Wrap Text
Preliminary announcement – year ended 31 December 2017
British American Tobacco p.l.c.
Incorporated in England and Wales
(Registration number: 03407696)
Short name: BATS
Share code: BTI
ISIN number: GB0002875804
("British American Tobacco p.l.c." or "the Company")
22 February 2018
BRITISH AMERICAN TOBACCO p.l.c.
PRELIMINARY ANNOUNCEMENT – YEAR ENDED 31 DECEMBER 2017
TRANSFORMATIONAL DEAL MARKS A RECORD YEAR
KEY FINANCIALS 2017 2016 Change
Current Constant Current Constant
rates rates* rates rates*
Revenue £20,292m £14,751m +37.6%
Adjusted, organic revenue* £15,712m £15,173m £14,751m +6.5% +2.9%
Profit from operations £6,476m £4,655m +39.1%
Adjusted, organic profit from £5,910m £5,683m £5,480m +7.8% +3.7%
operations*
Diluted earnings per share 1,830.0p 249.2p +634%
Adjusted diluted earnings per share* 284.4p 272.1p 247.5p +14.9% +9.9%
Dividend per share 195.2p 169.4p +15.2%
*The non-GAAP measures, before adjusting items, the use of organic measures and constant currencies, are not defined by IFRS and are further discussed on page 21 and 22.
FULL YEAR HIGHLIGHTS
- Successfully completed the acquisition of Reynolds American Inc. (RAI/Reynolds American) on 25 July 2017
for a total consideration of £41.8 billion in a combination of cash and ordinary shares to become the
world’s leading international tobacco and Next Generation Products (NGP) business.
- Continued roll-out and investment in the development of NGPs, with the national roll-out in Japan of our
tobacco heating product (THP), glo achieving 3.6% national share as well as launches in five new markets
combined with the continued growth of our vapour portfolio.
- Volume of cigarettes and THPs grew by 3.2%, driven by the acquisition of RAI, and fell on an organic basis
by 2.6%, outperforming the market which declined by an estimated 3.5%.
- The Group’s cigarette market share grew 40 basis points (bps), driven by the Global Drive Brand (GDB)
portfolio, with volume up 7.6% on an organic basis with market share up, excluding the US, by 110 bps.
- Group revenue grew 37.6%, with profit from operations up 39.1%, due to the acquisition of RAI, improved
revenue from the NGP portfolio, pricing and a translational foreign exchange tailwind due to the relative
weakness of sterling.
- Adjusted, organic revenue grew 6.5% or 2.9% at constant rates of exchange, driven by pricing and the
performance of NGP.
- Adjusted, organic profit from operations at current rates was up 7.8% or 3.7% at constant rates.
- Operating margin, at current rates, was ahead of 2016 by 30 bps at 31.9%, by 270 bps on an adjusted
basis, or 40 bps on an adjusted organic basis.
- Diluted earnings per share increased by over 600% largely due to a gain of £23.3 billion related to the
acquisition of RAI (see page 12) and a deferred tax credit of £9.6 billion from the revaluation of the net
deferred tax liability arising on the acquisition net assets to the 21% federal tax rate in the US (described
on page 11). On an adjusted basis the increase was 14.9%, or 9.9% on an adjusted, constant rate basis.
- Dividend per share increased 15.2% to 195.2p, payable in four quarterly dividend payments of 48.8p per
share. An additional dividend of 43.6p was also paid in February 2018 – see page 35.
Key Market offtake share, as independently measured by AC Nielsen, and as share of retail for the US business. All variances in this document are based upon the absolute number.
Richard Burrows, Chairman, commenting on the year ended 31 December 2017
“The transformational deal to acquire RAI marked a record year in 2017. The Group continued to deliver on its
commitment to high single figure constant currency earnings growth, substantially reinforced the long-term
sustainability of that growth with the largest acquisition of a tobacco company ever completed and achieved
Page 1
significant success in its Next Generation Products business. This is an exciting time for the Group and the
Board has confidence in the Group’s ability to continue delivering sustainable growth in the years to come.”
CHIEF EXECUTIVE’S REVIEW
The Group delivered another set of strong financial results in 2017, despite a challenging trading environment. Following
the transformational deal in July 2017, these results benefit from the acquisition of RAI while also demonstrating the
strength of the organic business.
The Group has delivered outstanding returns to shareholders for many years. We recognise that the tobacco and
nicotine industry has entered a dynamic period of change. Increased public health awareness, new societal attitudes and
rapid developments in new technologies have all combined to create a unique opportunity to accelerate the delivery of
our long-held ambition to provide our consumers with less risky tobacco and nicotine choices.
Since 2012, together with RAI, we have invested approximately US$2.5 billion in the growth of our Next Generation
Product (NGP) business – comprising vapour and tobacco heating products (THPs). Following the acquisition of RAI, not
only have we become the world’s leading vapour company, we have also significantly increased the size of our existing
oral tobacco and nicotine business with the addition of leading snus and moist snuff brands in the US. Collectively, we
refer to these products as our potentially reduced-risk products.
Our investments are now coming to fruition and, recognising that not all consumers are the same, we now have an
unrivalled range of exciting and innovative products across the potentially reduced-risk categories – including vapour,
THPs, oral tobacco, tobacco-free nicotine pouches and moist snuff. With the increased size and scale coming from RAI,
we are clear leaders in the potentially reduced-risk product space and we are confident of leading the NGP category. This
year we generated revenue from NGP of £397 million. On a full year basis including the contribution from RAI, this would
have been approximately £500 million and we expect this to double in 2018 to £1 billion, rising to more than £5 billion in
2022.
New Strategic Portfolio of brands
In light of the evolution of the business, with the addition of leading brands in the US, as well as the growing
importance and progress of our potentially reduced-risk products, we have taken the opportunity to establish a
new portfolio of priority brands – which we will in future refer to as our Strategic Portfolio.
This Strategic Portfolio comprises our existing GDBs, combined with RAI’s Strategic Brands (Camel, Newport and
Natural American Spirit). Also included is our portfolio of potentially reduced-risk products, including our key oral
tobacco brands and NGP brands in vapour and THP. Further details can be found on page 29.
From 2018, the Group will introduce a new metric called Revenue Growth of our Strategic Portfolio, replacing
the Global Drive Brand (GDB) & Key Strategic Brand (KSB) volume growth metric. To provide the comparator
against which 2018 will be measured, Revenue of our Strategic Portfolio in 2017 would have been £16,711
million assuming we had consolidated RAI for a full 12 months and after recognising the impact of
implementing the new accounting requirements of IFRS 15.
Strong results across our portfolio of products
Notwithstanding the good progress we are making with our potentially reduced-risk products, combustible cigarette
products remain at the core of our business - delivering growth today and providing the funds required for investing in
the future. I am therefore pleased that 2017 saw the Group yet again deliver another good performance.
The Group’s cigarette market share in its Key Markets continued to grow strongly (up 40 bps). This was powered by
another excellent performance by our GDBs, which grew 110 bps (ex US) and now account for more than 50% of Group
cigarette and THP volume outside the US. Over the year, market share in the US also grew strongly and was up 20 bps,
with the RAI Strategic Brands growing 40 bps.
Total Group cigarette and THP volume grew 3.2% to 686 billion or, on an organic basis fell 2.6%, outperforming the
industry which was estimated to have declined by around 3.5%.
In 2017, we also made excellent progress with our NGP business. Our flagship THP, glo, first launched in Japan in
December 2016, reached 3.6% market share by the end of 2017 – having been rolled out nationally from October 2017.
Since then, 50% of the overall category growth in Japan has been from glo – demonstrating its strong consumer appeal
in a very short period. Good initial progress is also being made in our other launch markets of South Korea, Russia,
Canada, Romania and Switzerland.
Page 2
Chief Executive’s review cont…
In the vapour category, Vype is now present in 9 markets1 and we remain market leader in the UK, with Vype and Ten
Motives combined delivering around 40% share of measured retail in December 2017. We also lead the vapour category
in Poland. In the US, the Vuse range of products continues to have a significant presence in the market. We see the
rapidly developing vapour category, as a whole, contributing significantly to our long-term growth ambitions in NGPs.
The Group’s financial performance was positively impacted by the accounting for the acquisition of RAI and the
subsequent US tax reforms. These drove diluted earnings per share up by over 600% to 1,830.0p. However, while trading
conditions remain challenging in a number of markets, including ad hoc excise increases and increasing illicit
consumption, 2017 again saw the Group deliver on its high single-digit earnings growth commitment on an adjusted
basis, increasing adjusted diluted earnings per share by 14.9% to 284.4p, or 9.9% at constant rates of exchange.
Continued confidence in future growth
The Group’s results in 2017 are testament to our commitment to delivering strong results for shareholders whilst at the
same time investing substantially in the long-term future of the business. Following our acquisition of RAI, and the
progress we are making with NGPs, we can now accelerate our ambition to transform tobacco. With the right people,
products and strategy we are ideally positioned to deliver greater choice for our consumers, potential benefits for society
as a whole and long-term sustainable value for shareholders.
21 February 2018
Nicandro Durante
Summary performance (extract)
The Group’s results in 2017 include a number of significant items, mainly arising from the acquisition of RAI and the US
tax reforms. The following table has been provided to assist the interpretation of the financial statements in the
understanding of the Group, including the impact of the above-mentioned items, the relative weakness of sterling and
other adjusting items and acquisitions, which are discussed on pages 21 to 26 and reconciled on page 23.
Extract of performance – key financial measures
Cigs and THP
volume Revenue Profit from operations Associates Tax
Bn sticks £m £m £m £m
Total Group 686 20,292 6,476 24,209 8,113
Movement on prior year +3.2% +37.6% +39.1%
Impact of RAI acquisition (36) (4,211) (1,318) (23,288) 706
RAI adjusting items - - 763
RAI adjusted performance (36) (4,211) (2,081)
Deferred tax credit from US tax (9,620)
reform
Other impact of US tax reform 34
Other adjusting items (258) 754 91 (634)
650 15,823 5,912 1,012 (1,401)
Other exchange (545) (227)
Other acquisitions (3) (105) (2)
Adjusted organic, 647 15,173 5,683
at constant rates of exchange
Movement on prior year -2.6% +2.9% +3.7%
1 Vype is available in 9 markets and in duty free via our Global Travel Retail business
Page 3
REGIONAL REVIEW
This review presents the performance of the regions and markets, including before adjusting items, as
explained on pages 21 to 22 and excluding the impact of movements on foreign exchange on the reported
results. However, as explained on page 22, the Group does not adjust for transactional gains or losses in profit
from operations which are generated by exchange rate movements. Revenue, profit from operations, adjusted
profit from operations at constant rates of exchange and volume are as follows:
Revenue Profit from Adjusted profit Volume
operations from operations @
constant rates
2017 2016 2017 2016 2017 2016 2017 2016
£m £m £m £m £m £m Bns Bns
US1 4,211 - 1,318 - 1,980 - 36 -
Asia-Pacific 4,509 4,266 1,638 1,432 1,674 1,630 193 196
Americas 3,125 2,868 1,147 1,017 1,288 1,172 107 113
Western Europe 4,532 3,867 1,127 1,044 1,458 1,389 122 120
EEMEA 3,915 3,750 1,246 1,182 1,265 1,289 228 236
Other (including Fox River) - - - (20) - -
Total cigarettes and THP 686 665
Total organic 5,683 5,480 647 665
Total 20,292 14,751 6,476 4,655 7,665 5,480 714 689
The Group delivered another year of growth in the organic financial results, which were supplemented by the
acquisition of RAI. Market share continued to grow based on the performance of the Global Drive Brand
portfolio.
Revenue increased by 37.6%. This was driven by the inclusion of RAI from the acquisition date (£4,211 million),
pricing, the growth of the NGP portfolio and the translational foreign exchange tailwind benefiting the
reported results due to the relative weakness of sterling against the Group’s operating currencies. Revenue
also included products manufactured by third parties under short-term arrangements. Such bought-in products
increase both cost of sales and revenue, due to the treatment of excise, for the period of the short-term
arrangement. After adjusting for this impact, which distorts revenue growth and operating margin, adjusting
for acquisitions and the effect of exchange on the reported result, on an organic, adjusted constant currency
basis, revenue was up by 2.9%.
Our NGP business grew across both the heated tobacco and vapour categories. glo is present in six markets,
and achieved approximately 3.6% market share in Japan following the national roll out in October 2017. Vype,
which is present in 9 markets and via duty free, and Ten Motives represent the two fastest growing vapour
brands in the UK. The NGP portfolio contributed £397 million of revenue (including THP: £223 million, Vapour:
£173 million), at current rates of exchange, which includes the revenue from RAI brands since the acquisition
date. On a 12-month basis, including a full year’s revenue from RAI, revenue from NGP would have been
approximately £500 million.
Profit from operations was up 39.1% at £6,476 million. Adjusted, organic profit from operations (see page 23)
at constant rates of exchange was 3.7% higher at £5,683 million.
Group volume from subsidiaries was 686 billion (including 2 billion of THP volume), an increase of 3.2% against
the previous year, due to the inclusion of RAI volume. Volume was down 2.6% on an organic basis. Organic
volume growth in Bangladesh, Nigeria, the Gulf Cooperation Council (GCC) and Turkey was more than offset by
industry volume decline, in particular in Ukraine, Brazil, South Africa and Russia, driven by excise increases and
illicit trade growth.
1 All financial statements and financial information provided by or with respect to the US business or RAI (and/or the RAI Group) are prepared on the basis of U.S. GAAP and constitute the
primary financial statements or financial records of the US business or RAI (and/or the RAI Group). For the purpose of consolidation within the results of BAT p.l.c. and the BAT Group, this
financial information is then converted to International Financial Reporting Standards as issued by the IASB and as adopted by the European Union (IFRS). To the extent any such financial
information provided in this preliminary announcement relates to the US business or RAI (and/or the RAI Group) it is provided as an explanation of the US business’s or RAI’s (and/or the RAI
Group’s) primary U.S. GAAP based financial statements and information.
Unless otherwise stated, volume throughout this preliminary announcement refers to sum of cigarette volume and volume from THP sticks.
Page 4
Regional review cont…
Market share in the Group’s key markets increased 40 bps. This was driven by the growth from the GDB
portfolio, including THP, with market share, excluding the US, up a total of 110 bps, on volume that grew 7.6%
on an organic basis:
- Dunhill’s overall market share was down 10 bps with volume lower by 5.9%, driven by the economic
slowdown impacting consumers’ disposable income in Indonesia and continued down-trading in Malaysia,
and GCC, and industry contraction in South Korea;
- Kent volume increased by 11.2%, with market share up 30 bps, driven by Japan, due to the success of glo,
Turkey and Brazil, offsetting a decline in Iran;
- Lucky Strike grew market share and volume by 20 bps and 12.2% respectively, with growth in Indonesia
and Spain more than offsetting reductions in Argentina and Egypt;
- Pall Mall market share grew 20 bps, with volume up 14.8%, or 6.4% on an organic basis, as growth in GCC,
Nigeria and Poland more than offset declines in Chile and Russia; and
- Rothmans’ volume increased 14.3%, with market share up 40 bps, driven by Russia, Poland, Nigeria and
Colombia, offsetting lower volume in Kazakhstan and Egypt.
The performances of the regions are discussed below. The following discussion is based upon the Group’s
internal reporting structure in place during 2017.
United States:
The 57.8% of RAI not already owned was acquired by the Group, with an effective date of 25 July 2017. From
that date, the Group consolidates the results of RAI as a wholly owned subsidiary. The following analysis
describes the performance of the United States region, being the historic RAI organisation, from the acquisition
date. No comparison to prior year volume or profit from operations is provided, as prior to the acquisition date
the results were recorded, in accordance with IFRS, as an associate.
In the period since acquisition, cigarette volume was 36 billion, outperforming the industry with total cigarette
market share at 34.7%, up 20 bps on 2016. Newport and Natural American Spirit continued to grow market
share driven by the investment into the trade and, together, they are the fastest growing premium brands on
the market. Camel market share increased due to the performance of the menthol range. Pall Mall market
share was lower due to price competition in the value for money category. Combined, the US drive brands
grew market share in 2017 by 40 bps.
Volume of moist snuff was equivalent to 3.2 billion sticks in the period since acquisition. Total moist market
share was up 100 bps on 2016 to 34.4%, primarily due to the performance of Grizzly, benefiting from its
strength in the pouch and wintergreen categories, as well as the recent national expansion of its Dark Select
style and limited edition packaging.
Revenue was £4,211 million and profit from operations was £1,318 million in the period since acquisition.
Profit from operations was impacted by the United States’ FDA user fees of £62 million and product liability
defence costs of £59 million. Additionally, £865 million was incurred as part of the State Settlement
Agreements, with £109 million credits recognised as part of the non-participating manufacturers (NPM)
adjustment claims.
The United States business also incurred other costs that meet the Group’s definition of adjusting items,
including the Engle progeny cases, tobacco related or other litigation and other costs associated with the
integration with the rest of the Group. Adjusted profit from operations, at constant rates, was £1,980 million
for the period since acquisition.
Page 5
Regional review cont…
Eastern Europe, Middle East and Africa (EEMEA):
Volume, in 2017, was 228 billion, a decline of 3.4% on the prior year, as higher volume in Nigeria, GCC, Turkey,
and Algeria was more than offset by reductions in Ukraine, South Africa, Russia and Iran. Market share was up
30 bps as growth in Russia and Turkey, driven by Rothmans and Kent, and GCC, more than offset a lower
market share in South Africa.
Revenue was up 4.4% at £3,915 million as pricing in a number of markets, including Ukraine, Turkey and Iran,
and the impact of the devaluation in sterling, more than offset the decline in volume in the region and down-
trading in both Russia (due to competitive pricing in the low segment) and GCC (following the increase in
excise). On a constant currency basis, adjusted revenue was up 0.6% at £3,773 million.
Profit from operations was 5.4% higher in 2017, at £1,246 million, driven by the growth in revenue and the
foreign exchange tailwind due to the devaluation of sterling. Excluding adjusting items and the impact of
exchange on the regional performance, adjusted profit from operations at constant rates of exchange fell by
1.9%, to £1,265 million, as the impact of the excise change in GCC, down-trading in Russia and continued
transactional foreign exchange headwinds on cost of sales more than offset the growth in Ukraine, Iran and
Algeria.
Asia-Pacific (ASPAC):
Volume was lower in 2017 (down 1.3% at 193 billion). glo was launched nationally in Japan and South Korea,
performing well with national market share in Japan reaching 3.6% in December 2017. Volume from glo and
cigarette volume growth in Bangladesh was more than offset by the lower combustible volume in Japan and
industry volume decline in Malaysia, Pakistan and South Korea. Market share was higher, up 60 bps, with
growth in Bangladesh, Japan, Pakistan and Australia, driven by Lucky Strike, Pall Mall and Rothmans, more than
offsetting lower market share in Malaysia and Indonesia, which was due to down-trading.
In 2017, revenue was up by 5.7% at £4,509 million due to the combination of volume and pricing, notably in
Bangladesh, Australia and New Zealand, revenue from glo following the roll-out and subsequent growth in
Japan and South Korea, and the positive impact of the devaluation in sterling on the reported results. This
more than offset the impact of down-trading in Malaysia and the industry contraction combined with growth
in illicit trade in Pakistan. Excluding the positive currency effect, on a constant exchange rate basis, adjusted
revenue increased by 1.3% to £4,320 million.
Profit from operations was 14.4% higher in 2017 at £1,638 million, as the growth in revenue, and transactional
foreign exchange tailwinds notably due to the relative movements in the US dollar and euro against the
Japanese yen, were partly offset by the investment behind glo in Japan and South Korea and negative mix
effects from down-trading in Malaysia.
Excluding adjusting items, which mainly related to the Malaysian factory closure and the amortisation of
trademarks, and the impact of exchange rate movements on the reported results, adjusted profit from
operations on a constant currency basis was up 2.7% at £1,674 million.
Page 6
Regional review cont…
Americas:
Volume was 5.0% lower in 2017 at 107 billion, as growth in Mexico was more than offset by the difficult
economic conditions which led to continued down-trading and industry contraction in Brazil and Argentina,
and the growth of illicit trade in Chile. Market share was flat as the combined growth in Mexico, Argentina,
Colombia and Chile offset Brazil, which was lower despite the continued success of Minister and Kent
(following the migration from Free).
Revenue grew by 9.0% in 2017, to £3,125 million. This was driven by pricing across the region, with revenue
higher in Canada, Mexico, Chile and Colombia, more than offsetting a decline in Brazil and in Venezuela, as the
deterioration in the exchange rate more than offset higher pricing due to local inflation. On a constant rate
basis, adjusted revenue was up 10.8% at £3,178 million.
Profit from operations increased by 12.8%, to £1,147million. This was mainly due to the growth in revenue
noted above. Excluding adjusting items, that largely relate to the amortisation of acquired trademarks, and the
impact of currency, adjusted profit from operations at constant rates increased by 9.9% to £1,288 million.
Western Europe:
In 2017, volume was 122 billion, an increase on 2016 of 1.7%. This was driven by the contribution from the
tobacco assets of Bulgartabac Holding AD (Bulgartabac) in Bulgaria and Fabrika Duhana Sarajevo (FDS) in
Bosnia, acquired in the year, and higher volume in Spain, Romania, Portugal, Poland and Hungary, which more
than offset lower volume in Italy and Greece. On an organic basis, volume fell 0.8%.
Market share was up 30 bps, driven by Germany, Spain, Romania and Poland largely due to the performance of
Rothmans, Pall Mall and Lucky Strike.
Revenue grew by 17.2% to £4,532 million, as the positive effect of acquisitions in the year and higher revenue
in Germany, Romania, and Spain offset a decline in the UK due to aggressive pricing in the market and lower
revenue in Italy and France. Excluding excise on goods acquired under short-term contract manufacturing
arrangements and the uplift from acquisitions, on an adjusted, constant rate basis, revenue was up 0.9%.
Profit from operations grew 8.0% in 2017 to £1,127 million, due to improved revenue and devaluation in
sterling, with profit from operations up in Germany, Romania, Denmark and Spain. This was partly offset by the
costs of the ongoing closure of the factory in Germany and impairment of certain assets related to a third-party
distributor (Agrokor) in Croatia, the partial absorption of excise in France, investment behind NGP in the UK
and lower profit from operations in Belgium and Netherlands. Excluding the adjusting items (including Agrokor,
factory closure costs and trademark amortisation) and the impact of foreign exchange, adjusted profit from
operations on an organic, constant rate basis increased by 4.9% to £1,456 million.
Page 7
Regional review cont…
The following includes a summary of the Group’s key performance measures as reconciled between reported
information and non-GAAP information on page 23.
Non-
Western
REGIONAL INFORMATION US Asia-Pacific Americas EEMEA tobacco Total
Europe
litigation
SUBSIDIARIES
Volume - cigarette and THP (billions)
2017 36 193 107 122 228 686
2017 (organic) - 193 107 119 228 647
2016 - 196 113 120 236 665
Change nm -1.3% -5.0% +1.7% -3.4% +3.2%
Change (organic) nm -1.3% -5.0% -0.8% -3.4% -2.6%
Revenue (£m)
2017 (at current) 4,211 4,509 3,125 4,532 3,915 20,292
2016 - 4,266 2,868 3,867 3,750 14,751
Change (at current) nm +5.7% +9.0% +17.2% +4.4% +37.6%
Adjusted Revenue (£m)
2017 (at current) 4,211 4,509 3,125 4,274 3,915 20,034
2017 (at constant) 4,006 4,320 3,178 4,007 3,773 19,284
2017 (organic, at constant) - 4,320 3,178 3,902 3,773 15,173
2016 - 4,266 2,868 3,867 3,750 14,751
Change (organic, at constant) - +1.3% +10.8% +0.9% +0.6% +2.9%
Profit from operations (£m)
2017 (at current) 1,318 1,638 1,147 1,127 1,246 - 6,476
2016 - 1,432 1,017 1,044 1,182 (20) 4,655
Change (at current) nm 14.4% 12.8% 8.0% 5.4% +39.1%
Adjusted profit from operations (£m)
2017 (at current) 2,081 1,755 1,256 1,562 1,339 7,993
2017 (at constant) 1,980 1,674 1,288 1,458 1,265 7,665
2017 (organic, at current) - 1,755 1,256 1,560 1,339 5,910
2017 (organic, at constant) - 1,674 1,288 1,456 1,265 5,683
2016 - 1,630 1,172 1,389 1,289 5,480
Change (organic, at current) - +7.7% +7.1% +12.3% +3.9% +7.8%
Change (organic, at constant) - +2.7% +9.9% +4.9% -1.9% +3.7%
Operating margin (%)
2017 (at current) 31.3% 36.3% 36.7% 24.9% 31.8% 31.9%
2016 - 33.6% 35.5% 27.0% 31.5% 31.6%
Adjusted operating margin based on adjusted revenue and adjusted profit from operations (%)
2017 (at current) 49.4% 38.9% 40.2% 36.5% 34.2% 39.9%
2016 - 38.2% 40.9% 35.9% 34.4% 37.2%
All variances quoted above are based upon absolute numbers.
Organic volume change excludes the volume from brands acquired from RAI, Bulgartabac and FDS during the review period. The financial impact of the acquisitions have been
excluded to present an adjusted organic revenue and adjusted organic profit from operations.
Adjusted revenue excludes excise included in goods acquired from a third party under short term arrangements, and then passed on to customers, due to the distorting nature to
revenue and operating margin.
Page 8
Regional review cont…
REGIONAL INFORMATION
Western
US Asia-Pacific Americas EEMEA Total
Europe
ASSOCIATES AND JOINT VENTURES
Share of post-tax results of associates and joint ventures (£m)
2017 (at current) 23,819 411 - (23) 2 24,209
2016 1,880 342 - 3 2 2,227
Share of adjusted post-tax results of associates and joint ventures (£m)
2017 (at current) 624 382 - 4 2 1,012
2017 (at constant) 593 352 - 4 2 951
2016 991 331 - 3 2 1,327
GROUP
For the year ended 31 December Total
Statutory effective tax rate (%)
2017 (at current) (27.4)%
2016 (at current) 22.5%
Underlying tax rate of subsidiaries (%)^
2017 (at current) 29.7%
2016 (at current) 29.8%
Diluted earnings per share (pence)
2017 (at current) 1,830.0
2016 249.2
Change (at current) +634%
Adjusted diluted earnings per share (pence)
2017 (at current) 284.4
2017 (at constant) 272.1
2016 247.5
Change (at current) +14.9%
Change (at constant) +9.9%
^ The underlying tax rate of subsidiaries is a non-GAAP measure, and is discussed on page 11. This measure excludes the share of
associates’ and joint ventures’ post tax profit and adjusting items.
Page 9
FINANCIAL INFORMATION AND OTHER
NET FINANCE COSTS
Net finance costs were £1,094 million, compared to £637 million in 2016. The movement is principally due
to additional interest charges following the increased level of borrowings (up £29,955 million) driven by
debt to finance the acquisition of RAI, and the RAI legacy debt subsequently consolidated into the Group
results.
After adjusting for the items mentioned below, net adjusted finance costs, as reconciled below, increased
by £360 million.
Net finance costs comprise:
2017 2016
£m £m
Finance costs (1,197) (681)
Finance income 103 44
Net finance costs (1,094) (637)
Less: adjusting items 205 108
Acquisition of RAI, see below 153 -
Interest on adjusting tax payables, see below 43 25
Hedge ineffectiveness, see below 9 (18)
Make-whole provision re early redemption of bond, see below - 101
Net adjusted finance costs (889) (529)
Comprising:
Interest payable (1,094) (650)
Interest and dividend income 84 68
Fair value changes - derivatives 149 458
Exchange differences (28) (405)
Net adjusted finance costs (889) (529)
In 2017, the Group incurred £153 million of pre-financing costs, as described on page 31 related to the
acquisition of the shares not already owned by the Group in RAI. As this related to the acquisition, and will
not repeat, the costs have been treated as an adjusting item.
In 2017, the Group incurred interest on adjusting tax payables of £43 million, including interest of £25
million (2016: £25 million) in relation to the Franked Investment Income Group Litigation Order (FII GLO),
as described on page 39.
In 2016, the Group redeemed a US$700 million bond, prior to its original maturity date of 15 November
2018, undertaken to manage the Group’s debt maturity profile, manage future refinancing risk and
reduce the on-going interest expense. This led to an expense in the year of £101 million which was
treated as an adjusting item. Also in 2016, the Group experienced significant hedge ineffectiveness on its
external swaps, driven by the market volatility following the referendum regarding “Brexit”. The gain, in
2016, of £18 million, which partially reversed in 2017 (£9 million charge) has been deemed to be adjusting
as it is not representative of the underlying performance of the business.
The above have been included in the adjusted earnings per share calculation on page 34.
Page 10
RESULTS OF ASSOCIATES
The Group’s share of post-tax results of associates increased by £21,982 million to £24,209 million. This
was driven by the recognition of a gain of £23,288 million arising on the acquisition of RAI, as the Group is
deemed to have disposed of an associate and acquired a subsidiary. The Group’s share of the adjusted
post-tax results of associates fell by 23.7% to £1,012 million, or by 28.3% to £951 million at constant rates
of exchange.
The adjusted contribution from RAI as an associate relates to the period prior to 25 July 2017 only, and
consequently decreased by 37.0% to £624 million, or by 40.1% at constant rates of exchange. The Group’s
adjusted contribution from its main associate in India, ITC, was £376 million, up 16.7%. At constant rates
of exchange, the contribution would have been 7.5% higher than last year. See pages 26 for the adjusting
items.
TAXATION
2017 2016
£m £m
UK
- current year tax 26 7
Overseas
- current year tax expense 1,615 1,382
- adjustment in respect of prior periods 2 13
Current tax 1,643 1,402
Deferred tax (9,756) 4
(8,113) 1,406
Adjusting items (see below) 10,220 67
Adjusted tax charge 2,107 1,473
The tax charge in the Income Statement was a credit of £8,113 million. This was largely due to the impact
of the change in the Federal tax rates in the United States which led to a credit of £9.6 billion related to
revaluing the net deferred tax liabilities arising on the net assets accounted for as part of the RAI
transaction. The tax rates in the Income Statement are therefore a credit of 27.4% in 2017, against a
charge in 2016 of 22.5%. These are also affected by the inclusion of adjusting items and the associates’
post-tax profit in the Group’s pre-tax results. Excluding these items and the deferred tax credit in 2017,
the underlying tax rate for subsidiaries was 29.7% in 2017 (2016: 29.8%).
IFRS requires entities to provide deferred taxation on the undistributed earnings of associates and joint
ventures. From the date of the acquisition of the remaining shares in RAI not already owned by the
Group, the Group consolidates the results of RAI as a wholly owned subsidiary and as such the deferred
tax liability of £180 million on unremitted earnings of RAI as an associate has been released to the Income
Statement, and treated as an adjusting item. In 2016, the Group’s share of the gain on the divestiture of
intangibles and other assets by RAI to Japan Tobacco International was £941 million. Given that the profit
on this item is recognised as an adjusting item by the Group, the additional deferred tax charge of £61
million on the potential distribution of these undistributed earnings was also treated as adjusting.
The adjusting tax item also includes £454 million (2016: £128 million) in respect of the tax on adjusting
items, see pages 24 to 25. Please refer to page 39 for the FII GLO update.
Page 11
CASH FLOW AND NET DEBT
In the Group cash flow statement, prepared in accordance with IFRS and presented on page 20, net cash
generated from operating activities grew by 16.0% to £5,347 million largely due to the cash generated by
RAI post the acquisition, the profit from operations earned in the period from the rest of the Group (as
discussed on pages 6 to 7) and a reduction in inventories. This more than offset an increase in receivables,
reduction in trade and other payables, the payment of the 2017 liability related to the Master Settlement
Agreement (MSA) in the United States and the final quarterly payments in relation to the Quebec Class
Action.
Excluding the effect of adjusting items, and excluding interest, net capital expenditure, dividends paid to
non-controlling-interests and dividends from associates, the Group generated £3,282 million cash from
operations, an increase on 2016 of 5.4% and marginally higher than 2016 on a constant rate basis. This
increase was after the early payment of the 2017 MSA liability, which is deductible for tax purposes at the
2017 tax rates. Excluding the timing of this payment, adjusted cash generated from operations would
have increased by approximately 45%.
Based upon net cash generated from operating activities, the Group’s conversion rate decreased from 99% to
83% in 2017. Excluding the impact of adjusting items and investments in such items as capital expenditure
which will deliver profitable returns in future periods, operating cash flow conversion (based upon adjusted
profit from operations) fell from 93% to 79%. After adjusting for the timing of the payment of the 2017 MSA
liability, operating cash flow conversion would have been 96%, ahead of 2016 (93%) and reflective of the
Group’s ability to deliver cash from the operating performance of the business.
After taking account of other changes, including the additional borrowing to acquire the remaining shares
in RAI, as described on page 31, the payment of the prior year final dividend and the 2017 interim
dividend (£3,465 million, up £555 million on prior year) and exchange rate movements, total borrowings
were £49,450 million, an increase of £29,955 million on 2016, with closing net debt up £28,804 million at
£45,571 million (2016: £16,767 million).
REGIONAL STRUCTURE AND MANAGEMENT BOARD
During 2017, the Group announced the appointments of Jack Bowles as Chief Operating Officer with
responsibility for the International (non-US) business, effective 1 October 2017, and Ricardo Oberlander
as President and CEO of RAI, effective 1 January 2018.
The Group also announced a simplification of the regional structure, with effect from 1 January 2018, as
follows:
- United States, comprising the RAI group of companies in the United States;
- Americas and Sub-Saharan Africa (AmSSA) which includes Canada, Central America and the
Caribbean, South America, East & Central Africa, West Africa and South Africa;
- Europe and North Africa (ENA) which includes Europe, Russia, Ukraine, Caucasus, Central Asia,
Belarus, Egypt, Morocco and Turkey; and
- Asia-Pacific and Middle East (APME), which includes Japan and North Asia, Malaysia, Southern
Asia, Indonesia, Australasia, the GCC and Iran.
As these are effective from 1 January 2018, the Group has provided revenue and profit from operations
(including adjusted revenue and adjusted profit from operations) as related to 2017 as part of an
additional disclosure on page 28.
BOARD CHANGES
With effect from the conclusion of the Annual General Meeting on 25 April 2018:
- Ann Godbehere who has served as a Non-Executive Director since October 2011 and is a member of
the Nominations and Remuneration Committees; and
- Dr Pedro Malan who has served as a Non-Executive Director since February 2015 and is a member
of the Nominations and Audit Committees,
will retire from the Board.
Page 12
UPDATE ON INVESTIGATION INTO MISCONDUCT ALLEGATIONS
As previously reported, we are investigating, through external legal advisers, allegations of misconduct
and have been liaising with the UK’s Serious Fraud Office (“SFO”) and other relevant authorities. It was
announced in August 2017 that the SFO had opened an investigation in relation to the Company, its
subsidiaries and associated persons. We are co-operating with the SFO’s investigation. A sub-Committee
of the Board has oversight of these matters, providing support for the investigation between Board
meetings.
UPDATE ON QUEBEC CLASS ACTION
On 27 October 2015, the Quebec Court of Appeal made an Order for Security in the amount of CAD$984
million, of which Imperial Tobacco Canada’s (“ITCAN”) share was CAD$758 million paid in seven equal
quarterly instalments. ITCAN appealed the substantive decision awarding CAD$15.6 billion to the
plaintiffs, of which ITCAN’s share was CAD$10.4 billion. This appeal was heard by a panel of five judges of
the Quebec Court of Appeal on 21-25 November 2016 with a decision pending. As at the date of this
release, no judgment has been made.
RISKS AND UNCERTAINTIES
During the year, the Directors carried out a robust assessment of the principal risks and uncertainties
facing the Group, including those that would threaten its business model, future performance, solvency,
liquidity and viability. As part of that assessment, the Board reviewed the risk related to the development
and commercialisation of NGPs and now considers this to be a principal risk.
The principal Group risks and applicable sub-categories are summarised under the headings of:
- Competition from illicit trade;
- Tobacco and nicotine regulation inhibits growth strategy;
- Significant excise increases or structure changes;
- Litigation related to product liability and regulatory action;
- Geopolitical tensions;
- Inability to obtain price increases and impact of increases on consumer affordability thresholds;
- Disputed taxes, interest and penalties;
- Market size reduction and consumer down-trading;
- Foreign exchange rate exposures;
- Injury, illness or death in the workplace;
- Failure to successfully develop and commercialise Next Generation Products;
- Solvency and liquidity.
Full details of all principal risks will be included in the Annual Report and Form 20-F for the year ended 31
December 2017.
Page 13
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 announcement. Further information will be provided in the
Strategic Report and in the notes to the financial statements, all of which will be included in the 2017
Annual Report and Form 20-F.
The Group has, at the date of this announcement, sufficient existing financing available for its estimated
requirements for at least the next 12 months. This, together with the ability to generate cash from trading
activities, the performance of the Group’s Global Drive Brands, its leading market positions in a number of
countries and its broad geographical spread, as well as numerous contracts with established customers
and suppliers across different geographical areas and industries, provides the Directors with the
confidence that the Group is well placed to manage its business risks successfully in the context of current
financial conditions and the general outlook in the global economy.
After reviewing the Group’s annual budget, plans and financing arrangements for the next three years, the
Directors consider that the Group has adequate resources to continue operating and that it is therefore
appropriate to continue to adopt the going concern basis in preparing the Annual Report and Form 20-F.
DIRECTORS’ RESPONSIBILITY STATEMENT
The responsibility statement set out below is solely for the purpose of complying with Disclosure
Guidance and Transparency Rule 6.3.5R. This statement relates to and is extracted from the 2017 Annual
Report. Responsibility is for the full 2017 Annual Report and not the extracted information presented in
this Preliminary Announcement. 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 Ben Stevens
Chairman Finance Director
21 February 2018
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Mike Nightingale 020 7845 1180 Press Office 020 7845 2888
Rachael Brierley 020 7845 1519
Stephanie Brassinne 020 7845 2012
Webcast and Conference Call - Passcode: 26879018#
A live webcast of the results is available via www.bat.com/ir.
If you wish to listen to the presentation via a conference call facility please use the dial in details below:
UK: +44 (0) 333 300 0804 US: +1 631 913 1422
UK (toll free): 0800 358 9473 US (toll free): +1 855 85 70686
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A replay of the conference call will also be available from 1pm for 48 hours.
UK: +44 (0) 333 300 0819 US: +1 844 307 9361
UK (toll free): 0800 358 2049 US (toll free): +1 866 931 1566
Page 14
GROUP INCOME STATEMENT
For the year ended 31 December
2017 2016
£m £m
Revenue 1 20,292 14,751
Raw materials and consumables used (4,520) (3,777)
Changes in inventories of finished goods and work in progress (513) 44
Employee benefit costs (2,679) (2,274)
Depreciation, amortisation and impairment costs (902) (607)
Other operating income 144 176
Other operating expenses (5,346) (3,658)
Profit from operations 6,476 4,655
Net finance costs (1,094) (637)
Finance income 103 44
Finance costs (1,197) (681)
Share of post-tax results of associates and joint ventures 24,209 2,227
Profit before taxation 29,591 6,245
Taxation on ordinary activities 8,113 (1,406)
Profit for the year 37,704 4,839
Attributable to:
Owners of the parent 37,533 4,648
Non-controlling interests 171 191
37,704 4,839
Earnings per share
Basic 1,836.3p 250.2p
Diluted 1,830.0p 249.2p
All of the activities during both years are in respect of continuing operations.
1 Revenue is net of duty, excise and other taxes of £37,780 million and £32,136 million for the years ended 31 December 2017 and
2016, respectively.
The accompanying notes on pages 10 to 12 and 21 to 39 form an integral part of this condensed
consolidated financial information.
Page 15
GROUP STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December
2017 2016
£m £m
Profit for the year (page 15) 37,704 4,839
Other comprehensive (expense)/income
Items that may be reclassified subsequently to profit or loss: (3,812) 1,760
Differences on exchange
– subsidiaries (3,087) 1,270
– associates (923) 1,425
Cash flow hedges
– net fair value (losses)/gains (264) 29
– reclassified and reported in profit for the year 109 38
– reclassified and reported in net assets (16) (12)
Available-for-sale investments
– net fair value losses in respect of subsidiaries (27) -
– net fair value gains/(losses) in respect of associates net of tax 5 (10)
Net investment hedges
– net fair value gains/(losses) 425 (837)
– differences on exchange on borrowings (68) (124)
Tax on items that may be reclassified 34 (19)
Items that will not be reclassified subsequently to profit or loss: 681 (173)
Retirement benefit schemes
– net actuarial gains/(losses) in respect of subsidiaries 833 (228)
– surplus recognition and minimum funding obligations in respect of subsidiaries (6) (1)
– actuarial gains in respect of associates net of tax 25 20
Tax on items that will not be reclassified (171) 36
Total other comprehensive (expense)/income for the year, net of tax (3,131) 1,587
Total comprehensive income for the year, net of tax 34,573 6,426
Attributable to:
Owners of the parent 34,406 6,180
Non-controlling interests 167 246
34,573 6,426
The accompanying notes on pages 10 to 12 and 21 to 39 form an integral part of this condensed
consolidated financial information.
Page 16
GROUP STATEMENT OF CHANGES IN EQUITY
At 31 December
2017 Attributable to owners of the parent
Share
premium,
capital Total
redemption attributable Non-
Share and merger Other Retained to owners controlling
capital reserves reserves earnings of parent interests Total equity
£m £m £m £m £m £m £m
Balance at 1 January 2017 507 3,931 413 3,331 8,182 224 8,406
Total comprehensive (expense)/income for
the year (page 16) - - (3,808) 38,214 34,406 167 34,573
Profit for the year - - - 37,533 37,533 171 37,704
Other comprehensive income for the year - - (3,808) 681 (3,127) (4) (3,131)
Employee share options
– value of employee services - - - 105 105 - 105
– proceeds from shares issued - 5 - - 5 - 5
Dividends and other appropriations
– ordinary shares - - - (4,465) (4,465) - (4,465)
– to non-controlling interests - - - - - (169) (169)
Purchase of own shares
– held in employee share ownership
trusts - - - (205) (205) - (205)
Shares issued – RAI acquisition 107 22,666 - - 22,773 - 22,773
Other movements - - - 3 3 - 3
Balance at 31 December 2017 614 26,602 (3,395) 36,983 60,804 222 61,026
2016 Attributable to owners of the parent
Share
premium,
capital Total
redemption attributable Non-
Share and merger Other Retained to owners controlling
capital reserves reserves earnings of parent interests Total equity
£m £m £m £m £m £m £m
Balance at 1 January 2016 507 3,927 (1,294) 1,754 4,894 138 5,032
Total comprehensive income for the year
(page 16) - - 1,707 4,473 6, 180 246 6,426
Profit for the year - - - 4,648 4,648 191 4,839
Other comprehensive income for the year - - 1,707 (175) 1,532 55 1,587
Employee share options
– value of employee services - - - 71 71 - 71
– proceeds from shares issued - 4 - - 4 - 4
Dividends and other appropriations
– ordinary shares - - - (2,910) (2,910) - (2,910)
– to non-controlling interests - - - - - (156) (156)
Purchase of own shares
– held in employee share ownership
Trusts - - - (64) (64) - (64)
Non-controlling interests – acquisitions - - - 4 4 (4) -
Other movements - - - 3 3 - 3
Balance at 31 December 2016 507 3,931 413 3,331 8,182 224 8,406
The accompanying notes on pages 10 to 12 and 21 to 39 form an integral part of this condensed
consolidated financial information.
Page 17
GROUP BALANCE SHEET
At 31 December
2017 2016
£m £m
Assets
Non-current assets
Intangible assets 117,785 12,117
Property, plant and equipment 4,882 3,661
Investments in associates and joint ventures 1,577 9,507
Retirement benefit assets 1,123 455
Deferred tax assets 317 436
Trade and other receivables 756 599
Available-for-sale investments 42 43
Derivative financial instruments 590 596
Total non-current assets 127,072 27,414
Current assets
Inventories 5,864 5,793
Income tax receivable 460 69
Trade and other receivables 4,053 3,884
Available-for-sale investments 65 15
Derivative financial instruments 228 375
Cash and cash equivalents 3,291 2,204
13,961 12,340
Assets classified as held-for-sale 5 19
Total current assets 13,966 12,359
Total assets 141,038 39,773
The accompanying notes on pages 10 to 12 and 21 to 39 form an integral part of this condensed
consolidated financial information.
Page 18
GROUP BALANCE SHEET - continued
At 31 December
2017 2016
£m £m
Equity
Capital and reserves
Share capital 614 507
Share premium, capital redemption and merger reserves 26,602 3,931
Other reserves (3,395) 413
Retained earnings 36,983 3,331
Owners of the parent 60,804 8,182
Non-controlling interests 222 224
Total equity 61,026 8,406
Liabilities
Non-current liabilities
Borrowings 44,027 16,488
Retirement benefit liabilities 1,821 826
Deferred tax liabilities 17,129 652
Other provisions for liabilities and charges 354 386
Trade and other payables 1,058 1,040
Derivative financial instruments 79 119
Total non-current liabilities 64,468 19,511
Current liabilities
Borrowings 5,423 3,007
Income tax payable 720 558
Other provisions for liabilities and charges 399 407
Trade and other payables 8,847 7,335
Derivative financial instruments 155 549
Total current liabilities 15,544 11,856
Total equity and liabilities 141,038 39,773
The accompanying notes on pages 10 to 12 and 21 to 39 form an integral part of this condensed
consolidated financial information.
Page 19
GROUP CASH FLOW STATEMENT
For the year ended 31 December
2017 2016
£m £m
Cash flows from operating activities
Cash generated from operations (page 30) 6,119 4,893
Dividends received from associates 903 962
Tax paid (1,675) (1,245)
Net cash generated from operating activities 5,347 4,610
Cash flows from investing activities
Interest received 83 62
Purchases of property, plant and equipment (791) (586)
Proceeds on disposal of property, plant and equipment 95 93
Purchases of intangibles (187) (88)
Purchases of investments (170) (109)
Proceeds on disposals of investments 160 22
Acquisition of RAI (17,657) -
Acquisitions of subsidiaries (77) (57)
Proceeds from associate's share buy-back - 23
Net cash used in investing activities (18,544) (640)
Cash flows from financing activities
Interest paid (1,114) (641)
Proceeds from increases in and new borrowings 40,937 3,476
Outflow relating to derivative financial instruments (406) (26)
Purchases of own shares held in employee share ownership trusts (205) (64)
Reductions in and repayments of borrowings (20,827) (3,840)
Dividends paid to owners of the parent (3,465) (2,910)
Purchases of non-controlling interests - (70)
Dividends paid to non-controlling interests (167) (147)
Other 6 (7)
Net cash generated from/(used in) financing activities 14,759 (4,229)
Net cash flows generated from/(used in) operating, investing and financing
activities 1,562 (259)
Differences on exchange (391) 180
Increase/(decrease) in net cash and cash equivalents in the year 1,171 (79)
Net cash and cash equivalents at 1 January 1,651 1,730
Net cash and cash equivalents at 31 December 2,822 1,651
Cash and cash equivalents per balance sheet 3,291 2,204
Overdrafts and accrued interest (469) (553)
Net cash and cash equivalents 2,822 1,651
The accompanying notes on pages 10 to 12 and 21 to 39 form an integral part of this condensed
consolidated financial information.
The net cash outflows relating to the Quebec Class Action (see page 38) and other adjusting items on pages
24 and 25, included in the above, are £685 million (2016: £711 million).
Page 20
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The condensed consolidated financial information has been extracted from the Annual Report and Form
20-F, including the audited financial statements for the year ended 31 December 2017. This condensed
consolidated financial information does not constitute statutory accounts within the meaning of Section
434 of the Companies Act 2006.
The Group has prepared its annual consolidated financial statements in accordance with IFRS as issued by
the International Accounting Standards Board (IASB), IFRS as adopted by the European Union (EU) and in
accordance with the provisions of the UK Companies Act 2006. IFRS as adopted by the EU differs in certain
respects from IFRS as issued by the IASB. The differences have no impact on the Group’s consolidated
financial statements for the periods presented.
These financial statements have been prepared under the historical cost convention, except in respect of
certain financial instruments and on a basis consistent with the IFRS accounting policies as set out in the
Annual Report for the year ended 31 December 2016.
The preparation of these condensed 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 these condensed consolidated financial
statements. 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 condensed consolidated financial statements. In the future, actual experience may deviate
from these estimates and assumptions, which could affect these condensed consolidated financial
statements as the original estimates and assumptions are modified, as appropriate, in the year in which
the circumstances change.
NON-GAAP MEASURES
In the reporting of financial information, the Group uses certain measures that are not required under
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 profit from
operations, adjusted diluted earnings per share, operating cash flow conversion ratio and adjusted cash
generated from operations which are before the impact of adjusting items and are reconciled from
revenue, profit from operations, diluted earnings per share, cash conversion ratio and net cash
generated from operating activities. 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. These include 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. The adjusting items are used to calculate the non-GAAP
measures of adjusted revenue, adjusted profit from operations, adjusted operating margin, adjusted net
finance costs, adjusted taxation, adjusted share of post-tax results of associates and joint ventures,
underlying tax rate and adjusted diluted earnings per share. The Group also provides other non-GAAP
measures of adjusted cash generated from operations, operating cash flow conversion ratio and net
debt, which the Group uses to monitor its liquidity and financial position.
The Group also includes organic measures of volume, revenue and profit from operations to ensure a full
understanding of the underlying performance of the Group, before the impact of acquisitions.
Page 21
Non-GAAP measures cont…
The Management Board, as the chief operating decision maker, reviews a number of our IFRS and non-
GAAP measures for the Group and its geographic segments at constant rates of exchange. This allows
comparison of the Group’s results, had they been translated at the previous year’s average rates of
exchange. The Group does not adjust for the normal transactional gains and losses in operations that are
generated by exchange movements. However, for clarity and where useful to the users of the financial
information, the Group also gives a figure for growth in adjusted profit from operations excluding both
transactional and translational foreign exchange movements. Although the Group does not believe that
these measures are a substitute for IFRS measures, the Group does believe that such results excluding the
impact of currency fluctuations year-on-year provide additional useful information to investors regarding
the operating performance on a local currency basis.
The Group also supplements its presentation of cash flows in accordance with IFRS by presenting the non-
GAAP measures of adjusted cash generated from operations and operating cash flow conversion ratio.
The Group’s management believes these measures, which are used internally, are useful to the users of
the financial statements in helping them understand the underlying business performance and can
provide insights into the cash flow available to, among other things, reduce debt and pay dividends.
Adjusted cash generated from operations and operating cash flow conversion ratio have limitations as an
analytical tool. They are not presentations made in accordance with IFRS and should not be considered as
an alternative to net cash generated from operating activities determined in accordance with IFRS.
Adjusted cash generated from operations and operating cash flow conversion ratio are not necessarily
comparable to similarly titled measures used by other companies. As a result, readers should not consider
these measures 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 Group also presents net debt, a non-GAAP measure, on page 32. The Group uses net debt to assess
its financial capacity. The Management Board believes that this additional measure, which is used
internally, 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 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.
Due to the secondary listing of the ordinary shares of British American Tobacco p.l.c. on the main board of
the JSE Limited (JSE) in South Africa, the Group is required to present headline earnings per share and
diluted headline earnings per share, as alternative measures of earnings per share, calculated in
accordance with Circular 2/2015 ‘Headline Earnings’ issued by the South African Institute of Chartered
Accountants. These are shown on page 34.
Page 22
ANALYSIS OF VOLUME, REVENUE, PROFIT FROM OPERATIONS AND DILUTED EARNINGS PER
SHARE
2017 2016
Impact
Reported of Acqs Organic2 Reported
Bn Bn Bn Bn
Volume
US 36 (36) - -
Asia-Pacific 193 - 193 196
Americas 107 - 107 113
Western Europe 122 (3) 119 120
EEMEA 228 - 228 236
Total Region 686 (39) 647 665
Adj
Adj Adjusted Impact Organic2 Adj
Reported Items Adjusted Exchange at CC1 of Acqs at CC1 Reported Items Adjusted
£m £m £m £m £m £m £m £m £m £m
Revenue
US 4,211 - 4,211 (205) 4,006 (4,006) - - - -
Asia-Pacific 4,509 - 4,509 (189) 4,320 - 4,320 4,266 - 4,266
Americas 3,125 - 3,125 53 3,178 - 3,178 2,868 - 2,868
Western Europe 4,532 (258) 4,274 (267) 4,007 (105) 3,902 3,867 - 3,867
EEMEA 3,915 - 3,915 (142) 3,773 - 3,773 3,750 - 3,750
Total Region 20,292 (258) 20,034 (750) 19,284 (4,111) 15,173 14,751 - 14,751
Profit from operations
US 1,318 763 2,081 (101) 1,980 (1,980) - - - -
Asia-Pacific 1,638 117 1,755 (81) 1,674 - 1,674 1,432 198 1,630
Americas 1,147 109 1,256 32 1,288 - 1,288 1,017 155 1,172
Western Europe 1,127 435 1,562 (104) 1,458 (2) 1,456 1,044 345 1,389
EEMEA 1,246 93 1,339 (74) 1,265 - 1,265 1,182 107 1,289
Total Region 6,476 1,517 7,993 (328) 7,665 (1,982) 5,683 4,675 805 5,480
Fox River3 - - - - - - - (20) 20 -
Profit from
6,476 1,517 7,993 (328) 7,665 (1,982) 5,683 4,655 825 5,480
operations
Operating Margin 31.9% 39.9% 39.7% 37.5% 31.6% 37.2%
Net finance costs (1,094) 205 (889) 56 (833) (637) 108 (529)
Associates and joint
24,209 (23,197) 1,012 (61) 951 2,227 (900) 1,327
ventures
Profit before tax 29,591 (21,475) 8,116 (333) 7,783 6,245 33 6,278
Taxation 8,113 (10,220) (2,107) 74 (2,033) (1,406) (67) (1,473)
Non-controlling
(171) (4) (175) 5 (170) (191) 1 (190)
interest
Profit attributable
37,533 (31,699) 5,834 (254) 5,580 4,648 (33) 4,615
to shareholders
Diluted number of
2,051 2,051 2,051 1,865 1,865
shares (m)
Diluted earnings per
1,830.0 284.4 272.1 249.2 247.5
share (pence)
Notes:
(1) CC: profit translated at constant rates of exchange. No adjustment is made for the transactional impact of currency movements
on cost of sales, as described on page 22.
(2) Organic volume, revenue and profit from operations performance excludes the increased contribution from RAI following the
acquisition of the remaining shares not previously owned by the Group, the contribution from brands acquired from
Bulgartabac and FDS, and the acquisition of Winnington, and Must Have Limited described on pages 27 and 28.
(3) The Fox River charges have not been allocated to any segment as they neither relate to current operations nor to the tobacco
business. They are not included in the segmental performance as reported to the chief operating decision maker.
Page 23
ADJUSTING ITEMS INCLUDED IN REVENUE
Adjusting items in revenue relate to certain third-party contract manufacturing. The Group will acquire
and sell goods inclusive of excise, acquired from a third party under short term arrangements, and then
passed on to customers. This increases both revenue and cost of sales, with no impact to profit from
operations but distorts operating margin. To better reflect the underlying performance of the Group, this
uplift from excise in both revenue and cost of sales has been adjusted for, given the temporary nature of
the arrangement.
ADJUSTING ITEMS INCLUDED IN PROFIT FROM OPERATIONS
Adjusting items are significant items in the profit from operations that individually or, if of a similar type,
in aggregate, are relevant to an understanding of the Group’s underlying financial performance, as
described on pages 21 and 22. These items are separately disclosed in the segmental analyses.
(a) Restructuring and integration costs
Restructuring costs reflect the costs incurred as a result of initiatives to improve the effectiveness and the
efficiency of the Group as a globally integrated enterprise, including the relevant operating costs of
implementing the operating model. These costs represent additional expenses incurred that are not
related to the normal business and day-to-day activities. The operating model is underpinned by a global
single instance of SAP with benefits already being realised within the business and future savings
expected in the years to come. The initiatives also include a review of the Group’s trade marketing and
manufacturing operations, supply chain, overheads and indirect costs, organisational structure and
systems and software used. The costs of these 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:
2017 2016
£m £m
Employee benefit costs 193 240
Depreciation, amortisation and impairment costs 85 64
Other operating expenses 330 325
Other operating income (8) (26)
Total 600 603
Restructuring and integration costs in 2017 include advisor fees and costs incurred related to the
acquisition of the shares in RAI not already owned by the Group, the restructuring initiatives directly
related to implementation of a new operating model and the cost of initiatives in respect of permanent
headcount reductions and permanent employee benefit reductions in the Group. The costs also cover
certain integration costs related to the acquisition of RAI, factory closure and downsizing activities in
Germany and Malaysia, certain exit costs and asset write-offs related to the withdrawal from the
Philippines. Since the acquisition of RAI, adjusting items also includes costs related to the Engle progeny
cases as well as tobacco-related and other litigation costs.
Restructuring and integration costs in 2016 principally related to the implementation of a new operating
model and the cost of initiatives in respect of permanent headcount reductions and permanent employee
benefit reductions in the Group. The costs also cover factory closure and downsizing activities in
Germany, Malaysia and Brazil, certain exit costs and asset write-offs related to the change in approach to
the commercialisation of Voke, uncertainties surrounding regulatory changes, and restructurings in Japan
and Australia.
Other operating income in 2017 includes gains from the sale of land and buildings in Brazil. In 2016, other
operating income includes gains from the sale of land and buildings in Malaysia.
Page 24
Adjusting items included in profit from operations cont…
(b) Amortisation and impairment of trademarks and similar intangibles
Acquisitions in 2017 of RAI, Winnington, Must Have Limited and the tobacco assets of Bulgartabac and
FDS, combined with prior year acquisitions resulted in the capitalisation of trademarks and similar
intangibles that are amortised over their expected useful lives, which do not exceed 20 years. The
amortisation and impairment charge of £383 million (2016: £149 million) is included in depreciation,
amortisation and impairment costs in the profit from operations. The increase in 2017 is driven by the
amortisation of brands included as part of the RAI acquisition including Capri, Misty and Kodiak.
(c) Fox River
In 2011, a Group 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. Based
on this Funding Agreement, £25 million has been paid in 2017, which includes legal costs of £7 million
(2016: £17 million, including legal costs of £11 million).
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, although
this consent decree requires approval from the District Court of Wisconsin. Considering these
developments, the provision has been reviewed. No adjustment has been proposed, other than as related
to the payment above, with the provision standing at £138 million at 31 December 2017. In 2016, the
provision was increased by £20 million due to the devaluation of sterling against the US dollar, which was
partly offset by the payments made.
In July 2016, the High Court ruled in a Group subsidiary’s favour that a dividend of €135 million paid by
Windward to Sequana in May 2009 was a transaction made with the intention of putting assets beyond
the reach of the Group subsidiary and of negatively impacting its interests. On 10 February 2017, further
to a hearing in January 2017 to determine the relief due, the Court found in the Group subsidiary’s favour,
ordering that Sequana must pay an amount up to the full value of the dividend plus interest which
equates to around US$185 million, related to past and future clean-up costs. The Court granted all parties
leave to appeal and Sequana a stay in respect of the above payments. The appeal hearing is expected to
take place in June 2018. 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. No payments have been received.
(d) Other
In 2017, the release of the fair value acquisition accounting adjustments to finished goods inventories of
£465 million has been adjusted within “changes in inventories of finished goods and work in progress”.
Also included in 2017 is the impairment of certain assets (£69 million) related to a third-party distributor
(Agrokor) in Croatia, that has been adjusted within “other operating expenses”.
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 sales tax (excise and VAT) and penalties. This
resulted in the recognition of a £53 million charge by a Group subsidiary. Management deems the tax and
penalties to be unfounded and has appealed to the tax tribunal against the assessment. Management
believes that this appeal will be successful and based upon the Group’s expectation that the penalties will
be reversed in future, BAT recognised the tax and penalties charge as adjusting in 2016.
ADJUSTING ITEMS INCLUDED IN NET FINANCE COSTS
Adjusting items are significant items in net financing costs which individually or, if of a similar type, in
aggregate, are relevant to an understanding of the Group’s underlying financial performance and are
discussed on page 10.
Page 25
ADJUSTING ITEMS INCLUDED IN SHARE OF POST-TAX RESULTS OF ASSOCIATES AND JOINT
VENTURES
The following is a summary of the adjusting items incurred in respect of the Group’s associates and joint
ventures, shown reflecting the Group’s share of post-tax results:
2017 2016
£m £m
Gain on deemed disposal of RAI as an associate 23,288 -
Disposal by RAI of Natural American Spirit - 941
Contract manufacturing termination fee recognised by RAI - 18
Costs incurred by RAI related to its acquisition by BAT (33) -
Other adjusting items incurred by RAI pre-acquisition (60) (70)
Tisak/Agrokor adjustment (27) -
Dilution of interest in ITC 29 11
Total 23,197 900
In 2017, the Group is deemed to have disposed of its shares in RAI as an associate and acquired RAI as a
wholly owned subsidiary, with a gain on the disposal of £23,288 million.
In 2017, in the period prior to the acquisition, RAI incurred costs in relation to the acquisition of the
remaining shares not already owned by BAT, the Group’s share of which was £33 million, net of tax and
deferred tax charges in respect of temporary differences on trademarks, the Group’s share of which was
£18 million. RAI also incurred restructuring charges the Group’s share of which was £14 million, net of tax
(2016: £7 million net of tax), and costs in respect of a number of Engle progeny lawsuits and other
tobacco litigation charges, the Group’s share of which was £32 million, net of tax (2016: £17 million, net
of tax). Additionally, in the period prior to acquisition, there was income related to the Non-Participating
Manufacturer (NPM) Adjustment claims of the states no longer challenging the findings of non-diligence
entered against them by an Arbitration Panel, the Group’s share of which is £4 million net of tax (2016: £2
million, net of tax).
Also in 2017, the Group impaired the carrying value of its investment in Tisak d.d (Tisak) by £27 million,
due to a deterioration in the financial performance linked to the financial difficulties associated with a
third-party distributor (Agrokor) in Croatia.
In 2017, the Group’s interest in ITC Ltd. (ITC) decreased from 29.89% to 29.71% (2016: 30.06% to 29.89%)
as a result of ITC issuing ordinary shares under ITC’s employee share option scheme. The issue of these
shares and change in the Group’s share of ITC resulted in a gain of £29 million (2016: gain of £11 million),
which is treated as a deemed partial disposal and included in the income statement.
The remaining costs in 2016 relate to financing and transaction costs related to RAI’s acquisition of
Lorillard, the Group’s share of which was £47 million and £1 million respectively, partly offset by the
recognition of income related to the early termination of the manufacturing agreement between a Group
subsidiary and R.J.Reynolds Tobacco Company, the Group’s share of which was £18 million. In 2016, RAI
recognised a gain in relation to the sale of the international rights to Natural American Spirit to the Japan
Tobacco Group of companies (JT) of US$4,861 million. The Group’s share of this net gain amounted to
£941 million (net of tax).
ADJUSTING ITEMS INCLUDED IN TAXATION
On 22 December 2017, the United States Federal tax rate was changed to 21% from 1 January 2018. This
revised rate has been used to revalue net deferred tax liabilities in the United States, leading to a credit to
the income statement of £9,620 million, partially offset by a one-time deemed repatriation tax charge
related to unremitted foreign earnings of £34 millioshen. The net deferred tax liabilities largely relate to
the net assets accounted for as part of the RAI acquisition.
The other adjusting items included in taxation have been discussed on page 11.
Page 26
ACQUISITION OF RAI
On 25 July 2017, the Group announced the completion of the acquisition of the remaining 57.8% of RAI
not already owned by the Group for a consideration of £41.8 billion. RAI shareholders received, for each
share of RAI common stock, US$29.44 in cash, without interest, and 0.5260 BAT ordinary shares which are
represented by BAT American Depositary Shares (ADSs) listed on the New York Stock Exchange.
RAI ceased to be reported as an associate and has been consolidated as a wholly owned subsidiary from
the acquisition date. The Group was deemed to have disposed of the investment in the RAI as an
associate and has accordingly recognised a gain of £23,288 million, as discussed on page 11.
IFRS 3 requires certain disclosures for material transactions. The fair value table below, stated at the
exchange rates prevailing at the date of the transaction, has been based on available management
information to ascertain the fair value of the assets acquired. The values shown in the table below are
considered final and are presented in accordance with IFRS 3.
Final values:
Fair value
£m
Intangible assets 75,482
Property, plant and equipment 1,039
Deferred tax assets 293
Trade and other receivables 145
Inventories 1,751
Income tax asset 200
Cash and cash equivalents 1,285
Borrowings (11,197)
Retirement benefit liabilities (1,339)
Deferred tax liabilities (27,358)
Other provisions for liabilities and charges (42)
Trade and other payables (2,516)
Income tax liability (108)
Net identifiable assets acquired 37,635
Goodwill 34,280
Total 71,915
Being:
Consideration paid to Reynolds shareholders (57.8%) 41,770
Value attributable to BAT shareholding (42.2%) 30,145
Total 71,915
If the acquisition had occurred on 1 January 2017, before accounting for anticipated synergy and
restructuring benefits, it is currently estimated that Group revenue would have been £25,749 million and
Group profit from operations would have been £8,576 million for the year ended 31 December 2017. This
is after charging £243 million for the amortisation of acquired intangibles, the release of the fair value
acquisition accounting adjustments to finished goods inventory of £465 million and £125 million in respect
of integration and acquisition costs.
Page 27
OTHER CHANGES IN THE GROUP
During 2017, the Group acquired certain tobacco assets from Bulgartabac Holding AD in Bulgaria and FDS
in Bosnia. The Group also acquired Winnington Holdings AB in Sweden and certain assets from Must Have
Limited in the UK, including the electronic cigarette brand ViP. The financial impact of these transactions
to the Group were immaterial individually and in aggregate.
On 21 December 2017, the Group signed an agreement to acquire 100% of the share capital of Twisp
Propriety Limited, a South African e-cigarette/nicotine vapour company. Completion of the proposed
acquisition is conditional upon South African anti-trust approval and other conditions and, subject to this,
will complete by mid-2018.
2017 REVENUE, PROFIT FROM OPERATIONS and DILUTED EPS RESTATED for Regional
structure, IFRS 15 and inclusive of RAI - to provide 2018 comparator base
The previously announced regional restructure is effective from 1 January 2018. IFRS 15 is also effective 1
January 2018. The Group has decided to restate prior years as permitted by IFRS 15 to maintain
comparability between financial years. The Group is also providing the Group’s adjusted performance for
2017, including a full year’s performance from RAI as a wholly owned subsidiary, to provide the users of
the preliminary announcement with a representative, 12-month equivalent, base for comparison of 2018
performance.
IFRS Adjusted
Adjust
for 12-
IFRS Restated Post month Repres
As reported in 15 incl IFRS15 IFRS 15 acq adj1
2017 Allocations impact IFRS 15 Adjusted Allocations impact adjusted uplift
£m £m £m £m £m £m £m £m £m £m
Revenue
US 4,211 13 (64) 4,160 4,211 13 (64) 4,160 5,531 9,691
APME 5,213 (4) (236) 4,973 5,213 (4) (236) 4,973 (4) 4,969
AMSSA 4,391 (3) (65) 4,323 4,391 (3) (65) 4,323 (3) 4,320
ENA 6,477 (6) (363) 6,108 6,219 (6) (363) 5,850 53 5,903
Total Region 20,292 - (728) 19,564 20,034 - (728) 19,306 5,577 24,883
Profit from operations
US 1,318 (89) (64) 1,165 2,081 (89) (64) 1,928 2,502 4,430
APME 1,848 54 - 1,902 1,995 54 - 2,049 25 2,074
AMSSA 1,704 (56) - 1,648 1,838 (56) - 1,782 22 1,804
ENA 1,606 91 - 1,697 2,079 91 - 2,170 29 2,199
Profit from
6,476 - (64) 6,412 7,993 - (64) 7,929 2,578 10,507
operations
Operating Margin 31.9% 32.8% 39.9% 41.1%
Net finance costs (1,094) - - (1,094) (889) - - (889)
Associates and joint
24,209 - - 24,209 1,012 - - 1,012
ventures
Profit before tax 29,591 (64) 29,527 8,116 (64) 8,052
Taxation 8,113 - 16 8,129 (2,107) - 16 (2,091)
Non-controlling
(171) - - (171) (175) - - (175)
interest
Profit attributable
37,533 - (48) 37,485 5,834 - (48) 5,786
to shareholders
Diluted number of
2,051 2,051 2,051 2,051
shares (m)
Diluted earnings per
1,830.0 1,827.6 284.4 282.1
share (pence)
* Allocations relate to centre costs and income allocated across the Group’s regions. In providing the Group’s adjusted performance for
2017, including a full year’s performance from RAI as a wholly owned subsidiary, the centre allocations made on an IFRS basis have been
reallocated to reflect RAI on a full 12-month allocation and corresponding reallocation upside in the other regions versus the IFRS basis.
1 Repres adj (Representative adjusted) reflects the representative 12-month performance of the Group, under the new regional structure
and after adjusting for the effect of IFRS 15, assuming RAI and other acquisitions had been owned for the full year.
Page 28
CHANGE TO PERFORMANCE MEASURES
The Group continuously assesses the performance metrics to ensure they remain relevant to reflect the
Group’s short and long-term delivery in line with the strategic vision. To that end, from 2018, the Group
will introduce a new measure called Revenue Growth of our Strategic Portfolio, as part of the short-term
incentive scheme. This measure will have a 30% weighting, with the Strategic Portfolio reflecting the
focus of the Group’s investment activity, and defined as:
- the GDBs (Kent, Dunhill, Lucky Strike, Pall Mall and Rothmans);
- the 3 main brands from the US combustibles business (Camel, Newport and Natural American
Spirit); and
- our Potentially Reduced Risk Products portfolio, including our NGP business of THP and Vapour,
and the snus and moist snuff brands.
The new metric will replace the GDB & Key Strategic Brands (GDSB) volume growth metric. The volume
share metric of key markets is retained with a weighting reduced from 20% to 10%.
In 2017, whilst not part of the Group’s KPIs, to provide the comparator against which 2018 will be
measured, Revenue of our Strategic Portfolio was £11,614 million (including the estimated impact of IFRS
15 which is effective 1 January 2018 with retrospective application), or £16,711 million including a full
year’s revenue from the US business.
2017 2017
Restated reported for IFRS 15 Representative, adjusted including 12
impact months from acquisitions
Strategic Other Total Strategic Other Total
Portfolio Brands Portfolio Brands
£m £m £m £m £m £m
Combustible Tobacco 10,842 7,330 18,172 15,395 7,507 22,902
Potentially Reduced Risk:
Vapour 168 - 168 258 - 258
THP 202 - 202 203 - 203
Total NGP 370 - 370 461 - 461
Oral tobacco 402 - 402 855 - 855
Total Potentially Reduced Risk 772 - 772 1,316 - 1,316
Other businesses* - 620 620 - 665 665
Total 11,614 7,950 19,564 16,711 8,172 24,883
* Other businesses largely comprise revenue related to distribution activities and includes sales of leaf and other semi-finished products
to third parties
Page 29
CASH FLOW
Net cash generated from operating activities
The net cash generated from operating activities in the cash flow statement on page 20 includes the
following items:
2017 2016
£m £m
Profit from operations 6,476 4,655
Depreciation, amortisation and impairment costs 902 607
Decrease/(increase) in inventories 1,409 (638)
(Increase)/decrease in trade and other receivables (732) 87
Increase in amounts receivable in respect of the Quebec Class Action (130) (242)
Decrease in provision for master settlement agreement (934) -
(Decrease)/increase in trade and other payables (749) 428
Decrease in net retirement benefit liabilities (131) (145)
(Decrease)/increase in provisions for liabilities and charges (78) 141
Other non-cash items 86 -
Cash generated from operating activities 6,119 4,893
Dividends received from associates 903 962
Tax paid (1,675) (1,245)
Net cash generated from operating activities (page 20) 5,347 4,610
Net cash generated from operating activities increased by £737 million (or 16.0%) largely due to the cash
generated by RAI following the acquisition, the profit from operations earned in the period from the rest of
the Group (as discussed on pages 6 to 7) and a reduction in inventories. This more than offset an increase in
receivables (partly due to a short-term loan provided to a trading partner due to inventory movements in the
year), reduction in trade and other payables, the early payment of the 2017 liability related to the MSA in the
United States and the final quarterly payments in relation to the Quebec Class Action. In 2016, the net cash
generated from operating activities was driven by the profit from operations earned in the year, partly offset
by the net movement between an increase in inventories and an increase in trade and other payables,
together with payments on the Quebec Class Action.
Expenditure on research and development was approximately £191 million in 2017 (2016: £144 million) with
a focus on products that could potentially reduce the risk associated with smoking conventional cigarettes.
Net cash used in investing activities
In 2017, net cash used in investing activities increased by £17,904 million to £18,544 million principally due to
the acquisition of the shares in RAI not already owned by the Group. In 2016, cash outflows from investing
activities related to the acquisition of Ten Motives.
Included within investing activities is gross capital expenditure which includes purchases of property, plant
and equipment and purchases of intangibles. This includes the investment in the Group’s global operational
infrastructure (including, but not limited to, the manufacturing network, trade marketing and IT systems). In
2017, the Group invested £862 million, an increase of 32.2% on the prior year (2016: £652 million). The Group
expects gross capital expenditure in 2018 of £1,075 million.
Net cash generated/(used) in financing activities
In 2017, net cash generated in financing activities was £14,759 million, against an outflow of £4,229 million in
2016. The 2017 position was due to the debt movements below, largely due to the financing undertaken in
respect of the acquisition of RAI, partly offset by the payment of the dividend. Dividends paid in 2017
increased to £3,465 million compared to £2,910 million in 2016. The increase was due to the increased
dividend per share and the higher number of shares in issue following the acquisition of RAI.
In March 2016, a US$300 million bond was repaid. In July 2016, the Group issued a £500 million bond
maturing in 2021, and issued two bonds in September 2016 (a US$650 million bond maturing in 2019 and a
£650 million bond maturing in 2052). The Group repaid on maturity a CHF 350 million bond in August 2016
and a £325 million bond in September 2016.
Page 30
Cash flow cont…
On 19 July 2016, the Group exercised the make-whole provision for its US$700 million bond originally issued
in 2008 pursuant to Rule 144A. The bond was redeemed on 18 August 2016, prior to its original maturity date
of 15 November 2018.
In March and April 2017, the Group arranged short term bilateral facilities with some of its core banks for a
total of approximately £1,600 million equivalent. In June 2017, a €1,250 million bond and a US$600 million
bond were repaid at maturity. In August 2017, the Group paid on maturity a US$500 million bond.
In July 2017, following the shareholder approvals of the acquisition of RAI, the Group utilised its US$25 billion
acquisition facility provided by a syndicate of relationship banks, comprising US$15 billion and US$5 billion
bridge facilities with one and two-year maturities respectively. In addition, the acquisition facility included
two US$2.5 billion term loans with maturity in 2020 and 2022. In August 2017, the bridge facilities were
refinanced in the US and European capital markets.
Eight US$ denominated bonds were issued pursuant to Rule 144A with registration rights totalling US$17.25
billion. The issue comprised of two bonds totalling US$3.25 billion maturing in August 2020, two bonds
totalling US$3 billion maturing in August 2022, one US$2.5 billion bond maturing in August 2024, one US$3.5
billion bond maturing in August 2027, one US$2.5 billion bond maturing in August 2037 and one US$2.5
billion bond maturing in August 2047.
During 2017, four series of bonds were issued pursuant to the EMTN programme and comprised of a £450
million bond maturing in August 2025 and three euro denominated bonds totalling €3.1 billion comprising of
a €1.1 billion bond maturing in August 2021, a €750 million bond maturing in November 2023 and a €1.25
billion bond maturing in January 2030.
Adjusted cash generated from operations
Before the cash related to adjusting items and a trading loan to a third party, and after interest, net
capital expenditure, dividends paid to non-controlling-interests and dividends from associates, adjusted
cash generated from operations was £3,282 million, an increase of 5.4%, and a marginal increase against
2016 on a constant rate basis. This was after the payment of the 2017 MSA liability. Excluding the timing
of this payment, adjusted cash generated from operations would have increased by approximately 45%.
This is reconciled to net cash generated from operating activities as follows:
2017 2016
£m £m
Net cash generated from operating activities (page 20) 5,347 4,610
Cash impact of adjusting items 685 711
Dividends paid to non-controlling interests (167) (147)
Net Interest paid (1,004) (537)
Net capital expenditure (767) (559)
Dividends from associates (903) (962)
Short-term trading loan to third party 101 -
Other (10) (1)
Adjusted cash generated from operations 3,282 3,115
Exchange (157)
Adjusted cash generated from operations at constant rates of exchange 3,125
Cash flow conversion
The conversion of profit from operations to cash may indicate the Group’s ability to generate cash from the
profits earned. Based upon net cash generated from operating activities, the Group’s conversion rate
decreased from 99% to 83% in 2017. This was largely due to the timing of the payment in relation to the 2017
liability for the MSA in December 2017, the costs associated with the acquisition of RAI and other adjusting
items. Excluding the impact of adjusting items and investments in such items as capital expenditure which
will deliver profitable returns in future periods, operating cash flow conversion (based upon adjusted profit
from operations) fell from 93% to 79%. Excluding the timing of the payment of the 2017 MSA liability,
operating cash flow conversion would have been 96%, ahead of 2016 (93%) and reflective of the Group’s
ability to deliver cash from the operating performance of the business.
Page 31
BORROWINGS AND NET DEBT
The increase in borrowings was driven by the acquisition of RAI as discussed above.
The Group defines net debt as borrowings including related derivatives, less cash and cash equivalents and
current available-for-sale investments. A reconciliation of borrowings to net debt is provided below.
2017 2016
£m £m
Total borrowings* 49,450 19,495
Derivatives in respect of net debt:
- Assets (640) (809)
- Liabilities 117 300
Cash and cash equivalents (3,291) (2,204)
Current available for sale investments (65) (15)
Net debt 45,571 16,767
*Borrowings as at 31 December 2017 include £947 million in respect of the purchase price adjustments relating to the acquisition of
Reynolds.
The Group remains confident about its ability to access the debt capital markets successfully and reviews its
options on a continuing basis. The maturity profile of net debt is as follows:
2017 2016
£m £m
Net debt due within one year:
Borrowings 5,423 3,007
Related derivatives (19) (498)
Cash and cash equivalents (3,291) (2,204)
Current available-for-sale investments (65) (15)
2,048 290
Net debt due beyond one year:
Borrowings 44,027 16,488
Related derivatives (504) (11)
43,523 16,477
Total net debt 45,571 16,767
LIQUIDITY
The Treasury function is responsible for raising finance for the Group, managing the Group’s cash
resources and financial risks arising from underlying operations. All of these activities are carried out
under defined policies, procedures and limits.
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 rolling 12-month period. As at 31 December 2017, the
average centrally managed debt maturity was 9.2 years (2016: 8.2 years) and the peak maturity of
centrally managed debt in a rolling 12-month period was 13.2% (2016: 18.1%).
The only externally imposed capital requirement the Group has is in respect of its centrally managed
banking facilities, which require a gross interest cover of 4.5 times. The Group targets a gross interest
cover, as calculated under its key central banking facilities, of greater than 5 times. For 2017, it is 7.8
times (2016: 12.2 times).
The Group continues to maintain investment-grade credit ratings, with ratings from Moody’s/S&P at Baa2
(stable outlook)/BBB+ (stable outlook) respectively. The strength of the ratings has underpinned debt
issuance and the Group is confident of its ability to successfully access the debt capital markets. All
contractual borrowing covenants have been met and none are expected to inhibit the Group’s operations
or funding plans.
Page 32
Liquidity cont…
The Group replaced the existing £3 billion revolving credit facility maturing in 2021 with a new two-
tranche £6 billion revolving credit facility. This consists of a 364-day revolving credit facility of £3 billion
(with a one-year extension and a one-year term out option), and a £3 billion revolving credit facility
maturing in 2021. The Group also increased the EMTN programme from £15 billion to £25 billion and
increased its US and European commercial paper programmes from US$3 billion to US$4 billion and from
£1 billion to £3 billion respectively to accommodate the liquidity needs of the enlarged Group. At 31
December 2017, £600 million was drawn within the RCF (2016: undrawn) with £1.2 billion of commercial
paper outstanding (2016: £254 million), due to short term funding of the payment of the 2017 MSA
liability.
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.
On 25 July 2017, British American Tobacco p.l.c. acceded as guarantor under the indentures of its indirect
wholly owned subsidiaries RAI and R.J. Reynolds Tobacco Company. The securities issued under these
indentures include approximately US$12.2 billion aggregate principal amount of unsecured RAI debt
securities and approximately US$231 million aggregate principal amount of unsecured RJR Tobacco
Company securities.
EARNINGS PER SHARE
Basic earnings per share were 634% higher at 1,836.3p (2016: 250.2p), benefiting from the growth in the
Group’s operating performance, the deferred tax credit arising in the United States following the tax
reform, the gain arising on deemed disposal of RAI as an associate, a reduction in non-controlling interest
and the foreign exchange tailwind on translation of the Group results which more than offset the
increased net finance costs and reduced contribution from associates and joint ventures. After accounting
for the potential dilutive effect of employee share schemes, diluted earnings per share increased by
634%, to 1,830.0p.
Excluding the adjusting items described earlier and at constant rates of exchange, adjusted diluted
earnings per share were 9.9% ahead of the prior year at 272.1p (2016: 247.5p), which was driven by the
improved financial performance, including the effect of recognising RAI as a wholly owned subsidiary,
partly offset by the higher interest charges.
2017 2016
pence pence
Earnings per share
- basic 1,836.3 250.2
- diluted 1,830.0 249.2
Adjusted earnings per share
- basic 285.4 248.4
- diluted 284.4 247.5
- diluted (at constant) 272.1 247.5
Headline earnings per share
- basic 702.2 205.6
- diluted 699.7 204.8
Basic earnings per share are based on the profit for the year attributable to ordinary shareholders and the
weighted average number of ordinary shares in issue during the period (excluding treasury shares). For
the calculation of the diluted earnings per share, the weighted average number of shares reflects the
potential dilutive effect of employee share schemes.
Page 33
Earnings per share cont…
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 2/2015
‘Headline Earnings’, as issued by the South African Institute of Chartered Accountants.
Adjusted diluted earnings per share and adjusted diluted earnings per share at constant rates of
exchange are calculated by taking the following adjustments into account (see pages 24 to 26):
2017 2016
pence pence
Diluted earnings per share 1,830.0 249.2
Effect of restructuring and integration costs 22.8 27.5
Effect of amortisation of trademarks and similar intangibles 14.3 6.3
Effect of South Korea sales tax challenge - 2.6
Effect of Fox River - 1.1
Effect of other adjusting items 17.0 -
Effect of associates’ adjusting items (1,131.0) (48.3)
Effect of adjusting items in net finance costs 7.5 5.8
Effect of adjusting items in respect of deferred taxation (476.2) 3.3
Adjusted diluted earnings per share 284.4 247.5
Effect of exchange rate movements (12.3)
Adjusted diluted earnings per share (at constant rates) 272.1
Diluted headline earnings per share are calculated by taking the following adjustments into account:
2017 2016
pence pence
Diluted earnings per share 1,830.0 249.2
Effect of impairment of intangibles and property, plant and equipment
and held-for-sale assets 6.9 4.9
Effect of gains on disposal of property, plant and equipment and held- (1.7) (1.6)
for-sale assets
Effect of associates’ gain on disposal of asset held-for-sale - (47.1)
Effect of issue of shares and change in shareholding in associate (1.4) (0.6)
Gain on deemed disposal of an associate (RAI) (1,135.4) -
Other 1.3 -
Diluted headline earnings per share 699.7 204.8
In the earnings per share disclosed above, the calculation is based upon the following level of earnings and
number of shares:
2017 2016
Earnings Shares Earnings Shares
£m m £m m
For earnings per share
- basic 37,533 2,044 4,648 1,858
- diluted 37,533 2,051 4,648 1,865
For adjusted earnings per share
- basic 5,834 2,044 4,615 1,858
- diluted 5,834 2,051 4,615 1,865
- diluted, at constant rates 5,580 2,051
For headline earnings per share
- basic 14,352 2,044 3,819 1,858
- diluted 14,352 2,051 3,819 1,865
Page 34
DIVIDENDS
On 26 April 2017, the Group announced its move to quarterly dividends with effect from 1 January 2018.
Further to that announcement, the Board has declared an interim dividend of 195.2p per ordinary share
of 25p, payable in four equal quarterly instalments of 48.8p per ordinary share in May 2018, August 2018,
November 2018 and February 2019. This represents an increase of 15.2% on 2016 (2016: 169.4p per
share), and a payout ratio, on 2017 adjusted diluted earnings per share, of 69%.
As part of the transition to quarterly dividend payments, the Group committed that shareholders would
receive the equivalent amount of total cash payment in 2018 as they would have under the previous
payment policy.
Based upon 65% of 2017 earnings, under the previous calculation methodology, shareholders would have
expected to receive a final dividend of 128.4p in May 2018 and an interim dividend of 61.6p in September
2018, being equivalent to one third of the dividend in respect of 2017, with a total dividend expected to
be received in 2018 of 190.0p.
A second interim dividend of 43.6p (equivalent to 25% of the cash dividend paid in 2017) was announced
on 5 December 2017 and was paid on 8 February 2018. This second interim dividend and the three
quarterly dividend amounts payable in the calendar year 2018 (May, August and November), ensure that
shareholders receive the equivalent cash amount during the year as they would have under the previous
payment policy.
The quarterly dividends will be paid to shareholders registered on either the UK main register or the
South Africa branch register and to holders of American Depositary Shares (ADSs), each on the applicable
record dates set out under the heading ‘Key Dates’ below.
General dividend information
Under IFRS, the dividend is recognised in the year that it is declared or, if required, approved by
shareholders. Therefore, the 2017 accounts reflect the 2016 final dividend (approved in April 2017); the
2017 interim dividend (declared in July 2017) and the 2017 second interim dividend (declared in December
2017), which, in total amount to 218.2p (£4,465 million (2016: 155.9p - £2,910 million)).
2017 2016
Pence per Pence per
Dividends declared: share share
Interim 56.5 51.3
Final 2015 - 104.6
Final 2016 118.1 -
2017 second interim dividend 43.6 -
218.2 155.9
Holders of ADSs
For holders of ADSs listed on the New York Stock Exchange (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. A fee of US$0.005 per ADS will be
charged by Citibank, N.A. in its capacity as depositary bank for the BAT American Depositary Receipt (“ADR”)
programme in respect of each quarterly dividend payment.
South Africa Branch Register
In accordance with the JSE Limited (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.
Page 35
Dividends cont…
Key dates
In compliance with the requirements of the London Stock Exchange (LSE), the NYSE and Strate, the
electronic settlement and custody system used by the JSE, the following salient dates for the quarterly
dividends payments are applicable. All dates are 2018, unless otherwise stated.
Event Payment No. Payment No. 2 Payment No. 3 Payment No. 4
1
Preliminary announcement 22 February 2018
(includes declaration data
required for JSE purposes)
Publication of finalisation 12 March 19 June 25 September 13 December
information (JSE)
No removal requests permitted 12 March to 19 June to 29 25 September to 13 December to
between the UK main register 23 March June (inclusive) 5 October 28 December
and the South Africa branch (inclusive) (inclusive) (inclusive)
register
Last Day to Trade (LDT) cum 19 March 26 June 2 October 21 December
dividend (JSE)
Shares commence trading ex- 20 March 27 June 3 October 24 December
dividend (JSE)
No transfers permitted 20 March to 27 June to 29 3 October to 5 24 December to
between the UK main register 23 March June (inclusive) October 28 December
and the South Africa branch (inclusive) (inclusive) (inclusive)
register
No shares may be 20 March to 27 June to 29 3 October to 5 24 December to
dematerialised or 23 March June (inclusive) October 28 December
rematerialised on the South (inclusive) (inclusive) (inclusive)
Africa branch register
Shares commence trading ex- 22 March 28 June 4 October 27 December
dividend
(LSE and NYSE)
Record date 23 March 29 June 5 October 28 December
(JSE, LSE and NYSE)
Last date for receipt of Dividend 17 April 18 July 25 October 17 January 2019
Reinvestment Plan (DRIP)
elections (LSE)
Payment date (LSE and JSE) 9 May 8 August 15 November 7 February 2019
ADS payment date (NYSE) 14 May 13 August 20 November 12 February 2019
Page 36
RETIREMENT BENEFIT SCHEMES
The Group’s subsidiaries operate around 190 retirement benefit arrangements worldwide. The majority
of the scheme members belong to defined benefit schemes, most of which are funded externally and
many of which are closed to new entrants. The Group also operates a number of defined contribution
schemes.
The present total value of funded scheme liabilities as at 31 December 2017 was £11,868 million (2016:
£7,155 million), while unfunded scheme liabilities amounted to £1,157 million (2016: £476 million). The
fair value of scheme assets increased from £7,278 million in 2016 to £12,350 million in 2017.
The overall net liability for all pension and health care schemes in Group subsidiaries amounted to £698
million at the end of 2017, compared to £371 million at the end of 2016.
The actuarial gain of £833 million (2016: £228 million loss) recognised in the Group Statement of
Comprehensive Income is principally driven by changes to the demographic assumptions, partially offset
by a change in the discount rates used in the valuation of retirement benefit scheme liabilities at each
year end, resulting in gains of £342 million (2016: £843 million loss) and increases in the fair value of
scheme assets of £491 million (2016: £615 million increase).
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.
RELATED PARTY DISCLOSURES
The Group’s related party transactions and relationships for 2016 were disclosed on page 140 of the
Annual Report for the year ended 31 December 2016. In the year to 31 December 2017, there were no
material changes in related parties or in related party transactions except for the matters noted below.
The acquisition of the remaining shares of RAI not previously owned by the Group is deemed to be a
related party transaction, with the effect disclosed throughout this preliminary announcement.
FOREIGN CURRENCIES
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.
The principal exchange rates used were as follows:
Average Closing
2017 2016 2017 2016
Australian dollar 1.681 1.824 1.730 1.707
Brazilian real 4.116 4.740 4.487 4.022
Canadian dollar 1.672 1.795 1.695 1.657
Euro 1.142 1.224 1.127 1.172
Indian rupee 83.895 91.022 86.343 83.864
Japanese yen 144.521 147.466 152.387 144.120
Russian rouble 75.170 91.026 77.880 75.429
South African rand 17.150 19.962 16.747 16.898
US dollar 1.289 1.355 1.353 1.236
Page 37
CONTINGENT LIABILITIES AND FINANCIAL COMMITMENTS
The Group has contingent liabilities in respect of litigation, taxes and guarantees in various countries. The
Group is subject to contingencies pursuant to requirements that it complies with relevant laws,
regulations and standards. 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, it
is probable that an outflow of economic resources will be required to settle the obligation and the
amount of the obligation can be reliably estimated, a provision will be recognised based on best estimates
and management judgement. There are, however, contingent liabilities in respect of litigation, taxes in
some countries and guarantees for which no provisions have been made.
While the amounts that may be payable or receivable 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 in the next three years.
Taxes
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, among 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 the Group’s 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.
There are disputes that may proceed to litigation in a number of countries including Brazil, Netherlands
and South Africa. A dispute in Bangladesh, which proceeded to litigation in 2014, is on-going, whilst the
Group is appealing the ruling in respect of sales taxes and penalties in South Korea.
Group litigation
Group companies, as well as other leading cigarette manufacturers, are defendants in a number of
product liability cases. In a number of the cases, the amounts of compensatory and punitive damages
sought are significant.
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. An
adverse judgment was entered against one Group company, ITCAN, in the Quebec class actions and an
appeal has been made. If further adverse judgments are entered against any of the Group’s companies in
any case, all 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 a
particular fiscal period could be materially affected by this, by the impact of a significant increase in
litigation, or and by the final outcome of any particular litigation.
Summary
Having regard to all these matters, with the exception of Fox River, certain Engle progeny cases, and the
US Department of Justice litigation, the Group does not consider it appropriate to make any provision or
charge 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. The Group does not believe that the ultimate outcome of this litigation will significantly impair
the Group’s financial condition.
Full details of the litigation against Group companies and tax disputes as at 31 December 2017 will be
included in the Annual Report and Form 20-F for the year ended 31 December 2017. There were no
material developments in 2017 that would impact on the financial position of the Group.
Page 38
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 FII GLO. There are 25 corporate groups in the FII GLO. The case concerns the
treatment for UK corporate tax purposes of profits earned overseas and distributed to the UK. Full details
are provided in the 2016 Annual Report and Accounts, note 6(b), page 105 and in the Form F-4 filed with
the SEC.
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 outcome of the Court of Appeal has not reduced the
estimated receivable. HMRC have sought permission to appeal to the Supreme Court on all issues. The
Supreme Court has deferred a decision on whether or not to grant permission pending other litigation. A
decision on whether permission will be granted is anticipated in mid-2018. If permission is granted the
hearing of the appeal will likely be in 2019.
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 is scheduled to be heard in 2018.
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 in respect of the receipt which, net of the deduction
by HMRC, is held as deferred income. Any future recognition as income will be treated as an adjusting
item, due to the size of the order, with interest of £25 million for the year ended 31 December 2017
(2016: £25 million) accruing on the balance, which was also treated as an adjusting item.
Page 39
ANNUAL REPORT and FORM 20-F
Statutory accounts
The financial information set out above does not constitute the Company’s statutory accounts for the
years ended 31 December 2017 or 2016. Statutory accounts for 2016 have been delivered to the Registrar
of Companies and those for 2017 will be delivered following the Company’s Annual General Meeting. The
auditors’ reports on both the 2017 and 2016 accounts were unqualified, did not draw attention to any
matters by way of emphasis and did not contain statements under s498(2) or (3) of Companies Act 2006
or equivalent preceding legislation.
Publication
The Annual Report and Form 20-F will be published on bat.com on or around 16 March 2018. A printed
copy will later be mailed to shareholders on the UK main register who have elected to receive it. At the
same time, shareholders will be notified of the availability of the Annual Report and Form 20-F on the
website and of the Performance Summary together with other ancillary documents in accordance with
their elections. Specific local mailing and/or notification requirements will apply to shareholders on the
South Africa branch register.
DISTRIBUTION OF PRELIMINARY STATEMENT
This announcement is released or otherwise made available or notified to the London Stock Exchange, the
JSE Limited and the New York Stock Exchange. It may be viewed and downloaded from our website
www.bat.com.
This announcement, together with the Group financial statements (including the notes on the financial
statements) and the report of the independent registered public accounting firm (for US purposes) for the
year ended 31 December 2017, will be furnished on a Form 6-K with the United States Securities and
Exchange Commission (SEC) by 5:00pm UK time (12:00pm EST) on 22 February 2018 and will be available
on the SEC's website at www.sec.gov. That Form 6-K will be submitted to the U.K. National Storage
Mechanism thereafter and will be available for inspection at www.morningstar.co.uk/uk/NSM.
Copies of the announcement may also be obtained during normal business hours from: (1) the Company’s
registered office; (2) the Company’s representative office in South Africa; (3) British American Tobacco
Publications; and (4) Citibank Shareholder Services. Contact details are set out below.
Paul McCrory
Secretary
21 February 2018
Page 40
APPENDIX 1
OTHER TOBACCO PRODUCTS
The Group reports volumes as additional information. This is done with cigarette sticks as the basis, with
usage levels applied to other tobacco products to calculate the equivalent number of cigarette units.
The usage rates that are applied:
Equivalent to one cigarette
Roll-your-own (RYO) 0.8 grams
Make-your-own (MYO)
- Expanded tobacco 0.5 grams
- Optimised tobacco 0.7 grams
Cigars 1 cigar
Oral
- Pouches 1 pouch
- Loose 2.8 grams
Roll-your-own (RYO)
Loose tobacco designed for hand rolling, normally a finer cut with higher moisture, compared to cigarette
tobacco.
Make-your-own (MYO)
MYO expanded tobacco; also known as volume tobacco.
Loose cigarette tobacco with enhanced filling properties – to allow higher yields of cigarettes/kg -
designed for use with cigarette tubes and filled via a tobacco tubing machine.
MYO non-expanded tobacco; also known as optimised tobacco.
Loose cigarette tobacco designed for use with cigarette tubes and filled via a tobacco tubing machine.
GROUP VOLUME
The Group volume includes 100% of all volume sold by subsidiaries. As previously reported in the case of
the joint operation, (known as CTBAT International Limited) between China National Tobacco Corporation
(CNTC) and the Group, the volume of CTBAT not already recognised by Group subsidiaries is included in
Group volumes at 100% rather than as a proportion of volume sold, in line with the Group’s measurement
of market share, which is based on absolute volume sold, both in individual markets and globally.
SHAREHOLDER INFORMATION
FINANCIAL CALENDAR 2018
Wednesday 25 April Annual General Meeting at 11.30am
Milton Court Concert Hall, Silk Street, London EC2Y 8DT
Thursday 26 July Half-Year Report
Page 41
CORPORATE INFORMATION
Premium listing
London Stock Exchange (Share Code: BATS; ISIN: GB0002875804)
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ, UK
tel: 0800 408 0094; +44 370 889 3159
Share dealing tel: 0370 703 0084 (UK only)
Your account: www.computershare.com/uk/investor/bri
Share dealing: www.computershare.com/dealing/uk
Web-based enquiries: www.investorcentre.co.uk/contactus
Secondary listing
JSE (Share Code: BTI)
Shares are traded in electronic form only and transactions settled electronically through Strate.
Computershare Investor Services Proprietary Limited
PO Box 61051, Marshalltown 2107, South Africa
tel: 0861 100 634; +27 11 870 8216
email enquiries: web.queries@computershare.co.za
American Depositary Receipts (ADRs)
NYSE (Symbol: BTI; CUSIP Number: 110448107)
BAT’s shares are listed on the NYSE in the form of American Depositary Shares (ADSs) and these are
evidenced by American Depositary Receipts (ADRs), each one of which represents one ordinary share of
British American Tobacco p.l.c. Citibank, N.A. is the depositary bank for the sponsored ADR programme.
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
Publications
British American Tobacco Publications
Unit 80, London Industrial Park, Roding Road, London E6 6LS, UK
tel: +44 20 7511 7797; facsimile: +44 20 7540 4326
e-mail enquiries: bat@team365.co.uk or
The Company’s Representative office in South Africa using the contact details shown below.
British American Tobacco p.l.c.
Registered office
Globe House
4 Temple Place
London
WC2R 2PG
tel: +44 20 7845 1000
British American Tobacco p.l.c. is a public limited company which is listed on the London Stock Exchange
and the JSE Limited in South Africa. British American Tobacco p.l.c. is incorporated in England and Wales
(No. 3407696) and domiciled in the UK.
British American Tobacco p.l.c.
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 6576
Page 42
Forward looking statements
This announcement contains certain forward-looking statements, including “forward-looking” statements made
within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are
often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,”
“would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,”
“strategy,” “outlook”, “target” and similar expressions. These include statements regarding our intentions, beliefs
or current expectations concerning, amongst other things, our results of operations, financial condition, liquidity,
prospects, growth, strategies and the economic and business circumstances occurring from time to time in the
countries and markets in which the Group operates.
All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and
other factors that could cause actual future financial condition, performance and results to differ materially from
the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or
statistical data within this communication. Among the key factors that could cause actual results to differ
materially from those projected in the forward-looking statements are uncertainties related to the following: the
impact of competition from illicit trade; the impact of adverse domestic or international legislation and regulation;
changes in domestic or international tax laws and rates; adverse litigation and dispute outcomes and the effect of
such outcomes on the Group’s financial condition; changes or differences in domestic or international economic
or political conditions; the inability to obtain price increases and the impact of price increases on consumer
affordability thresholds; adverse decisions by domestic or international regulatory bodies; the impact of market
size reduction and consumer down-trading; translational and transactional foreign exchange rate exposure; the
impact of serious injury, illness or death in the workplace; the ability to maintain credit ratings and to fund the
business under the current capital structure; the ability to develop and commercialise new alternative products
and to do so profitably; and changes in the market position, businesses, financial condition, results of operations
or prospects of the Group.
It is believed that the expectations reflected in this announcement are reasonable but they may be affected by a
wide range of variables that could cause actual results to differ materially from those currently anticipated. Past
performance is no guide to future performance and persons needing advice should consult an independent
financial adviser. The forward-looking statements reflect knowledge and information available at the date of
preparation of this announcement 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 communication is intended to be a profit forecast and no statement in this communication
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.
Additional information concerning these and other factors can be found in BAT’s and Reynolds American Inc.’s
(“RAI”) filings with the U.S. Securities and Exchange Commission (“SEC”), including RAI’s most recent Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and BAT’s registration
statement on Form F-4, which was declared effective by the SEC on June 14, 2017, and Current Reports on
Form 6-K, which may be obtained free of charge at the SEC’s website, http://www.sec.gov, and BAT’s Annual
Reports, which may be obtained free of charge from BAT’s website www.bat.com.
Sponsor: UBS South Africa (Pty) Ltd
Page 43
Date: 22/02/2018 09:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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Sharenet Sites 
