Business context and reporting period
British American Tobacco p.l.c. (BAT) filed this annual report on Form 20-F for the fiscal year ended 31 December 2018. Although the request metadata specifies 2018 Q4, the filing reports full-year results and does not provide a clear standalone Q4 financial summary. The statements are prepared under IFRS. Results reflect a full year of Reynolds American Inc. (RAI), acquired in July 2017, versus about five months of RAI in 2017.
Key financial metrics
| Metric | FY 2018 | Comparison / context |
|---|---|---|
| Revenue | £24.492bn | +25.2% reported; +3.5% adjusted on a representative, constant-currency basis |
| Profit from operations | £9.313bn | +45.2% reported; adjusted representative constant-currency growth was 4.0% |
| Operating margin | 38.0% | Up over 500 basis points reported; adjusted representative margin increased 40 basis points |
| Profit for the year | £6.210bn | Down from £37.656bn in 2017, which included large RAI-related accounting gains and a US tax-reform deferred tax credit |
| Basic / diluted EPS | 264.0p / 263.2p | Basic EPS fell 86% from 1,833.9p; adjusted diluted EPS was 296.7p, up 5.2%, or 315.5p at constant rates, up 11.8% |
| Net cash from operating activities | £10.295bn | Up 93%; cash conversion was 111%, versus 83% in 2017 |
| Capital expenditure | £883m | 2019 expected gross capital expenditure: approximately £872m |
| Borrowings / net debt | £47.509bn / £44.351bn | Net debt was £45.571bn in 2017; adjusted net debt/EBITDA improved to 4.0x from 5.3x |
| Cash and cash equivalents | £2.602bn | Down from £3.291bn at year-end 2017 |
| Net finance costs | £1.381bn | Up £287m, largely reflecting a full year of interest on higher acquisition-related debt |
| Dividend per share | 203.0p | Up 4.0% from 195.2p; payout ratio on adjusted diluted EPS was 68.4% |
Material changes versus the prior comparable period
- Reported revenue and operating profit growth primarily reflect the full-year consolidation of RAI, not solely underlying organic expansion. On a representative constant-currency basis, adjusted revenue grew 3.5% and adjusted operating profit grew 4.0%.
- Combustible volume declined 3.5% on a representative basis, while pricing and growth in potentially reduced-risk products (PRRPs) more than offset the decline. Key-market share increased 40 basis points.
- PRRP revenue was £1.8bn, up 40.8% on an adjusted representative constant-currency basis. THP and vapour were the main growth drivers; THP revenue was £565m reported (£576m at constant rates), and vapour volume rose 35% on a representative basis.
- Net debt declined by £1.220bn, although foreign-exchange movements increased its reported sterling value. The prior year included RAI acquisition financing and a £23.288bn deemed gain on disposal of RAI as an associate.
- Reported profit and EPS are not directly comparable with 2017: that year included the RAI deemed gain and a £9.620bn deferred-tax credit associated with US tax reform.
Outlook, management commentary, risks and unusual items
- Management emphasized continued growth, deleveraging and investment in PRRPs. RAI cost synergies were running at over US$300m annualized, with at least US$400m per year targeted by the end of 2020.
- Management reported approximately 6% translational foreign-exchange headwinds to revenue and operating profit. Adjusted constant-currency growth measures are non-GAAP and should be read alongside IFRS results.
- Major risks include increasingly restrictive tobacco and nicotine regulation, possible US restrictions on menthol cigarettes and flavoured vapour products, excise increases, illicit trade, consumer down-trading, litigation, tax disputes, foreign exchange, and the ability to develop and commercialize PRRPs. The filing says outcomes and timing of proposed FDA measures remain uncertain.
- BAT disclosed an ongoing UK Serious Fraud Office investigation into allegations of misconduct and stated that it is cooperating; potential consequences could not be assessed. The filing also reports numerous tobacco and other litigation matters, generally without provisions where loss was not considered probable or reasonably estimable.
- After the year-end, on 1 March 2019, the Quebec Court of Appeal upheld the class-action judgment while reducing the maximum award to CAD$13.6bn. The company stated it expected to record an approximately £436m adjusting charge in 2019, equivalent to its escrow deposit. On 12 March 2019, Imperial Tobacco Canada obtained protection under Canada’s CCAA process; the filing says the process is intended to address the Quebec case and other Canadian tobacco litigation.
- CEO Nicandro Durante was due to retire effective 1 April 2019, succeeded by Jack Bowles; Finance Director Ben Stevens was due to retire in August 2019, with Tadeu Marroco named as successor.
- IFRS 16 leases took effect in 2019. BAT estimated approximately £562m of lease liabilities and £565m of right-of-use assets at adoption; the filing expected no material effect on reported profit.
Important facts for investors to verify
- Separate RAI consolidation effects from underlying results: compare reported growth with representative, constant-currency measures and review the non-GAAP reconciliations.
- Track leverage, debt servicing and refinancing: year-end net debt was £44.351bn, adjusted net debt/EBITDA was 4.0x, and interest cover was 7.2x.
- Monitor the Quebec CCAA process, the expected 2019 charge, escrow recovery prospects and the potential effect of other Canadian litigation.
- Assess the status and commercial impact of FDA proposals on menthol and vapour products, alongside product approvals, recalls and PRRP adoption.
- Review the SFO investigation, significant tax disputes and other contingencies, including the Franked Investment Income litigation and environmental claims.
- Confirm dividend sustainability against cash generation, leverage objectives, investment requirements and the stated 65% long-term sustainable earnings policy.