factories,
warehouses and office buildings together with adjoining land, mainly in the US, UK, Bangladesh, Indonesia and South Korea.
Upon adoption of IFRS 16 Leases prospectively from 1 January 2019, the right-of-use assets related to leased properties have been
included in the asset class ‘Leasehold Property’ and other right-of-use assets have been reported under ‘Plant, equipment and other
leased’. A further breakdown of leasehold property is given in note 9(c).
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 186
Financial Statements
Notes on Accounts
Continued
9 Property, Plant and Equipment Continued
Cost of freehold land within freehold property on which no depreciation is provided
Contracts placed for future expenditure
2020
£m
251
110
2019
£m
261
133
(b) Right-of-use assets
The Group leases various offices, warehouses, retail spaces, equipment and vehicles through its subsidiaries across the globe.
Arrangements are entered into in the course of ordinary business, and lease terms are negotiated on an individual basis and contain a
wide range of different terms and conditions reflecting local commercial practice. The lease agreements do not impose any covenants
other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for
borrowing purposes.
Assets representing ‘leasehold property’ relate to leases in respect of offices, retail space, warehouses and manufacturing facilities
occupied by Group subsidiaries and include property leases with lease terms of more than five years in Japan, Brazil, Germany,
Romania and Poland, amongst other countries. In addition, capitalised expenditure representing leasehold improvements is included in
this category.
Assets representing ‘plant, equipment and other’ relate to leases of various assets including tobacco vending machines, industrial
equipment and distribution vehicles in Japan, Russia, Romania, Brazil and other countries.
(c) Leasehold property
As of 31 December 2020, the Group holds £132 million (2019: £135 million) of leasehold properties acquired and another £351 million
(2019: £421 million) of right-of-use leased properties.
Leasehold land and property comprises
– net book value of long leasehold
– net book value of short leasehold
2020
£m
17
466
483
2019
£m
83
473
556
Leasehold property net book value movements for the year
ended 31 December 2020
– Property acquired (IAS16)
– Right-of-use properties (IFRS16)
Leasehold property net book value movements for the
year ended 31 December 2019
– Property acquired (IAS16)
– Right-of-use properties (IFRS16)
Net book
value at
1 January
£m
135
421
556
Differences
on exchange
£m
Depreciation
and impairment
£m
Other net
movements*
£m
(6)
(19)
(25)
(11)
(108)
(119)
14
57
71
2020
Net book
value at
31 December
£m
132
351
483
2019
Net book
value at
1 January
£m
Accounting
policy
changes
IFRS16
£m
139
–
139
–
470
470
Differences
on exchange
£m
Depreciation
and impairment
£m
Other net
movements*
£m
Net book
value at
31 December
£m
(7)
(23)
(30)
(10)
(106)
(116)
13
80
93
135
421
556
* Property acquired (IAS 16) other net movements represent additions (directly acquired and/or transferred from assets in the course of construction) net of disposals, whereas the right-of-use
properties (IFRS 16) other net movements relates to new leases net of reassessments, modifications and terminations as reported in the Property, plant and equipment movement table in
note 9(a). Other net movements also includes £1 million (2019: £4 million) in relation to acquired companies.
BAT Annual Report and Form 20-F 2020 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 £7,574 million (2019: £9,099 million))
Other listed associates (Group’s share of the market value is £184 million (2019: £221 million))
Unlisted associates
187
2019
£m
1,737
390
(239)
8
(36)
1,860
1,237
1,085
(74)
(388)
1,860
1,794
22
44
1,860
2020
£m
1,860
323
(394)
5
2
1,796
1,021
1,155
(61)
(319)
1,796
1,724
26
46
1,796
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 resulting in a charge of £27 million to the income statement in that year that was reported
as an adjusting item. 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 2021.
The principal associate undertaking of the Group is ITC Ltd. (ITC). Included within the dividends amount of £394 million (2019: £239 million)
are £386 million (2019: £231 million) attributable to dividends declared by ITC.
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
29.42%.
ITC prepares accounts on a quarterly basis with a 31 March year-end. As permitted by IAS 28, results up to 30 September 2020 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 2020.
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Group’s share of ITC Ltd. (2020: 29.42%; 2019: 29.46%)
2020
£m
3,399
3,513
(194)
(858)
5,860
2019
£m
4,124
3,234
(237)
(1,031)
6,090
1,724
1,794
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 188
Financial Statements
Notes on Accounts
Continued
11 Retirement Benefit Schemes
The Group’s subsidiary undertakings operate defined benefit and defined contribution schemes including post-retirement healthcare
schemes. Benefits provided through defined contribution schemes are charged as an expense as payments fall due.
The liabilities arising in respect of 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 underlying 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 benefits 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 plans are the Reynolds American Retirement Plan (‘PEP’) and the Retirement Income Plan for Certain RAI Affiliates
(‘Affiliates’), and the only 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 plans in accordance with the plan’s rules and to comply with all
relevant legislation, including the Employee Retirement Income Security Act of 1974. Similarly, in the UK, the main pension arrangement
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. With effect from 1 July 2020, the UK Fund was closed to further
accrual of benefits with all active members becoming deferred members of the fund. No incentives or compensation was provided to
affected employees. A past service credit was recognised on the difference between the salary increase assumption for active members
and the inflation assumption for deferred members at the date of the plan amendment and curtailment of benefits.
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 2021 in total are
expected to be £81 million compared to £103 million in 2020.
Contributions to the various funded plans in the US are agreed with the named fiduciary, scheme actuaries and the committee of local
management after taking account of statutory requirements including the Pension Protection Act of 2006, as amended. Through its
US subsidiaries, the Group may make significant contributions, either as required by statutory requirements or at the discretion of the
Group, with the aim of maintaining a funding status of at least 90% and becoming fully funded long-term. During 2020, the Group did not
contribute to its funded pension and post-retirement plans in the US and does not expect to do so in 2021. By the end of 2020, the PEP and
Affiliates plans referred to above were each reporting a surplus under IAS 19 (£113 million and £119 million, respectively). Under the rules of
these plans, any surplus would be returnable to the Group in the event of a termination or could otherwise be repurposed for other existing
or replacement benefit plans and accordingly no surplus restrictions have been recognised.
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 were payable as required until the Fund was valued to
110% on a Technical Provisions basis. These were £12 million in 2020, and £12 million in each of 2019 and 2018. Total contributions payable
to the UK Fund were secured by a charge over the Group’s Head Office (Globe House) up to a maximum of £150 million. Following the
completion of the 2020 triennial valuation noted below, the Trustee agreed to release the charge over Globe House. The UK Fund closed
to future accrual for current employees with effect from 1 July 2020. Consequently, the Trustee and the Group agreed to reduce the 2020
contribution payment for future service from £18 million to £9 million to reflect this. An interim Schedule of Contributions dated 15 July
2020 was put in place in order to give effect to this until the formal valuation of the Fund had been completed.
The formal triennial actuarial valuation of the Fund was carried out with an effective date of 31 March 2020. This showed that the Fund
had a surplus of £139 million on a Technical Provisions basis, in accordance with the statutory funding objective. The Trustee also has a
Long-Term Funding Target to be fully funded on a Solvency Liabilities basis by 2026, and on this basis the Fund had a surplus of £7 million
at the valuation date. The Trustee and the Group agreed a new Schedule of Contributions with an effective date of 5 October 2020 such
that the Group will pay £12 million per annum from July 2021 until July 2023. 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 restrictions 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 £33 million in 2021 and the same amount for the
four years after that. Contributions to pension schemes in Canada, Netherlands and Switzerland in total are anticipated to be around
£20 million in 2021 and then around £10 million per annum for the four years after that.
BAT Annual Report and Form 20-F 2020 189
11 Retirement Benefit Schemes Continued
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 UK based 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, 39% 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 15% 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 plans 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, commonly referred to as a ‘buy-in’, has
reduced the UK Fund’s value at risk in relation to key risks associated with improved longevity, inflation and interest rate movements while
improving the security to the UK Fund and its members. On an IAS 19 basis, the fair value of the insurance policy matches 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.
For the residual assets in the UK Fund, the current allocation is broadly split as 75% in risk reducing assets and 25% in return seeking
assets. The return seeking portfolio is invested in illiquid assets which, in the normal course of events, will wind down naturally 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 or matching assets. Given the strong funding position of the UK Fund as shown in the 31 March 2020
Actuarial valuation, the Trustee will continue to review the investment strategy and may look to increase the proportion of risk-reducing or
matching assets, commensurate with their ultimate target to further reduce the UK Fund’s exposure to the key risk above.
Through its defined benefit pension schemes and healthcare benefit 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 190
Financial Statements
Notes on 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
2020
£m
(11,970)
12,403
433
(16)
417
(602)
(185)
2019
£m
(11,454)
11,682
228
(28)
200
(578)
(378)
The above net (liability)/asset is recognised in the balance sheet as follows:
– retirement benefit scheme liabilities
– retirement benefit scheme assets
(897)
712
(185)
(807)
429
(378)
The net liabilities of funded pension schemes by territory are as follows:
– US
– UK
– Germany
– Canada
– Netherlands
– Switzerland
– Rest of Group
Funded schemes
2020
£m
(5,012)
(3,485)
(1,035)
(756)
(873)
(348)
(461)
(11,970)
Liabilities
2019
£m
(4,945)
(3,214)
(958)
(738)
(778)
(333)
(488)
(11,454)
2020
£m
(253)
173
(80)
–
(80)
(545)
(625)
(627)
2
(625)
2020
£m
5,144
3,866
918
758
893
312
512
12,403
2019
£m
(272)
178
(94)
–
(94)
(557)
(651)
(652)
1
(651)
Assets
2019
£m
4,818
3,533
928
747
814
294
548
11,682
2020
£m
(12,223)
12,576
353
(16)
337
(1,147)
(810)
(1,524)
714
(810)
2020
£m
132
381
(117)
2
20
(36)
51
433
Total
2019
£m
(11,726)
11,860
134
(28)
106
(1,135)
(1,029)
(1,459)
430
(1,029)
Total
2019
£m
(127)
319
(30)
9
36
(39)
60
228
Of the Group’s unfunded pension schemes 54% (2019: 50%) relate to arrangements in the UK and 32% (2019: 32%) relate to arrangements
in the US, while 85% (2019: 86%) 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 (credit)/cost, 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
2020
£m
2019
£m
2020
£m
2019
£m
2020
£m
72
(12)
300
(289)
1
72
88
160
92
7
391
(388)
–
102
97
199
2
–
27
(7)
–
22
–
22
2
–
34
(8)
–
28
–
28
74
(12)
327
(296)
1
94
88
182
Total
2019
£m
94
7
425
(396)
–
130
97
227
The above charges are recognised within employee benefit costs in note 3(a) and include a charge of £10 million in 2020 (2019: £16 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 2020 is £16 million (2019: £21 million) of administration costs.
Current service cost is stated after netting employee contributions, where applicable.
BAT Annual Report and Form 20-F 2020 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
2020
£m
12,032
(106)
72
(58)
300
1
(737)
26
1,032
10
12,572
2019
£m
11,562
(343)
94
7
391
–
(743)
(84)
1,105
43
12,032
2020
£m
829
(23)
2
–
27
–
(58)
(7)
59
(31)
798
2019
£m
861
(30)
2
–
34
–
(63)
(10)
70
(35)
829
2020
£m
12,861
(129)
74
(58)
327
1
(795)
19
1,091
(21)
13,370
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
2020
£m
1,305
1,897
9,370
12,572
2019
£m
1,895
1,308
8,829
12,032
2020
£m
54
2
742
798
2019
£m
59
2
768
829
2020
£m
1,359
1,899
10,112
13,370
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
2020
£m
11,682
(117)
(45)
289
103
3
(696)
1,184
12,403
2019
£m
11,747
(326)
–
388
82
3
(704)
492
11,682
2020
£m
178
(7)
–
7
–
–
(15)
10
173
2019
£m
178
(6)
–
8
–
–
(17)
15
178
Pension schemes
Healthcare schemes
2020
£m
1,259
992
2,432
3,163
202
4,355
12,403
2019
£m
1,221
1,025
2,739
2,417
549
3,731
11,682
2020
£m
5
68
5
73
13
9
173
2019
£m
7
68
7
74
13
9
178
2020
£m
11,860
(124)
(45)
296
103
3
(711)
1,194
12,576
2020
£m
1,264
1,060
2,437
3,236
215
4,364
12,576
191
Total
2019
£m
12,423
(373)
96
7
425
–
(806)
(94)
1,175
8
12,861
Total
2019
£m
1,954
1,310
9,597
12,861
Total
2019
£m
11,925
(332)
–
396
82
3
(721)
507
11,860
Total
2019
£m
1,228
1,093
2,746
2,491
562
3,740
11,860
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 192
Financial Statements
Notes on 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
Healthcare schemes
2020
£m
(28)
3
(1)
10
(16)
2019
£m
(20)
(1)
–
(7)
2018
£m
(23)
1
(2)
4
(28)
(20)
2020
£m
2019
£m
2018
£m
2020
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(28)
3
(1)
10
(16)
2019
£m
(20)
(1)
–
(7)
Total
2018
£m
(23)
1
(2)
4
(28)
(20)
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.
2020
2019
US
UK Germany Canada Netherlands Switzerland
UK Germany Canada Netherlands Switzerland
Rate of increase in salaries (%) 3.4
Rate of increase in pensions
in payment (%)
Rate of increase in deferred
pensions (%)
Discount rate (%)
General inflation (%)
2.5 3.0
– 2.2
2.6
1.4
2.5 3.0
–
2.5
3.0
1.5
Nil
1.5
0.9
1.5
Nil
2.3
2.0
2.1
0.9
0.9
0.5
2.0
1.1
Nil
–
–
0.9
2020
US
3.4
3.0
0.6
3.0
2.5
3.0
–
3.3
2.5
2.2
2.0
3.0
0.4
0.4
0.3
0.4
Nil
Nil
3.0
2.0
2.1
0.9
0.9
1.1
2.0
1.3
Nil
–
0.1
1.1
2019
Weighted average duration of
liabilities (years)
11.6 17.0
14.0
11.0
18.0
13.4
11.4
16.1
14.0
11.0
17.8
13.9
US
UK Germany Canada Netherlands Switzerland
US
UK Germany Canada Netherlands Switzerland
For healthcare inflation in the US, the assumption is 6.0% for 2020 (2019: 6.5%) and in Canada, the assumption is 5.0% for both years.
BAT Annual Report and Form 20-F 2020 193
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-2020 generational projection (2019: RP-2019
and MP-2019)
S2PA (YOB) with the CMI (2019) improvement model with a 1.25% long-term improvement rate (2019: CMI (2018))
RT Heubeck 2018 G (both years)
CPM-2014 Private Table (both years)
AG Prognosetafel 2020 (2019: AG Prognosetafel 2018)
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:
US
UK
Germany
Canada
Netherlands
Switzerland
Male Female
Male Female
Male Female
Male Female
Male Female
Male Female
31 December 2020
Member age 65 (current
life expectancy)
Member age 45 (life expectancy
at age 65)
31 December 2019
Member age 65 (current
life expectancy)
Member age 45 (life expectancy
at age 65)
20.4
22.4
22.8
24.1
18.3
23.8
21.6
24.0
20.6
24.0
21.9
23.9
21.9
23.8
24.5
25.9
23.1
26.0
22.6
24.9
22.7
25.7
23.8
25.8
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
For the remaining territories, typical assumptions are that real salary increases will be from 0% to 9.0% (2019: 0% to 5.0%) per annum and
discount rates will be from 0% to 12.0% (2019: 0% to 11.7%) 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 2020 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
1 year
decrease
£m
343
(339)
0.25
percentage
point
increase
£m
0.25
percentage
point
decrease
£m
209
(388)
(196)
411
A one percentage point increase in healthcare inflation would increase healthcare scheme liabilities by £41 million, and a one percentage
point decrease would decrease liabilities by £32 million. The income statement effect of this change in assumption is not material.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 194
Financial Statements
Notes on Accounts
Continued
12 Deferred Tax
Net deferred tax (liabilities)/assets comprise:
1 January 2020
Differences on exchange
Credited/(charged) to the
income statement
Credited relating to changes in tax rates
Credited to other comprehensive income
31 December 2020
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
Excess of
capital
allowances
over
depreciation
£m
Undistributed
earnings of
associates
and
subsidiaries
£m
Tax
losses
£m
Retirement
benefits
£m
Trademarks
£m
Other
temporary
differences
£m
Total
£m
(208)
13
(6)
12
–
(189)
(210)
11
–
(9)
–
–
(208)
79
(3)
(21)
3
–
58
105
(2)
–
(24)
–
–
79
(318)
8
(18)
97
–
(231)
(281)
15
–
(52)
–
–
(318)
279
–
(12)
–
(21)
246
222
(9)
–
(15)
(1)
82
279
(17,408)
528
75
21
–
(16,784)
(18,246)
701
(4)
92
49
–
(17,408)
995
(44)
(16,626)
506
138
–
44
1,133
1,048
(40)
–
(68)
(1)
56
995
184
133
23
(15,780)
(17,432)
680
(4)
(55)
47
138
(16,626)
Stock
relief
£m
(45)
4
28
–
–
(13)
(70)
4
–
21
–
–
(45)
The net deferred tax liabilities are reflected in the Group balance sheet as follows: deferred tax asset of £534 million and deferred tax
liability of £16,314 million (2019: deferred tax asset of £424 million and deferred tax liability of £17,050 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
(2019: £342 million) which have no expiry date and unused tax losses of £458 million (2019: £208 million) which will expire within the next
20 years.
In 2020 and 2019 the Group has not recognised any deferred tax asset in respect of deductible temporary differences which have no
expiry date and has not recognised £173 million (2019: £92 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 (2019: £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 (2019: £0.6 billion).
BAT Annual Report and Form 20-F 2020 13 Trade and Other Receivables
Trade receivables
Loans and other receivables
Prepayments and accrued income
Current
Non-current
195
2020
£m
2,763
696
504
3,963
3,721
242
3,963
2019
£m
3,369
629
343
4,341
4,093
248
4,341
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 arrangements, the Group also acts as a collection agent for the bank. At 31 December
2020, the value of trade receivables derecognised through the factoring arrangements where the Group acts as a collection agent
was £600 million (2019: £572 million) and where the Group does not act as a collection agent was £25 million (2019: £26 million).
Included in trade receivables above is £205 million (2019: £295 million) of trade debtor balances which were available for factoring
under these arrangements.
Included in loans and other receivables are £78 million of litigation related deposits (2019: £110 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. The effect of discounting would be immaterial.
Prepayments and accrued income include £8 million (2019: £5 million) of accrued income primarily in relation to rebates.
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
2020
£m
2,804
(41)
696
–
504
3,963
2019
£m
3,396
(27)
639
(10)
343
4,341
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 196
Financial Statements
Notes on Accounts
Continued
13 Trade and Other Receivables Continued
The movements in the allowance account are as follows:
1 January
Differences on exchange
Provided in the year
Released
31 December
Trade
receivables
£m
Loans
and other
receivables
£m
27
(2)
31
(15)
41
10
–
–
(10)
–
2020
Total
£m
37
(2)
31
(25)
41
Trade
receivables
£m
Loans
and other
receivables
£m
30
(2)
24
(25)
27
10
–
–
–
10
2019
Total
£m
40
(2)
24
(25)
37
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.
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: 2.6% (2019: 4.2%), UK sterling: 0.1% (2019: 0.2%), Euro: 0.4% (2019: 1.1%) and other currencies: 1.7% (2019: 11.2%).
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.
14 Investments Held at Fair Value
Investments
Fair value through P&L
Fair value through OCI
Current
Non-current
2020
£m
255
9
264
242
22
264
2019
£m
127
8
135
123
12
135
Investments held at fair value through other comprehensive income (OCI) relate to the Group’s corporate venturing partnerships with
various start-up businesses which are held for their strategic value.
Functional currency
US dollar
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.
2020
£m
260
4
264
2019
£m
131
4
135
BAT Annual Report and Form 20-F 2020 197
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
2020
2019
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
20
255
–
189
62
211
45
15
797
430
367
797
518
279
797
–
–
–
–
100
43
53
123
319
278
41
319
172
147
319
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
* 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 interest rate swaps and 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.
** Derivatives in respect of net debt are in a net asset position of £346 million as at 31 December 2020 (2019: net asset position of £143 million). The Group’s net debt is presented in note 19.
For cash flow hedges, the timing of expected cash flows is as follows: assets of £251 million (2019: £171 million) of which £98 million
(2019: £51 million) is expected within one year and £143 million (2019: £114 million) beyond five years and liabilities of £100 million
(2019: £321 million) of which £94 million (2019: £75 million) is expected within one year and £nil (2019: £163 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 198
Financial Statements
Notes on Accounts
Continued
15 Derivative Financial Instruments Continued
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
Inflow
£m
Assets
Outflow
£m
2020
Liabilities
Outflow
£m
Inflow
£m
Inflow
£m
Assets
Outflow
£m
Inflow
£m
2019
Liabilities
Outflow
£m
7,345
1,756
(6,567)
(1,655)
10,661
–
(10,185)
–
10,168
35
(9,367)
(38)
8,534
18
(8,069)
(62)
522
33
(498)
(54)
285
–
(266)
–
548
811
(524)
(765)
278
969
(263)
(1,012)
1,446
(1,261)
19
(29)
469
(451)
–
–
–
–
–
–
15
(23)
17
(36)
725
(590)
683
(679)
9
(15)
10
(15)
767
12,357
(594)
(11,109)
–
10,946
–
(10,451)
762
13,073
(609)
(11,931)
460
10,969
(435)
(10,571)
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
2020
Assets
Inflow
£m
Liabilities
Outflow
£m
Assets
Inflow
£m
2019
Liabilities
Outflow
£m
296
26
16
–
–
–
338
263
21
18
–
–
–
302
44
25
25
10
43
182
329
44
39
39
21
63
263
469
BAT Annual Report and Form 20-F 2020 199
15 Derivative Financial Instruments Continued
The items designated as hedging instruments are as follows:
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
16 Inventories
Raw materials and consumables
Finished goods and work in progress
Goods purchased for resale
2020
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Nominal amount
of hedging
instrument
£m
2019
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Nominal amount
of hedging
instrument
£m
757
1,428
–
2,822
3,279
5,922
(5)
66
–
(155)
(36)
156
3,065
1,436
4,068
2,695
3,827
5,274
392
21
372
73
(72)
(103)
(61)
(3)
161
22
2020
£m
2,362
3,549
87
5,998
2019
£m
2,750
3,258
86
6,094
Inventories pledged as security for liabilities amount to £2 million (2019: £7 million). Write-offs taken to other operating expenses in the
Group income statement were £309 million (2019: £255 million; 2018: £148 million). In 2020, this included £24 million in relation to the
restructuring in Indonesia (refer to note 3(e)) and £47 million as a result of the decision to withdraw glo Sens from Japan. Goods purchased
for resale include Group brands produced under third-party contract manufacturing arrangements.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 200
Financial Statements
Notes on Accounts
Continued
17 Cash and Cash Equivalents
Cash and bank balances
Cash equivalents
2020
£m
2,940
199
3,139
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
2020
£m
2,597
197
170
175
3,139
2019
£m
2,199
127
64
136
2,526
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
2020
£m
3,139
(251)
2,888
2019
£m
2,526
(491)
2,035
Cash and cash equivalents include restricted amounts of £878 million (2019: £445 million) due to subsidiaries in CCAA protection (note
28), as well as £455 million (2019: £182 million) principally due to exchange control restrictions, including amounts of £141 million (2019: £nil)
where the underlying restrictions are expected to be short-term in nature.
Cash and cash equivalents also include £48 million (2019: £14 million) of cash that is held as a hedging instrument.
BAT Annual Report and Form 20-F 2020 18 Capital and Reserves
(a) Share capital
Allotted and fully paid
1 January 2020
Changes during the year
– share option schemes
31 December 2020
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
201
Ordinary
shares of 25p each
Number of shares
£m
2,456,520,738
614.12
70,859
0.02
2,456,591,597
614.14
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
(b) Share premium account, capital redemption reserves and merger reserves comprise:
31 December 2020
31 December 2019
31 December 2018
Share
premium
account
£m
Capital
redemption
reserves
£m
103
94
91
101
101
101
Merger
reserves
£m
26,414
26,414
26,414
Total
£m
26,618
26,609
26,606
Share premium account
The share premium account includes the difference between the value of shares issued and their nominal value. The share premium
increase includes £2 million (2019: £3 million; 2018: £4 million) in respect of ordinary shares issued under the Company’s share option
schemes. A further £7 million (2019: £nil; 2018: £nil) increase in share premium is related to shares repurchased and not cancelled that
have been transferred from the Company to other Group undertakings, to be granted to certain employees on vesting of awards, and
represents the excess of transfer price of the share over the original weighted average cost of shares.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 202
Financial Statements
Notes on Accounts
Continued
18 Capital and Reserves Continued
Merger reserve account
The merger reserve comprises:
a.
b.
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
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.
(c) Equity attributed to owners of the parent – movements in other reserves and retained earnings (which are after deducting
treasury shares) comprise:
1 January 2020
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 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
– treasury shares used for share
option schemes
Dividends and other appropriations
– ordinary shares
Purchase of own shares
– held in employee share ownership trusts
Other movements
31 December 2020
Translation
reserve
(i)
£m
Hedging
reserve
(ii)
£m
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
Other
(v)
£m
Total other
reserves
£m
Treasury
shares
(vi)
£m
Other
£m
(3,974)
(346)
13
179
573
(3,555)
(5,261)
45,495
Retained earnings
–
(2,582)
–
–
(16)
(163)
(95)
–
–
–
–
–
–
–
–
–
–
–
(256)
90
–
–
(3)
44
–
–
–
–
(33)
–
–
–
–
–
–
–
–
–
–
–
–
–
(31)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,582)
(256)
90
(16)
(163)
(98)
44
–
–
(31)
–
(33)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
9
–
–
–
(6,830)
–
–
(504)
–
–
(18)
–
–
179
–
–
573
–
–
(6,600)
(17)
119
(5,150)
6,400
–
–
–
–
–
–
–
105
10
(3)
(26)
–
88
(16)
(4,747)
–
(115)
47,191
BAT Annual Report and Form 20-F 2020 203
Retained earnings
Other
(v)
£m
573
Total other
reserves
£m
Treasury
shares
(vi)
£m
Other
£m
(333)
(5,242)
43,799
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,948)
(246)
53
21
(18)
(115)
56
–
–
7
–
(32)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,704
–
–
–
–
–
–
–
(582)
(7)
–
75
–
115
(3,476)
–
(133)
45,495
–
–
13
–
–
179
–
–
573
–
–
(3,555)
(117)
98
(5,261)
18 Capital and Reserves Continued
Translation
reserve
(i)
£m
Hedging
reserve
(ii)
£m
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 204
Financial Statements
Notes on Accounts
Continued
18 Capital and Reserves Continued
Translation
reserve
(i)
£m
Hedging
reserve
(ii)
£m
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
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
– surplus recognition
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
Other movements
31 December 2018
(4,029)
–
(4,029)
–
3,861
–
–
–
(472)
(236)
(38)
–
–
–
–
–
–
–
–
–
–
–
(914)
(132)
–
(132)
–
–
(58)
17
–
–
–
–
18
–
–
–
–
(22)
–
–
–
–
–
(177)
17
(9)
8
–
–
–
–
(8)
–
–
–
–
–
–
6
–
–
–
–
–
–
–
6
179
–
179
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Retained earnings
Total other
reserves
£m
Treasury
shares
(vi)
£m
Other
£m
(3,392)
(5,195)
42,130
(9)
(3,401)
–
(5,195)
(29)
42,101
Other
(v)
£m
573
–
573
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,861
(58)
17
(8)
(472)
(236)
(38)
18
–
–
6
–
(22)
–
–
–
–
–
(333)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(139)
–
92
(5,242)
6,032
–
–
–
8
–
–
–
–
138
4
–
(33)
–
121
(4,463)
–
(11)
(98)
43,799
–
–
–
179
–
–
–
573
BAT Annual Report and Form 20-F 2020 205
18 Capital and Reserves Continued
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).
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 £16 million (2019: £12 million gain;
2018: £15 million gain) and a gain of £19 million (2019: £3 million gain; 2018: £23 million gain) were reported within revenue and raw materials
and consumables, respectively, together with a loss of £2 million (2019: £11 million gain; 2018: £7 million loss) reported in other operating
expenses and a gain of £57 million (2019: £27 million gain; 2018: £14 million loss) reported within net finance costs.
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 2020 is an accumulated gain of £9 million
(2019: £14 million; 2018: £20 million) in respect of the cost of hedging.
iii. Fair value reserve:
The fair value reserve 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 £4,836 million
(2019: £4,845 million; 2018: £4,845 million) for shares repurchased and not cancelled and £314 million (2019: £416 million; 2018: £397 million)
in respect of the cost of own shares held in employee share ownership trusts. The reduction in the shares repurchased and not cancelled
is primarily due to shares reissued to satisfy the vesting of US share options.
The share buy-back programme was suspended from 30 July 2014. As at 31 December 2020, treasury shares include 6,053,158
(2019: 8,275,677; 2018: 7,536,408) shares held in trust and 162,347,246 (2019: 162,645,590; 2018: 162,645,590) shares repurchased and not
cancelled as part of the Company’s share buy-back programme. From March 2020 the Company has utilised shares acquired in the share
buy-back programme to satisfy shared-based payment awards made to certain employees.
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 (gains)/losses in respect of subsidiaries
Owners of the parent
Non-controlling interests
Total tax recognised in other comprehensive income for the year (note 6(f))
2020
£m
2019
£m
2018
£m
44
44
(26)
(26)
18
–
18
56
56
75
75
131
–
131
18
18
(33)
(33)
(15)
–
(15)
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 206
Financial Statements
Notes on Accounts
Continued
18 Capital and Reserves Continued
(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 interim dividends on a quarterly basis. The interim quarterly dividend payment
for the year ended 31 December 2019 of 210.4p per ordinary share (31 December 2018: 203.0p per ordinary share) was payable in four
equal instalments: amounts payable in May 2020 of £1,185 million (May 2019: £1,157 million), August 2020 of £1,195 million (August
2019: £1,159 million), November 2020 of £1,206 million (November 2019: £1,160 million) and £1,203 million in February 2021 (February
2020: £1,161 million) respectively. The total dividends recognised as an appropriation from reserves in 2020 was £4,747 million
(2019: £3,476 million).
As described in last year’s annual report, the Group revised in 2019 the recognition of the dividend. From 2019, the Group recognises
interim dividends as a liability in the Group’s financial statements in the period in which they are paid. Prior to this, interim dividends were
recognised when confirmed by the Directors of the Company.
The Board has declared an interim dividend of 215.6p per ordinary share of 25p, for the year ended 31 December 2020, payable in four equal
quarterly instalments of 53.9p per ordinary share in May 2021, August 2021, November 2021 and February 2022. These payments will be
recognised as appropriations from reserves in 2021 and 2022. The total amount payable is estimated to be £4,946 million based on the
number of shares outstanding at the date of these accounts.
19 Borrowings
Eurobonds
Bonds issued pursuant to Rules under the
US Securities Act (as amended)
Bonds and notes
Commercial paper
Other loans
Bank loans
Bank overdrafts
Lease liabilities
Currency
Maturity dates
Interest rates
Euro
Euro
UK sterling
Swiss franc
2021 to 2045
2021
2021 to 2055
2021 to 2026
0.9% to 4.9%
3m EURIBOR +50bps
1.8% to 7.3%
0.6% to 1.4%
US dollar
US dollar
2022 to 2050
2022
1.7% to 8.1%
USD 3m LIBOR + 88bps
2020
£m
8,875
984
4,590
540
25,461
548
40,998
–
1,929
317
249
475
43,968
2019
£m
7,591
931
4,161
510
23,805
1,325
38,323
1,056
4,624
293
491
579
45,366
Other loans primarily comprise £1,929 million (2019: £3,859 million) relating to a term loan maturing in January 2022 and £nil
(2019: £745 million) relating to bilateral facilities. Commercial paper is issued at competitive rates to meet short-term borrowing
requirements as and when needed.
Current borrowings per the balance sheet include interest payable of £499 million at 31 December 2020 (2019: £474 million).
Included within borrowings are £5,356 million (2019: £5,136 million) of borrowings subject to fair value hedges where their amortised cost
has been increased by £173 million (2019: £210 million) in the table above.
The fair value of borrowings is estimated to be £47,029 million (2019: £45,674 million) of which £44,059 million (2019: £38,631 million) has
been calculated using quoted market prices and is within level 1 of the fair value hierarchy and £2,970 million (2019: £7,043 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 2020 are
£21 million (2019: £88 million). The majority of lease liabilities are also secured against the associated assets.
BAT Annual Report and Form 20-F 2020 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
207
Per balance sheet
Contractual gross maturities
2020
£m
4,041
4,049
2,587
3,854
4,108
25,329
43,968
2019
£m
7,562
2,947
6,992
2,505
3,173
22,187
45,366
2020
£m
4,901
5,355
3,829
5,095
5,025
35,848
60,053
2019
£m
8,926
4,181
8,215
3,529
3,871
32,176
60,898
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 2020
Total borrowings
Effect of derivative financial instruments
– cross-currency swaps
– forward foreign currency contracts
31 December 2019
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
Other
currencies
£m
Total
£m
32,000
2,700
452
8,221
595
43,968
3,795
593
36,388
–
(460)
2,240
(450)
–
2
(3,536)
(520)
4,165
(265)
394
724
(456)
7
43,519
32,536
2,772
451
8,919
688
45,366
3,946
(610)
35,872
–
(213)
2,559
(450)
–
1
(3,432)
440
5,927
(249)
372
811
(185)
(11)
45,170
The exposure to interest rate changes when borrowings are re-priced is as follows:
31 December 2020
Total borrowings
Effect of derivative financial instruments
– interest rate swaps
– cross-currency swaps
31 December 2019
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
6,519
1,568
2,594
3,855
4,108
25,324
43,968
219
454
7,192
(219)
–
1,349
–
(744)
1,850
–
–
3,855
–
(23)
4,085
–
(143)
25,181
–
(456)
43,512
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
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 208
Financial Statements
Notes on Accounts
Continued
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
2020
£m
137
98
71
47
35
87
475
2019
£m
154
120
92
64
43
106
579
2020
£m
156
114
80
55
41
104
550
2019
£m
178
138
100
72
51
135
674
For more information on leasing arrangements refer to note 9(b).
The Group’s undrawn committed borrowing facilities (note 22) amount to £9,366 million (2019: £6,000 million) with £6,366 million
maturing within one year (2019: £3,000 million maturing within one year) and with £3,000 million maturing between four and five years
(2019: £3,000 million maturing between one and two years).
The Group defines net debt as follows:
Borrowings (excluding lease liabilities)*
Lease liabilities
Derivatives in respect of net debt (note 15)
Cash and cash equivalents (note 17)
Current investments held at fair value (note 14)
2020
£m
43,493
475
(346)
(3,139)
(242)
40,241
2019
£m
44,787
579
(143)
(2,526)
(123)
42,574
* Borrowings as at 31 December 2020 include £790 million (2019: £848 million) in respect of the purchase price adjustments relating to the acquisition of Reynolds American.
The movements in net debt are presented below along with a reconciliation to the financing activities in the Group Cash Flow Statement:
Borrowings (excluding lease liabilities)
Lease liabilities
Derivatives in respect of net debt (note 15)
Cash and cash equivalents (note 17)
Current investments held at fair value (note 14)
Opening
balance
Subsidiaries
acquired
Cash flow
Foreign
exchange
Fair value,
accrued
interest and
other
44,787
579
(143)
(2,526)
(123)
42,574
–
1
–
(96)
–
(95)
(1,049)
(164)
(240)
(768)
(119)
(2,340)
(195)
(24)
(134)
264
20
(69)
(50)
83
171
(13)
(20)
171
2020
£m
Closing
balance
43,493
475
(346)
(3,139)
(242)
40,241
BAT Annual Report and Form 20-F 2020
209
19 Borrowings Continued
Borrowings (excluding lease liabilities)
Lease liabilities
Derivatives in respect of net debt (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
Cash flow
Foreign
exchange
–
607
–
–
–
607
–
3
–
–
–
3
(1,176)
(154)
(391)
17
95
(1,609)
(1,536)
(30)
598
57
38
(873)
Opening
balance
47,495
14
(378)
(2,602)
(178)
44,351
2019
£m
Closing
balance
44,787
579
(143)
(2,526)
(123)
42,574
Fair value,
accrued
interest and
other
4
139
28
2
(78)
95
‘Fair value, accrued interest and other’ movements in lease liabilities in 2020 mainly comprise additions of £85 million (2019: £135 million)
(net of reassessments, modifications and terminations), see note 9(a). The £20 million movement (2019: £78 million increase) in current
investments held at fair value represents the fair value gains for these investments.
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 non-controlling interests
Dividends paid to non-controlling interests
Other
Net cash used in financing activities per cash flow statement
2020
£m
(2,340)
1,129
(1,737)
(26)
(43)
(18)
(4,745)
17
(136)
2
(7,897)
2019
£m
(1,609)
(329)
(1,601)
(32)
(173)
(117)
(4,598)
20
(157)
3
(8,593)
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 210
Financial Statements
Notes on Accounts
Continued
20 Provisions for Liabilities
1 January 2020
Differences on exchange
Subsidiaries acquired
Provided in respect of the year
– in respect of MSA litigation (Texas, Minnesota, Mississippi)
– in respect of other
Utilised during the year
– in respect of excise dispute in Russia
– in respect of other
31 December 2020
Analysed on the balance sheet as
– current
– non-current
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
Restructuring
of existing
businesses
£m
Employee-
related
benefits
£m
Fox River
£m
Other
provisions
£m
298
5
–
60
–
60
(122)
–
(122)
241
165
76
241
28
(2)
–
19
–
19
(7)
–
(7)
38
23
15
38
73
–
–
–
–
–
(3)
–
(3)
70
1
69
70
659
(57)
6
312
212
100
(284)
(226)
(58)
636
409
227
636
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
381
(17)
793
436
252
105
(498)
(436)
(62)
659
447
212
659
Total
£m
1,058
(54)
6
391
212
179
(416)
(226)
(190)
985
598
387
985
Total
£m
649
(29)
1,037
436
252
349
(599)
(436)
(163)
1,058
670
388
1,058
The restructuring provisions relate to the restructuring and integration costs incurred and are reported as adjusting items. The principal
restructuring activities in 2020 and 2019 are as described in note 3(e). While some elements of the non-current provisions of £76 million
will unwind over several years, as termination payments are made over extended periods in some countries, it is estimated that
approximately 88% of these non-current provisions 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 61% of the non-current provisions of £15 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 £2 million in 2020
(2019: £32 million). In addition, the Group incurred legal costs of £1 million (2019: £3 million), which were also charged against the provision.
It is expected that the non-current provision will unwind within five years.
BAT Annual Report and Form 20-F 2020 211
20 Provisions for Liabilities Continued
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. Other provisions also include a provision for interest of £129 million in relation to the
Franked Investment Income Group Litigation Order (FII GLO), as mentioned in notes 4(b) and 6(b).
In 2020, the Group recognised a provision of US$272 million (£212 million) in relation to the ITG MSA litigation agreements with the states
of Texas, Minnesota and Mississippi. Further details are provided in note 27.
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
CAD$758 million (£436 million) in 2019, 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 Group utilised the litigation related deposit which was
shown as a receivable at 31 December 2018 (within trade and other receivables) against the current estimate of the liability and both the
provision and litigation related deposit were reduced accordingly. Further details are provided in note 27.
In 2019, the Group recognised a provision of £252 million in relation to the Russia excise dispute. The provision was utilised in January 2020,
when the tax claim was paid.
Amounts provided above are shown net of reversals of unused provisions which include reversals of £72 million (2019: £18 million) for
restructuring of existing businesses, £4 million (2019: £3 million) for employee benefits and £125 million (2019: £97 million) for other
provisions, of which £4 million (2019: £10 million) was reclassified to trade and other payables.
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
2020
£m
3,722
3,410
2,228
963
53
381
10,757
9,693
1,064
10,757
2019
£m
3,453
3,852
2,037
963
51
405
10,761
9,727
1,034
10,761
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 £128 million
(2019: £115 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 2020, the value of amounts payable under the SCF programmes was £48 million
(2019: £71 million). The cash outflows in respect of these arrangements have been recognised within operating cash flows.
Accrued charges and deferred income include £nil of deferred income (2019: £4 million) and £55 million (2019: £61 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 5% in
other currencies (2019: less than 6% in other currencies).
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 212
Financial Statements
Notes on Accounts
Continued
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). There are no externally imposed capital requirements for
the Group. Group policies include a set of financing principles
that 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 2020 is 3.6% (2019: 3.3%).
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 2020, the
average centrally managed debt maturity was 9.9 years (2019: 9.1
years) and the highest proportion of centrally managed debt
maturing in a single rolling year was 16.4% (2019: 18.6%).
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., B.A.T. Netherlands Finance B.V.
and B.A.T Capital Corporation and guaranteed by British American
Tobacco p.l.c.. At 31 December 2020, commercial paper of £nil was
outstanding (2019: £1,056 million).
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. In January 2017, Moody’s and S&P revised the Group’s rating
to Baa2 and BBB+ with stable outlook, respectively, following the
announcement of the Reynolds American acquisition. 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
for future refinancing requirements.
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
2020, the Group does not have any investments in money market
funds (2019: £nil).
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.
In March 2020, the Group refinanced its £6 billion revolving credit
facility consisting 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).
The facility no longer contains a financial covenant. Subsequent to
the year-end, in February 2021, the Group extended £2.85 billion
of the 364-day tranche from March 2021 to March 2022 and
£2.85 billion of the five-year tranche from March 2025 to March
2026 (£3 billion of this tranche remains available until March 2025).
As at 31 December 2020, the facility remains undrawn.
In March and April 2020, the Group arranged short-term bilateral
facilities with core relationship banks for a total amount of
approximately £4.8 billion, strengthening the Group’s liquidity
position and further mitigating liquidity risks during the COVID-19
crisis. The bilateral facilities have since been reduced to a total
amount of approximately £3.4 billion. At 31 December 2020, these
facilities were undrawn.
In April 2020, the Group accessed the US dollar market under its
SEC Shelf Programme, raising a total of US$2.4 billion across three
tranches. Additionally, the Group accessed the European market
under its EMTN Programme, raising a total of €1.7 billion across
two tranches.
In May and June 2020, the Group repaid US$750 million and
US$770.8 million bonds at maturity, respectively. Additionally, in
June 2020, the Group raised £500 million in the Sterling market
under its EMTN Programme.
In July 2020, the Group repaid a €600 million bond and a £1.9 billion
term loan at maturity, and in August 2020, the Group repaid a
US$1 billion bond at maturity.
In September 2020, the Group accessed the US dollar market
under its SEC Shelf programme, raising a total of US$6.25 billion
across five tranches. The Group also made a tender offer to
repurchase portions of seven series of bonds prior to their
maturities. The tender offer was completed in October 2020,
totalling US$3.2 billion under five series of bonds, £70 million and
€100 million under two separate series of bonds, all of which would
have otherwise matured in 2021 and 2022.
In October 2020, the Group exercised the make whole redemption
provision to fully redeem the remaining amounts outstanding
following the tender offer on three series of bonds that would
have otherwise matured in 2022. In November 2020, the
balance outstanding on these bonds was repurchased, totalling
US$597.6 million.
BAT Annual Report and Form 20-F 2020 213
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 £61 million
lower (2019: £16 million lower; 2018: £33 million higher) and
items recognised directly in other comprehensive income being
£57 million higher (2019: £22 million lower; 2018: £384 million
higher). A 10% weakening of functional currencies against non-
functional currencies would result in pre-tax profit being £74 million
higher (2019: £20 million higher; 2018: £41 million lower) and
items recognised directly in other comprehensive income being
£70 million lower (2019: £27 million higher; 2018: £469 million lower).
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.
22 Financial Instruments and Risk Management Continued
Subsequent to the balance sheet date, at the end of February 2021,
the Group anticipates repaying a €650 million bond at maturity.
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).
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 four tranches.
In September 2019, the Group repaid a US$650 million bond at maturity.
As part of the liquidity management strategy, the Group 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.
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 2020, the currency profile of the Group’s
gross debt, after taking into account derivative contracts, was 63%
US dollar (2019: 59%), 13% euro (2019: 13%), 19% sterling (2019: 21%)
and 5% other currencies (2019: 7% 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 214
Financial Statements
Notes on Accounts
Continued
22 Financial Instruments and Risk Management Continued
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.
Additional objectives are to minimise the cost of hedging and the
associated counterparty risk.
During 2020, the Group financial covenant being gross interest
cover was removed from the centrally managed banking facilities.
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 2020, the
relevant ratios of floating to fixed rate borrowings were 7:93
(2019: 18:82) 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 £31 million lower (2019: £143 million lower;
2018: £90 million lower). A 100 basis point decrease in interest
rates, or less where applicable, would result in pre-tax profit being
£29 million higher (2019: £108 million higher; 2018: £74 million
higher). The effect of these interest rate changes on items
recognised directly in other comprehensive income is not material
in either year.
In accordance with the UK Financial Conduct Authority’s
announcement on 27 July 2017, LIBOR and other benchmark rates
are expected to be discontinued after 2021. The Group has early
adopted the Phase 2 Amendments to IFRS 9 Financial Instruments
in respect of disclosures and other accounting matters relating to
Interest Rate Benchmark Reform.
As at 31 December 2020, the Group has floating rate borrowings
with nominal value of £1,929 million and US$750 million
(£549 million) that are due to mature in January 2022 and August
2022 respectively. The Group assessed the impact on these
borrowings consequent to Interest Rate Benchmark Reform and
concluded that they are not significant.
Additionally, the Group has a total of nine derivatives (five interest
rate swaps and four cross-currency interest rate swaps) that may
be impacted by Interest rate Benchmark Reform of which two
are free standing derivatives maturing in January 2023 and seven
derivatives which are in a fair value hedge relationship that are
maturing in June 2022 and October 2023. The Group believes that
the hedge relationships on these derivatives will continue with the
resulting ineffectiveness likely to be immaterial.
The Group’s syndicated revolving credit facility (undrawn at
31 December 2020) has references to USD LIBOR, EURIBOR
and GBP LIBOR. This facility includes market standard LIBOR
replacement language. Following 1 June 2021, the agreement will
adopt SOFR and SONIA as the alternative benchmark rates in
respect of USD LIBOR and GBP LIBOR, respectively.
In January 2021, the Group confirmed adherence to the ISDA 2020
IBOR Fallbacks Protocol as published by the International Swaps
and Derivatives Association, Inc. (ISDA) on 23 October 2020 (the
Protocol), ensuring that appropriate fallback rates can apply to
derivatives in the event of LIBOR discontinuation.
The Group believes that any outstanding contracts on 1 January
2022 with interest rates based on LIBOR benchmarks will
adequately provide for alternate calculations of interest in the event
that they are unavailable.
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. 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 £88 million (2019: £54 million).
In addition, the Group has entered into guarantee arrangements to
support short-term bank credit facilities with certain distribution
and supply chain partners. The maximum exposure under the
arrangements would be £36 million (2019: £54 million).
BAT Annual Report and Form 20-F 2020 215
22 Financial Instruments and Risk Management Continued
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.
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 Policy, 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
171
–
–
–
171
–
–
–
–
–
65
444
288
797
53
–
266
319
93
–
–
–
93
–
–
–
–
2020
Total
£m
264
65
444
288
1,061
53
–
266
319
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 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 216
Financial Statements
Notes on Accounts
Continued
22 Financial Instruments and Risk Management Continued
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:
2020
2019
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
797
(237)
560
765
(291)
474
(319)
478
237
–
(82)
478
(468)
297
291
–
(177)
297
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.
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:
2020
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
Carrying amount
of the hedged
item
£m
Changes in
fair value used
for calculating
hedge
ineffectiveness
£m
Cash flow
hedge reserve
(gross of tax)
£m
5,356
173
Borrowings
(57)
2,816
Borrowings
155
(628)
Fair value hedges
Interest rate risk
– borrowings (liabilities)
Cash flow hedges
Interest rate risk
– borrowings (liabilities)
BAT Annual Report and Form 20-F 2020 22 Financial Instruments and Risk Management Continued
217
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
Carrying amount
of the hedged
item
£m
Changes in
fair value used
for calculating
hedge
ineffectiveness
£m
Cash flow
hedge reserve
(gross of tax)
£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)*
* In 2019, the carrying value reported for derivative financial instruments represents the aggregated exposure as at the balance sheet date. For assets, the gross nominal value amounted to
£226 million and for liabilities, the gross nominal value amounted to £932 million.
£392 million (2019: £372 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. A number of these relationships had matured in 2019. The change in the value used for calculating hedge ineffectiveness for
hedged items designated under net investment hedge relationships is £21 million (2019: £22 million).
As at 31 December 2020, the total balance of the cash flow hedge reserve was a loss of £504 million (2019: loss of £346 million) including a
loss of £628 million (2019: loss of £309 million) in relation to interest rate exposure and foreign currency exposure arising from borrowings
held by the Group, £nil (2019: loss of £160 million) in relation to interest rate exposure on forecasted borrowings, and a gain of £139 million
(2019: gain of £105 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)).
23 Business Combinations, Disposals and Other Changes in the Group
(a) 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 12 November 2020, the Group acquired 100% of the share capital in Eastern Tobacco Company for Trading, formerly known as
Rafique Mohammed Sudki Jad Establishment for Trading when acting as BAT’s distributor in Saudi Arabia (KSA), for £50 million (SAR
246 million). Goodwill of £36 million, representing anticipated synergies, and trademarks and similar intangibles of £39 million, as well
as £96 million of cash and cash equivalents, were recognised on acquisition. The transaction is expected to enable the Group to take
ownership of its route to market in KSA.
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. Due to
difficult trading conditions, the goodwill was fully impaired in 2020 and deferred consideration adjusted by £3 million.
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. The business was
subsequently discontinued and liquidation proceedings commenced in December 2020.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 218
Financial Statements
Notes on Accounts
Continued
23 Business Combinations, Disposals and Other Changes in the Group Continued
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. As explained in note 8, at the end of 2019, acquired goodwill and intangibles were
fully impaired.
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.
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 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 £1 million in final settlement in 2018.
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 was recognised as other income (note 3(e)).
(b) Non-controlling interests
In 2020, the Group made a capital contribution to Brascuba Cigarrillos S.A. at a cost of £17 million (2019: £20 million). This contribution
was in proportion to a capital contribution made by the non-controlling interest to the 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.
(c) Other transactions
On 20 October 2020, the Group acquired the formulations, brands, associated know-how and other relevant assets owned by Dryft
Sciences, LLC (DSL) relating to its white nicotine pouch products for consideration of up to US$150 million payable in accordance
with the achievement of certain milestones. The transaction has been accounted for as an asset acquisition, rather than as a business
combination, as the intellectual property and associated assets acquired do not represent an integrated set of activities required by IFRS
for business combination accounting. Consequently, the consideration payable has been assigned to the acquired assets by relative
fair value.
During 2020, the Group increased its ownership of a wholesale producer and distributor operating in the agriculture sector based in
Uzbekistan, FE “Samfruit” JSC to 38.63%, for £5 million.
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.
BAT Annual Report and Form 20-F 2020 219
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)
Awards granted in 2020 under the Long-Term Incentive Plan are the Performance Share Plan and the Restricted Share Plan with the
following conditions:
Performance Share Plan (PSP): nil-cost options released three years from date of grant. 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 2020, 2019 and 2018. 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 PSP awards are granted in March
each year.
Restricted Share Plan (RSP): Nil-cost options 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 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 RSP awards were
granted in March.
Awards granted in 2018 and 2019 are nil-cost options exercisable after three years from date of grant with a contractual life of 10 years.
The performance conditions and the dividend entitlement attached to these awards are identical to the PSP award mentioned above.
Both equity and cash-settled LTIP awards were granted in March.
Following the acquisition of Reynolds American on 25 July 2017, underlying Reynolds American shares for LTIPs were replaced with BAT
American Depositary Shares (ADS). LTIP awards for ADSs are measured against the performance conditions of Reynolds American at
the maximum of 150% at the vesting date. Equity-settled LTIPs were granted by Reynolds American 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.
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
36
44
8
88
2020
Cash-
settled
£m
–
3
–
3
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
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 220
Financial Statements
Notes on Accounts
Continued
24 Share-Based Payments Continued
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 2020 and 2019:
LTIP
DSBS
Total liability
2020
2019
Vested
£m
Unvested
£m
Vested
£m
Unvested
£m
0.3
0.2
0.5
1.5
5.7
7.2
0.5
0.3
0.8
2.8
6.2
9.0
(a) Long-Term incentive Plan
Details of the movements for the equity- and cash-settled LTIP scheme during the years ended 31 December 2020 and 31 December 2019,
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
2020
Equity-
settled
Number of
options in
thousands
Cash-
settled
Number of
options in
thousands
Equity-
settled
Number of
options in
thousands
2019
Cash-
settled
Number of
options in
thousands
9,193
3,856
(1,590)
(1,459)
10,000
690
318
109
(63)
(90)
274
27
6,908
4,552
(1,045)
(1,222)
9,193
739
306
202
(129)
(61)
318
25
As at 31 December 2020, the Group has 10,000,000 shares (2019: 9,193,000 shares) outstanding which includes 2,876,738 shares
(2019: 2,479,057 shares) which are related to Reynolds American LTIP awards from which nil shares (2019: 43,924 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
£29.37 (2019: £28.31; 2018: £38.90) for equity-settled and £28.68 (2019: £30.87; 2018: £40.62) 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 Reynolds American LTIP awards was US$40.04 (2019: US$36.35; 2018:
US$51.43).
The outstanding shares for the year ended 31 December 2020 had a weighted average remaining contractual life of 8.1 years (2019: 8.2
years; 2018: 8.1 years) for the equity-settled scheme, 1.72 years for Reynolds American equity-settled scheme (2019: 1.93 years; 2018: 1.91
years) and 8.1 years (2019: 8.3 years; 2018: 8.1 years) for the cash-settled share-based payment arrangements.
(b) Deferred Share Bonus Scheme
Details of the movements for the equity- and cash-settled DSBS scheme during the years ended 31 December 2020 and 31 December
2019, 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
2020
Equity-
settled
Number of
options in
thousands
Cash-
settled
Number of
options in
thousands
Equity-
settled
Number of
options in
thousands
2019
Cash-
settled
Number of
options in
thousands
3,748
1,829
(1,368)
(68)
4,141
91
282
109
(175)
(16)
200
4
3,248
2,097
(1,500)
(97)
3,748
90
281
202
(184)
(17)
282
6
BAT Annual Report and Form 20-F 2020 221
24 Share-Based Payments Continued
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 £28.08 (2019: £28.40; 2018: £40.00) for equity-settled and £28.06 (2019: £30.06; 2018: £40.51) for cash-settled options.
The outstanding shares for the year ended 31 December 2020 had a weighted average remaining contractual life of 1.4 years (2019: 1.5
years; 2018: 1.3 years) for the equity-settled scheme and 1.4 years (2019: 1.5 years; 2018: 1.1 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
25.0
3.5 / 3.0
0.2
7.9
7.9
26.33
26.33
21.23 / 20.76
21.23 / 20.76
2020
DSBS
25.0
3.0
0.2
7.9
7.9
26.33
26.33
20.76
20.76
LTIP
22.0
3.5
0.7
6.5
6.0
30.83
33.28
21.93
24.03
* Where two figures have been quoted for the Long Term Incentive Plan, the numbers relate to PSP and RSP awards, respectively.
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 (%)
2020
LTIP (PSP)
21
31
2019
DSBS
22.0
3.0
0.7
6.5
6.0
30.83
33.28
25.35
25.35
2019
LTIP
18
28
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, excluding RSP, 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 222
Financial Statements
Notes on Accounts
Continued
25 Group Employees
The average number of persons employed by the Group and its associates during the year, including Directors, was 89,182 (2019: 94,846).
United States
APME
AMSSA
ENA
Subsidiary undertakings
Associates
2020
Number
4,914
12,703
17,869
23,957
59,443
29,739
89,182
2019
Number
5,046
14,910
18,638
25,505
64,099
30,747
94,846
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 £394 million (2019: £239 million; 2018: £211 million).
Transactions
– revenue
– purchases
– other net income
Amounts receivable at 31 December
Amounts payable at 31 December
2020
£m
495
(80)
388
33
(5)
2019
£m
511
(79)
248
42
(2)
2018
£m
473
(101)
216
26
(1)
During 2020, the Group made a capital contribution in Brascuba Cigarrillos S.A. at a cost of £17 million (2019: £20 million) and increased its
ownership of FE “Samfruit” JSC to 38.63% for £5 million.
During 2020, there was a capital reduction in CTBAT International Limited of approximately US$171 million with funds due to be remitted
prorate to investors in 2021.
During 2019, the Group acquired 60% of VapeWild Holdings LLC and a minority stake in AYR Limited.
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.
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.
The total compensation for key management personnel, including Directors, was:
– salaries and other short-term employee benefits
– post-employment benefits
– share-based payments
2020
£m
2019
£m
2018
£m
17
2
13
32
26
4
23
53
21
4
18
43
BAT Annual Report and Form 20-F 2020 223
26 Related Party Disclosures Continued
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
2020
£’000
2019
£’000
2018
£’000
2020
£’000
2019
£’000
2018
£’000
2020
£’000
2019
£’000
2018
£’000
2020
£’000
2019
£’000
Total
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
2,026 2,356
2,211
427
608
744
5,031
4,791
3,274
1,294 4,420 5,300
7,338 12,175 12,969
304
20
324
921
686
50
47
971
733
7,662 12,908 13,940
Aggregate gains on LTIP shares exercised in the year
714
77
695
137
680
116
1,028
72
969
310
1,092
303
791
832
796
1,100
1,279
1,395
791
832
796
1,100
1,279
1,395
2,211
2,026 2,356
1,772
1,664
1,742
846
1,055
893
5,031
4,791
3,274
1,294 4,420 5,300
9,229 14,286 15,160
304
20
324
686
47
733
9,553 15,019
921
50
971
16,131
Jack Bowles
Tadeu Marroco
LTIP – Value of awards 2017
Jack Bowles
Tadeu Marroco
Note:
1. For information only as awards are made as nil-cost options.
Sharesave – Aggregate Gains 2020
Award
27 March 2017
27 March 2017
Exercised
LTIP shares
Exercise date Price per share (£) Aggregate gain (£)
18,497
14,755
06 April 2020
08 June 2020
29.62
31.23
547,881
460,799
Shares Price per share (£)1
Face value (£)
26,463
21,109
52.11
52.11
1,378,987
1,099,990
Tadeu Marroco
23 March 2015
495
09 June 2020
30.26
0
Award date
Shares
Exercise date Price per share (£) Aggregate gain (£)
Sharesave – Value of award 2015
Tadeu Marroco
Shares Price per share (£)
Face value (£)
495
30.26
14,979
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 224
Financial Statements
Notes on Accounts
Continued
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 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, public nuisance, 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 (as
defined in paragraph 41 below), the funding by various tobacco
companies of a US$5.2 billion (approximately £3.8 billion) trust
fund contemplated by the Master Settlement Agreement (as
described in paragraph 41 below) 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
2020 and the increase or decrease from the number of cases
pending against Group companies as of 31 December 2019.
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.
BAT Annual Report and Form 20-F 2020 225
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 2020
Case Numbers as at
31 December 2019
(note 1)
Change in Number
Increase/(decrease)
2
20
189
1,400
1,227
48
4
19
12
68
2
19
135
1,773
1,228
51
4
18
13
81
No change
1
54
(373)
(1)
(3)
No change
1
(1)
(13)
(Note 1) This includes cases to which the Reynolds American Inc. (Reynolds American) 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.
(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 189 active individual smoking and health cases, four judgments have been returned in the
plaintiffs’ favour, awarding damages totalling approximately US$147 million (approximately £108 million), which are pending post-trial in
trial courts or on appeal. For a further description of these cases, see note 27, paragraphs 39-40.
(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 £106 billion)
in punitive damages, apportioned US$36.3 billion (approximately £26.6 billion) to RJRT, US$17.6 billion (approximately £12.9 billion) to
B&W, and US$16.3 billion (approximately £11.9 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 2018 and 31 December 2020, 33 judgments have been returned in the
plaintiffs’ favour, awarding damages totalling approximately US$332.2 million (approximately £243 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 2020. For a further description of
the Engle progeny cases, see note 27, paragraphs 29-38 seq.
(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 £219.5 million) to fund research on the detection and cure of tobacco-related diseases and US$49 million (approximately
£35.8 million) in plaintiffs’ counsel’s fees and expenses. Group companies’ share of these payments totalled US$174 million (approximately
£127.3 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 2018, Lorillard Tobacco and RJRT have paid, or
have reached agreement to pay, a total of approximately US$31.3 million (approximately £22.9 million) in settlements to resolve 124 Filter
Cases. See note 17 to paragraph 40.
(Note 8) Group companies’ expenses and payments under the State Settlement Agreements for 2020 amounted to approximately
US$3.6 billion (approximately £2.6 billion) in respect of settlement expenses and US$2.9 billion (approximately £2.1 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 226
Financial Statements
Notes on Accounts
Continued
c.
27 Contingent Liabilities and Financial Commitments Continued
(Note 9) Outside the United States, there are 12 class actions
being brought against Group companies as of 31 December
2020. These include class actions in the following jurisdictions:
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 £8.9 billion), of which the Group companies’
share was CAD$10.4 billion (approximately £5.9 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$9.2 billion (approximately £5.3 billion). For a
further description of the Quebec Class Actions, see paragraph 78.
All of the class actions in Canada are currently stayed pursuant to a
court order. See paragraph 58.
‘Settlement’ refers to certain types of cases in which
cigarette manufacturers, including RJRT, B&W and Lorillard
Tobacco, have agreed to resolve disputes with certain
plaintiffs without resolving the cases through trial.
d. All sums set out in note 27 have been converted to GBP
and US$ using the following end closing rates as at
31 December 2020: GBP 1 to US$ 1.3670, GBP 1 to CAD$
1.7415, GBP 1 to EURO 1.1172, GBP 1 to BRL 7.1002, GBP 1
to AOA 895.4418, GBP 1 to NGN 539.6035, GBP 1 to KRW
1484.92, GBP 1 to HRK 8.4326, GBP 1 to JPY 141.1308, GBP 1
to QAR 4.9770 and GBP 1 to SAR 5.128.
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.
(Note 10) As at 31 December 2020, the jurisdictions with the
most active individual cases against Group companies were,
in descending order: Brazil (31), Italy (14), Chile (8), Canada (6),
Argentina (5) and Ireland (2). There were a further two jurisdictions
with one active case only. Out of these 68 cases, in 2020, one case
in Argentina (Baldassare) returned a first instance judgment on
28 December 2020, in the amount of ARS 685,976 (approximately
£6,000) in compensatory damages and ARS 2,500,000
(approximately £22,000) in punitive damages (plus interest),
which judgment is subject to appeal, in the plaintiffs’ favour as of
31 December 2020.
11. Certain terms and phrases used in this note 27 may require
some explanation.
a.
b.
‘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.
‘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.
13. The total number of US tobacco product liability cases pending
at 31 December 2020 involving RJRT, B&W and/or Lorillard
Tobacco was approximately 2,901. As at 31 December 2020,
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 2020.
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), Reynolds American, Lorillard Inc., other Reynolds
American 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 30
cases, exclusive of Engle progeny cases, scheduled for trial
as of 31 December 2020 through 31 December 2021, for the
Reynolds Defendants: 19 individual smoking and health cases,
10 Filter Cases and one non-smoking and health case. There are
also approximately 112 Engle progeny cases against RJRT
(individually and as successor to Lorillard Tobacco) and B&W
scheduled for trial through 31 December 2021. It is not known
how many of these cases will actually be tried.
BAT Annual Report and Form 20-F 2020 227
27 Contingent Liabilities and Financial Commitments Continued
17. Trial results. From 1 January 2018 through 31 December 2020,
83 trials occurred in individual smoking and health, Engle
progeny, and Filter Cases in which the Reynolds Defendants
were defendants, including 10 where mistrials were declared.
Verdicts in favour of the Reynolds Defendants and, in some
cases, other defendants, were returned in 27 cases (including
one directed verdict after the jury reached an impasse in a
punitive damages trial), tried in Florida (25) and Massachusetts
(2). Verdicts in favour of the plaintiffs were returned in 37 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 (32), the US
Virgin Islands (2), and Massachusetts (3). Seven of the cases
in Florida were dismissed during trial. Two cases were punitive
damages retrials.
(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.
19. At 31 December 2020, 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
£204.8 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.
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, on television, on the
companies’ websites, and in onserts on cigarette packaging.
The compelled public statements in newspapers and on
television were completed in 2018 and in package onserts were
completed in mid-2020. Also, the compelled public statements
now appear on RJRT websites. 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 12 July 2021.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 228
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
(b) Class Actions
25. At 31 December 2020, 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 £3.6 million) and one that
alleged that the plaintiffs were seeking less than US$75,000
(approximately £54,900) per class member plus unspecified
punitive damages.
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 Reynolds American,
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.
On 21 December 2017, that court granted the defendants’ motion to
dismiss in part, dismissing a number of claims with prejudice, and
denied it in part. The district court conducted a five-day hearing
on the motion for class certification and on the motion challenging
the admissibility expert opinion testimony in December 2020.
The parties filed post-hearing briefs in January 2021 and will file
proposed findings of fact and conclusions of law in February 2021.
A decision is expected in the second half of 2021.
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.
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..
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 £106 billion) in
punitive damages, apportioned US$36.3 billion (approximately
£26.6 billion) to RJRT, US$17.6 billion (approximately £12.9 billion) to
B&W, and US$16.3 billion (approximately £11.9 billion) to Lorillard
Tobacco. The three class representatives in the Engle class
action were awarded US$13 million (approximately £9.5 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 £73.2 million) divided as follows:
RJRT US$42.5 million (approximately £31.1 million); PM USA
US$42.5 million (approximately £31.1 million); and Lorillard Tobacco
US$15 million (approximately £10.9 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.
BAT Annual Report and Form 20-F 2020 229
27 Contingent Liabilities and Financial Commitments Continued
33. As at 31 December 2020, there were approximately 1,400 Engle progeny cases pending in which RJRT, B&W and/or Lorillard Tobacco have
all been named as defendants and served. These cases include claims by or on behalf of 1,725 plaintiffs. In addition, as of 31 December 2020,
RJRT was aware of seven 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. 71 trials occurred in Engle progeny cases in Florida state and federal courts against RJRT, B&W and/or Lorillard Tobacco from 1 January
2018 through 31 December 2020, and additional state court trials are scheduled for 2021.
35. The following chart identifies the number of trials in Engle progeny cases as at 31 December 2020 and additional information about the
adverse judgments entered:
Trials/verdicts/judgments of individual Engle progeny cases from 1 January 2018 through 31 December 2020:
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 33 trials resulting in plaintiffs’ verdicts 1 January 2018 to 31 December 2020 (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 2018 to 31 December 2020:
Number of adverse judgments appealed by RJRT
71
33**
US$332,210,000
(approximately £243 million)
US$107,621,000 (of overall US$332,210,000)
(approximately £78.7 million of £243 million)
US$224,589,000 (of overall US$332,210,000)
(approximately £164.3 million of £243 million)
24 (note 12)
0
8
26 (note 13)
Note 11: the 33 trials include two cases that were tried twice (Gloger v. R.J. Reynolds Tobacco Co. and Bessent-Dixon 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 24 adverse judgments appealed by RJRT as a result of judgments arising in the period 1 January 2018 to 31 December 2020:
a. 10 appeals remain undecided in the District Courts of Appeal; and one case has been affirmed but the rehearing time is pending;
b. 12 appeals were decided and/or closed in the District Court of Appeals. Of these 12 appeals, seven were affirmed in favour of plaintiff. One was reversed for a new trial, one was voluntarily
dismissed and judgment paid, one was involuntarily dismissed, and one was affirmed in part, reversed in part, for additur or a new trial, one was reversed in part for reinstatement of jury’s
punitive damages verdict and entry of amended final judgment.
Note 13: of the 26 adverse judgments appealed by RJRT (during the period 1 January 2018 to 31 December 2020):
a. 10 appeals remain undecided in the District Courts of Appeal and one case affirmed but rehearing time pending;
b. 15 were decided and/or closed in the District Courts of Appeal. Of these appeals, nine were affirmed in favour of plaintiff, one was reversed for a new trial, one was voluntarily dismissed
and judgment paid, one was involuntarily dismissed, one was affirmed in part, reversed in part, for additur or a new trial, one reversed in part for reinstatement of jury’s punitive damages
verdict and entry of amended final judgment. Note that one appeal was reversed in the Eleventh Circuit for entry of order granting Defendants’ motion for judgment in accordance with
the verdict; and
c. does not include two cases that were appealed prior to the relevant time period but which remain pending before the Florida Supreme Court.
36. By statute, Florida applies a US$200 million (approximately £146.3 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 2020.
37. In 2020, RJRT or Lorillard Tobacco paid judgments in eight Engle progeny cases. Those payments totalled US$73.7 million
(approximately £53.9 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 one case (Starr-Blundell v. R. J. Reynolds Tobacco Co.)
was recorded in Reynolds American’s consolidated balance sheet as of 31 December 2020 to the value of US$69,200 (approximately
£50,621).
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 230
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
(c) Individual Cases
39. As of 31 December 2020, 189 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 2020 as against the number pending as of
31 December 2019, 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 2020
US Case Numbers
31 December 2019
Change in Number
Increase/(Decrease)
189
1,400 (1,725)
1,227
48
135
1,773 (2,228)
1,228
51
54
(373) (503)
(1)
(3)
(Note 14) Out of the 189 pending individual smoking and health cases, four have received adverse verdicts or judgments in the court of first
instance or on appeal, and the total amount of those verdicts or judgments is approximately US$147 million (approximately £108 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 £220 million)
in three annual US$100 million (approximately £73 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 £36 million) for the plaintiffs’ counsel’s fees and expenses. RJRT’s portion of these payments was approximately US$86 million
(approximately £63 million); B&W’s was approximately US$57 million (approximately £41 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 2020, Lorillard Tobacco and/or Lorillard Inc. was a defendant in 48 Filter Cases. Since 1 January 2018,
Lorillard Tobacco and RJRT have paid, or have reached agreement to pay, a total of approximately US$31.3 million (approximately £22.8 million) in
settlements to resolve 124 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 £3.8 billion) trust fund to be used to address the possible
adverse economic impact of the MSA on tobacco growers.
BAT Annual Report and Form 20-F 2020 231
27 Contingent Liabilities and Financial Commitments Continued
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. Reynolds American‘s operating subsidiaries’ expenses and payments under the State
Settlement Agreements for 2017, 2018, 2019 and 2020 and the projected expenses and payments for 2021 and 2022 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
$2,762
$2,918
2020
$3,572
$2,848
2021
2022 and
thereafter
$>3,300
$>3,600
$>3,300
$>3,300
* 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. Reynolds American believes that
these settlement obligations may materially adversely affect the results of operations, cash flows or financial position of Reynolds
American 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 2019. 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 £804 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 sought payment under the Florida State Settlement Agreement of approximately
US$45 million (approximately £33 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 Reynolds American 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 claimed future annual losses of approximately US$30 million per year (approximately
£22 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 232
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
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. 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 £72 million)
with US$84 million (approximately £61 million) to the State of
Florida and US$16 million (approximately £12 million) to PM
USA. RJRT advised the auditor that it disputed 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. 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 judgment 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. Appellate briefing
was completed on 6 February 2020. Oral argument, originally
scheduled for 7 April 2020, was conducted through video
conference on 9 June 2020. On 29 July 2020, Florida’s Fourth
District Court of Appeal affirmed the Final Judgement.
On 12 August 2020, RJRT filed a motion for rehearing or for
certification to the Florida Supreme Court of the 29 July 2020
decision. On 10 June 2020, RJRT posted an additional bond in
the amount of US$84,102,984.75 (approximately £61.5 million),
over the US$103,694,155.08 (approximately £75.8 million)
bond initially posted, to cover additional disputed amounts
plus two years of statutory interest. The total amount RJRT
bonded for its appeal was US$187,797,139.83 (approximately
£138 million). RJRT’s motion for rehearing or certification to
the Florida Supreme Court was denied on 18 September 2020
and its motion for review was denied by the Florida Supreme
Court on 18 December 2020. On 5 October 2020, RJRT satisfied
the Final Judgment (approximately US$192,869,589.86
(approximately £140,000,000)) and paid approximately
US$3.1 million (approximately £2.2 million) of Florida’s attorneys’
fees but continues to litigate over the remaining approximately
US$300,000 (approximately £219,000) in attorneys’ fees.
RJRT’s appellate bonds were released to RJRT by order dated
5 November 2020. RJRT will seek indemnification from ITG.
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 Reynolds American
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 Reynolds
American 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 Reynolds
American 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,
Reynolds American 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 RJRT 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. Discovery is currently
ongoing with respect to the hearing to interpret the intent of
the asset purchase agreement on assumed liabilities.
BAT Annual Report and Form 20-F 2020 233
27 Contingent Liabilities and Financial Commitments Continued
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 £29 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. 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. A multi-day hearing to determine
whether ITG is liable for settlement payments was completed
on 9 September 2020. The parties filed post-hearing briefs on
13 November 2020; a decision is pending. A status conference
is scheduled for 3 March 2021. Settlement discussions are
ongoing. Under the proposed settlement framework, ITG and
RJR Tobacco would split the 2015-2019 payments, ITG would join
the settlement agreement and make all payments from 2020
forward, and RJR Tobacco and PM would resolve outstanding
payment calculation issues.
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 £91 million) with
respect to the Acquired Brands that were sold to ITG in the
Divestiture. The motion also claimed future annual losses of
an unspecified amount absent the court’s enforcement of the
Texas State Settlement Agreement. The State’s motion sought,
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. After completion of discovery,
a hearing on the motions to enforce was held on 30 October
2019. On 25 February 2020, the Court entered a Memorandum
Opinion and Order holding that RJRT remains liable for
settlement payments on the Acquired Brands under the Texas
Settlement Agreement. The Court further held that, although
ITG is unambiguously an assign within the meaning of the Texas
Settlement Agreement, a final determination of the scope of ITG’s
obligations under the APA is to be determined in the litigation
pending before the Delaware Court. Pursuant to the Court’s
direction, on 9 March 2020 the parties submitted a status report
indicating the remaining issues before the Court include RJRT’S
position that the Court should subtract the equity fee payments
made on the Acquired Brands by ITG’s distributors from the
settlement payments due by RJRT after including the Acquired
Brands in calculating damages, whether a final judgment should
be entered in favour of ITG, whether a partial final judgment
should be entered against RJRT and the State’s request for an
award of attorneys’ fees and costs against RJRT and/or ITG.
On 5 May 2020 the Court entered final judgment (later clarified
in a 14 August 2020 amended judgment) on the State’s motion,
ordering RJRT to pay all settlement amounts due on the Acquired
Brands under the Texas Settlement Agreement; granting RJRT
a full dollar-for-dollar set-off for all equity fee payments made on
the Acquired Brands by ITG or its distributors, but holding RJRT
liable for any equity fee payments that are lawfully refunded;
and ordering the case closed, to be reopened after ITG’s liability
under the APA is determined by the Delaware Court. ITG’s equity
fee payments to Texas for the Acquired Brands currently equal
approximately 90% of the annual Texas settlement payments for
those brands. Thus, the settlement payments for those Acquired
Brands exceed ITG’s equity fee payments by approximately
US$3 million (approximately £2 million) per year. As such,
RJRT would owe approximately US$3 million (approximately
£2 million) a year after an equity fee credit. Due to how the profit
penalty is allocated, RJRT will pay approximately US$10 million
(approximately £7 million) less in 2019 in Texas payments than
it would have paid had ITG joined, with that trend continuing in
future years. However, because ITG made equity fee payments
at a substantially lower rate before 2019, and because of how
the profit penalty was calculated before now, RJRT owes
approximately US$260.4 million (before interest) (approximately
£190 million) in past payments under the judgment through 2020.
On 3 and 4 June 2020, respectively, RJRT and ITG filed notices of
appeal of the 5 May 2020 judgment. In August 2020, RJRT filed a
notice of appeal, and in September 2020, the State and ITG filed
notices of appeal from the portion of the judgment denying the
motion to remove the equity fee set-off. RJRT moved to dismiss
ITG’s appeal for lack of jurisdiction, which motion was ordered by
the Fifth Circuit Court of Appeals to be argued with ITG’s appeal.
On 2 November 2020 RJRT filed its appellate brief. On 19 January
2021 the parties filed responses. Settlement discussions are
ongoing. Under the proposed settlement framework, ITG and
RJR Tobacco would split the 2015-2019 payments, ITG would join
the settlement agreement and make all payments from 2020
forward, and RJR Tobacco and PM would resolve outstanding
payment calculation issues.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 27 Contingent Liabilities and Financial Commitments Continued
53. In June 2015, ITG joined the Mississippi Settlement Agreement.
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.
234
Financial Statements
Notes on Accounts
Continued
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 £4 million)
through 2017. On 21 February 2019, the Chancery Court of
Jackson County, Mississippi held a scheduling conference
and issued a discovery schedule order. A hearing on PM USA’s
Motion to Enforce Settlement Agreement originally scheduled
for 3-6 May 2021 was adjourned on consent of the parties
to 11-12 August 2021. Settlement discussions are ongoing.
Under the proposed settlement framework, RJR Tobacco and
PM USA would resolve the outstanding payment calculation.
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 £3.6 million) difference in its 2018 payment
because of this issue. Determination of this issue may affect
RJRT’s annual payment thereafter. A hearing on Mississippi’s
Motion to Enforce Settlement Agreement is scheduled on
6-7 October 2021.
(e) UK — Based Group Companies
54. As at 31 December 2020, 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. Given the continued lack of activity, this case will now be
considered dormant and closed.
Tobacco-Related Litigation Outside the United States
55. As at 31 December 2020:
a. medical reimbursement actions are being brought in
Angola, Argentina, Brazil, Canada, Nigeria and South Korea;
b. class actions are being brought in Canada and Venezuela;
c. active tobacco product liability claims against the Group’s
companies existed in 12 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 £893,400) 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.
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 two Quebec class actions (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
£5.3 billion). As a result of this judgment, there were attempts
by the Quebec plaintiffs to obtain payment out of the CAD
$758 million (approximately £436 million) on deposit with the
court. 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. A court order
to stay all tobacco litigation in Canada against all defendants
(including RJRT and its affiliate R.J. Reynolds Tobacco
International Inc. (collectively, the RJR Companies)) until 4 April
2019 was obtained, and the need for a mediation process
to resolve all the outstanding litigation across the country
was recognised. 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
31 March 2021. 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.
BAT Annual Report and Form 20-F 2020 235
27 Contingent Liabilities and Financial Commitments Continued
Canadian province
British Columbia
Act pursuant to which
Claim was brought
Companies named as
Defendants
Current stage
Tobacco Damages
and Health Care
Costs Recovery
Act 2000
Imperial
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
Saskatchewan
Manitoba
Tobacco Damages
and Health Care
Costs Recovery
Act 2007
Tobacco Damages
Health Care Costs
Recovery Act 2006
Alberta
Crown’s Right of
Recovery Act 2009
Imperial, the UK
Companies and the
RJR Companies
have all been named
as defendants
and served.
Imperial, the UK
Companies and the
RJR Companies
have all been named
as defendants
and served.
Imperial, the UK
Companies and RJR
Companies have
all been named
as defendants
and served.
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 £67 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 £6.3 billion) and CAD $23.2 billion (approximately
£13.3 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 £161 billion) – CAD$630 billion (approximately
£362 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 £190 billion). On 31 January 2019,
the Province delivered a further expert report claiming an additional
amount between CAD $9.4 billion (approximately £5.4 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
£5.7 billion). No trial date has been set.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 236
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
Act pursuant to which
Claim was brought
Companies named as
Defendants
Current stage
Canadian province
Quebec
Tobacco Related
Damages and Health
Care Costs Recovery
Act 2009
Prince Edward Island Tobacco Damages
and Health Care
Costs Recovery
Act 2009
Nova Scotia
Tobacco Health Care
Costs Recovery
Act 2005
Imperial, Investments,
Industries, the RJR
Companies and
Carreras Rothmans
Limited have been
named as defendants
and served.
Imperial, the UK
Companies and RJR
Companies have
all been named
as defendants
and served.
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 £34.5 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 £18.5 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 £36.3 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. On 20 November 2020, the court issued a judgment in favour of the defendants and dismissing
all of the plaintiff’s claims. The NHIS filed an appeal of the judgment on 11 December 2020.
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.
BAT Annual Report and Form 20-F 2020 237
27 Contingent Liabilities and Financial Commitments Continued
68. On 19 August 2019, Souza Cruz filed an interlocutory appeal
71. On 12 November 2008, the São Paulo Court of Appeals
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.
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). On 12 March 2020, the court denied the request
for a stay. On 11 May 2020, the Company filed a petition to
intervene in Souza Cruz’s interlocutory appeal. On 17 June 2020,
AGU filed its opposition to Souza Cruz’s interlocutory appeal.
The Company filed a reply submission on 8 July 2020. On 15 July
2020, the court denied the interlocutory appeal. Souza Cruz
and the Company submitted on 6 August 2020 requests for
clarification of this appellate decision, which requests remain
pending. Souza Cruz and the Company filed their respective
defences on 12 May 2020. On 19 May 2020, a notice was sent
to the Public Prosecutor’s Office (MPF) regarding the AGU’s
request that the MPF join the action as a plaintiff. The MPF,
in its response filed 10 July 2020, rejected the AGU’s request,
and declined to join the action as party, but will act as an
‘inspector of the law’, which enables MPF to express its opinion
on matters in the case. The judge so far has not opened up the
term for the AGU to reply to the defences presented.
(b) Class Actions
Brazil
70. In 1995, the Associação de Defesa da Saúde do Fumante 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.
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. On 8 May 2020,
this appeal was rejected and plaintiffs filed a further appeal
that was in turn rejected on 28 August 2020. Plaintiffs filed no
further appeal and the Superior Court of Justice certified the
decision in favour of defendants on 22 September 2020, which
closed the case.
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 two Quebec Class
Actions, as further described below. Imperial’s share of the
judgment is approximately CAD $9.2 billion (approximately
£5.3 billion). As a result of this judgment, there were attempts
by the Quebec plaintiffs to obtain payment out of the CAD
$758 million (approximately £436 million) on deposit with the
court. JTI-MacDonald Corp (a co-defendant in the cases)
filed for creditor protection under the CCAA on 8 March 2019.
A court order to stay all tobacco litigation in Canada against
all defendants (including the RJR Companies) until 4 April
2019 was obtained, and the need for a mediation process to
resolve all the outstanding litigation across the country was
recognised. 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
31 March 2021. 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 238
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
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.
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
137-138). 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
£8.9 billion), most of which was on a joint and several basis, of
which Imperial’s share was CAD$10.4 billion (approximately
£5.9 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 £650 million), of
which Imperial’s share was approximately CAD$742 million
(approximately £426 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 £565 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
£62 million) between 31 December 2015 and 30 June 2017.
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 £7.9 billion)
as of 1 March 2019, with Imperial’s share being reduced to
approximately CAD $9.2 billion (approximately £5.2 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
£649 million), of which Imperial’s share was recalculated
by the Court of Appeal as CAD $759 million (approximately
£436 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,
the Company, Carreras Rothmans Limited and Ryesekks p.l.c.
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.
BAT Annual Report and Form 20-F 2020 239
27 Contingent Liabilities and Financial Commitments Continued
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, Carreras Rothmans Limited and
Ryesekks p.l.c. 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 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.
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 2020, the jurisdictions with the most active
individual cases against Group companies were, in descending
order: Brazil (31), Italy (14), Chile (8), Canada (6), Argentina (5)
and Ireland (2). There were a further two jurisdictions with one
active case only. Out of the 68 active individual tobacco related
personal injury claims, one case in Argentina (Baldassare)
received an unfavourable verdict as at 31 December 2020.
In that case, a first instance judgment, issued on 28 December
2020, awarded damages to the plaintiff in the amount of ARS
685,976 (approximately £6,000) in compensatory damages and
ARS 2,500,000 (approximately £22,000) in punitive damages
(plus interest). This judgment is subject to appeal.
Non-Tobacco Related Litigation
VUSE Litigation
85. On 15 May 2020, four public school districts in the State of
Illinois (Peoria Public Schools District 150, Hall Township High
School District 502, Marion Community School District 2, and
La Moille Community Unit School District 303) filed a putative
class action complaint in California federal court, individually
and on behalf of all similarly situated school districts in Illinois,
against Reynolds American, RJR Vapor, the Company, Lorillard
LLC and LOEC, Inc., as well as against JUUL Labs Inc., Altria
Group Inc., Altria Client Services Inc., Altria Group Distribution
Company, Nu Mark LLC, Nu Mark Innovations Ltd., Imperial
Brands plc, Fontem Ventures BV, Fontem US Inc., and Walgreen
Co. Plaintiffs have asserted several claims against Reynolds
American, RJR Vapor, Lorillard LLC, and LOEC, Inc. and the
Company, including claims of public nuisance alleging that
the defendants negligently or intentionally marketed vapour
products to students enrolled in the plaintiffs’ schools, as well
as claims for negligence, misrepresentation, fraud, unjust
enrichment and alleged violation of Illinois consumer fraud
and trade practices statutes. The complaint was served on
13 July 2020 on Reynolds American, RJR Vapor, Lorillard LLC,
and LOEC, Inc., and on 3 August 2020, Reynolds American,
RJR Vapor, Lorillard LLC, and LOEC, Inc. moved for dismissal
of the complaint for lack of personal jurisdiction, improper
venue and failure to state a claim for relief. On 3 August 2020,
the Company moved to dismiss the complaint for improper
service and lack of personal jurisdiction. The case was 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. On 13 August 2020, plaintiffs filed a
notice of voluntary dismissal without prejudice, and the case
was closed.
86. On 22 July 2020, Nicholas Bernston filed a personal injury
action in the Northern District of Oklahoma against JUUL Labs
Inc. (JUUL), Altria Client Services, LLC, RJR Vapor, Reynolds
American, and others. The complaint seeks damages for
personal injuries (including pneumonia and acute respiratory
failure) allegedly resulting from vaping on several theories,
including strict liability, negligence, and breach of implied
warranty of merchantability. On 24 July 2020, JUUL notified the
JPML that this case could be a potential tag-along in the JUUL
MDL. On 5 August 2020, the Judicial Panel on Multidistrict
Litigation entered a conditional transfer order transferring the
case to the Northern District of California. That order became
effective on 12 August 2020, and this case now is a member
case in the JUUL multidistrict litigation (MDL). On 13 October
2020, RJR Vapor and Reynolds American moved to dismiss the
complaint or, in the alternative, for a stay or a suggestion of
remand to the Northern District of Oklahoma. On 16 October
2020, the MDL court issued an order staying those motions
to dismiss. The case will remain pending against Reynolds
American and RJR Vapor, but they will not be subject to
discovery or other pretrial obligations absent further order from
the court.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 240
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
Croatian Distributor Dispute
87. 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 £48 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 £48 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 has
decided that 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
88. Following the Company’s acquisition of the remaining 57.8%
of Reynolds American in July 2017, pursuant to North Carolina
law, under which Reynolds American was incorporated, a
number of Reynolds American shareholders dissented and
asserted their rights to a judicial appraisal of the value of their
Reynolds American stock. On 29 November 2017, Reynolds
American filed a Complaint for Judicial Appraisal in state court
in North Carolina against 20 dissenting shareholders holding an
aggregate of approximately 9.65 million shares. The complaint
asked the court to determine the fair value of the dissenting
shareholders’ shares in Reynolds American and any accrued
interest. A trial was held in June 2019, at which the dissenters
sought US$92.17 per share plus interest. On 27 April 2020, the
court issued its final judgment upholding Reynolds American’s
proposed valuation of $59.64 per share and concluding that
no further payment is due to the dissenters for their shares.
Dissenting shareholders holding an aggregate of approximately
6.52 million shares filed a notice of appeal to the North Carolina
Supreme Court on 21 May 2020, and briefing of the appeal
concluded on 14 December 2020.
Patents Litigation
89. Certain Group companies are party to a number of patent
litigation cases and procedural challenges concerning the
validity of patents owned by or licensed to them and/or the
alleged infringement of third-parties’ patents.
90. On 22 June 2018, an affiliate of Philip Morris International (PMI)
commenced proceedings against British American Tobacco
Japan, Ltd. (BAT Japan) in the Japanese courts challenging the
import, export, sale and offer of sale of the glo device and of
the NeoStiks 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 affiliate’s Japanese patents.
Damages for the glo device and NeoStik are claimed in the
court filing, to the amount of 100 million Yen (approximately
£708,000). The PMI affiliate has also filed a request for
injunction with respect to the glo device. BAT Japan denies
infringement and is challenging the validity of the two PMI
affiliate’s Japanese patents.
91. Fuma International LLC (Fuma) filed two separate patent
infringement complaints in the US District Court for the Middle
District of North Carolina against RJR Vapor on 6 March
2019 and 2 July 2019, each alleging that Vuse Solo and Vuse
Ciro products infringe a patent. The two complaints were
consolidated into a single proceeding involving both asserted
Fuma patents. Fuma seeks monetary damages in an amount
ranging from US$64.0 million (approximately £47 million)
to US$135.4 million (approximately £99 million) (which the
Court may (but is not obligated to) increase up to 3x the
actual damages awarded should RJR Vapor be found to have
wilfully infringed) and an injunction. RJR Vapor filed its answer,
affirmative defences and declaratory judgment counterclaim
for patent unenforceability based on inequitable conduct on
26 July 2019. RJR Vapor’s inequitable conduct counterclaim was
dismissed by the Court on 6 March 2020. The Court issued its
claim construction order on 23 March 2020, which is consistent
with RJR Vapor’s non-infringement positions for Vuse Ciro
and Vuse Solo products. The first court ordered mediation
session was held on 23 January 2020 and a second was held on
30 October 2020. Dispositive motions were filed on 20 October
2020 (Fuma moved for summary judgment of infringement and
RJR Vapor moved for summary judgment of non-infringement).
Briefing on the summary judgment motions was completed on
25 November 2020.
92. On 9 April 2020, Nicoventures Trading Limited (Nicoventures)
commenced an action in the England and Wales High Court
(Patents Court) against Philip Morris Products S.A. (PMP) for
revocation against three divisional patents in the same family,
of which PMP is the proprietor (a further divisional patent in
the same family was added into the revocation action on 9 July
2020). On 12 May 2020 PMP filed its defence together with a
counterclaim for patent infringement against Nicoventures
and Investments concerning prototype examples or production
samples of certain ‘glo’ tobacco heating devices. PMP are
seeking an injunction, an order for delivery up or a destruction
upon oath of all infringing articles, and either an account of
profits or damages on commercial sales (and interest thereon).
On 12 June 2020, Nicoventures and Investments filed their
defence to the counterclaim. The trial of this action will take
place in the week commencing 17 May 2021.
BAT Annual Report and Form 20-F 2020 241
27 Contingent Liabilities and Financial Commitments Continued
93. On 28 May 2020 Altria Client Services LLC and U.S.
Smokeless Tobacco Company LLC commenced proceedings
against RJR Vapor before the US District Court for the Middle
District of North Carolina against the vapour products Vuse
Vibe and Vuse Alto, and the tin used in the modern oral product
Velo. Nine patents in total were asserted: two against Vibe,
four against Alto and three against Velo. On 5 January 2021,
Altria filed an Amended Complaint that adds Modoral Brands,
Inc. as a defendant with respect to the Velo product claims.
The plaintiffs have sought damages but have not to date
sought preliminary or permanent injunctions. RJR Vapor has
responded to the complaint. Pleadings are closed, and fact
discovery is proceeding. The parties have agreed on a mediator,
but have not set a date for mediation. The court issued a
scheduling order on 28 October 2020. Significant dates in that
order include a claim construction hearing tentatively set for
the week of 22 March 2021 and the close of fact discovery on
23 June 2021. No trial date has been set.
94. On 9 April 2020, RAI Strategic Holdings, Inc. and RJR Vapor
commenced an action in the US District Court for the Eastern
District of Virginia against Altria Client Services LLC, Philip
Morris USA, Inc., Altria Group, Inc., Philip Morris International,
Inc., and Philip Morris Products S.A. (collectively, Philip Morris)
for infringement of six patents based on the importation and
commercialisation within the United States of IQOS. On 8 May
2020 and 12 June 2020, Philip Morris filed Inter Partes Review
(IPR) petitions in the US Patent Office challenging the validity of
each of the six patents asserted. On 29 June 2020, Philip Morris
asserted counterclaims alleging that RJR Vapor infringes
five patents. On 24 November 2020, the court issued a claim
construction order that determined that each disputed term
would have its plain and ordinary meaning. On 4 December
2020, the magistrate judge issued an order staying RJR Vapor
and Philip Morris’s patent claims pending a decision by the
US Patent Office regarding whether to proceed with the
IPRs. At the time of the stay, fact and expert discovery was
ongoing and was scheduled to conclude 26 January 2021.
If the stay is lifted, fact and expert discovery will resume
and it is expected that the date for close of fact and expert
discovery will be rescheduled based on the date the stay is
lifted (i.e., approximately 8 weeks after the date the stay is
lifted). On 13 January 2021, the USPTO instituted one of the
IPRs. The parties submitted a joint status report on 19 January
2021. On 20 January 2021, Philip Morris filed a motion to lift
the stay solely as to the counterclaims against RJRV; RJRV
is opposing Philip Morris’s motion and filed its opposition on
28 January 2021.
95. On 27 November 2020 Philip Morris filed a complaint before the
Regional Court Mannheim in Germany against British American
Tobacco (Germany) GmbH (BAT Germany) alleging that the
sale, offer for sale and importation of Vype ePod products
infringes a patent. Philip Morris is seeking an injunction, a recall
of product from commercial customers and a declaratory
judgment for damages. The trial of this action will take place on
15 June 2021.
96. On 11 December 2020 Philip Morris filed a complaint before the
Regional Court Dusseldorf in Germany against BAT Germany
alleging that the sale, offer for sale and importation of glo
TABAK HEATER and neo STICK products infringe a patent.
Philip Morris is seeking an injunction, a recall of product
from commercial customers and a declaratory judgment
for damages.
Mozambican IP Litigation
97. 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.
Malawi Group Action
98. In December 2020, the Company and British American Tobacco
(GLP) Limited (GLP) were named as defendants in a claim
made in the English High Court by around 7,500 Malawian
tobacco farmers and their family members. The claim also
names Imperial Brands plc and five affiliates as defendants.
The claimants allege they were subjected to unlawful and
exploitative working conditions on tobacco farms from which
it is alleged that the defendants indirectly acquire tobacco.
They seek unquantified damages (including aggravated and
exemplary damages) for the torts of negligence and conversion
and unquantified personal and proprietary remedies for
restitution of unjust enrichment. They also seek an injunction
to restrain the commission of further torts of conversion or
negligence by the defendants. The Company and GLP intend
vigorously to defend the claim.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 242
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
Qatar Customs Authority Claims
99. On 12 November 2020, British American Tobacco Middle
East W.L.L (formerly British American Tobacco Middle East
SPC) (BATME), along with its distributor in Qatar, Ali Bin Ali
Establishment (ABA), filed a case before the Qatar Court of First
Instance which challenges a decision of the Qatar Customs
Authority dated 16 August 2020 ordering ABA to pay a total
amount of QAR 160,531,588 (approximately £33 million) in
customs duties and penalties in relation to 27 consignments
of cigarettes imported into Qatar by ABA. BAT ME’s potential
liability in respect of the foregoing amounts arises from certain
contractual arrangements with ABA. BAT ME and ABA strongly
assert that the additional customs duty and penalties imposed by
the Qatar Customs Authority are inconsistent with the customs
law of the GCC. The case is in the very early stages, and the Qatar
Customs Authority has not yet filed its pleading in response to
the claim.
Saudi Arabia Customs Claim
100. On 25 January 2021, Walid Ahmed Mohammed Al Naghi for
Trading Establishment (Al Naghi), a former distributor for the
Group’s operating companies in the Middle East, filed a claim
in the Commercial Court in Jeddah, Saudi Arabia, seeking SAR
2,105,356,121 (approximately £410 million) for reimbursement of
funds allegedly due under contract. Al Naghi did not formally
name any Group entity as a defendant in the claim. The claim
was dismissed orally by the Court on 9 February 2021.
Rentko Asbestos Action
101. On 15 January 2021, plaintiffs in an individual asbestos personal
injury action (Rentko), originally filed 5 October 2020 in the New
York City Asbestos Litigation court, filed an amended complaint,
which names as defendants the Company, BATUS Holdings,
Inc., British American Tobacco (Brands), Inc., and RJRT, along
with various other defendants. The amended complaint was
served 20 January 2021 on BATUS Holdings, Inc. and British
American Tobacco (Brands), Inc., and served 22 January 2021 on
RJRT. The amended complaint alleges that one of the plaintiffs
was exposed to the defendants’ asbestos and asbestos-
contaminated talcum powder products, which allegedly caused
her to develop mesothelioma, and asserts claims under state
law, including for negligence, breach of warranty, product liability,
negligent misrepresentation, fraudulent concealment, and civil
conspiracy. A further amended complaint was filed on 27 January
2021, which names Reynolds American as a defendant as an
alleged successor in interest to the Company, and which was
served on Reynolds American on 5 February 2021. Plaintiffs seek
unspecified compensatory and punitive damages jointly and
severally against the defendants.
Fox River
Background to environmental liabilities arising out of
contamination of the Fox River:
102. 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).
103. 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 £603 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 £180 million).
104. 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.
105. 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, approved by the District Court of Wisconsin on
23 August 2017.
106. The principal terms of that Consent Decree, in summary, are
as follows:
a. NCR is obliged to perform and fund all of the remaining Fox
River remediation work by itself.
b. The US Government enforcement proceedings were
settled, with NCR having no liability to meet the US
Government’s claim for costs it had incurred in relation to
the clean-up to date, a secondary responsibility to meet
certain future costs, and no liability to the US Government
for NRDs.
c. NCR ceased to pursue its contribution claims against the
other PRPs and in return received contribution protection
preventing other PRPs from pursuing their contribution
claims against NCR and existing claims for contribution
being dismissed by order of the Court. NCR does, 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 also agreed to cease pursuance of claims against
the other PRPs, subject to retention of the right to reinstate
its claims if the other PRPs decide to continue to pursue
certain claims against Appvion.
107. 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.
108. In NCR’s Form 10-K Annual Report for the year ended
31 December 2019 NCR disclosed that, in November 2019, an
arbitral tribunal had awarded US$10 million (approximately
£7 million) to a remediation general contractor engaged by
the LLC formed by NCR and Appvion to perform the clean-
up operation of the Fox River. It further indicated that it
expected its indemnitors and co obligors to bear responsibility
for the majority of the award, estimating its own share as
approximately one fourth of the award.
BAT Annual Report and Form 20-F 2020 243
27 Contingent Liabilities and Financial Commitments Continued
Industries’ involvement with environmental liabilities arising out of
the contamination of the Fox River:
109. 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 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 proceedings brought
against Sequana, PricewaterhouseCoopers LLP (PwC) and
other former advisers.
110. Until May 2012, Appvion and Windward Prospects Limited
(Windward) (another former Group subsidiary) had paid a 60%
share of the clean-up costs. 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.
111. 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
112. On 30 September 2014, Industries entered into a 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 £7 million)
of funding and Appvion has contributed US$25 million
(approximately £18 million) for Fox River and agreed to
contribute US$25 million (approximately £18 million) for the
Kalamazoo River (see further below). Appvion entered Chapter
11 bankruptcy protection on 1 October 2017.
113. 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
£397 million) in 2008 and €135 million (approximately
£121 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) (together, the Sequana Proceedings).
114. The Windward Dividend Claim and BAT section 423 Claim
were heard together in the High Court, with judgment handed
down on 11 July 2016. The court upheld the BAT section 423
Claim and, by way of a consequentials judgment dated
10 February 2017, ordered that Sequana pay to BTI an amount
up to the full value of the 2009 Dividend plus interest, which
equates to around US$185 million (approximately £135 million).
The Court dismissed the Windward Dividend Claim.
115. The parties pursued cross appeals on the judgment, during
which time Sequana was granted a stay in respect of the
above payments. That stay was lifted in May 2017, three
months after Sequana had entered into an insolvency process
in France seeking court protection (the Sauvegarde). 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.
116. 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 £135 million). Because of
Sequana’s ongoing insolvency process, execution of that
judgment is stayed. 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.
117. All parties to the appeal sought permission from the Court
of Appeal for a further appeal to the UK Supreme Court.
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. The hearing of BTI’s appeal
was listed to take place on 25 and 26 March 2020 but was
adjourned because of the Covid-19 pandemic. The hearing is
now listed to take place on 4 and 5 May 2021.
118. 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 had been stayed
pending the outcome of the Sequana Proceedings. Once that
stay was lifted, PwC applied 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 granted
PwC permission to appeal in respect of part of its dismissal of
the application and the hearing of that appeal was heard by the
Court of Appeal on 27 and 28 October 2020. On 11 January 2021,
the Court of Appeal handed down judgment dismissing PwC’s
appeal. The Court of Appeal also refused PwC’s application
for permission to appeal to the Supreme Court and made an
order requiring PwC to file its Defence within two months
of 11 January 2021. PwC has subsequently applied directly
to the Supreme Court for permission to appeal the Court of
Appeal’s decision.
119. An agreed stay is also in place in respect of BTI’s separate
assigned claim against Freshfields Bruckhaus Deringer.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 244
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
120. 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 2019, Industries paid £32 million in
respect of clean-up costs and is potentially liable for further
costs associated with the clean-up. From January through
December 2020, Industries paid £2 million. Industries has a
provision of £70 million which represents the current best
estimate of its exposure – see note 20.
Kalamazoo
121. NCR is also being pursued by Georgia-Pacific, a designated
PRP in respect of the Kalamazoo River in Michigan, in relation
to remediation costs caused by PCBs released into that river.
122. On 26 September 2013, the Michigan Court held that NCR
was liable as a PRP on the basis that it had arranged for
the disposal of hazardous material for the purposes of the
Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA).
123. The second phase of the Kalamazoo trial to determine the
apportionment of liability amongst PRPs took place between
September and December 2015. On 29 March 2018, Judge
Jonker ordered that NCR pay 40% of Georgia-Pacific past
costs (around US$22 million (approximately £16 million)).
The question of future remediation costs was not determined.
124. The parties commenced appeal proceedings against the
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.
125. It is anticipated that NCR will look to Industries to pay 60%
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.
126. Industries also anticipates that NCR may seek to recover from
Appvion (subject to a cap of US$25 million (approximately
£18 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.
127. 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
was approved by the District Court for the Western District of
Michigan on 2 December 2020. The payments to be made on
the face of the Consent Decree in respect of such work total
approximately US$245 million (approximately £179 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.
128. 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.
129. 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.
Other environmental matters
130. Reynolds American 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 CERCLA with
respect to several superfund sites. Reynolds American 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
Reynolds American or its subsidiaries.
Criminal investigations
131. The Group has been investigating, and is aware of
governmental authorities’ investigations into, allegations of
misconduct. The Group is cooperating with the authorities’
investigations, including the DOJ and OFAC in the United
States, which are conducting an investigation into suspicions
of breach of sanctions. In January 2021, the Group was
informed that the investigation by UK’s Serious Fraud Office
(the SFO) into suspicions of corruption in the conduct of
business by Group companies and associated persons
had been closed. The SFO stated that it would continue to
offer assistance to the ongoing investigations of other law
enforcement partners.
132. 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.
BAT Annual Report and Form 20-F 2020 245
27 Contingent Liabilities and Financial Commitments Continued
Closed litigation matters
133. The following matters on which the Company reported in the contingent liabilities and financial commitments note 27 to the
Company’s 2019 financial statements have been dismissed, concluded or resolved as noted below:
Matter
Jurisdiction
Companies named as Defendants
Description
Disposition
Vuse Litigation (Whatcom County)
USA
Cyprus competition investigation
Cyprus
Reynolds American, RJR Vapor,
the Company, Lorillard LLC and
LOEC Inc.
B.A.T. (Cyprus) Ltd
Public Nuisance
Investigation
Voluntary dismissal
by plaintiff
Investigation ended
without liability to
B.A.T. (Cyprus) Ltd
General Litigation Conclusion
134. 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.
135. 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 paid into court. 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.
136. 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.
Other contingencies
137. 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.
138. 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.
139. ITG Indemnity. In the Divestiture, Reynolds American 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, Reynolds American 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, Reynolds
American 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 Reynolds American under the terms
of this indemnity, and Reynolds American has, subject to a reservation of rights, agreed to defend and indemnify ITG pursuant to the
terms of the indemnity. Reynolds American has tendered an action to ITG under the terms of this indemnity, and ITG has, subject to
a reservation of rights, agreed to defend and indemnify Reynolds American and its affiliates 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 246
Financial Statements
Notes on Accounts
Continued
27 Contingent Liabilities and Financial Commitments Continued
140. 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.
141. SFRTI Indemnity. In connection with the 13 January 2016 sale
by Reynolds American 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 £19 million).
142. 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.
143. Except as otherwise noted above, Reynolds American is not
able to estimate the maximum potential of future payments, if
any, related to these indemnification obligations.
144. 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
and Netherlands.
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.
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 following matters are in or 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 BRL1,778 million (£250 million) to cover tax,
interest and penalties.
Souza Cruz appealed all reassessments. Regarding the first
assessments (2004-2006) Souza Cruz’s appeals were rejected
by the ultimate Administrative Court after which Souza Cruz filed
two lawsuits with the Judicial Court to appeal the reassessments.
The judgment in respect of the reassessment of corporate income
tax has been decided in favour of Souza Cruz by the first level of
the Judicial Court and Souza Cruz is waiting to see whether the
Brazilian Tax Authorities will appeal the judgment. The lawsuit
appealing the social contribution tax is pending judgment in the
first level of the Judicial Court. 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.
BAT Annual Report and Form 20-F 2020 247
27 Contingent Liabilities and Financial Commitments Continued
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 £1,220 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.
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 £154 million.
On 3 February 2020, the certified Court Order was received. The Government filed a Review Petition on 25 March 2020 in the Appellate
Division of the Supreme Court of Bangladesh against the judgment. The matter is yet to be taken up for hearing.
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 £122 million. Management believes that the tax claims are unfounded and has appealed
the tax claims. These cases are under review by the Council of State. During hearings in August 2020, the courts decided, in both cases, to
transfer the files to court appointed experts but these sessions have not yet been scheduled. Progress on the case, and further hearings,
have been delayed due to COVID-19.
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 £54 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
£5 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 2022. Due to the
uncertain outcome of the case no asset has been recognised in relation to this ruling.
Turkey
British American Tobacco Tutun Mamulleri Sanayi ve Ticaret Anonim Sirketi (BAT Tutun) has been subject to tax audits on inventory
movements for the years 2015, 2016 and 2019. In November 2020, BAT Tutun received a tax assessment amounting to £100 million
comprising principal, penalty and interest for the years 2015 and 2016. The Group is not, at the date of this announcement, aware of
any assessment in relation to 2019. Management is engaging with the tax authorities on the matter but believes that the tax claims
are unfounded.
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 by 2022.
The Group’s Brazilian subsidiary, Souza Cruz, had filed an individual lawsuit to establish that it had overpaid taxes to the government.
Based on favourable court decisions in 2020 and 2019 the Group has recognised £58 million (2019: £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 £507 million.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 248
Financial Statements
Notes on Accounts
Continued
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
2020
£m
2019
£m
63
17
6
86
15
20
–
35
Financial commitments arising from short-term leases and leases of low-value assets that are not capitalised under IFRS 16 Leases are
£6 million (2019: £10 million) for property and £3 million (2019: £2 million) for plant, equipment and other assets.
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 was £42 million at
31 December 2019. These commitments expired during 2020.
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 2020, 2019 and 2018. 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 used 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
2020
£m
162
45
22
46
23
(24)
14
120
(5)
(137)
(8)
(4)
40
–
(35)
–
5
(2)
3
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
BAT Annual Report and Form 20-F 2020 249
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
2020
£m
2,354
1,251
(132)
(528)
2,945
2019
£m
2,403
768
(131)
(447)
2,593
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 £992 million,
of which £878 million is restricted (2019: £595 million, £445 million of which was restricted) (note 17) and inventories of £114 million
(2019: £117 million). Included in non-current assets for 2020 and 2019 is goodwill of £2.3 billion subject to impairment reviews (note 8).
Included in current liabilities are trade and other payables of £284 million (2019: £310 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, with the Group increasing its stake in Bentoel to 92%. Simultaneously,
the Group amended the total return swap to take account of an additional 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..
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 250
Financial Statements
Notes on Accounts
Continued
29 Summarised Financial Information
The following summarised 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 in respect of the guarantees of:
The financial information relates to the guarantees of:
– US$12.35 billion of outstanding bonds issued by B.A.T Capital Corporation (BATCAP) in connection with the acquisition of Reynolds,
including registered bonds issued in exchange for the initially issued bonds (the 2017 Bonds);
– US$10.65 billion of outstanding bonds issued by BATCAP pursuant to 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; and
– US$1.50 billion of outstanding bonds issued by BATIF pursuant to 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.
As of July 28, 2020, all relevant Group entities suspended their reporting obligations with respect to the US$7.7 billion (2019: US$10.3 billion)
of Reynolds unsecured notes and US$40.9 million (2019: US$149.5 million) of Lorillard unsecured notes. As such, no summarised financial
information is provided with respect to these securities.
As described below, Reynolds American Inc. (Reynolds American) is a subsidiary guarantor of all outstanding series of BATCAP and
BATIF bonds. Under the terms of the indentures governing such notes, any subsidiary guarantor (including Reynolds American) other
than BATCAP or BATIF, as applicable, BATNF and BATHTN, will automatically and unconditionally be released from all obligations under
its guarantee, and such guarantee shall thereupon terminate and be discharged and of no further force or effect, in the event that (1) its
guarantee of all then outstanding notes issued under the Group’s EMTN Programme is released or (2) at substantially the same time its
guarantee of the debt securities is terminated, such subsidiary guarantor is released from all obligations in respect of indebtedness for
borrowed money for which such subsidiary guarantor is an obligor (as a guarantor or borrower). Under the EMTN Programme, Reynolds
American’s guarantee is released if at any time the aggregate amount of indebtedness for borrowed money, subject to certain exceptions,
for which Reynolds American is an obligor does not exceed 10% of the outstanding long-term debt of BAT as reflected in the balance sheet
included in BAT’s most recent publicly released interim or annual consolidated financial statements.
Reynolds American’s guarantee may be released notwithstanding Reynolds guaranteeing other indebtedness, provided Reynolds
American’s guarantee of outstanding notes issued under the EMTN Programme is released. If Reynolds American’s guarantee is released,
BAT is not required to replace such guarantee, and the debt securities will have the benefit of fewer subsidiary guarantees for the
remaining maturity of the debt securities.
Note: The following summarised financial information report the unconsolidated contribution of each applicable company to the Group’s
consolidated 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 Reynolds 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 Reynolds 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. To the extent any such financial information
provided in these financial statements relates to the US business or RAI (and/or the Reynolds Group), it is provided as an explanation of the
US business’s or RAI’s (and/or the Reynolds Group’s) primary US GAAP based financial statements and information.
The subsidiaries disclosed below are wholly-owned and the guarantees provided are full and unconditional, and joint and several:
– British American Tobacco p.l.c. (as the parent guarantor), referred to as ‘BAT p.l.c.’ in the financials below;
– B.A.T Capital Corporation (as an issuer or a subsidiary guarantor, as the case may be), referred to as ‘BATCAP’ in the financials below;
– 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;
– B.A.T. Netherlands Finance B.V. (as a subsidiary guarantor), referred to as ‘BATNF’ in the financials below;
– Reynolds American Inc. (as a subsidiary guarantor), referred to as ‘RAI’ in the financials below; and
– British American Tobacco Holdings (The Netherlands) B.V. (as a subsidiary guarantor of the 2017 Bonds only), referred to as ‘BATHTN’ in
the financials below.
BAT Annual Report and Form 20-F 2020 251
29 Summarised Financial Information Continued
In accordance with Regulation S-X 13-01, information in respect of investments in subsidiaries that are not issuers or guarantors has
been excluded from non-current assets as shown in the balance sheet table below. The “BATHTN” column in the summarised financial
information is only applicable in the context of the 2017 Bonds. British American Tobacco Holdings (The Netherlands) B.V. (‘BATHTN’) is
not an issuer nor guarantor of any of the other securities referenced in this note. None of the issuers or other guarantors has material
balances with or an investment in BATHTN. Investments in subsidiaries represents share capital acquired in relation to or issued by
subsidiary undertakings.
Year ended 31 December 2020
Income Statement
Revenue
(Loss)/profit from operations
Dividend income
Net finance income/(costs)
Profit/(loss) before taxation
Taxation on ordinary activities
Profit/(loss) for the year
Intercompany Transactions – Income Statement
Transactions with non-issuer/non-guarantor subsidiaries
income/(expense)
Transactions with non-issuer/non-guarantor subsidiaries
net finance income/(cost)
Dividend income from non-issuer/non-guarantor subsidiaries
Year ended 31 December 2019
Income Statement
Revenue
Loss from operations
Dividend income
Net finance income/(costs)
Profit/(loss) before taxation
Taxation on ordinary activities
Profit/(loss) for the year
Intercompany Transactions – Income Statement
Transactions with non-issuer/non-guarantor subsidiaries
(expense)/income
Transactions with non-issuer/non-guarantor subsidiaries
net finance income/(cost)
Dividend income from non-issuer/non-guarantor subsidiaries
BAT p.l.c.
£m
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Summarised Financial Information
–
(112)
5,050
131
5,069
(14)
5,055
–
(1)
–
417
416
(101)
315
(118)
(1)
5
5,050
996
–
–
(2)
–
174
172
4
176
4
747
–
–
–
–
–
–
–
–
–
–
–
–
(5)
4,845
(758)
4,082
170
4,252
22
32
4,845
–
–
224
1
225
–
225
–
–
224
BAT p.l.c.
£m
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Summarised Financial Information
–
(125)
6,090
121
6,086
–
6,086
–
(2)
–
154
152
(35)
117
–
(5)
–
195
190
8
198
(125)
(2)
(5)
12
6,090
773
–
563
–
–
–
–
–
–
–
–
–
–
–
–
(2)
3,993
(497)
3,494
125
3,619
19
33
3,993
–
(5)
195
1
191
1
192
–
–
195
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 252
Financial Statements
Notes on Accounts
Continued
29 Summarised Financial Information Continued
As at 31 December 2020
Balance Sheet
Non-current assets
Current assets
Non-current liabilities
Non-current borrowings
Other non-current liabilities
Current liabilities
Current borrowings
Other current liabilities
Intercompany Transactions – Balance Sheet
Amounts due from non-issuer/non-guarantor subsidiaries
Amounts due to non-issuer/non-guarantor subsidiaries
Investment in subsidiaries (that are not issuers or guarantors)
As at 31 December 2019
Balance Sheet
Non-current assets
Current assets
Non-current liabilities
Non-current borrowings
Other non-current liabilities
Current liabilities
Current borrowings
Other current liabilities
Intercompany Transactions – Balance Sheet
Amounts due from non-issuer/non-guarantor subsidiaries
Amounts due to non-issuer/non-guarantor subsidiaries
Investment in subsidiaries (that are not issuers or guarantors)
BAT p.l.c.
£m
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Summarised Financial Information
236
7,070
1,580
1,571
9
52
9
43
18,991
3,404
17,867
17,867
–
4,444
4,329
115
7,031
3
27,234
16,088
3,139
–
10,332
30,601
15,326
15,243
83
24,038
23,478
560
38,761
19,550
718
1,509
22
1,509
1,509
–
22
22
–
402
268
8,885
8,823
62
972
200
772
26
15
6
–
6
2
1
1
–
–
–
620
62
23,820
15
1
1,580
BAT p.l.c.
£m
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Summarised Financial Information
236
6,732
1,580
1,571
9
139
13
126
6,690
101
27,234
12,722
6,379
15,405
15,168
237
3,800
3,706
94
15,415
2,773
–
16,188
25,441
14,918
14,590
328
25,273
24,816
457
38,851
19,190
718
–
–
–
–
–
–
–
–
–
–
–
439
749
6,864
6,741
123
3,590
2,979
611
1,160
81
24,012
39
16
10
–
10
3
1
2
16
1
1,419
BAT Annual Report and Form 20-F 2020 253
30 Accounting Policy Changes
Adoption of new accounting standards effective 1 January 2019: Adoption of IFRS 16
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 for lessees has been removed.
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 took 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.
The impact of IFRS 16 to the Group’s balance sheet at 1 January 2019 was the capitalisation of £610 million of right-of-use assets and lease
liabilities of £607 million. The weighted average incremental borrowing rate applied in discounting lease commitments at that date was
5.60%. The impact of IFRS 16 to the Group’s results and equity in 2019 was not material.
Adoption of new accounting standards effective 1 January 2018: Adoption of IFRS 9
Adoption of IFRS 9
With effect from 1 January 2018, the Group 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, was recognised as a restatement of
opening reserves in 2018, and was £38 million, arising from the impairment of financial assets under the expected loss model.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 254
Financial Statements
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 2020 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 99% of the Group revenue and 100% of profit from operations.
Subsidiary Undertakings
Albania
Rruga e Kavajes, Ish Kombinati Ushqimor, Tirana, Albania
British American Tobacco – Albania SH.P.K.
Austria
Dr. Karl Lueger Platz 5, 1010, Wien, Austria
British American Tobacco (Austria) GmbH
Algeria
Industrial Zone, Cheraga, El Omrane, Ouled Fayet Road, Lot 04 Ilot
789, Algiers, Algeria
British American Tobacco (Algérie) S.P.A. (51%)
Bahrain
Flat 2115, Building 2504, Road 2832, Block 428 Al Seef Area,
Kingdom of Bahrain
British American Tobacco Middle East S.P.C.
Angola
Viana Park, Polo Industrial, Viana, Luanda, Angola
British American Tobacco – B.A.T. Angola, Limitada1
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
BAT Operaciones S.A.U.
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 Limited
British American Tobacco Australasia Limited
British American Tobacco Australia Limited
British American Tobacco Australia Overseas Pty Limited
British American Tobacco Australia Services Limited
Rothmans Asia Pacific Limited#
The Benson & Hedges Company Pty. Limited
W.D. & H.O. Wills Holdings Limited
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.
Benin
Cotonou, Lot Numbero H19, Quartiers Les Cocotiers, 01 BP 2520,
Benin
British American Tobacco Benin SA
Bolivia
Av. Costanerita 71, Esq. Calle 6, Piso 5, Zona de Obrajes, La Paz,
Bolivia
BAT Bolivia S.R.L.
BAT Annual Report and Form 20-F 2020 255
Bosnia and Herzegovina
Fra Dominka Mandica 24 A, 88220 Široki Brijeg, Bosnia
and Herzegovina
IPRESS 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.
Botswana
Plot 20774 Broadhurst Industrial Estate, Gaborone, Botswana
British American Tobacco Botswana (Pty) Limited
Business Venture Investments Botswana 6773 (Pty) Ltd.
Brazil
Avenida República do Chile, nº 330, Bloco 1, Torre Leste, 30º andar,
Centro, Rio de Janeiro/RJ - CEP 20.031-170, Brazil
Souza Cruz LTDA
Yolanda Participacoes S.A.
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%)
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 Ltd
Liggett & Myers Tobacco Company of Canada Limited (70%)
(50%)^ 3
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, Santiago, Chile
BAT Chile S.A.
British American Tobacco Chile Operaciones S.A. (99.51%)
Inversiones Casablanca S.A.
China (People’s Republic of)
607, Floor 6, China Resources Tower, No. 2666 South Keyuan Road,
Zhuhai Community, Yuehai Street, 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)
1er étage, Immeuble du Centenaire, Gombe, Kinshasa, Democratic
Republic of Congo
BAT Distribution SARL
British American Tobacco Congo SARL
1st floor immeuble L’horizon sis avenue Colonel Lukusa n.50,
Gombe, Kinshasa, Democratic Republic of Congo
British American Tobacco Services Congo SARL (99%)
British American Tobacco Import SARL (99%)
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 256
Financial Statements
Group Companies and Undertakings
Continued
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
TDR d.o.o.
Osje˘cka 2, 33000 Virovitica, Croatia
Hrvatski Duhani d.d. Tobacco Leaf Processing (89.55%)
Cuba
Parcela nº 2 a noroeste do terminal de contêineres de Mariel, a 2,2
km do vértice nº 4, Município de Mariel, Província de Artemisa, na
República de 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
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 7-10, 10145 Tallinn, Estonia
British American Tobacco Estonia AS
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
111 Avenue Victor Hugo, Paris, 75016, France
Carreras France SAS
Cœur Défense Tour A 100-110 Esplanade de Gaulle 92932 Paris
La Défense Cedex, France
British American Tobacco France SAS
Germany
Alsterufer 4, 20354 Hamburg, Germany
BATIG Gesellschaft fur Beteiligungen m.b.H.
British American Tobacco (Germany) GmbH
British American Tobacco (Industrie) 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
Lot 122 Parade Street, Kingston, 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
LEHMAN, LEE & XU CORPORATE SERVICES, Suite 3313, Tower One,
Times Square, 1 Matheson Street, Causeway Bay, Hong Kong
Reynolds Asia-Pacific 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
Level 24, Suites 2407 - 09, 3 Pacific Place, 1 Queen’s Road East,
Wanchai, Hong Kong
BAT Global Travel Retail 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
BAT Annual Report and Form 20-F 2020 257
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, 1 Desa Banjararum, Kecamatan Singosari, Jawa
Timur 65153 Indonesia
PT Bentoel Prima4 (100%) (99.99%)^
Jl. Susanto No. 2B, Ciptomulyo, Sukun, Malang, Jawa Timur
65148 Indonesia
PT Bentoel Distribusi Utama (100%) (99.8%)^
Iran, Islamic Republic of
Unit 5001, No.0, Sahand 1 St., Sabalan 1 St., Phase 3, Eshtehard
Industrial Estate, Palang Abad, Alborz Provine, 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.,
Tehran, Islamic Republic of Iran
TDR Parsian Company (PJS) (In Liquidation)
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 Irel and
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 Sayegh-Mezzanine, Abidjan, Cocody 2
plateaux, Côte d’Ivoire
British American Tobacco RCI SARL
Marcory, Immeuble Plein Ciel Boulevard VGE – 6 BP 1377,
Ivory Coast
Tobacco Marketing Consultant CDI SARL (In Liquidation)
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
Jordan
Airport Road, Al Qastal Industrial Area, Air Cargo Road, 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
BAT Kenya Tobacco Company Limited (100%) (60%)^
British American Tobacco Area Limited
British American Tobacco Kenya plc (60%)
East African Tobacco Company (Kenya) Limited (100%) (60%)^
Korea, Republic of
141, Gongdan1-ro, Sanam-Myun, Sacheon City, Kyungsangnamdo,
Korea (the Republic of)
British American Tobacco Korea Manufacturing Limited
42FI Gangnam Finance Center, 152 Teheran-ro, Gangnam-gu, Seoul,
Korea (the Republic of)
British American Tobacco Korea 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 Complex, Masauko Chipembere Highway,
Blantyre, Malawi
British American Tobacco (Malawi) Limited
Malaysia
12th Floor, Menara Symphony, No. 5, Jalan Prof Khoo Kay Kim,
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%)^
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 258
Financial Statements
Group Companies and Undertakings
Continued
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. 63197,
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) Shwe
Than Lwin Industrial Zone, Hlaing Tharyar Township Yangon Region,
Myanmar
British American Tobacco Myanmar Limited (95%)8
British American Tobacco Myanmar Services Limited8
Namibia
24 Orban Street, Klein Windhoek, Namibia
Twisp (Pty) Limited
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.
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.
New Zealand
2 Watt Street, Parnell, Auckland, 1052, New Zealand
British American Tobacco (New Zealand) Limited
British American Tobacco Holdings (New Zealand) Limited
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 (In Liquidation)
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
BAT Annual Report and Form 20-F 2020 259
North Macedonia, Republic of
Blvd. 8-mi SEPTEMVRI No. 18, 1000 Skopje, Republic of Macedonia
TDR SKOPJE DOOEL 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 Jammu & 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. (87.65%)
British American Tobacco Panama S.A.
Tabacalera Istmeña S.A.
Papau New Guinea
Ashurst Png, Level 11 Mrdc Haus, Cnr Of Musgrave Street and
Champion Parade, Port Moresby, National Capital District, Papau
New Guinea
British American Tobacco (PNG) Limited
Papua New Guinea Tobacco Co. Ltd
Paradise Tobacco Co. Limited
Rothmans of Pall Mall (P.N.G) Limited
Paraguay
Avda. 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.
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. IŁZECKA 26E, 02-135, Warszawa, 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 (76.4%)
Qatar
P O Box 6689, 41 Floor, Tornado Tower, West Bay, Doha, Qatar
British American Tobacco Q LLC
Réunion
5, Immeuble Cap, Avenue Théodore Drouhet, ZAC Horizon 2000,
Le Port, 97420, IIe de 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.
319 Splaiul Independentei, Sema Parc ‘City Building’, 6th Floor,
6th Sector, Bucharest, Romania
BRITISH American GBS Recruitment S.R.L.
Municipiul Ploiesti, Str. Laboratorului, NR 17-19, Judetul Prahova,
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
SORAS Building, 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 Sercices Ltd
Pointe Seraphine, Castries, Saint Lucia
Rothmans Holdings (Caricom) Limited
Samoa
Vaitele Estate, Vaitele, Samoa
British American Tobacco Company (Samoa) Limited
Saudi Arabia, Kingdom Of
7051 Al Amir Sultan-Al Salamah District, Unit 1302. Jeddah 23525 -
2661 Saudi Arabia
BAT Saudia for Trading
Eastern Tobacco Company For Trading
Senegal
Almadies, Route Hôtel Méridien en Face Club Med, Dakar, Senegal
BP 3174
Tobacco Marketing Consultant TMC S.A.R.L. (In Liquidation)
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 260
Financial Statements
Group Companies and Undertakings
Continued
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.
Singapore
15 Senoko Loop, Singapore, 758168
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# (In Liquidation)
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
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) (Pty) 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 East and Southern Africa (Pty) Limited
Brown & Williamson Tobacco Corporation (Pty) Limited
Business Venture Investments No 216 (Pty) Limited
Carlton Cigarette Company (Pty) Limited
John Chapman (Pty) Limited
John Player & Sons (Pty) Limited
Kentucky Tobacco Corporation (Pty) Limited
Martins of London (Pty) Limited
Rembrandt Tobacco Corporation (Overseas) (Pty) Ltd
Riggio Tobacco Corporation of New York (Pty) Ltd
Rothmans of Pall Mall London (Pty) Limited
St. Regis Tobacco Corporation (Pty) Ltd
Thomas Bear’s Son & Co (Pty) Limited
Tobacco Research and Development Institute (Pty) Limited
Twisp (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 (Pty) 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
213 King Mswati III Avenue West, Matsapha Industrial Site,
Mutsapha, eSwatini
British American Tobacco Swaziland (Pty) Limited
Sweden
Södra Järnvägsgatan 13, 4 fl. SE-252 24 Helsingborg, Sweden
Niconovum AB
Stationsvägen 11, 523 74 Hokerum, Sweden
Winnington AB
Stenåldersgatan 23, 213 76 Malmö, Sweden
Fiedler & Lundgren AB
Västra Trädgårdsgatan 15, 11153 Stockholm, Sweden
British American Tobacco Sweden AB
Switzerland
Route de France 17, 2926 Boncourt, Geneva, Switzerland
American-Cigarette Company (Overseas) Limited
BAT Switzerland Vending SA
British American Tobacco Switzerland SA
Nicoventures Communications (Switzerland) SA
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 Road, P.O Box 288, Dar es Salaam.
Tanzania
BAT Distribution Tanzania Limited
British American Tobacco (Tanzania) Limited
International Cigarette Distributors Limited (99%)
Zanzibar Distribution Company Limited (99%)
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 İş Merkezi, Eski Büyükdere Caddesi, Kat 9-10, Maslak,
Sarıyer, İstanbul
British American Tobacco Tütün Mamulleri Sanayi ve Ticaret
Anonim Sirketi
BAT Annual Report and Form 20-F 2020 261
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
Unit # 2680, DMCC Business Center- Level # 1, Jewellery &
Gemplex 3 Dubai United Arab Emirates
British American Tobacco International 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%) (In Liquidation)
Building 7, Chiswick Business Park, 566 Chiswick High Road,
London, England, W4 5YG, United Kingdom
British American Tobacco UK Limited
Ten Motives Limited
10 Motives Limited
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 Exports 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 (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
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 262
Financial Statements
Group Companies and Undertakings
Continued
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
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
BTomorrow Ventures 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
United States
CSC-Lawyers Incorporating Service, 2710 Gateway Oaks Drive,
Suite 150N, Sacramento CA 95833-3505, 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
Conwood Holdings, Inc.
EXP Homes, LLC
Lorillard Licensing Company LLC
Lorillard, LLC
Modoral Brands 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.
Vuse Stores LLC
BAT Annual Report and Form 20-F 2020 263
3220 Knotts Grove Road, Oxford, NC 27565, United States
Santa Fe Natural Tobacco Company, Inc.
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 Regelfall, 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 (JV) (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
Plot No. PH1 IND & 53 & 54, LS-MFEZ, Chifwema Road, Lusaka,
Zambia
British American Tobacco (Zambia) plc (78.08%)
Zimbabwe
Manchester Road 1, Southerton, Harare, Zimbabwe
American-Cigarette Company (Overseas) (Private) Ltd
British American Tobacco Zimbabwe (Holdings) Limited (63.74%)
Rothmans Limited
Associated Undertakings and Joint Ventures
Croatia
Slavonska avenija 11a, 10000 Zagreb, Croatia
Tisak d.d. (41.86%)
France
88 Avenue des Ternes, 75017, Paris, France
Alcome SAS (24%)
Hungary
H-6800 Hódmezóvásárhely, Erzsébeti út 5/b, Hungary
Országos Dohányboltellátó Korlátolt Felelosségu Társaság (49%)
India
Virginia House, 37, J.L. Nehru Road, Kolkata, 700071, India
ITC Limited (29.42%)
Azamabad, Andhra Pradesh, Hyderabad, 500 020, India
VST Industries Limited (32.16%)8
United Kingdom
65a Hopton Street, London,SE1 9LR, United Kingdom
AYR LTD (13.14%)9
Uzbekistan
Gulobod Village, Samarkand Region, 140100, Uzbekistan
FE “Samfruit” JSC (38.63%)
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 US Dollar 100 (100%) (76.30%)^ and US Dollar 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 264
Financial Statements
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
16 February 2021
Note
2020
£m
2019
£m
2
3
4
5
27,995
27,908
8,373
5
-
8,378
36,373
614
104
101
23,116
90
9,263
33,288
3,085
-
3,085
36,373
7,644
5
8
7,657
35,565
614
95
101
23,116
90
8,529
32,545
3,020
–
3,020
35,565
BAT Annual Report and Form 20-F 2020 Statement of Changes in Equity@
British American Tobacco p.l.c. – for the year ended 31 December
Called up
share capital
£m
Share
premium
account
£m
Merger
Reserve
£m
Capital
redemption
reserves
£m
Other
Reserves
£m
1 January 2020
Increase in share capital
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 2020
614
–
–
–
–
–
614
95
9
–
–
–
–
104
23,116
–
–
–
–
–
23,116
101
–
–
–
–
–
101
90
–
–
–
–
–
90
1 January 2019
Increase in share capital
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
* Other movements includes share-based payments.
Called up
share capital
£m
Share
premium
account
£m
Merger
Reserve
£m
Capital
redemption
reserves
£m
Other
Reserves
£m
614
–
–
–
–
–
614
92
3
–
–
–
–
95
23,116
–
–
–
–
–
23,116
101
–
–
–
–
–
101
90
–
–
–
–
–
90
265
Total
Equity
£m
32,545
9
5,304
(4,747)
(14)
191
33,288
Total
Equity
£m
29,932
3
6,106
(3,476)
(115)
95
32,545
Profit
and
loss
account
£m
8,529
–
5,304
(4,747)
(14)
191
9,263
Profit
and
loss
account
£m
5,919
–
6,106
(3,476)
(115)
95
8,529
There was no difference between profit and loss for the period and total comprehensive income for the period.
The profit and loss account is stated after deducting the cost of treasury shares which was £5,138 million at 31 December 2020
(31 December 2019: £5,247 million).
@ 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 266
Financial Statements
Notes to the Accounts@
1 Accounting Policies
Basis of accounting
The financial statements of the Company have been prepared in
accordance with the Companies Act 2006 (‘the Act’) and 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
accounting standards in conformity with the requirements of the Act,
but makes amendments where necessary in order to comply with the
Act and has set out below where advantage of the FRS 101 disclosure
exemptions has 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). Judgement is necessary to assess the likelihood that
a pending claim is probable (more likely than not to succeed), possible
or remote. 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
With effect from 1 January 2018, the Company moved to quarterly
payments of interim dividends. The Company recognises the interim
dividend as an appropriation of reserves in the period in which it is paid.
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
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. Fees receivable in respect of
these guarantees are carried at discounted present value.
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.
Where interest bearing receivables and payables have their floating
rates based on benchmark rates, such as LIBOR, the Company will
account for the application of replacement benchmark rates in
accordance with the Amendments to IFRS 9 Financial Instruments
published in 2019 (phase 1) and 2020 (phase 2) when applicable.
@ 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.
BAT Annual Report and Form 20-F 2020
267
1 Accounting Policies Continued
Impairment of financial assets held at amortised cost
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.
Share-based payments
The Company has equity-settled share-based compensation plans
in respect of Group employees.
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.
The cost of these awards, less any direct recharges made to Group
companies, are recognised as capital contributions to investments
in subsidiaries.
Historically, the Company has used the British American Tobacco
Group Employee Trust (BATGET), which operates as an extension
of the Company, as the vehicle to obtain shares on market and
hold them in trust to satisfy outstanding awards. In addition, from
March 2020 the Company has utilised treasury shares acquired in
the share buy-back programme to satisfy shared-based payment
awards made to certain employees.
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 254 to 263 of the Group’s financial statements.
Other movements in investments (additions) are related to share-scheme costs net of recharges as well as the cost of certain 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
2020
£m
27,908
87
27,995
2019
£m
27,901
7
27,908
@ 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 268
Financial Statements
Notes to the Accounts@
Continued
3 Debtors
Amounts due from Group undertakings
Current
Non-current
Allowance account
31 December
Allowance account
1 January
Provided in year
Released during the year
Foreign exchange
31 December
Current
Non-current
31 December
2020
£m
8,373
7,214
1,204
(45)
8,373
2020
£m
35
11
–
(1)
45
8
37
45
2019
£m
7,644
6,826
853
(35)
7,644
2019
£m
37
–
(2)
–
35
8
27
35
Included within amounts due from Group undertakings is an amount of £7,024 million (2019: £6,681 million) which is unsecured,
interest-bearing and repayable on demand. The interest rate is based on LIBOR, which is unlikely to be offered after the end of 2021.
The receivable falls under standard lending agreements within the Group which are scheduled to be revised during 2021 to take account
of global benchmark interest rate reform. The interest rate to be applied in future will be in accordance with the changes to the Group’s
intercompany lending agreements, and the Company will apply the relevant Amendments to IFRS 9 Financial Instruments at that time.
The Company does not believe that it would be materially adversely affected by these changes.
Amounts due from Group undertakings include £1,386 million (2019: £989 million) representing the discounted value of the fees receivable
from the parental guarantees issued by the Company, of which £183 million (2019: £136 million) is due within one year and £1,204 million
(2019: £853 million) is due after more than one year. In addition, amounts due from Group undertakings include balances of £8 million
(2019: £9 million) which are unsecured, interest free and repayable on demand.
4 Shareholders’ Funds
Profit and loss account
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 2020 was £5,304 million (2019: £6,106 million).
Dividend distributions to the Company’s shareholders are recognised in the period in which these are paid. The Company makes four
interim quarterly dividend payments.
Details of the Directors’ remuneration, share options and retirement benefits are given in the Remuneration Report in the Group’s 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 2020 (2019: two). These two employees are Jack Bowles and Tadeu Marroco. The details of their
remuneration are shown on page 125 of the Group’s Annual Report and Accounts for the year ended 31 December 2020. The costs of these
employees are borne by another Group company.
Shareholders’ funds are stated after deducting the cost of treasury shares which include £4,836million (2019: £4,845 million) for
shares repurchased and not cancelled and £302 million (2019: £402 million) in respect of the cost of own shares held in Employee Share
Ownership Trusts. In 2020, the value of shares repurchased and not cancelled has decreased by £9 million as compared to previous year,
representing the value of shares that have been transferred from the Company to other Group undertakings to be granted to employees
on vesting of awards.
As at 31 December 2020, treasury shares include 5,787,154 (2019: 8,049,187) of shares held in trust and 162,347,246 (2019: 162,645,590)
of shares repurchased and not cancelled as part of the Company’s share buy-back programme (which was suspended in 2014).
From March 2020, the Company has utilised shares acquired in the share buy-back programme to satisfy share-based payment awards
made to certain employees.
Other movements in shareholders’ funds principally relate to the recognition of share-based payments and the release of treasury shares
as a result of the exercise of share options.
@ 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.
BAT Annual Report and Form 20-F 2020 4 Shareholders’ Funds Continued
Called up Share Capital
Called up Share Capital
Allotted and fully paid
1 January 2020
Changes during the year
– share option schemes
31 December 2020
Called up Share Capital
Allotted and fully paid
1 January 2019
Changes during the year
– share option schemes
31 December 2019
269
£m
614.12
0.02
614.14
£m
614.09
0.03
614.12
Ordinary Shares of 25p
each Number of shares
2,456,520,738
70,859
2,456,591,597
Ordinary Shares of 25p each
Number of shares
2,456,415,884
104,854
2,456,520,738
Merger reserve
In 2017, the Company announced the completion of the acquisition of the remaining 57.8% of Reynolds American Inc. 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 Reynolds American Inc. 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 reserve
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 includes £2 million (2019: £3 million) in respect of ordinary shares issued under the Company’s share option
schemes. These schemes are described in the Remuneration Report. A further £7 million (2019: £nil) increase in share premium is related
to shares repurchased and not cancelled that have been transferred from the Company to other Group undertakings, to be granted
to employees on vesting of awards, and represents the excess of transfer price of the shares over the original weighted average cost
of shares.
@ 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
270
Financial Statements
Notes to the Accounts@
Continued
5 Creditors
Amounts due to Group undertakings
Loans due to Group undertakings
Other creditors
Deferred income
Current
Non-current
2020
£m
11
1,571
1,495
8
3,085
202
2,883
3,085
2019
£m
114
1,571
1,327
8
3,020
282
2,738
3,020
Amounts due to Group undertaking of £11 million (2019: £114 million) are unsecured, interest free and repayable on demand.
Loans due to Group undertakings of £1,571 million (2019: £1,571 million) are unsecured, bear interest at rates between 1.51% and 2.19%
(2019: 1.51% and 2.38%), and are repayable in 2022.
Included in other creditors is a provision of £1,453 million (2019: £1,301 million) in respect of subsidiary undertaking borrowings guaranteed
by the Company. Out of this amount, a total of £150 million (2019: £144 million) represents amounts to be settled within one year.
6 Audit Fees
Fees payable to KPMG
– Audit fees
– Fees paid for other services
The audit fees are borne by another Group Company.
2020
2019
£30,000
£nil
£30,000
£nil
7 Contingent Liabilities
British American Tobacco p.l.c. has guaranteed borrowings by subsidiary undertakings of £43.1 billion (2019: £43.0 billion) and total
borrowing facilities of £58.4 billion (2019: £48.7 billion).
The Company has cross-guaranteed the liabilities of the British American Tobacco UK Pension Fund (“Fund”) which had a surplus
according to the last formal triennial valuation in March 2020 of £139 million on a Technical Provisions basis, in accordance with the
statutory funding objective. The Trustee of the Fund also has a Long-Term Funding Target to be fully funded on a Solvency Liabilities
basis by 2026, and on this basis the Fund had a surplus of £7 million at the valuation date. On an IAS 19 basis, the Fund had a surplus at
31 December 2020 of £389 million (2019: £326 million).
In addition, there are contingent liabilities in respect of litigation in various countries (note 27 to the Group financial statements).
8 Post Balance Sheet Events
On 3 February 2021, the fourth quarterly interim dividend of 52.6p (£1,203 million) declared by the Directors in February 2020, and
reconfirmed to the market prior to 31 December 2020, was paid to shareholders. The impact of this on the Company was to reduce the
level of profit and loss reserve from £9,263 million to £8,060 million.
In addition, on 16 February 2021, the Board declared an interim dividend of 215.6p per ordinary share of 25p for the year ended 31 December
2020, payable in four equal quarterly instalments of 53.9p per ordinary share in May 2021, August 2021, November 2021 and February
2022. These payments will be recognised as appropriations from reserves in 2021 and 2022. The total amount payable is estimated to be
£4,946 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.
BAT Annual Report and Form 20-F 2020 Other Information
Additional Disclosures
271
Additional Disclosures
Information on the Group
Selected Financial Information
Non-Financial KPIs
Non-GAAP Measures
Employees
Additional Disclosures on Liquidity and Capital Resources
Summary of Group Risk Factors
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
Raw Materials
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
Purchase of Shares
Group Employee Trust
American Depositary Shares
Shareholding Administration and Services
Exhibits
Other Information
Glossary
Cross-Reference to Form-20F
272
273
274
276
285
286
288
290
307
311
312
314
314
315
316
316
317
318
319
320
322
326
337
340
341
342
343
344
346
347
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 272
Other Information
Information on the Group
Overview
British American Tobacco p.l.c. is the parent holding company of
the Group, a leading consumer-centric, 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).
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. Reynolds American Inc. 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 Reynolds American Inc.
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 Reynolds American Inc.’s purchase
of Lorillard Inc., the Group invested US$4.7 billion to maintain
its approximate 42% equity position in the enlarged Reynolds
American Inc.
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 Reynolds American Inc. the Group did not already own.
Following completion of the acquisition, Reynolds American Inc.
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.
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.
In 2020, the Group acquired the nicotine pouch product assets
of Dryft Sciences, LLC (Dryft), a US-based Modern Oral nicotine
product company. Also in 2020, the Group acquired 100% of the
share capital in Eastern Tobacco Company for Trading, formerly
known as Rafique Mohammed Sudki Jad Establishment for Trading
when acting as the Group’s distributor in Saudi Arabia.
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.
Board oversight of M&A transactions
The Company’s Board has strategic oversight of significant
M&A transactions (determined by value or strategic nature of
transaction), which are referred to it for noting under the Group
Statement of Delegated Authorities (SoDA).
Other M&A transactions are referred for strategic oversight to the
Management Board or other applicable senior forum or persons,
under the Group SoDA. Those referral requirements under the
Group SoDA apply alongside any requirement for corporate
approval of M&A transactions by or within a Group company.
BAT Annual Report and Form 20-F 2020 273
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 150. This selected financial information should be read in conjunction with the consolidated financial statements and the
Strategic Report.
As of and for the Year Ended 31 December
2020
2019
2018
2017
2016
All items shown in £m except per share information
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
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
25,776
(4,583)
445
(2,744)
(1,450)
188
(3)
(7,667)
9,962
(1,745)
455
8,672
(2,108)
6,564
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
2,286
2,295
280.0p
278.9p
215.6p
$2.99
2,284
2,291
249.7p
249.0p
210.4p
$2.69
2,285
2,292
264.0p
263.2p
203.0p
$2.71
2,044
2,051
1,833.9p
1,827.6p
195.2p
$2.54
124,078
13,612
137,690
127,731
13,274
141,005
133,687
12,655
146,342
127,088
13,966
141,054
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
59,257
15,478
43,968
614
62,955
58,022
18,823
45,366
64,325
16,329
47,509
64,468
15,605
49,450
614
64,160
614
65,688
614
60,981
507
8,406
Cash flow data
Net cash generated from operating activities
Net cash used in investing activities
Net cash (used in)/generated from financing activities
9,786
(783)
(7,897)
8,996
(639)
(8,593)
10,295
(1,021)
(9,630)
5,347
(18,544)
14,759
4,610
(640)
(4,229)
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 £39,172 million, £39,826 million, £38,553 million, £37,780 million and £32,136 million for the years ended 31 December 2020, 2019, 2018, 2017 and
2016, respectively.
3. In February 2021, the BAT Directors declared an interim dividend of 215.6 pence per share for the year ended 31 December 2020, payable in four equal instalments of 53.9 pence per ordinary
share. The interim dividend will be paid to BAT shareholders in May 2021, August 2021, November 2021 and February 2022. 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 was 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 274
Other Information
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, total 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. This measure is also useful to understand the Group’s
performance when seeking to grow scale within a market or category from which future financial returns can be realised. 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 2020).
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 measure is particularly useful when the Group’s products and/or the relevant category in the market in which
they are sold has developed or achieved scale from which value can be realised. 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 2020).
BAT Annual Report and Form 20-F 2020 275
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 (excluding
translational foreign exchange movements) of 2.8% in 2020, with a decline in combustibles volume of 4.5% in 2020, leads to a price mix of
7.3% in 2020. No assumptions underlie this metric as it utilises the Group’s own data.
Non-Combustible Consumers
The number of consumers of Non-Combustible products is defined as the estimated number of Legal Age (minimum 18 years) consumers
of the Group’s Non-Combustible products. In markets where regular consumer tracking is in place, this estimate is obtained from adult
consumer tracking studies conducted by third parties (including Kantar). In markets where regular consumer tracking is not in place,
the number of consumers of Non-Combustible products is derived from volume sales of consumables and devices in such markets,
using consumption patterns obtained from other similar markets with consumer tracking (utilising studies conducted by third parties
including Kantar).
The number of Non-Combustible products consumers is used by management to assess the number of consumers regularly using the
Group’s New Categories products as the increase in Non-Combustible products is a key pillar of the Group’s ESG Ambition and is integral
to the sustainability of our business.
The Group’s management believes that this measure is useful to investors given the Group’s ESG ambition and alignment to the
sustainability of the business with respect to the Non-Combustibles portfolio.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 276
Other Information
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.
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 acquired and sold which, for the period 2017 to 2019, has been recorded in accordance with IFRS as a cost of sale and
within revenue, with a dilutive effect on operating margin. In 2020, as the short-term arrangements ceased or were immaterial, the goods
are manufactured by the Group, and the excise, in accordance with Group policy, is not included in cost of sales or revenue. For the 2017
to 2019 period, this excise included in revenue led to a reduction in revenue and improvement in operating margin that did not represent
the underlying performance of the Group. As such, the excise on bought-in goods in 2019, 2018 and 2017 met 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 2020, 2019 and 2018.
Revenue
Less: Excise on goods bought-in on short-term arrangements
Adjusted revenue
Impact of translational foreign exchange
2020 adjusted revenue re-translated at 2019 exchange rates
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
For the year ended 31 December (£m)
2019
2018
2017
2016
25,877
(50)
25,827
24,492
(180)
24,312
(144)
1,448
19,564
(258)
19,306
(700)
14,130
–
14,130
(687)
2020
25,776
–
25,776
894
26,670
25,683
25,760
18,606
13,443
+7.2%
Change in adjusted revenue at prior year’s exchange rates (constant rates)
+3.3%
+5.6%
+33.4%
+31.7%
BAT Annual Report and Form 20-F 2020 277
Adjusted Revenue by Product Category or Geographic Segment – 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, including by the geographic segments of the United States, Europe and North Africa,
Americas and Sub-Saharan Africa and Asia-Pacific and Middle East.
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, including
from the geographic segments of the United States, Europe and North Africa, Americas and Sub-Saharan Africa and Asia-Pacific and
Middle East, 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, including by geographic segment, 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 and the Group’s operations in the United States, Europe and North Africa, Americas and Sub-Saharan
Africa and Asia-Pacific and Middle East.
The Group’s Management Board also believes that the adjusted revenue performance by product category, including by geographic
segment 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 by product category, including by geographic segment have limitations as
analytical tools. The most directly comparable IFRS measure to adjusted revenue by product category, including by geographic segment,
is revenue. Adjusted revenue by product category, including by geographic segment, are not presentations made in accordance with IFRS,
are not measures of financial condition or liquidity and should not be considered as alternatives to revenue as determined in accordance
with IFRS. Adjusted revenue by product category, including by geographic segment, 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 as determined in accordance with IFRS.
Reconciliation of revenue by product category to adjusted revenue by product category at constant rates
of exchange – 2020- 2019
Reported
£m
vs 2019
%
Adjusting
items
£m
Impact of
exchange
£m
Adjusted
at constant
£m
2020
Adjusted
at constant
vs 2019
%
2019
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
Vapour
THP
Modern Oral
New Categories
Traditional Oral
Other
Revenue
22,752
611
634
198
1,443
1,160
421
25,776
-1.1%
+52.3%
-12.9%
+57.1%
+14.9%
+7.2%
-21.7%
-0.4%
–
–
–
–
–
–
–
–
842
4
2
–
6
5
41
894
23,594
615
636
198
1,449
1,165
462
26,670
+2.8%
+53.4%
-12.7%
+57.1%
+15.4%
+7.7%
-14.4%
+3.3%
23,001
401
728
126
1,255
1,081
540
25,877
(50)
–
–
–
–
–
–
(50)
Reconciliation of revenue by product category to adjusted revenue by product category at constant rates
of exchange – 2019- 2018
22,951
401
728
126
1,255
1,081
540
25,827
2018
Combustible
Vapour
THP
Modern Oral
New Categories
Traditional Oral
Other
Revenue
Reported
£m
23,001
401
728
126
1,255
1,081
540
25,877
vs 2018
%
+4.2%
+26.1%
+28.9%
+267%
+36.9%
+15.0%
-4.0%
+5.7%
Adjusting
items
£m
Impact of
exchange
£m
Adjusted
at constant
£m
2019
Adjusted
at constant
vs 2018
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
(50)
–
–
–
–
–
–
(59)
(9)
(35)
3
(41)
(45)
1
22,892
+4.6%
22,072
(180)
21,892
392
693
129
1,214
1,036
541
+23.4%
+22.7%
+273%
+32.4%
+10.2%
-3.8%
318
565
34
917
941
562
–
–
–
–
–
–
318
565
34
917
941
562
(50)
(144)
25,683
+5.6%
24,492
(180)
24,312
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
278
Other Information
Non-GAAP Measures
Continued
Adjusted Revenue From the Strategic Portfolio, at Constant Rates of Exchange
Definition – 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 from the Strategic Portfolio (at constant rates of exchange) to evaluate the underlying business performance
of the Group reflecting the focus of the Group’s investment activity. The Group’s Management Board defines 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 (particularly Grizzly).
The Group’s Management Board also believes that the adjusted revenue 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 from the Strategic Portfolio has limitations as an analytical tool. The most directly
comparable IFRS measure to adjusted revenue from the Strategic Portfolio is revenue. Adjusted revenue 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 – 2020-2019
2020
£m
Adjusting
items
£m
Impact
of exchange
£m
Adjusted
at constant
2020
£m
Adjusted at
constant vs
2019
%
2019
£m
Adjusting
items
£m
Adjusted
2019
£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
Non-strategic
Revenue
16,992
611
634
198
1,443
1,100
2,543
19,535
6,241
25,776
–
–
–
–
–
–
–
–
–
–
559
17,551
+6.3%
16,515
4
2
–
6
6
12
615
636
198
1,449
1,106
2,555
571
323
894
20,106
6,564
26,670
+53.4%
-12.7%
+57.1%
+15.4%
+8.1%
+12.2%
+7.0%
-6.7%
+3.3%
401
728
126
1,255
1,023
2,278
18,793
7,084
25,877
–
–
–
–
–
–
–
–
(50)
(50)
16,515
401
728
126
1,255
1,023
2,278
18,793
7,034
25,827
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
Non-strategic
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)
392
693
129
1,214
980
2,194
18,509
7,174
25,683
+23.4%
+22.7%
+273.1%
+32.4%
+11.0%
+21.9%
+7.3%
+1.7%
+5.6%
318
565
34
917
883
1,800
17,257
7,235
24,492
–
–
–
–
–
–
–
–
(180)
(180)
15,457
318
565
34
917
883
1,800
17,257
7,055
24,312
BAT Annual Report and Form 20-F 2020 279
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 2020, 2019 and 2018.
Profit from operations
Add:
Restructuring and integration costs
Amortisation and impairment of trademarks and similar intangibles
Impairment of goodwill
(Income)/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
Charge in respect of MSA liabilities related to brands sold to a third party
Other, including litigation
Adjusted profit from operations
Operating margin
Adjusted operating margin*
Impact of translational foreign exchange
2020 adjusted profit from operations re-translated at 2019 exchange rates
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
Change in adjusted profit from operations at prior year’s exchange rates
(constant rates)
* Adjusted profit from operations as a percentage of adjusted revenue.
For the year ended 31 December (£m)
2020
9,962
408
339
209
(40)
–
–
–
–
400
87
11,365
38.6%
44.1%
296
11,661
2019
9,016
565
481
194
202
436
–
–
–
–
236
11,130
34.8%
43.1%
(98)
11,032
2018
9,313
363
377
–
–
–
–
110
–
–
184
10,347
38.0%
42.6%
577
10,924
2017
6,412
600
383
–
–
–
465
–
–
–
69
7,929
2016
4,655
603
149
–
–
–
–
–
20
–
53
5,480
32.8%
41.1%
32.9%
38.8%
(324)
(283)
7,605
5,197
+4.8%
+6.6%
+37.8% +38.8%
+4.1%
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 280
Other Information
Non-GAAP Measures
Continued
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 Reynolds American Inc.
Gain on disposal of assets
Other
Adjusted Group’s share of post tax results of associates and joint ventures
2020
455
(17)
–
–
4
442
For the year ended 31 December (£m)
2019
498
(25)
–
–
–
473
2018
419
(22)
–
–
(10)
387
2017
2016
24,209
(29)
(23,288)
–
120
1,012
2,227
(11)
–
(941)
52
1,327
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.
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
2020
8,672
(455)
1,403
153
9,773
(2,108)
(35)
(287)
(2,430)
+24.3%
+24.9%
For the year ended 31 December (£m)
2019
2018
2017
2016
7,912
(498)
2,114
80
9,608
(2,063)
(65)
(373)
(2,501)
26.1%
26.0%
8,351
(419)
1,034
(4)
8,962
(2,141)
(24)
(199)
(2,364)
25.6%
26.4%
29,527
(24,209)
1,517
205
7,040
8,129
(9,766)
(454)
(2,091)
(27.5%)
29.7%
6,245
(2,227)
825
108
4,951
(1,406)
61
(128)
(1,473)
22.5%
29.8%
BAT Annual Report and Form 20-F 2020 281
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 117 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 117. 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
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 Reynolds American Inc. post acquisition
(2017 only)
Operating cash flow ex Reynolds American Inc. (for LTIP incentive scheme –
2017 only)
Adjusted profit from operations
Exclude adjusted profit from operations from Reynolds American Inc.
post acquisition
Adjusted profit from operations ex Reynolds American Inc. (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)
2020
9,786
732
(351)
2,132
(605)
–
9
1
11,704
2019
2018
8,996
564
(252)
2,204
(774)
–
4
–
10,742
10,295
601
(214)
1,891
(845)
75
(93)
2
11,712
2017
5,347
685
(903)
1,675
(767)
156
101
(9)
6,285
2016
4,610
711
(962)
1,245
(559)
78
–
(1)
5,122
–
–
–
(628)
–
11,704
11,365
10,742
11,130
11,712
10,347
5,657
7,929
5,122
5,480
–
–
–
(1,928)
–
11,365
103%
103%
98%
11,130
97%
97%
100%
10,347
6,001
5,480
113%
113%
111%
79%
94%
83%
93%
93%
99%
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)
2020
11,704
–
11,704
11,365
103%
For the year ended 31 December (£m)
2019
10,742
–
10,742
11,130
97%
2018
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%
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 282
Other Information
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)
2020
9,786
(136)
(1,759)
(605)
–
9
–
7,295
(4,745)
2,550
2019
2018
2017
8,996
(157)
(1,550)
(774)
–
4
–
6,519
10,295
(142)
(1,533)
(845)
–
(93)
2
7,684
(4,598)
1,921
(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
(2,910)
479
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
2020
(42,574)
7,295
(4,955)
95
(171)
–
69
(40,241)
For the year ended 31 December (£m)
2019
2018
2017
2016
(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)
BAT Annual Report and Form 20-F 2020 283
Adjusted Net Debt to Adjusted Earnings Before Interest, Tax, Depreciation and Amortisation
(Adjusted EBITDA)
Definition – net debt excluding the impact of the revaluation of Reynolds American Inc. acquired debt arising as part of the
purchase price allocation process, 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 Reynolds American Inc. 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. This is also used within the Group’s incentive schemes as reported
within the Remuneration Report beginning on page 117.
For the purposes of this ratio, adjusted net debt is net debt, as discussed and reconciled on page 282, adjusted for the uplift arising on the
Reynolds American Inc. 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.
Borrowings (excluding lease liabilities)
Lease liabilities
Derivatives in respect of net debt
Cash and cash equivalents
Current investments held at fair value
Purchase price allocation adjustment to Reynolds American Inc. 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
2020
43,493
475
(346)
(3,139)
(242)
(790)
39,451
6,564
2,108
1,745
1,450
(455)
704
12,116
3.3x
46
39,497
323
12,439
3.2x
As of the year ended 31 December (£m)
2019
2018
2017
2016
19,469
26
(509)
(2,204)
(15)
–
16,767
4,839
1,406
637
607
(2,227)
612
5,874
2.9x
44,787
579
(143)
(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
47,495
14
(378)
(2,602)
(178)
(944)
43,407
49,428
22
(523)
(3,291)
(65)
(947)
44,624
6,210
2,141
1,381
1,038
(419)
37,656
(8,129)
1,094
902
(24,209)
1,049
8,363
5.3x
499
10,850
4.0x
(1,694)
41,713
590
11,440
3.6x
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 284
Other Information
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
2020
9,962
1,403
351
As of the year ended 31 December (£m)
2019
9,016
2,114
252
2018
9,313
1,034
214
2017
6,412
1,517
903
2016
4,655
825
962
Adjusted profit from operations, inclusive of dividends from associates and
joint ventures
11,716
11,382
10,561
8,832
6,442
Total Assets
Current Liabilities
Capital employed at balance sheet date
Average capital
Adjusted ROCE
137,690
15,478
122,212
122,197
9.6%
141,005
18,823
122,182
126,099
146,342
16,329
130,013
127,731
141,054
15,605
125,449
76,683
9.0%
8.3%
11.5%
39,773
11,856
27,917
25,213
25.6%
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 and adjusted diluted earnings per share, 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 64) should be read in conjunction with the information provided in note 2 in the Notes on the Accounts.
In 2020, 2019 and 2018, results were affected by translational exchange rate movements. In 2020, at the prevailing exchange rates,
adjusted revenue declined by 0.4%, adjusted profit from operations increased by 2.1%, adjusted revenue from the strategic portfolio
increased by 4.0% and adjusted revenue from New Categories increased by 14.9% versus 2019. At constant rates of exchange, adjusted
revenue would have increased by 3.3%, adjusted profit from operations would have increased by 4.8%, adjusted revenue from the
strategic portfolio would have increased by 7.0% and adjusted revenue from New Categories would have increased by 15.4%. 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, at the prevailing exchange rates, adjusted revenue increased by 6.2%, adjusted profit from operations increased by
7.6%, adjusted revenue from the strategic portfolio increased by 8.9% and adjusted revenue from New Categories increased by 36.9%
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%, adjusted revenue from the strategic portfolio would have increased by 7.3% and adjusted revenue from New
Categories would have increased by 32.4%. These higher rates at prevailing exchange rates reflects the translational benefit as a result of
the relative weakness of the pound sterling.
In 2020, 2019 and 2018, adjusted diluted earnings per share was affected by translational exchange rate movements. In 2020, the adjusted
diluted earnings per share of 331.7p, an increase of 2.4%, would, when translated at 2019 exchange rates, have been 341.4p, an increase
of 5.5%. This lower growth rate, in 2020, at prevailing exchange rates, reflects the negative translational impact as a result of the relative
strength of the pound sterling. 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.
BAT Annual Report and Form 20-F 2020 285
Employees
As at 31 December 2020, the number of persons employed by the Group was 55,329 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 400 in 2020
and largely relates to seasonal workers within operations.
The following table sets forth the number of Group employees by region in 2020, 2019 and 2018.
Region (number of employees worldwide)
US
APME
AmSSA
ENA1
Total employees
As of 31 December
2020
2019
2018
4,921
10,750
15,873
23,785
55,329
5,020
13,465
16,862
24,642
59,989
5,019
15,077
17,372
26,409
63,877
Note:
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 286
Other Information
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 2020, 2019 and 2018, all contractual borrowing covenants were met and none are expected to inhibit the Group’s operations or funding
plans. In 2020, the Group’s financial covenant (interest cover) was removed from the terms of the revolving credit facility and syndicated
term loan.
Capital Expenditure
Gross capital expenditures include purchases of property, plant and equipment and purchases of certain intangibles. The Group’s gross
capital expenditures for 2020, 2019 and 2018 were £648 million, £807 million and £883 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 2021 of approximately £700 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
Maturity dates
Interest rates at 31 December 2020
Euro
Euro
UK pound sterling
US dollar
Swiss franc
2021 to 2045
2021
2021 to 2055
2019
2021 to 2026
0.9% to 4.9%
3m EURIBOR +50bps
1.8% to 7.3%
Not applicable
0.6% to 1.4%
US dollar
US dollar
2022 to 2050
2022
1.7% to 8.1%
USD 3m LIBOR + 88bps
Eurobonds2
Bonds issued pursuant
to rules under the
US Securities Act (as
amended)2
Commercial Paper2
Other loans
Bank loans
Bank overdrafts
Finance leases
Total
As of 31 December (£m)1
2020
8,875
984
4,590
–
540
25,461
548
–
1,929
317
249
475
43,968
2019
7,591
931
4,161
–
510
23,805
1,325
1,056
4,624
293
491
579
45,366
2018
8,717
986
4,671
512
523
25,428
1,381
536
3,859
608
274
14
47,509
Notes:
1. The financial data above has been extracted from the Group’s consolidated financial statements.
2. 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.
BAT Annual Report and Form 20-F 2020
287
Off-Balance Sheet Arrangements and Contractual Obligations
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 2020 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.
Total
42,994
499
475
850
44,818
Less than
1 Year
3,405
499
137
773
4,814
Payments due by period (£m)
1–3 Years
3–5 Years Thereafter
6,467
–
169
67
6,703
7,880
–
82
10
7,972
25,242
–
87
–
25,329
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 £810 million as of 31 December
2020, which is net of pension assets of £12,576 million. The Group expects to be required to contribute £81 million to its defined benefit
plans during 2021. See note 11 in the Notes on the Accounts for further information.
The above table also excludes any amounts in relation to service contracts which are disclosed in note 27 in the Notes on the Accounts.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 288
Other Information
Summary of Group Risk Factors
The following is a summary of some of the risks and uncertainties, the occurrence of any one of which, alone or in combination with
other events or circumstances, may materially adversely affect the Group’s results of operations and financial condition. You should read
this summary together with the ‘Principal Group risks’ section on pages 84 to 88 and the more detailed description of each risk factor
contained below.
Business execution and supply chain risks
– Competition from illicit trade.
– Geopolitical tensions that have the potential to disrupt the Group’s business in multiple markets.
– 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.
– Failure to meet current or future New Categories demand.
– Failure of a financial counterparty.
– Exposure to unavailability of, and price volatility, in raw materials and increased costs of employment.
– Failure to retain key personnel or to attract and retain skilled talent.
– Disruption to the supply chain and distribution channels.
– Failure to deliver digital innovation and drive digital transformation.
– Exposure to product contamination.
– Inability to obtain adequate supplies of tobacco leaf.
– Failure to successfully design, implement and sustain an integrated operating model.
– Failure to uphold the high standard of ESG management.
– Impact of a pandemic on the performance of the Group.
Legal, regulatory and compliance risks
– Exposure to increasingly stringent regulatory measures affecting the manufacture, packaging, sale and marketing of the
Group’s products.
– 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).
– Exposure to litigation on tobacco, nicotine, New Categories and other issues.
– Significant and/or unexpected increases or structural changes in tobacco and nicotine-related taxes.
– Failure to comply with health and safety and environmental laws.
– Exposure to unfavourable tax rulings.
– Unexpected legislative changes to corporate income tax laws.
– Exposure to potential liability under competition or antitrust laws.
– Failure to establish and maintain adequate controls and procedures to comply with applicable securities, corporate governance and
compliance regulations.
– Loss of confidential information, including through manipulation of data by employees and system failure.
– Failure to comply with product regulations due to uncertainty surrounding the proper interpretation and application of
those regulations.
– Failure to uphold high standards of corporate behaviour, including under anti-bribery and anti-corruption laws.
– Imposition of sanctions under sanctions regimes or similar international, regional or national measures.
– Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation, the UK Data
Protection Act 2018, e-Privacy laws and other privacy legislation governing the processing of personal data.
BAT Annual Report and Form 20-F 2020 289
Economic and financial risks
– Foreign exchange rate exposures.
– Inability to obtain price increases and exposure to risks from excessive price increases and value chain erosion.
– Effects of declining consumption of legitimate tobacco products and a tough competitive environment.
– Funding, liquidity and interest rate risks.
– Failure to achieve growth through mergers, acquisitions and joint ventures.
– Unforeseen underperformance in key global markets.
– Increases in net liabilities under the Group’s retirement benefit schemes.
– Adverse consequences of the UK’s exit from the EU.
Product pipeline, commercialisation and Intellectual Property risks
– Inability to predict consumers’ changing behaviours and launch innovative products that offer adult tobacco and nicotine
consumers meaningful value-added differentiation.
– 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
290
Other Information
Group Risk Factors
Business Execution and Supply Chain Risks
Risk: Competition from illicit trade.
Description
Illicit trade, illegal products and tobacco trafficking in the form of counterfeit products, smuggled genuine products (product diversion),
and locally manufactured products, which do not comply with applicable regulations and/or in which applicable taxes are evaded,
represent a significant and growing threat to the legitimate tobacco industry and New Categories products. 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 and New Categories consumers to switch to illegal cheaper tobacco and New Categories products
and are providing greater rewards for counterfeiters and smugglers. Regulatory restrictions such as plain packaging or graphic health
warnings, display bans, flavour or ingredient restrictions and increased compliance costs further disadvantage legitimate industry
participants by providing competitive advantages to illicit manufacturers and distributors of illicit tobacco and New Categories 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.
Further, counterfeit New Categories products and other illicit products could harm consumers, damaging goodwill and/or the category
(with lower volumes and reduced profits), and potentially leading to misplaced claims against BAT and further regulation. In addition, as
the Group has contractual and legislative obligations to prevent the diversion of our products into illicit channels, actual and perceived
breaches of the obligations to prevent product diversion into illicit channels can lead to substantial fines in the forms of seizure payments
and legislative penalties, as well as the risk of reputational damage from Group products being found in illicit channels.
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, restricted mobility, loss of assets and/or denial
of access to BAT sites that reduce the Group’s access to particular markets or may disrupt the Group’s operations, such as 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.
BAT Annual Report and Form 20-F 2020 291
Business Execution and Supply Chain Risks continued
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
292
Other Information
Group Risk Factors
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, other areas of focus for
the Group 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 the COVID-19 pandemic) 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.
BAT Annual Report and Form 20-F 2020 293
Business Execution and Supply Chain Risks continued
Risk: Failure to deliver digital innovation and drive digital transformation.
Description
The Group’s strategy in areas of further growth and increasing profitability depends to a large extent on digital transformation and
innovation. Digital transformation and innovation are key drivers of the Group’s Ethos, which includes new and modern categories of
products, increased interaction with customers, data-driven decision making and cost optimisation efforts driven by automated and
modernised processes. Examples of the Group’s ambitions that depend on digital transformation include:
– the ability to leverage our data assets to generate insights and foresights as a key driver of revenue growth;
– the expansion and flexibility of technology solutions to streamline the market realisation of new products and marketing campaigns;
and
– the ability to build new solutions and the flexibility to react to market disruptions.
The Group must effectively implement new ways of working and supporting technologies to fully develop the digital agenda defined by
the Board (e.g. digital channels, data and analytics, automation, cyber, etc.).
The Group may see stalled progress in the pace of digital transformation and hampered strategy goals realisation if the necessary
information and digital technology is not ready to support the business implementation of Global Functional Transformations (e.g.
direct relationship with consumers, integrated planning, demand forecasting and revenue growth management). The unavailability of the
necessary digital technology may be due to missing technology capabilities, lack of scalability or poor data quality. Shortage of skills and
ineffective ways of working may slow down the pace of the Group’s digital transformation and hamper its value realisation processes.
In addition, sub-optimal design of the global digital platforms implemented by BAT may lead to the fragmentation and under-utilisation of
such platforms and slow down the Group’s digital transformation.
Impact
The Group’s multi-category strategy requires dealing with different consumer needs and behaviours as well as complying with various
regulations, which increasingly require the expansion and flexibility of technology solutions. This may lead to the fragmentation and under-
utilisation of existing and future technology solutions. Similarly, increased control and centralisation of the technology solutions and delivery
mechanisms may slow down the effective delivery of the Group’s digital transformation and innovation.
The Group’s inability to adapt to the ever-changing digital space and fully exploit the value expected from digital transformation may have an adverse
impact on its competitive edge, market share and profitability, and may prevent the Group from reaching its medium and long-term financial targets.
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.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 294
Other Information
Group Risk Factors
Continued
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 aim to simplify the organisation and facilitate growth. The Group’s efforts
to achieve these goals are driven and enabled through use of our TaO (central SAP ERP system) global template - a standardised process
used by all BAT entities globally with the use of a central SAP instance common for BAT subsidiaries (excluding Reynolds American Inc. and its
subsidiaries). These processes include, among others, core back-office global processes, procurement, warehouse management, accounting
and controlling.
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. Lack of adherence to the TaO template, as well as template
degradation over time, may result in the failure to maintain achieved productivity gains and capture additional productivity gains which may in
turn have an adverse effect on the Group’s results of operations and financial condition.
Risk: Failure to uphold the high standard of ESG management.
Description
Stakeholder and shareholder expectations of Group’s ESG performance are continually evolving. The Group may fail to have the
appropriate internal standards, strategic plans and governance, monitoring and reporting mechanisms in place to ensure it can identify
emerging issues, meet external expectations and align with recognised international standards.
Impact
Failure to uphold high standards of ESG management could seriously impact Group reputation and reduce investor confidence.
In addition, poor performance across any aspect of ESG, such as a failure to address climate change or human rights impacts across
the Group’s business and supply chain, could result in increased regulation, difficulty in attracting and retaining talent, criminal or civil
prosecution, or decreases in consumer demand for our products.
Risk: Impact of a pandemic on the performance of the Group.
Description
The Group continues to closely monitor the development and disruption of the present coronavirus (the “COVID-19 pandemic”) and
second and further waves seen in some countries across the Group. The consequences of COVID-19 may include significant logistical
challenges for staff and their ability to perform their duties, potential loss of lives or significant level of illness in the workforce, inability to
deliver revenue stream and market share targets impacting profits and cash flows, disruption to supply chain and third parties unable to
deliver contractual goods and services. In addition, some countries across the Group have adopted regulations restricting the ability to
manufacture, distribute, market and sell products.
Impact
The COVID-19 pandemic on the Group’s results of operations and financial condition is uncertain and cannot be predicted as the pandemic evolves.
The long-term impacts of the COVID-19 pandemic to the Group’s business will depend on a range of factors which we are not able to accurately predict,
including the duration and scope of the pandemic, the geographies impacted, the impact of the pandemic on economic activity and the nature and
severity of measures adopted by governments. These factors include, but are not limited to:
– Reductions or volatility in consumer demand for one or more of our products due to illness, retail closures, quarantine or other travel restrictions,
health consciousness (quitting use of tobacco and nicotine products), government restrictions, the deterioration of socio-economic conditions,
economic hardship and customer-downtrading (switching to a cheaper brand), which may impact the Group’s market share.
– Disruptions to the Group’s operations, such as its supply chain, or manufacturing or distribution capabilities, which may result in increased costs due
to the need for more complex supply chain arrangements, to expand existing facilities or to maintain inefficient facilities, a reduction of the Group’s
sales volumes or an increase in bad debts from customers.
– Disruption to the Group’s operations resulting from a significant number of the Group’s employees, including employees performing key functions,
working remotely for extended periods of time or becoming ill, which may reduce the employees’ efficiency and productivity and cause product
development delays, hamper new product innovation and have other unforeseen adverse effects on the Group’s business.
– Significant volatility in financial markets (including exchange rate volatility) and measures adopted by governments and central banks that further
restrict liquidity, which may limit the Group’s access to funds, lead to shortages of cash and cash equivalents needed to operate the Group’s
business, and impact the Group’s ability to refinance its existing debt.
– Regulations restricting the ability to manufacture, distribute, market and sell products, and potentially increasing illicit trade.
– Governments seeking to increase revenues through increased corporate taxes and excise in combustible and/or New Category products, increasing
the cost and prices of our products - which could reduce volumes and margins, and/or increase illicit trade.
All of these factors may have material adverse effects on the Group’s results of operations and financial condition.
BAT Annual Report and Form 20-F 2020 295
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, advertising and marketing: including partial or total bans on advertising, marketing, promotions and sponsorship;
restrictions on brand sharing and brand stretching (i.e., using tobacco branding on non-tobacco products); restrictive regulatory measures
or principles (including our International Marketing Principles) on the marketing and sale of tobacco products to consumers such as age
verification measures;
– 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 expected over the medium term in many of the Group’s
markets, e.g. in the US following the change of administration and other results in the 2020 elections. 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.
In addition, the Group may fail to implement the right level of control measures or to maintain adequate standards of compliance with the
regulatory measures affecting the manufacture, packaging, sale and marketing of the Group’s products. For example, the Group’s marketing
activities may fail to comply with the relevant law and regulations or with the Group’s International Marketing Principles. 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 regulation, may increase these risks.
Traditional 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. With respect to tobacco and combustible 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, including
recommendations for plain packaging and flavour bans with menthol bans in effect in the European Union since 20 May 2020. 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. Additionally, 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. Finally, the FCTC COP9 and the EU Tobacco Product Directive 2, post-implementation review which is currently
ongoing, are likely to result in further regulation for New Categories and traditional tobacco products.
New Categories
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.
Following reports of individuals experiencing acute respiratory injury in suspected association with vaping certain e-liquids (EVALI) and several
allegations regarding vaping youth usage in the USA, regulators at the local, municipal, state, national and international levels are increasingly
applying or considering applying more restrictive regulations for vapour products. This approach is publicly supported by the World Health
Organization (WHO) which continues to call on countries to ban or regulate novel nicotine products as tobacco. The USA, Europe and Canada
are playing a leading role across all identified regulatory risks, including: bans on flavours, sales channel bans, advertising restrictions and
nicotine limits, among others. With respect to Modern Oral, regulatory frameworks currently follow divergent approaches. In certain markets, in
particular where there is an absence of adequate regulation, actions of irresponsible competitors may cause reputational harm to the category
and result in outright bans or adverse regulation, as has been the case in Russia with allegations regarding youth usage. In markets where
there is a likelihood of tobacco, pharmaceutical or food regulatory classification, the category can be at risk of severe regulation or total ban.
The Group believes that Tobacco Heated Products are likely to be regulated as traditional tobacco products, driven by the decision of WHO’s 7th
Conference of Parties to the Framework Convention on Tobacco Control, including recommendations for plain packaging and flavour bans.
Please refer to pages 307 to 310 for details of tobacco and nicotine regulatory regimes under which the Group’s businesses operate.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 296
Other Information
Group Risk Factors
Continued
Risk: Exposure to increasingly stringent regulatory measures affecting the manufacture, packaging, sale and marketing of the
Group’s products continued.
Impact
Existing and future regulatory measures impacting both New Categories and/or traditional tobacco products could adversely affect
volume, revenue and profits, as a result of: restrictions on the Group’s ability to sell its products or brands, reduced margins due to
increased operating costs, impediments to building or maintaining brand equity and restrictions on the Group’s ability to deliver, market
and sell existing or new products responding to consumers’ preferences. In addition, new regulation could lead to greater complexity, as
well as higher production and compliance costs.
As an example, through the acquisition of Reynolds American Inc., 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,
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.
As a reflection of the real or perceived impact of stricter regulation in our business, 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.
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. In particular, national authorities (such as the FDA),
organisations or even individuals may allege that our marketing activities do not comply with the relevant laws and regulations, or with our
International Marketing Principles. As such, the Group could be subject to liability and costs associated with civil and criminal actions as
well as regulatory sanctions, fines and penalties brought in connection with these allegations. Even when proven untrue, there are often
financial costs and reputational impacts in defending against such claims and allegations (including potential adverse impact on the
treatment by the FDA of the Group’s PMTAs in the US). Each of these results may in turn have an adverse effect on the Group’s results of
operations and financial condition.
Risk: Adverse implications of 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 Extended Producer Responsibility (“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 Q1 2021. In addition, in December 2020 the European Commission adopted
and published an Implementing Act harmonising specifications for required product markings with a compliance deadline of July 2021.
When transposing the Directive into national law, EU member states could decide to expand its scope under their respective national
laws, which may expose the Group to additional regulations and financial obligations. This is already the case in France, where EPR
implementation has already occurred with an expansion of the scope to include non-plastic filters for RYO products, and Sweden, where
the Swedish Ministry of Environment has proposed introducing an EPR scheme for snus pouches (with Modern Oral products also likely to
be included) in addition to the one for cigarette filters. A consultation on this is taking place until 15 March 2021.
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 other 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 covering
other plastic elements in our products beyond filters for traditional products and/or New Categories products.
Impact
The financial implications of existing and future EPR schemes will increase operating costs and 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.
BAT Annual Report and Form 20-F 2020 297
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, regulatory and patent 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), patent infringement (please refer to the risk factor under “Product pipeline,
commercialisation and Intellectual Property risks, 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” below), negligence, strict tort liability, 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 and taxed.
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 have in the past resulted, and may in the future
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 298
Other Information
Group Risk Factors
Continued
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 certain categories in a number of countries in which
it operates and/or is one of a small number of tobacco and /or New Categories companies in certain other markets in which it operates.
The Group has had antitrust infringement decisions against it in the past and is subject to ongoing investigations (please refer to note 27
in the Notes on the Accounts for details of contingent liabilities applicable to the Group). The Group may fail to comply with competition
or antitrust laws and may be subject to investigation and/or litigation for alleged abuse of its position in markets in which it has significant
market share or for alleged collusion/anti-competitive arrangements with other market participants.
Impact
Failure by the Group to comply with competition or antitrust laws and investigations (and/or litigation) 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 or other buyers, 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 and/or courts 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.
BAT Annual Report and Form 20-F 2020 299
Legal, Regulatory and Compliance Risks continued
Risk: Loss of confidential information, including through manipulation of data by employees and system failure.
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.
Extensive remote working may periodically increase this risk (e.g. during the COVID-19 pandemic).
In addition, flaws in our IT systems, 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.
Impact
The loss of confidential information may result in civil or criminal legal liability and prosecution by enforcement bodies and/or claims from
third parties, which may subject the Group to the imposition of material fines, damages and/or penalties and the costs associated with
defending these claims. It could also lead to a competitive disadvantage through the loss of trade secrets.
Inappropriate disclosure of confidential information or violation of the GDPR or other privacy laws (please refer to the risk factor under
“Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation, the UK Data
Protection Act 2018, e-Privacy Laws and other privacy legislation governing the processing of personal data” below) 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 300
Other Information
Group Risk Factors
Continued
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 and other anti-financial crime laws including but not limited to
failure to prevent facilitation of tax evasion (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.
In January 2021 the Group was informed that the investigation by UK’s Serious Fraud Office into suspicions of corruption in the conduct
of business by Group companies and associated persons had been closed. The SFO stated that it would continue to offer assistance to
the ongoing investigations of other law enforcement partners. 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.
Please refer to note 27 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
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.
The Group is cooperating with the authorities’ investigations, including the DOJ and OFAC in the United States, which are conducting
an investigation into suspicions of breach of sanctions. 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.
Please refer to note 27 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
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 or banking relationships
and reputational harm. Reputational harm may result regardless of whether the Group complies with imposed sanctions.
BAT Annual Report and Form 20-F 2020 301
Legal, Regulatory and Compliance Risks continued
Risk: Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation, the
UK Data Protection Act 2018, e-Privacy Laws and other privacy legislation governing the processing of personal data.
Description
Personal data is a subset of data (which is likely to be confidential) which attracts different risks and treatment under the law. Breaches
of data privacy laws include misuse of information which may not be confidential in nature. These include, for example, unsolicited
marketing calls to a publicly available number, or using an individual’s personal data in a way which was not authorised or in a way that the
individual did not reasonably expect through technologies such as online tracking or monitoring.
Various privacy laws, including the European General Data Protection Regulation (“GDPR”), UK Data Protection Act 2018 (“UKDPA”)
and e-Privacy Directive (“e-Privacy Laws”) / EU Regulatory guidances, govern the way in which organisations (comprising employees,
contractors, service providers and other authorised persons) handle individuals’ personal data including how such organisations, including
the Group, track or monitor their online behaviour.
In particular:
– in the event of:
– an unauthorised disclosure of personal data as a result of a bad actor (e.g. cyberattack); or
– flaws in our IT systems, or application resilience, slow or insufficient disaster recovery service levels or the installation failure of a new
system (which result in personal data stored or communicated by IT systems being corrupted, lost or disclosed);
Depending on the risk to the individuals concerned, such personal data breaches (including mass personal data unavailability) must be
reported to the local data protection supervisory authority which could subject Group companies to not only regulatory scrutiny but also
individual claims or even class action suits; and
– ePrivacy Laws state that any misuse of consumer personal data or lack of transparency provided to consumers on how we use their
data or track their online behaviours are subject to regulatory scrutiny.
Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve. Following the entry
into force 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 further increases the risks surrounding the processing of personal
data especially in the consumer space.
Impact
Failure to comply with existing or future e-Privacy Laws and privacy legislation governing the processing of personal data may adversely
impact the Group’s results of operations and financial condition.
Loss or misuse of personal data may result in civil or criminal legal liability and prosecution by enforcement bodies, which may subject
the Group to the imposition of material fines (currently up to 4% of Group worldwide turnover in the context of GDPR) and/or penalties
and/or claims and costs associated with defending these claims (which could include class action suits brought by consumers).
Reputational damage could also potentially cause significant harm to the Group.
Relevant data protection supervisory authority could also order certain Group legal entities to cease processing activities, which could
result in a significant operational disruption.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 302
Other Information
Group Risk Factors
Continued
Economic and Financial Risks continued
Risk: Inability to obtain price increases and exposure to risks from excessive price increases and value chain erosion.
Description
Annual price increases by the Group 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. As an example, excise on Tobacco Heated Products in Japan is increasing and will align closer to FMC
following a five year (2018-2022) phased excise plan.
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.
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 continuous 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, rising health concerns, a decline in the social acceptability of
smoking and an increase in New Category uptake.
The Group competes based on the strength of its strategic brand portfolio, product quality and taste, brand recognition, brand loyalty,
taste, innovation, packaging, service, marketing, advertising and price. The Group is subject to highly competitive environments in all
aspects of its business, and its 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.
BAT Annual Report and Form 20-F 2020 303
Economic and Financial Risks continued
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.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 304
Other Information
Group Risk Factors
Continued
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 188 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.
Risk: Adverse consequences of the UK’s exit from the EU.
Description
The consequences of the UK’s exit from the EU remain uncertain and the full extent of the impact is not expected for some time, 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, rules of origin requirements 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.
BAT Annual Report and Form 20-F 2020 305
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 306
Other Information
Group Risk Factors
Continued
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 these brand names and 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.
The Group currently is involved in various patent infringement litigation proceedings globally related to technology used in the Group’s
New Category products. This litigation involves both claims by the Group that competitors are infringing on the Group’s patents and
claims by competitors that the Group is infringing on competitors’ patents.
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.
BAT Annual Report and Form 20-F 2020 307
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. the EU’s General Product Safety Directive (2001/95/EC), electrical safety
regulations and reduced ignition propensity standards for cigarettes); 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 the guidelines are not legally binding, they provide a framework of
recommendations for parties to the guidelines.
To date, the FCTC has been ratified by 182 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 TPD2, was adopted in April 2014 for transposition into EU
member states’ law by May 2016. Provisions of 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, TPD2 bans the sale of cigarettes and roll-your-own tobacco
with a characterising flavour. Menthol-flavoured cigarettes were exempted from the ban until May 2020, which has since been applied also to menthol
cigarettes. (See ‘The US’ for information pertaining to the regulation of menthol in that market).
TPD2 also purports to leave open to EU Member States the possibility of further standardising the packaging of tobacco products and to apply some
of 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.
The European Commission is required to prepare a report by no later than 20 May 2021 on the application of TPD2 and setting out, in particular, the
elements of TPD2 which it believes should be reviewed or adapted based on scientific and technical developments as well as internationally agreed
rules and standards on tobacco and related products.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 308
Other Information
Regulation of the Group’s Business
Continued
Single-Use Plastics
The Single Use Plastics Directive (EU) 2019/904 (the SUP Directive) entered into force on 2 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 3 July
2021 for pack marking requirements and of 5 January 2023 for EPR schemes. Other governments have passed or are considering similar legislation
including Canada, Russia, South Korea and various levels of government in the United States.
Restrictions on Smoking in Private, Public and Workplaces
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 states and territories 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 European Commission report on TPD2 due by 20 May 2021 is required to consider,
amongst other things, the benefits of establishing a single list of permitted ingredients at 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 non-binding FCTC guidelines recommend that contracting
parties consider introducing plain packaging. To date, 21 countries (including Australia, Belgium, Canada, Denmark, France, Ireland, New Zealand,
the Netherlands, Saudi Arabia, Singapore, Turkey, and the UK) have adopted plain packaging legislation, with the measure being implemented in 15
of those countries. Countries, territories and states that are currently considering adopting plain packaging legislation include, but are not limited to
Argentina, India, Ecuador, Panama, Sweden, Brazil, Chile, Spain and South Africa. Others, such as South Korea, Ukraine and Colombia, are considering
implementing increased 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, Finland and Spain, 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 400 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 2021, 62 parties have ratified the Protocol.
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.
BAT Annual Report and Form 20-F 2020 309
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 currently 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. While Australia’s Therapeutic Goods Administration plans to re-classify nicotine as a prescription-only medication from 1 October 2021,
the effect will be that a doctor’s prescription will be required to legally access nicotine vapour products and liquid nicotine. 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, bans or restrictions on
flavours or other restrictions. 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 are ‘made or derived from
tobacco’ 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 premarket 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 Vapour’s Vuse Digital Vapour Cigarette) subsequently have entered into commerce. To address
this issue, the FDA established a compliance policy regarding the premarket 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. In October 2019, R. J. Reynolds Vapour
Company filed PMTAs for Vuse Solo. Based upon requirements of the FSPTCA that must be addressed in PMTAs, and the FDA’s Guidance regarding
the type of evidence required for such applications, the costs of preparing a PMTA are significant.
In January 2020, the FDA reinforced the filing deadline of 12 May 2020 in its Guidance related to vapour, but reversed its previous compliance policy that
allowed products to remain on the market without a PMTA. The Guidance announced the agency’s intent to enforce (as of February 2020) the PMTA
requirements on certain products as follows: 1) Flavoured, cartridge-based vapour products except for tobacco- or menthol-flavoured products; 2) All
other vapour products for which the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; 3) Any vapour
products that targets or whose marketing is likely to promote use by minors; and 4) Any vapour 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 vapour products and flavoured open
systems would remain available for sale unless 1) the manufacturer 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 a PMTA by 12 May 2020.
In April 2020, the federal court extended the PMTA deadline by 120 days to 9 September 2020 to address the FDA’s concerns regarding delays caused
by the COVID-19 pandemic. R. J. Reynolds Vapour Company filed PMTAs for the remaining Vuse products (Vibe, Ciro, and Alto) and the Velo products
(pouch and lozenge) by the September 2020 deadline. Certain additional data from ongoing research relevant to the Alto and Velo applications will be
submitted as amendments to the PMTAs during the FDA review process.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 310
Other Information
Regulation of the Group’s Business
Continued
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 FDA 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 FDA 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 FDA 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, many of the RAI subsidiaries’ cigarette
and smokeless tobacco products currently on the market are provisional products. At present, there is substantial uncertainty over the approaches that
the FDA CTP will take in evaluating 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. The FDA’s semiannual regulatory agenda, which details the regulatory activities that the FDA expects to undertake
in the foreseeable future, has not listed the NNN proposal since its publication. Thus, it is not known whether or when this proposed rule will be finalised,
and, if adopted, whether the final rule will be the same as or similar to the proposed rule. On 18 December 2017, the FDA accepted for review MRTP
applications for six Camel Snus smokeless tobacco products. In 2018, the FDA began its review of these applications, which included facility inspections
and a public meeting held 13-14 September 2018 before the Tobacco Product Scientific Advisory Committee to obtain its review and recommendation.
The FDA is completing its independent review of the applications with no announced deadline for completion.
On 18 March 2020, FDA issued a rule mandating the incorporation on cigarettes packages of graphic health warnings. The rule requires eleven new
textual warnings, each accompanied by a specific graphic image, on the top 50% of the front and back of all cigarette packages, on the left 50%
of the front and back of cigarette cartons, and the top 20% of all cigarette advertising, beginning June 18, 2021. On 3 April 2020, RAI subsidiaries R.
J. Reynolds Tobacco Company and Santa Fe Natural Tobacco Company, in conjunction with several cigarette manufacturers and retailers, filed a
lawsuit seeking to permanently enjoin implementation of the rule. The court has on two occasions entered orders delaying the implementation of the
rule, which is now delayed until 14 January 2022. The court is expected to issue a decision on all pending motions by March 2021 or otherwise order
another delay to the implementation date while it continues its review. Irrespective of the court’s decision, once issued it is expected to be appealed
to the federal court of appeals, from which a determination is estimated for the fourth quarter of 2021. If the industry challenge is unsuccessful, the
RAI companies are prepared to implement the rule’s requirements by the January 2022 deadline, having created compliant packaging and obtained
approval from the FDA for the required warning rotation plans. 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.
BAT Annual Report and Form 20-F 2020 Disclosure Pursuant to Section 219 of
the Iran Threat Reduction and Syria
Human Rights Act of 2012 (ITRA)
311
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 2020 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 54 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 305
direct employees and an additional 1,172 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 2020, BAT did not have any gross revenues or net profits derived from transactions with the
Government of Iran or affiliated entities.
BAT 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 312
Other Information
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, a tenth 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. In the first
quarter of 2020, certain conditions set forth in the 2018 agreements were met for those ten states. In addition, in August 2020, 24 states,
the District of Columbia and Puerto Rico agreed to settle NPM disputes related to claims for the period 2018-2022. 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). Reynolds American
Inc.’s operating subsidiaries’ expenses and payments under the MSA and the State Settlement Agreements for 2020 amounted to
US$3,572 million in respect of settlement expenses and US$2,848 million in respect of settlement cash payments. Reynolds American
Inc.’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.
R.J. Reynolds Tobacco Company divested certain brands to Imperial Tobacco Group (ITG) in 2015. In 2020, R.J. Reynolds Tobacco Company
recognised additional expenses, included above, under the state settlement agreements in the states of Mississippi, Florida, Texas
and Minnesota related to these divested brands. R.J. Reynolds Tobacco Company recognised US$241 million of expense for payment
obligations to the State of Florida for the ITG acquired brands from the date of divestiture, June 12, 2015, as a result of an unfavourable
judgment. In addition, R.J. Reynolds Tobacco Company recognised US$264 million related to the resolution of claims against it in
the States of Texas, Minnesota and Mississippi for payment obligations to those states for the ITG acquired brands from the date of
divestiture. Finally, R.J. Reynolds Tobacco Company settled certain related claims with Phillip Morris USA under the state settlement
agreements in the states of Mississippi, Texas and Minnesota for US$8 million.
BAT Annual Report and Form 20-F 2020 313
Change of Control Provisions as at 31 December 2020
Significant agreements
Nature of agreement
Key provisions
The revolving credit facilities agreement effective 12 March 2020
entered into between the Company, B.A.T. International Finance
p.l.c., B.A.T. Netherlands Finance 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).
In March and April 2020, the Group arranged short-term bilateral
facilities with core relationship banks for a total amount of
approximately £4.8 billion. B.A.T. International Finance p.l.c. is the
borrower under these facilities and the Company the guarantor.
The bilateral facilities have since been reduced to a total amount of
approximately £3.4 billion and remain undrawn.
– 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 shall
cease to be a borrower under the Facility; 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 the borrower cease to be a direct or indirect subsidiary
of the Company, the borrower shall immediately repay any
outstanding advances made to it under these facilities; and
– where there is a change of control in respect of the Company, the
lenders can require all amounts outstanding under these facilities
to be repaid.
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 Reynolds American Inc.
Facilities A, B and C have been repaid and facility D, totalling the
sterling equivalent of US$2.5 billion, is 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.
– 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.
On 25 July 2017, the Company acceded as a guarantor under
the indenture of its indirect, wholly-owned subsidiary Reynolds
American Inc. The securities issued under the indenture include
approximately US$7.7 billion aggregate principal amount of
unsecured Reynolds American Inc debt securities.
– 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), Reynolds American
Inc. 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 314
Other Information
Property, Plant
and Equipment
The Group uses a combination of in-house and contract manufacturers to manufacture its products.
BAT-owned manufacturing facilities1
United States
APME
AmSSA
ENA
Total
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
2
1
3
1
7
16
7
-
1
24
15
9
-
3
27
12
2
5
2
21
45
19
8
7
79
Note:
1. As of 31 December 2020.
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 2020, 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 2020, 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.
Raw Materials
While the Group does not own tobacco farms or directly employ farmers, it sources over 370,000 tonnes of tobacco leaf each year directly
from over 84,000 contracted farmers and through third-party suppliers mainly in developing countries and emerging markets. In respect
of farmers we contract, we continually strive to improve farmer sustainability and viability with a focus on improved quality and resistance
of seed, tailored mechanisation to reduce costs of production and increased yield, with similar expectation on our third-party suppliers
in respect of their farmer contracts. We review our contracts on an annual basis considering Group requirements over the medium term
(2 - 3 years) to promote the stability of demand and supply on production volumes. 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, economic and political factors, as well as climatic conditions which impact supply, demand and quality of
tobacco grown.
While COVID-19 impacted tobacco supply chains across most markets and required process enhancements to minimise transmission
risks within communities, prices and availability of tobacco were not significantly impacted. The Group believes there is an adequate
supply of tobacco leaf in the world markets to satisfy its current and anticipated production requirements.
We also source a number of other materials required as part of our production requirements, covering areas that include wrapping
materials and filters for our combustibles business and liquids and batteries for our New Categories products. We work closely with our
suppliers to ensure a robust supply chain, with contingency sourcing in place. Contracts and sourcing agreements are reviewed regularly,
to ensure competitive trading terms while recognising that prices may be impacted by external factors that affect our third-party
supply partners. COVID-19 has led to some short-term disruption in the supply of certain materials (due to local lockdowns and travel
restrictions), yet this has been proactively managed to mitigate the impact.
BAT Annual Report and Form 20-F 2020 315
Other Information
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 105, 110 and 117).
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, Jerry Fowden
and Darrell Thomas 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 110). Mr Jobin, Ms Keller Koeppel and Mr
Fowden 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 56 to 57 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 2020. 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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 316
Other Information
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 2020.
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 2020, 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.
BAT Annual Report and Form 20-F 2020 317
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
Disclosures concerning greenhouse gas emissions and energy consumption
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 issuance and 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 the Strategic Report
Financial review
Financial review
A strategy for accelerated growth
Accelerating the Enterprise of the Future
Tobacco Harm Reduction Through World-
class Science
People and Culture
Engaging with our stakeholders
People and Culture
Engaging with our stakeholders
Excellence in Environmental Management
Section in Other Information
Material contracts
Dividends
Articles of Association
Share capital and security ownership
Articles of Association
Articles of Association
Share capital and security ownership
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 2020 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 89 to 116@ and page 140@ and pages 271 to 343. The Directors’ Report was approved by the Board of
Directors on 16 February 2021 and signed on its behalf by Paul McCrory, Company Secretary.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 318
Other Information
Cautionary Statement
This document contains certain forward-looking statements, including “forward-looking” statements made within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995. 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,
including the projected future financial and operating impacts of the COVID-19 pandemic.
In particular, these forward-looking statements include, among other statements, statements regarding the Group’s future financial
performance, planned product launches and future regulatory developments, as well as: (i) certain statements in the Overview section
(pages 2 to 11, including the Chairman’s introduction, Chief Executive’s review and Finance Director’s overview; (ii) certain statements in
the Strategic Management section (pages 12 to 28), including the Global industry overview; (iii) certain statements in the Financial Review
section (pages 65 to 73), including the Treasury and cash flow section and going concern discussions; and (iv) certain statements in the
Other Information section (pages 271 to 348), 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. 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.
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; the inability to develop, commercialise and deliver the Group’s New Categories strategy; the impact of market
size reduction and consumer down-trading; adverse litigation and dispute outcomes and the effect of such outcomes on the Group’s
financial condition; the impact of significant increases or structural changes in tobacco, nicotine and New Categories related taxes;
translational and transactional foreign exchange rate exposure; changes or differences in domestic or international economic or political
conditions; the ability to maintain credit ratings and to fund the business under the current capital structure; the impact of serious injury,
illness or death in the workplace; adverse decisions by domestic or international regulatory bodies; 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 84 to 88 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 288 to 306.
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.
BAT Annual Report and Form 20-F 2020 319
Share Prices and Listing
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
£35.07
R723.34
£23.82
R498.00
US$45.48 US$27.64
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 320
Other Information
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 281, and reconciled from earnings per share in note 7 in the Notes on the Accounts. Please see page 69 of this
Annual Report and Form 20-F 2020 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 73 of this Annual Report and
Form 20-F 2020. 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 2016 to 31 December
2020 inclusive.
Announcement
Year
Payment
2016
May
September/October
Dividend period
Final 2015
Interim 2016
Total
Announcement
Year
Payment
2017
2018
2019
2020
May
September/October
February 2018
May
August
November
February 2019
May
August
November
February 2020
May
August
November
February 2021
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
Quarterly Interim 2020
Quarterly Interim 2020
Quarterly Interim 2020
Quarterly Interim 2020
Total
Dividend per BAT ordinary share
GBP
Dividend per BAT ADS1
ADS ratio 2:1
USD2
1.046
0.513
1.559
3.0292160
1.3324660
4.3616820
Dividend Per BAT Ordinary Share
GBP
Dividend Per BAT ADS1
ADS ratio 1:1
USD2
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
0.526
0.526
0.526
0.526
2.104
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
0.6424030
0.6889020
0.6895860
0.7178320
2.738723
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.
BAT Annual Report and Form 20-F 2020 321
Quarterly Dividends for the Year Ended 31 December 2020
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 215.6p per ordinary share of 25p which is payable in four equal quarterly instalments of
53.9p per ordinary share in May 2021, August 2021, November 2021 and February 2022. This represents an increase of 2.5% on 2019
(2019: 210.4p per share), and a payout ratio, on 2020 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 2021 unless otherwise stated.
Event
Preliminary announcement (includes
declaration data required for JSE purposes)
Payment No. 1
Payment No. 2
Payment No. 3
Payment No. 4
17 February
Publication of finalisation information (JSE)
No removal requests (in either direction)
permitted between the UK main register
and the South Africa branch register
15 March
15 March–
26 March
(inclusive)
Last day to trade (LDT) cum-dividend (JSE) 23 March
Shares commence trading ex-dividend (JSE) 24 March
No transfers permitted between the UK
main register and the South Africa
branch register
24 March–
26 March
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)
(inclusive)
24 March–
26 March
(inclusive)
25 March
25 March
26 March
20 April
12 May
17 May
29 June
29 June–
9 July
(inclusive)
6 July
7 July
7 July–
9 July
(inclusive)
7 July–
9 July
(inclusive)
8 July
8 July
9 July
29 July
19 August
24 August
20 September
20 September–
1 October
(inclusive)
28 September
29 September
29 September –
1 October
(inclusive)
29 September–
1 October
13 December
13 December–
24 December
(inclusive)
21 December
22 December
22 December–
24 December
(inclusive)
22 December–
24 December
(inclusive)
(inclusive)
30 September
23 December
30 September
23 December
1 October
21 October
24 December
19 January 2022
11 November
16 November
9 February 2022
14 February 2022
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 322
Other Information
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 tax-exempt organisation;
– an S corporation or other pass-through entity and an
investor therein;
– 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 is a tax-qualified retirement plan or a participant
or a beneficiary under such a plan;
– a person that is not a US holder (as defined below);
– 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 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 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.
BAT Annual Report and Form 20-F 2020 323
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).
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 324
Other Information
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.
BAT Annual Report and Form 20-F 2020 325
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 326
Other Information
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 2020
2,294,244,351
162,347,246
2,456,591,597
614.1
Note:
1. Includes treasury shares and shares owned by employee share trusts.
Authority to allot shares
This authority (granted at the 2020 AGM) will expire at the 2021 AGM
and provides the Company authority to allot relevant securities up to
the amount representing two-thirds of the Company’s then issued
ordinary share capital (excluding treasury shares), of which approximately
one-third can only be allotted pursuant to a rights issue. Although the
Directors have no present intention of exercising this authority, it provides
them with an appropriate level of authority for on-going purposes and
the Directors consider it appropriate to maintain the flexibility that this
authority provides.
Analyses of Shareholders
Ordinary Shares
At 31 December 2020, there was a total of 2,456,591,597 ordinary
shares in issue held by 108,467 shareholders. These shareholdings
are analysed as follows:
(a) by listing as at 31 December 2020:
Register
UK
South Africa
Total
Total number
of shares
Number of
holders
% of issued
share capital
2,197,039,462
259,552,135
36,648
71,819
89.43
10.57
2,456,591,597
108,467
100.00
(b) by size of shareholding as at 31 December 2020:
UK Register
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
Number of
holders
% of
UK ordinary
share capital
31,222
3,898
1,050
170
307
1
0.63
0.72
2.58
2.66
85.93
7.48
36,648
100.00
Number of
holders
% of
SA ordinary
share capital
66,334
3,730
1,601
91
63
71,819
6.59
5.86
24.98
10.75
51.82
100.00
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
97,556
7,628
2,651
261
370
1
108,467
1.29
1.27
5.17
3.62
82.03
6.62
100.00
American Depositary Shares (ADSs)
At 31 December 2020, there was a total of 189,157,550 ADSs
outstanding held by 9,344 registered holders. The ADS register is
analysed by size of shareholding as at 31 December 2020 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
9,139
179
24
1
1
9,344
0.95
0.32
0.34
0.12
98.27
100.00
Note:
1. One registered holder of ADSs represents 338,284 underlying shareholders.
Security Ownership of Ordinary Shares
As at 15 February 2021, there were 36,451 record holders of ordinary
shares listed on the LSE (including Citibank as the depositary bank for the
ADSs) and 2,196,175,409 of such ordinary shares outstanding. As at that
date, to BAT’s knowledge, 299 record holders, representing 0.01% of the
ordinary shares listed on the LSE, had a registered address in the US. As at
15 February 2021, there were 752 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 260,417,941
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 15 February 2021, based on information received
from Citibank, there were 9,309 record holders of ADSs and 190,737,381
ADSs outstanding. As at that date, based on information received from
Citibank, 9,236 record holders, representing 99.91% of ADSs representing
ordinary shares, had a registered address in the US.
Security Ownership – Major Shareholders
At 31 December 2020, 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.
Spring Mountain Investments Ltd.3
256,801,504
132,891,526
92,462,558
11.19
5.79
4.03
Notes:
1. The latest percentage of issued share capital excludes treasury shares.
2. Includes 26,775,611 ordinary shares represented by ADRs.
3. Includes 3,973,516 ordinary shares represented by ADRs.
On 14 January 2021, Spring Mountain Investments Ltd. notified the
Company that on 12 January 2021 its interest had increased to 115,596,737
ordinary shares (5.04% of issued share capital), including 3,973,516
ordinary shares represented by ADRs.
BAT Annual Report and Form 20-F 2020
327
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
Portfolio Services Ltd filed with the SEC a statement on Schedule 13G under the Exchange Act on 22 January 2021 disclosing that as of 31 December
2020 it beneficially owned 114,819,555 ordinary shares representing 5.0% of the Company’s ordinary shares outstanding as of 31 December 2020.
BlackRock, Inc. filed with the SEC a statement on Schedule 13G under the Exchange Act on 29 January 2021 disclosing that as of 31 December
2020 it beneficially owned 178,392,857 ordinary shares representing 7.8% of the Company's ordinary shares outstanding as of 31 December 2020.
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
16 February 2021. 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 Michael Dijanosic is Level 30, Three Pacific Place,
1 Queen’s Road East, Hong Kong. The address for Guy Meldrum 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
Karen Guerra
Dr Marion Helmes
Luc Jobin4
Holly Keller Koeppel4,5
Savio Kwan
Dimitri Panayotopoulos
Darrell Thomas
19,000
217,518
54,360
–
10,000
2,478
4,500
45,236
8,416
7,455
3,300
2,000
0.0008
0.0094
0.0023
–
0.0004
0.0001
0.0002
0.0020
0.0004
0.0003
0.0001
0.0000
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 328
Other Information
Share Capital and Security Ownership
Continued
Management Board
Jerome Abelman6,7,8
Marina Bellini6
Luciano Comin6,7,8
Michael Dijanosic ,7,8
Zafar Khan6,7,8
Hae In Kim6,7,8
Paul Lageweg6,7,8,9
Guy Meldrum6,7,8
David O’Reilly6,7,8
Johan Vandermeulen6,7,8
Kingsley Wheaton6,7,8
All Directors and Management Board as a group (23 persons)
Number of Ordinary Shares
Percentage of Class10
76,660
2,336
23,961
21,403
232
13,621
112,362
18,643
63,171
60,265
46,847
813,753
0.0033
0.0001
0.0010
0.0009
0.0000
0.0006
0.0049
0.0008
0.0027
0.0026
0.0020
0.0355
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) 685 ordinary shares for Mr Bowles, of which 421 have been held for less than three years; (b) 1,114 ordinary shares
for Mr Marroco, of which 642 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 16 February 2021: (a) 43,785 options under the LTIP for Mr Bowles; and (b) 28,248 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 16 Feburary 2021: (a) 12,064 ordinary shares for Mr Bowles; (b) 7,783 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, Ms Koeppel and Mr Thomas are represented by ADSs, each of which represents one ordinary share.
5. Ms Koeppel, being a former director of Reynolds American Inc. and a participant in the Deferred Compensation Plan for Directors of Reynolds American Inc. (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 25,125.91 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) 954 ordinary shares for Mr Abelman, of which 438 have been held for less than three
years; (b) 366 ordinary shares for Ms Bellini, of which 247 have been held for less than three years; (c) 975 ordinary shares for Mr Comin, of which 442 have been held for less than three
years; (d) 112 ordinary shares for Mr Khan, all of which have been held for less than three years; (e) 343 ordinary shares for Ms Kim, all of which have been held for less than three years; (f) 338
ordinary shares for Mr Lageweg, all of which have been held for less than three years; (g) 307 ordinary shares for Mr Meldrum, all of which have been held for less than three years; (h) 2,282
ordinary shares for Dr O’Reilly, of which 652 have been held for less than three years; (i) 923 ordinary shares for Mr Vandermeulen, of which 432 have been held for less than three years; and (j)
1,115 ordinary shares for Mr Wheaton, of which 484 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 16 February 2021: (a) 32,100 options under the LTIP for Mr Abelman; (b) 10,313 options under the LTIP for Mr Comin; (c) 6,158 options under the LTIP for Mr
Khan; (d) 6,497 options under the LTIP for Ms Kim; (e) 11,471 options under the LTIP for Mr Lageweg; (f) 11,066 options under the LTIP for Mr Meldrum; (g) 24,364 options under the LTIP for Mr
O’Reilly; (h) 6,673 options under the LTIP for Mr Dijanosic; (i) 30,335 options under the LTIP for Mr Vandermeulen; (j) 32,100 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 16 February 2021: (a) 8,844 ordinary shares for Mr Abelman; (b) 3,464 ordinary shares for Mr Comin; (c) 2,026 ordinary shares for Mr Khan; (d)
1,863 ordinary shares for Ms Kim; (e) 2,039 ordinary shares for Mr Lageweg; (f) 3,796 ordinary shares for Mr Meldrum; (g) 6,713 ordinary shares for Dr O’Reilly; (h) 2,259 ordinary shares for
Mr Dijanosic; (i) 8,358 ordinary shares for Mr Vandermeulen; and (j) 8,358 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 98,416 ADSs, each of which represents one ordinary share.
10. The information in this column is based on 2,294,246,104 ordinary shares outstanding (excluding treasury shares) as of 15 February 2021. 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.
BAT Annual Report and Form 20-F 2020 329
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 16 February 2021. 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, Ms Guerra, Dr Helmes,
Mr Jobin, Ms Koeppel, Mr Kwan, Mr Panayotopoulos and Mr Thomas.
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Directors
Jack Bowles
LTIP1
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
43,785 26 Mar 2018
28 Mar 2019
176,532
223,129 30 Mar 2020
238,814
0.00
0.00
0.00
38.94
33.28
26.33
–
–
–
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
30 Mar 2023 – 29 Mar 2030
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
–
–
1 Apr 2020
– 13 May 2020
–
–
–
19 Aug 2020
12 Nov 2020
5 Feb 2021
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12,064
26,192
53,618
70
3
4
6
7
112
6
8
9
7
125
9
13
12
13
92,278
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 330
Other Information
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
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
28,248 26 Mar 2018
36,057
28 Mar 2019
113,938 30 Mar 2020
266 28 Mar 2018
624 30 Mar 2020
179,133
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
–
1 Apr 2020
–
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
0.00
0.00
0.00
33.76
24.01
38.94
33.28
26.33
42.20
26.35
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
1 May 2021 – 31 Oct 2021
–
1 May 2025 – 31 Oct 2025
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,783
13,233
24,388
70
6
7
10
11
112
11
13
14
12
125
14
21
20
21
45,871
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
Tadeu Marroco
LTIP1
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
BAT Annual Report and Form 20-F 2020 331
Management Board
Jerome Abelman
LTIP1
Restricted Share Plan7
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Marina Bellini
LTIP1
Restricted Share Plan7
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
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
32,100 26 Mar 2018
37,560 28 Mar 2019
40,676 30 Mar 2020
10,653 30 Mar 2020
120,989
0.00
0.00
0.00
0.00
38.94
33.28
26.33
26.33
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
–
–
1 Apr 2020
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
29,296 28 Mar 2019
31,105 30 Mar 2020
8,146 30 Mar 2020
28 Mar 2019
785
69,332
– 28 Mar 2019
– 30 Mar 2020
1 Apr 2019
–
8 Aug 2019
–
14 Nov 2019
–
6 Feb 2020
–
–
1 Apr 2020
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,844
13,785
15,824
70
4
5
8
9
112
9
10
11
10
125
12
18
17
18
38,891
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
0.00
0.00
0.00
22.91
33.28
26.33
26.33
28.63
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
–
30 Mar 2023
1 May 2022 – 31 Oct 2022
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,525
12,101
99
1
3
2
125
2
7
6
2
17,873
28 Mar 2022
30 Mar 2023
1 Apr 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 332
Other Information
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
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
10,313
26 Mar 2018
31,550 28 Mar 2019
33,497 30 Mar 2020
8,773 30 Mar 2020
28 Mar 2018
533
84,666
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
–
1 Apr 2020
–
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
0.00
0.00
0.00
0.00
33.76
38.94
33.28
26.33
26.33
42.20
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
1 May 2021 – 31 Oct 2021
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,464
5,084
13,032
70
5
5
9
8
112
9
11
12
10
125
13
18
17
18
22,022
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
26 Mar 2018
6,673
8,299 28 Mar 2019
7,739 30 Mar 2020
2,149 30 Mar 2020
24,860
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
0.00
0.00
0.00
0.00
–
–
–
38.94
33.28
26.33
26.33
–
–
–
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
2,259
2,827
2,746
7,832
26 Mar 2021
28 Mar 2022
30 Mar 2023
Luciano Comin
LTIP1
Restricted Share Plan7
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Michael Dijanosic
LTIP1
Restricted Share Plan7
Total Options3
DSBS4
Total Restricted Share Awards6
BAT Annual Report and Form 20-F 2020 333
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Zafar Khan
LTIP1
Restricted Share Plan7
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
6,158 26 Mar 2018
8,862
28 Mar 2019
8,855 30 Mar 2020
2,459 30 Mar 2020
26,334
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
1 Apr 2019
–
Hae In Kim
LTIP1
Restricted Share Plan7
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
6,497
26 Mar 2018
30,048 28 Mar 2019
31,902 30 Mar 2020
8,355 30 Mar 2020
28 Mar 2018
533
76,335
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
3 Apr 2018
–
15 Nov 2018
–
7 Feb 2019
–
1 Apr 2019
–
8 May 2019
–
8 Aug 2019
–
14 Nov 2019
–
6 Feb 2020
–
–
1 Apr 2020
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
0.00
0.00
0.00
0.00
–
–
–
–
0.00
0.00
0.00
0.00
33.76
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38.94
33.28
26.33
26.33
–
–
–
–
38.94
33.28
26.33
26.33
42.20
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
2,026
2,981
3,062
112
8,181
26 Mar 2021
28 Mar 2022
30 Mar 2023
1 Apr 2022
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
1 May 2021 – 31 Oct 2021
–
1,863
3,798
12,411
70
2
1
112
1
3
4
3
125
3
7
6
6
18,415
26 Mar 2021
28 Mar 2022
30 Mar 2023
3 Apr 2021
15 Nov 2021
7 Feb 2022
1 Apr 2022
8 May 2022
8 Aug 2022
14 Nov 2022
6 Feb 2023
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 334
Other Information
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
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
4,540 28 Mar 2014
27 Mar 2015
8,954
12 May 2016
5,956
27 Mar 2017
8,234
26 Mar 2018
11,471
29,296 28 Mar 2019
31,105 30 Mar 2020
8,146 30 Mar 2020
1,309 28 Mar 2019
109,011
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
–
–
1 Apr 2020
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
11,066 26 Mar 2018
31,550 28 Mar 2019
33,497 30 Mar 2030
8,773 30 Mar 2030
84,886
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
3 Apr 2018
–
1 Apr 2019
–
1 Apr 2020
–
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
22.91
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.00
0.00
0.00
0.00
–
–
–
–
–
–
32.58
36.25
42.34
52.11
38.94
33.28
26.33
26.33
28.63
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38.94
33.28
26.33
26.33
–
–
–
–
–
–
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
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
1 May 2024 – 31 Oct 2024
–
2,039
5,265
12,101
70
1
1
1
112
1
2
3
2
125
3
6
5
6
19,743
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 30 Mar 2030
30 Mar 2030
–
3,796
5,651
13,032
70
112
125
22,786
26 Mar 2021
28 Mar 2022
30 Mar 2023
3 Apr 2021
1 Apr 2022
1 Apr 2023
Paul Lageweg
LTIP1
Restricted Share Plan7
Sharesave2
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Guy Meldrum
LTIP1
Restricted Share Plan7
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
BAT Annual Report and Form 20-F 2020 335
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
24,364 26 Mar 2018
30,048 28 Mar 2019
32,540 30 Mar 2020
8,522 30 Mar 2020
95,474
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
–
–
1 Apr 2020
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
30,335
26 Mar 2018
39,438 28 Mar 2019
41,872 30 Mar 2020
10,966 30 Mar 2020
122,611
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
–
1 Apr 2020
–
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
0.00
0.00
0.00
0.00
38.94
33.28
26.33
26.33
26 Mar 2021 – 25 Mar 2028
–
–
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
6,713
11,028
12,659
70
21
19
29
31
112
31
32
33
29
125
34
44
42
43
31,095
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
0.00
0.00
0.00
0.00
38.94
33.28
26.33
26.33
26 Mar 2021 – 25 Mar 2028
–
28 Mar 2022 – 27 Mar 2029
–
– 30 Mar 2023 – 29 Mar 2030
30 Mar 2023
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,358
13,785
16,290
70
4
5
7
8
112
8
10
11
10
125
11
18
16
17
38,865
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
Dr David O’Reilly
LTIP1
Restricted Share Plan7
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
Johan Vandermeulen
LTIP1
Restricted Share Plan7
Total Options3
DSBS4
SIP5
Total Restricted Share Awards6
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 336
Other Information
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
Shares Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
32,100 26 Mar 2018
43,194 28 Mar 2019
46,777 30 Mar 2020
12,251 30 Mar 2020
1,309 28 Mar 2019
135,631
– 26 Mar 2018
– 28 Mar 2019
– 30 Mar 2020
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
1 Apr 2020
–
– 13 May 2020
19 Aug 2020
–
12 Nov 2020
–
5 Feb 2021
–
0.00
0.00
0.00
0.00
22.91
38.94
33.28
26.33
26.33
28.63
–
–
26 Mar 2021 – 25 Mar 2028
28 Mar 2022 – 27 Mar 2029
– 30 Mar 2023 – 29 Mar 2030
–
–
30 Mar 2023
1 May 2024 – 31 Oct 2024
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,358
13,785
18,198
70
8
8
13
13
112
13
14
16
13
125
15
22
20
22
40,825
26 Mar 2021
28 Mar 2022
30 Mar 2023
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
1 Apr 2023
13 May 2023
19 Aug 2023
12 Nov 2023
5 Feb 2024
Kingsley Wheaton
LTIP1
Restricted Share Plan7
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: a portion of annual bonus is deferred into a grant of ordinary shares which vests after a three year period. No further performance conditions apply in that period. Participants have no
ownership over the shares until vesting and the shares carry no rights to vote in that period. Dividend equivalent payments are paid quarterly during the vesting 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.
7. Restricted Share Plan: grant of ordinary shares which vests after a three year period. No performance conditions apply in that period. Participants have no ownership over the shares until
vesting and the shares carry no rights to vote in that period. Dividend equivalent payments are paid on shares vesting.
BAT Annual Report and Form 20-F 2020 Articles of Association
337
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
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 338
Other Information
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 28 April 2021 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
BAT Annual Report and Form 20-F 2020 339
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 340
Other Information
Purchase of Shares
Renewal of Authority for Company to Purchase Own Shares
Current authority
to purchase shares
suspended with effect from 30 July 2014; and
– this authority (granted at the 2020 AGM) will expire at the 2021 AGM; the share buy-back programme was
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 2021 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 2020, the number of treasury shares was 162,347,246 (2019: 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 30 April 2020, authorisation was given to the Company to repurchase up to 229.4 million ordinary shares for the period until
the next AGM in 2021. This authorisation is renewed annually at the AGM. No ordinary shares were repurchased by the Company during
2020. 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
2020
2 January
5 February
6 February
4 March
1 April
1 April
7 April
7 April
7 April
5 May
6 May
13 May
3 June
1 July
5 August
19 August
2 September
7 October
4 November
12 November
2 December
2,807
2,422
14,968
2,612
237,096
3,023
1,283
14,338
5,689
95,397
2,807
15,342
2,643
2,713
3,374
22,421
3,295
3,074
3,237
20,322
3,201
32.750000
34.245000
34.566100
31.825000
28.442330
27.485000
29.400000
29.968600
29.450000
29.981900
29.945000
31.072700
31.965000
30.930000
25.575000
25.593800
25.530000
27.625000
25.820000
27.779740
26.930000
462,064
28.040008
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Notes:
1. There was no publicly announced plan for BAT to purchase its own ordinary shares or ADSs during the year ended 31 December 2020.
2. All the purchases of ordinary shares were made on open market transactions.
BAT Annual Report and Form 20-F 2020 Group Employee Trust
341
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: £795.02 million at 31 December 2020 (2019: £788.24 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 2020
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
– quarterly interim dividends 2020: £14.50 million across 2020.
1 Jan 2020
8,049,187
£260.1m
0.33
31 Dec 2020
5,787,154
£156.7m
0.24
– 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 2020: 2,708p (31 December 2019: 3,232p).
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 Reynolds American Inc. over Reynolds American Inc. common stock and which were assumed by BAT to be satisfied by the delivery of ADSs following the merger with
Reynolds American Inc. 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 2020 of US$37.49.
1 Jan 2020
15,197
US$0.6m
0.0006
31 Dec 2020
15,197
US$0.6m
0.0006
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information
342
Other Information
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 343.
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$3.7 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 2020.
In 2020, 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.
BAT Annual Report and Form 20-F 2020 343
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 2020 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 2020 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
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 2020.
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.
The Company’s agent for service in the United States for the purposes
of the registration statement on Form F-3 (333-232691) is Brian T.
Harrison, Secretary, B.A.T Capital Corporation, C/O Corporation Service
Company, 251 Little Falls Drive, Wilmington, Delaware 19808 U.S.A.
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:
Interactive Investor
Exchange Court, Duncombe Street, Leeds LS1 4AX
tel: 0345 607 6001; +44 113 346 2309
email enquiries: interactivehelp@ii.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 2021
Wed
28 April
at
11:30am
Proposed date of the Annual General Meeting
Details of the venue and business to be proposed at
the meeting are set out in the Notice of Annual General
Meeting, which is made available to all shareholders and
is published on www.bat.com. The format for the 2021
AGM will be contingent on applicable UK Government
health and safety restrictions in place at that time.
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 30 July Half-Year Report
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 344
Other Information
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
1
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17
2.18
2.19
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
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
Supplemental Indenture No. 5, dated as of 2 April 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.10
Supplemental Indenture No. 6, dated as of 2 April 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.11
Supplemental Indenture No. 7, dated as of 2 April 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.12
Supplemental Indenture No. 8, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.13
Supplemental Indenture No. 9, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.14
Supplemental Indenture No. 10, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.15
Supplemental Indenture No. 11, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.16
Indenture, dated as of 25 September 2020, by and among B.A.T. International Finance p.l.c., the Guarantors party thereto and Citibank, N.A., as trustee,
authentication agent, transfer agent, registrar, calculation agent and initial paying agent.17
Supplemental Indenture No. 1, dated as of 25 September 2020, by and among B.A.T. International Finance p.l.c., the Guarantors party thereto and Citibank,
N.A., as Trustee.18
Thirty-second Supplemental Trust Deed, dated 31 March 2020, 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.
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.19
Rules of the British American Tobacco 2007 Long-Term Incentive Plan.20
Rules of the British American Tobacco 2016 Long-Term Incentive Plan (Amended and Restated as of 19 February 2021).
British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.21
Annex to British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.22
British American Tobacco p.l.c. 2019 Deferred Annual Share Bonus Scheme.23
Rules of the British American Tobacco Restricted Share Plan.24
Deferred Compensation Plan for Directors of Reynolds American Inc. (Amended and Restated Effective 30 November 2007).25
Service Contract between British American Tobacco p.l.c. and Jack Bowles, dated as of 11 December 2018.26
Service Contract between British American Tobacco p.l.c. and Tadeu Marroco, dated as of 27 February 2019.27
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.28
Settlement Agreement dated 25 August 1997, between the State of Florida and settling defendants in The State of Florida v. American Tobacco Co.29
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.30
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 1998.31
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 1998.32
Form of Consent Judgment by Judge Kenneth J. Fitzpatrick, Judge of District Court in re: The State of Minnesota v. Philip Morris, Inc.33
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.34
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.35
BAT Annual Report and Form 20-F 2020 345
Exhibit
Number Description
4.19
4.20
4.21
8
11
12
13
15
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.36
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.37
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.38
List of Subsidiaries included on pages 254 to 263 in this report.
Code of Ethics.39
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification under Section 906 of the Sarbanes-Oxley Act of 2002.40
Consent of KPMG LLP, independent registered public accounting firm.
101
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 4.6 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.
11. Incorporated by reference to Exhibit 4.7 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.
12. Incorporated by reference to Exhibit 4.8 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.
13. Incorporated by reference to Exhibit 4.9 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
14. Incorporated by reference to Exhibit 4.10 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
15. Incorporated by reference to Exhibit 4.11 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
16. Incorporated by reference to Exhibit 4.12 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
17. Incorporated by reference to Exhibit 4.13 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
18. Incorporated by reference to Exhibit 4.14 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
19. Incorporated by reference to Exhibit 99.13 to BAT’s Amendment No. 4 to Schedule 13D filed on 17 January 2017.
20. 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.
21. 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.
22. 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.
23. 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.
24. 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.
25. 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.
26. 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.
27. Incorporated by reference to Exhibit 4.14 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2019 filed on 26 March 2020.
28. Incorporated by reference to Exhibit 4 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 24 November 1998.
29. Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 5 September 1997.
30. Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 27 January 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 March 1998 filed on 15 May 1998.
32. 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.
33. 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.
34. 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.
35. 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.
36. 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.
37. Incorporated by reference to Exhibit 10.1 to Reynolds American Inc.’s Form 8-K dated 12 March 2013.
38. Incorporated by reference to Exhibit 4.25 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2019 filed on 26 March 2020.
39. Incorporated by reference to Exhibit 11 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2017 filed on 15 March 2018.
40. 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 2020.
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.
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 346
Other Information
Glossary
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
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,
July 2018 version
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
MSA
NGP
NRT
NTO
NYSE
OCF
OECD
OTP
Parker Report
Master Settlement Agreement
Next Generation Product
Nicotine Replacement Therapy
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
PCAOB
Reynolds American Reynolds American Inc.
Reynolds American
British American Tobacco US companies
Companies
@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 (i.e. the devices) or
Tobacco Heated Products (i.e. the consumables
used by such devices)
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 Organization
BAT Annual Report and Form 20-F 2020 Cross-Reference
to Form 20-F
Item
Form 20-F caption
Location in this document
347
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
N/A
N/A
273
N/A
N/A
84-88, 288-289, 290-306
3, 67, 70-71, 172-173, 184-187, 217-218, 272, 286, 343
2-63, 66, 74-81, 272, 291, 293, 307-310, 313, 314, 316
254-263, 272
184-186, 314
N/A
3, 7, 9, 12-15, 35, 37, 39, 40, 41, 65, 73, 77, 87, 197-199, 213, 284,
286, 297, 307-310
70-71, 72, 155, 200, 206-209, 212-217, 282, 286, 303
3, 22-23, 31, 49-50, 66, 167-168, 272
2-57, 66-73, 74-81, 84-88, 307-310
73, 224-248, 287
287
318
92-94, 103
117-139, 188-193, 222-223, 326-336
92-94, 107, 110-116, 117-119, 120-123, 137, 222-223, 317, 338-339
222, 285
63, 122-123, 219-221, 327-336, 341
69, 111-112, 150-253, 320-321
N/A
326-327
222-223
N/A
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 212-217
319
N/A
319
N/A
N/A
N/A
N/A
134, 337-339
248, 312-313
320
322-325
N/A
N/A
343
N/A
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
BAT Annual Report and Form 20-F 2020Strategic ReportGovernance ReportFinancial StatementsOther Information 348
Other Information
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
342
N/A
N/A
316
110, 315
116, 315
113, 167
N/A
340
N/A
315
N/A
N/A
150-253
344-345
BAT Annual Report and Form 20-F 2020 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.
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