Business Context and Reporting Period
Company: British American Tobacco p.l.c. (BAT)
Filing Type: Form 6-K (Interim Results)
Reporting Period: Six months ended 30 June 2021
Context: BAT reported strong growth in its "New Categories" (vapour, tobacco heating products, and modern oral), adding 2.6 million consumers to reach a total of 16.1 million. The company continues its transformation strategy, funded by value growth in combustible products and cost savings from the "Quantum" program.
Key Financial Metrics
| Metric | Reported (H1 2021) | Reported (H1 2020) | Change (Reported) | Constant Currency (H1 2021) | Change (CC) |
|---|---|---|---|---|---|
| Revenue (£m) | 12,175 | 12,271 | -0.8% | 13,268 | +8.1% |
| New Category Revenue (£m) | 883 | 628 | +40.4% | 942 | +50.0% |
| Profit from Operations (£m) | 4,907 | 5,097 | -3.7% | 5,659 | +5.4% |
| Operating Margin (%) | 40.3% | 41.5% | -120 bps | 43.0% | -70 bps |
| Diluted EPS (pence) | 141.6p | 150.7p | -6.0% | 167.5p | +6.1% |
| Net Cash from Operating Activities (£m) | 2,254 | 3,484 | -35.3% | N/A | N/A |
| Borrowings (£m) | 45,010 | 50,461 | -10.8% | N/A | N/A |
| Net Debt (£m) | 41,251 | 45,114 | -8.6% | N/A | N/A |
Material Changes vs. Prior Period
- Revenue: Reported revenue declined 0.8% due to a significant translational foreign exchange headwind of 8.9% (strength of sterling). On a constant currency basis, revenue grew 8.1%, driven by New Category growth and emerging market recovery.
- Profitability: Reported Profit from Operations (PfO) fell 3.7% to £4,907m. Adjusted PfO at constant rates grew 5.4%. The decline in reported margins was driven by increased investment in New Categories (£346m incremental) and one-off charges (£328m), including £71m related to the proposed sale of Iranian operations.
- Cash Flow: Net cash from operating activities dropped 35.3% to £2,254m. This was primarily due to the timing of excise and corporate tax payments in the US (deferred from H1 2020 to H2 2020) and MSA-related litigation outflows.
- Debt: Borrowings decreased by 10.8% to £45,010m. Net debt reduced by 8.6% to £41,251m.
Guidance, Outlook, and Risks
Management Commentary & Outlook
- New Categories: Management expects 2021 to be a pivotal year. Targets remain £5bn of New Category revenue by 2025 and 50m non-combustible consumers by 2030.
- Investment: Incremental investment in New Categories increased by £346m in H1 2021, with further investment planned for H2 2021.
- Savings: The company expects to reach its £1bn annualised "Quantum" savings target 12 months early.
- Regional Challenges: No recovery expected in Global Travel Retail (GTR) until 2022. Australia faces a one-off excise impact of £170m. Associate income from ITC (India) remains negatively impacted by COVID-19.
Risks and Contingencies
- Regulatory: FDA actions regarding menthol cigarettes and flavored cigars in the US; suspension of Modern Oral sales in Germany pending regulatory classification.
- Litigation: Ongoing Canadian tobacco litigation (Quebec class action and provincial claims) under CCAA protection; US Engle progeny cases.
- Geopolitical: Proposed sale of Iranian subsidiary (BAT Pars) classified as held-for-sale; ongoing investigations by US authorities (DOJ/OFAC) regarding sanctions.
- Foreign Exchange: Continued volatility in sterling against operating currencies (USD, EUR) impacts reported results.
Investor Verification Checklist
- Constant Currency vs. Reported: Verify the significant divergence between reported and constant currency performance due to FX headwinds.
- New Category Profitability: Assess the timeline for New Categories to become profitable given the £346m incremental investment.
- Iran Disposal: Monitor the completion of the BAT Pars sale and the reclassification of associated foreign exchange items.
- US Regulatory Environment: Track FDA decisions on menthol bans and PMTA approvals for Vuse and Velo products.
- Cash Flow Timing: Confirm the normalization of operating cash flows in H2 2021 following the deferral of US tax payments in the prior year.