British American Tobacco p.l.c. — 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. Although the request specifies 2019 Q4, this filing is an annual report and does not provide standalone fourth-quarter results. Financial statements are prepared under IFRS as issued by the IASB. Amounts below are in pounds sterling unless stated otherwise.
Business context and strategy
BAT is a global tobacco and nicotine company operating across combustibles, traditional oral products and New Categories: vapour, tobacco-heating products (THP) and modern oral. CEO Jack Bowles’ priorities were to drive value from combustibles, improve New Categories performance and simplify the business. The Group reported more than 150 million consumer interactions daily and distribution across over 11 million retail outlets.
Financial and operating performance
| Metric | 2019 | Comparison |
|---|---|---|
| Revenue | £25.877bn | +5.7% reported; adjusted revenue +5.6% at constant currency |
| Profit from operations | £9.016bn | -3.2%; reported operating margin 34.8%, down 320 bps |
| Adjusted profit from operations | £11.130bn | +7.6% at reported rates; +6.6% at constant currency. Adjusted margin 43.1%, up 50 bps |
| Profit for the year | £5.849bn | -5.8%; attributable to parent shareholders: £5.704bn |
| Diluted EPS | 249.0p reported; 323.8p adjusted | Reported -5.4%; adjusted +9.1%, or +8.4% at constant currency (321.6p) |
| Net cash from operating activities | £8.996bn | -12.6%; cash conversion 100%, versus 111% |
| Net debt | £42.574bn | Down from £44.351bn; adjusted net debt/EBITDA improved to 3.5x from 4.0x |
| Dividend per share | 210.4p | +3.6%; 65.0% payout of adjusted diluted EPS |
Combustible revenue grew 4.2% to £23.001bn, supported by cigarette price/mix of 9%, despite cigarette volume declining 4.7% to 668 billion sticks. Group cigarette value and volume shares each rose 20 bps. New Categories revenue increased 37% to £1.255bn: vapour £401m, THP £728m and modern oral £126m. Traditional oral revenue rose 15% to £1.081bn.
Total borrowings were £45.366bn, including £579m of lease liabilities recognized under IFRS 16; cash and cash equivalents were £2.526bn. The Group had an undrawn £6bn revolving credit facility at year-end and £1.056bn of commercial paper outstanding. Gross interest cover was 7.1x against a 4.5x facility requirement. Net finance costs rose 16% to £1.602bn. Gross capital expenditure was £807m.
Changes versus 2018 and unusual items
- Revenue growth slowed sharply from 25.2% in 2018, when results benefited from the first full year of Reynolds American (RAI), to 5.7% in 2019.
- Reported operating profit and margin declined, while adjusted operating profit and margin improved. The gap reflects higher adjusting items, including litigation, tax disputes, impairments and restructuring.
- Operating cash flow declined partly because of the timing of US Master Settlement Agreement payments and working-capital movements, including changes to Australian excise payment terms.
- Reported profit included £2.114bn of adjusting items. Significant charges included £436m for the Quebec class actions, £202m for a Russian excise dispute, £236m of other smoking-and-health litigation costs, £264m related to Project Quantum, £172m of Indonesian goodwill impairment and £481m of acquired trademark and similar-intangible amortisation and impairment.
- IFRS 16 adoption added £607m of lease liabilities and increased assets and liabilities at transition; prior periods were not restated. After an FRC review, BAT corrected its interim-dividend accounting prospectively: liabilities and equity had each been misstated by £1.0bn in 2017 and £1.116bn in 2018. Directors concluded the error was immaterial and did not restate prior periods.
Outlook, risks and contingencies
Management’s medium- to long-term financial ambitions include 3–5% revenue growth and high-single-digit adjusted earnings growth at constant currency, with a minimum 95% cash-conversion target and continued deleveraging. BAT targeted at least £5bn of New Categories revenue in 2023/2024 and announced 2020 capital expenditure of approximately £650m. These are targets, not assurances of future performance.
Key risks include falling combustible volumes, excise increases and illicit trade; product and marketing restrictions; the ability to develop and commercialise New Categories; foreign-exchange, funding and interest-rate exposure; supply-chain disruption; and litigation and tax disputes. In the US, FDA rules require premarket authorisation for relevant vapour products; the FDA announced in January 2020 that certain flavoured cartridge products must be withdrawn pending authorisation. BAT also cited regulatory uncertainty and scrutiny of vapour products, including following reports of vaping-related lung injury. New Categories brands were being consolidated, and some products and trademarks were impaired or scheduled for withdrawal.
Canadian subsidiary Imperial Tobacco Canada entered creditor protection under the CCAA in March 2019; proceedings were stayed through September 2020. BAT recorded a £436m Quebec-related charge, while stating that other ongoing tobacco litigation could not be reasonably estimated and generally had not been provided for. The filing describes substantial contingent exposures, including Canadian claims, US Engle progeny cases and environmental matters; outcomes and ultimate cash costs remain uncertain. An ongoing UK Serious Fraud Office investigation and US investigations concerning suspected sanctions breaches were disclosed; BAT said it was cooperating, and potential penalties could not then be assessed.
The report states the Group had adequate resources to continue as a going concern and sufficient financing for estimated needs for at least 12 months. After the financial statements were approved on March 17, 2020, BAT reported that COVID-19’s impact was uncertain and not yet material, but could become significantly adverse if the pandemic persisted or worsened, affecting demand, operations, supply chains, currencies and liquidity.
Important facts for investors to verify
- Reconcile reported and adjusted operating profit, EPS and cash conversion, including the nature and recurrence of the £2.114bn adjusting items.
- Review debt maturity, refinancing needs, lease obligations, cash availability and the execution of the deleveraging target; distinguish Group cash from restricted cash, including funds restricted in Canada.
- Assess the range of possible outcomes and funding implications for Quebec and other litigation, US tobacco settlements, tax disputes and the environmental provisions.
- Track US FDA authorisations, flavour restrictions, product withdrawals and whether New Categories growth can support the £5bn revenue ambition.
- Test the sensitivity of RAI goodwill and brand valuations to revenue, discount-rate and menthol-regulation assumptions; RAI goodwill and indefinite-lived trademarks remain material assets.
Audit: KPMG issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2019.