British American Tobacco P.L.C. annual report, Q4 FY2021

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British American Tobacco p.l.c. — 2021 Form 20-F Summary

Reporting period: Fiscal year ended 31 December 2021. Although the request metadata says “2021 Q4,” this is an annual report, not a standalone quarterly filing. Financial statements are prepared under IFRS as issued by the IASB.

Business context and reporting period

BAT is a global tobacco and nicotine-products group operating in more than 175 markets. Its strategy combines generating value from combustible products with investment in “New Categories” (vapour, tobacco-heating products and modern oral) and business simplification. Management frames this transition as reducing the health impact of its business; it acknowledges that combustible products pose serious health risks and that alternative products are not risk-free or non-addictive.

Financial and operating performance

  • Revenue: £25.684 billion, down 0.4% reported year over year; up 6.9% at constant exchange rates. Currency translation was a 7.3% headwind.
  • Profit: Operating profit was £10.234 billion, up 2.7%; profit before tax was £9.163 billion; profit for the year was £6.974 billion, up 6.2%. The effective tax rate was 23.9%.
  • Margins: Reported operating margin increased 120 basis points to 39.8%. Adjusted operating margin decreased 70 basis points to 43.4%, reflecting New Category investment, mix and transactional foreign exchange.
  • EPS: Diluted EPS rose 6.0% to 295.6p. Adjusted diluted EPS was 329.0p, down 0.8% reported, but up 6.6% at constant exchange rates.
  • Cash flow: Net cash generated from operating activities was £9.717 billion, down 0.7%; cash conversion was 95%, versus 98% in 2020. Net cash used in investing activities was £1.140 billion and net cash used in financing activities was £8.749 billion.
  • Debt and liquidity: Borrowings, including lease liabilities, declined to £39.658 billion from £43.968 billion; net debt declined to £36.302 billion from £40.241 billion. Average centrally managed debt maturity was 10.1 years. The £5.85 billion revolving credit facility was undrawn at year-end; management stated that liquidity and working capital were sufficient for present requirements.
  • Dividends: The declared annual dividend increased 1.0% to 217.8p per ordinary share, with a 66.2% payout ratio. A £2 billion share repurchase programme was announced for 2022.
  • Category trends: New Categories revenue rose 42.4% to £2.054 billion (50.9% at constant exchange rates). Vapour revenue increased 52%, THP revenue 34%, and modern oral revenue 39%. Combustibles revenue declined 3.2% to £22.029 billion, although pricing remained strong; cigarette volume was broadly flat at 637 billion sticks.

Material changes versus 2020

  • Constant-currency revenue growth accelerated to 6.9% from 3.3%, while reported revenue remained slightly lower because of stronger sterling.
  • Reported operating profit growth slowed to 2.7% from 10.5%. Adjusted operating profit rose 5.2% at constant exchange rates; reported results included £916 million of adjusting items, versus £1.403 billion in 2020.
  • Operating cash flow remained strong but was slightly lower, and cash conversion fell three percentage points. Net debt continued to decline.
  • New Categories gained scale: consumers of non-combustible products increased to 18.3 million from 13.5 million. Management said losses in New Categories reduced for the first time, but the filing does not provide a clear standalone New Categories profit figure here.
  • Quantum simplification initiatives generated £595 million of incremental annual savings in 2021. Management said the programme had delivered its £1 billion savings commitment 12 months ahead of plan.

Outlook, risks, contingencies and unusual items

  • Outlook: Medium-term targets are 3–5% annual revenue growth at constant exchange rates, increased operating margin and high-single-digit adjusted EPS growth at constant exchange rates. BAT expects further strategic progress in 2022 and reported confidence in meeting its medium-term targets. It expects 2022 gross capital expenditure of approximately £750 million.
  • Unusual items: The disposal of the Iranian subsidiary, BAT Pars, generated a £358 million operating charge, including £272 million of foreign-exchange losses reclassified from reserves and asset write-off and associated costs. Other items included a £54 million Peru goodwill impairment and U.S. credits related to a pension buy-out and resolution of dissenting-shareholder litigation.
  • Legal and tax exposure: The filing describes extensive tobacco litigation and tax disputes. The Canadian subsidiary Imperial Tobacco Canada remains under CCAA creditor protection following Quebec class-action judgments; the company’s share of the Quebec judgment was estimated at about CAD$9.2 billion. The report states that other tobacco-related litigation was not provided for where losses could not be reasonably estimated. The Group also faces ongoing tax disputes, including the UK FII GLO matter; no income-statement benefit was recognised for the claim, and the £963 million net amount received from HMRC remains recorded as a payable.
  • Other risks: Management identifies regulation of tobacco and New Categories, potential U.S. menthol restrictions, excise increases, illicit trade, litigation, foreign exchange, sanctions, supply-chain disruption, cyber risk and climate-related impacts as important uncertainties. The FDA authorised marketing of Vuse Solo original flavour in October 2021; decisions on other products remained pending, and the filing says authorisations are not assured.
  • COVID-19 and subsequent events: The Group reported operational resilience during the continuing pandemic. After year-end, management highlighted the Russia-Ukraine conflict: together the two countries accounted for 3% of 2021 Group revenue, and the financial and operational impact was not yet clear. Management was monitoring sanctions and employee safety.
  • Audit: KPMG issued an unqualified opinion on the IFRS financial statements and concluded that internal control over financial reporting was effective as of 31 December 2021. Critical audit matters included impairment testing of Reynolds American goodwill and trademarks, including the proposed menthol ban, and Canadian legal proceedings.

Important facts for investors to verify

  • Reconcile reported and constant-currency growth, adjusted EPS and operating-margin measures to IFRS results; these are non-GAAP measures and depend on management’s definitions of adjusting items.
  • Assess the size and timing of potential outcomes in Canadian tobacco litigation, the CCAA process, U.S. MSA obligations and unresolved tax disputes.
  • Track FDA decisions on Vuse Alto, Velo and other PMTAs, as well as the status and potential effects of proposed U.S. menthol regulation and other New Category rules.
  • Verify execution against the £5 billion New Categories revenue-and-profitability ambition by 2025 and the 50 million non-combustible consumer target by 2030, including progress toward category profitability.
  • Monitor leverage, refinancing and cash available for dividends and the announced £2 billion 2022 buyback, taking account of restricted cash and ongoing settlement payments.
  • Assess the Russia-Ukraine conflict, sanctions exposure and any effects on operations, assets, supply chains or reported results; the filing says the impact was not yet determinable.