Business Context and Reporting Period
This Form 6-K filing contains the Half-Year Report for British American Tobacco p.l.c. (BAT) for the six-month period ended 30 June 2018, filed on 26 July 2018. The results reflect the full consolidation of Reynolds American Inc. (RAI), acquired in July 2017, which contributes approximately 40% to revenue and profit from operations. The Group continues to pursue a strategy of growing its combustible business while investing in Next Generation Products (NGP), including tobacco heating products (THP) and vapour.
Key Financial Metrics
| Metric | 2018 (Six Months) | Change vs 2017 (Current Rates) | Change vs 2017 (Constant Rates/Representative) |
|---|---|---|---|
| Revenue | £11,636m | +56.9% | +1.9% (Adjusted, Representative) |
| Profit from Operations | £4,438m | +72.4% | +2.4% (Adjusted, Representative) |
| Operating Margin | 38.1% | +340 bps | +20 bps (Adjusted, Representative) |
| Basic EPS | 117.7p | -3.4% | N/A |
| Diluted EPS | 117.4p | -3.3% | N/A |
| Adjusted Diluted EPS | 137.2p | +2.1% | +10.4% (Constant Rates) |
| Net Cash from Operating Activities | £3,858m | +126.1% | N/A |
| Borrowings | £48,512m | -1.9% (vs Dec 2017) | N/A |
| Net Debt | £45,679m | +0.2% (vs Dec 2017) | N/A |
Material Changes vs Prior Period
- Acquisition Impact: Reported revenue and profit growth are significantly inflated by the inclusion of RAI results for the full six months in 2018 compared to a partial period in 2017. On a "representative basis" (as if RAI was owned for all of 2017), adjusted revenue grew 1.9% at constant rates.
- Foreign Exchange: Translational foreign exchange was a headwind of approximately 8% for the first six months of 2018. The Group expects this to be a headwind of 5-6% for the full year.
- Volume Performance: Cigarettes and THP volume grew 11.0% on a reported basis. On a representative basis, volume fell 2.2% to 348 billion sticks, outperforming the industry which is estimated to be down 3-4%.
- NGP Growth: Revenue from the strategic portfolio grew 128% reported, or 8.5% on a representative constant currency basis. THP revenue reached £305 million (up over 750% on a representative basis), driven by glo in Japan.
- EPS Decline: Basic and Diluted EPS fell 3.4% and 3.3% respectively, as the operating performance gains were offset by higher financing costs, amortisation of acquired trademarks, tax provisions, and FX headwinds.
Guidance, Outlook, and Risks
- Outlook: Management remains confident of exceeding £1 billion of reported revenue in NGP for 2018. New product launches are expected to re-energise THP growth in the second half of the year.
- Dividends: The interim dividend of 195.2p per share is payable in four equal instalments. The next payment of 48.8p is scheduled for August 2018.
- Risks and Contingencies:
- Litigation: Ongoing investigations by the UK Serious Fraud Office (SFO) regarding misconduct allegations. Significant pending litigation includes the Quebec Class Action (CAD $15.6 billion award appealed) and Engle progeny cases in the US.
- Tax Disputes: A £170 million VAT and Supplementary Duty demand in Bangladesh was reversed by the Supreme Court in July 2018, though the Attorney General may seek a review. Disputes also exist in the Netherlands and Russia.
- Regulatory: Risks related to tobacco regulation, illicit trade, and excise increases remain principal risks.
Investor Verification Checklist
- Representative Basis Metrics: Verify the "Adjusted Revenue" and "Adjusted Profit" on a representative basis to understand organic growth excluding the RAI acquisition timing distortion.
- FX Sensitivity: Monitor the impact of the strong pound sterling, which created an 8% headwind in H1 and is projected to remain a headwind for the full year.
- NGP Revenue Target: Track progress toward the £1 billion NGP revenue target for 2018, specifically the performance of glo in Japan and South Korea.
- Legal Provisions: Review the status of the Quebec Class Action appeal and the SFO investigation for potential material financial impacts.
- Debt Maturity: Confirm the maturity profile of the £48.5 billion in borrowings, noting the average centrally managed bond maturity is 9.2 years.