British American Tobacco p.l.c. — FY2022 Form 20-F
Reporting period: Fiscal year ended 31 December 2022. This is an annual report, not a standalone Q4 filing; figures below are full-year unless stated. The Group reports under IFRS as issued by the IASB.
Business context and performance
BAT is a global tobacco and nicotine products company operating in more than 170 markets. Its strategy combines investment in New Categories (vapour, tobacco heating products and modern oral), value generation from combustibles, and business simplification. Combustibles remained the largest category, contributing £23.030 billion, or 83.3%, of revenue.
| Metric | FY2022 | Change vs. FY2021 |
|---|---|---|
| Revenue | £27.655bn | +7.7% reported; +2.3% at constant exchange rates |
| Profit from operations | £10.523bn | +2.8% reported |
| Adjusted profit from operations | £12.408bn | +4.3% at constant exchange rates |
| Operating margin | 38.1% | Down 1.7 percentage points |
| Adjusted operating margin | 44.9% | Up 1.5 percentage points |
| Profit for the year | £6.846bn | Down 1.8% |
| Diluted EPS | 291.9p | Down 1.3% |
| Adjusted diluted EPS | 371.4p | Up 12.9% reported; 348.1p, up 5.8% at constant rates |
| Net cash from operating activities | £10.394bn | Up 7.0%; cash conversion 99% |
| Net cash used in investing activities | £0.705bn | Outflow, versus £1.140bn in FY2021 |
| Net cash used in financing activities | £8.878bn | Outflow, versus £8.749bn in FY2021 |
| Total borrowings, including leases | £43.139bn | Up 8.8% |
| Net debt | £39.281bn | Up from £36.302bn |
Revenue mix and changes versus prior year
- New Categories revenue rose 40.9% to £2.894bn; at constant exchange rates it increased 37.0%. Vapour revenue was £1.436bn, THP £1.060bn and modern oral £398m. Management said New Categories losses fell and expected category profitability in 2024, a year ahead of its prior plan.
- Management reported that non-combustible products represented 14.8% of Group revenue; this includes Traditional Oral as well as New Categories. New Categories alone represented 10.4%.
- Combustibles revenue increased 4.5% reported, but declined 0.6% at constant rates. Cigarette volume fell 5.1% to 605 billion sticks; U.S. cigarette volume fell 15.4%. Strong price/mix of 4.6% partly offset lower volumes.
- Foreign exchange was a 5.4% tailwind to reported revenue in 2022, compared with a 7.3% headwind in 2021. Consequently, reported revenue growth outpaced constant-currency growth.
- Reported operating margin fell as substantial adjusting charges more than offset operating improvement. Adjusted operating margin rose, principally reflecting lower New Categories losses and cost efficiencies.
Debt, liquidity and shareholder returns
- Net finance costs increased 10.5% to £1.641bn. Management cited foreign exchange and higher rates on new debt; the Group’s average cost of debt rose to 4.0% from 3.5%. It expects finance costs to rise as debt is refinanced.
- Net debt increased mainly because sterling weakness raised the sterling value of foreign-currency borrowings; the reported currency headwind to net debt was £3.030bn. The filing says the Group continued to deleverage excluding this currency effect.
- Cash and cash equivalents were £3.446bn. This included £1.411bn restricted due to Canadian CCAA protection and £324m principally subject to exchange-control restrictions. The filing reports current assets of £15.409bn and current liabilities of £17.853bn.
- The £5.69bn revolving credit facility was undrawn at year-end. Average centrally managed debt maturity was 9.9 years; the Group also reported £7.828bn in undrawn committed borrowing facilities. A £2.7bn 364-day tranche was expected to be refinanced in the first half of 2023. Credit ratings were Baa2 (stable) from Moody’s and BBB+ (negative) from S&P.
- BAT returned £6.9bn to shareholders through £4.915bn of dividends paid and £2.012bn of share repurchases. The declared FY2022 dividend was 230.9p per share, up 6.0%, with a 62.2% payout ratio based on adjusted diluted EPS.
Outlook, management commentary and significant items
- Management remained on track for £5bn of New Categories revenue by 2025 and targeted 50 million non-combustible consumers by 2030; the reported consumer base was 22.5 million at year-end 2022. The filing does not provide a clear numerical FY2023 revenue or profit-growth forecast.
- Management prioritised balance-sheet strengthening and faster deleveraging amid higher interest rates, macroeconomic uncertainty, litigation and regulatory matters, while continuing investment in transformation. Expected 2023 gross capital expenditure was approximately £600m.
- Operating-profit adjusting items totalled £1.885bn. Significant charges included £612m relating to the proposed transfer of the Russia and Belarus businesses, £771m of restructuring and integration costs, £450m for DOJ and OFAC investigations into alleged historical sanctions breaches, and £79m related to the Nigerian investigation. These were partly offset by a £460m credit associated with the resolution of the Brazilian VAT-on-social-contributions litigation.
- The Russia and Belarus businesses were classified as held for sale at year-end. BAT said discussions with a joint management-distributor consortium were advanced, with a view to completing a transfer in 2023; no definitive agreement or final consideration had been reached by the report date. The filing also records a £295m estimated foreign-exchange amount to be reclassified to income on completion.
- Major risks include tobacco and New Categories regulation, illicit trade, litigation, excise increases, foreign-exchange exposure, supply-chain disruption, climate and circularity, and execution of the New Categories strategy. General tobacco litigation losses are not provided for where the Group says an outflow is not probable or cannot be reasonably estimated. The Canadian subsidiary remains under CCAA protection; stays in Canadian litigation were in place until March 2023.
- Subsequent to year-end, the FDA issued a January 2023 Market Denial Order concerning menthol Vuse Vibe and Ciro variants; BAT said it was challenging the order and seeking a permanent stay. The filing also notes a new NCR complaint filed in February 2023 concerning Kalamazoo River costs.
- Auditor KPMG gave an unqualified opinion on the IFRS financial statements and concluded that internal control over financial reporting was effective as of 31 December 2022. Critical audit matters included impairment testing of U.S. goodwill and indefinite-lived trademarks, and Canadian legal proceedings.
Most important facts for investors to verify
- Whether New Categories can achieve the 2024 profitability and 2025 revenue targets, and how much investment and cash generation those targets require.
- Progress, consideration and final accounting treatment for the proposed Russia and Belarus transfer, including the £612m charge and foreign-exchange reclassification.
- The eventual DOJ/OFAC resolution and whether the £450m provision adequately reflects fines, penalties and any non-monetary requirements.
- Developments in Canadian CCAA proceedings and tobacco litigation, including the Quebec class-action judgment and the extent of any future funding or settlement obligations.
- Leverage and usable liquidity after excluding restricted cash, the refinancing of near-term facilities, and the impact of foreign-exchange movements and higher interest rates.
- Regulatory status of U.S. Vuse and Velo products, including pending product authorisations and the challenged menthol-related order; also review the sensitivity of U.S. goodwill and brand valuations.