British American Tobacco Regulatory News (BATS)

11 February 2022 - PRESS RELEASE / PRELIMINARY RESULTS

BRITISH AMERICAN TOBACCO p.l.c. 

YEAR ENDED 31 DECEMBER 2021

 2021 - A PIVOTAL YEAR DELIVERED; BUYBACK ANNOUNCED

The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on pages 46 to 51, with reconciliations from the most comparable IFRS measure provided. Note - 1. Internal estimate. 2. Movement in adjusted operating margin free cash flow after dividends and operating cash conversion are provided at current rates. 3. Includes lease liabilities.

* at constant rates of exchange ** These products are not risk free and are addictive. 

Jack Bowles, Chief Executive: "In 2021 the business delivered on our transformation journey to build A Better Tomorrow. It has been a pivotal year: we accelerated New Category revenue, with growth of over 50%* and reached a total of 18.3m consumers (up 4.8m) of our non-combustible products. New Category losses reduced for the first time, contributing to earnings growth, and we reduced leverage to c.3x, while at the same time delivering strong financial results: 2021 has been a pivotal year.

Putting ESG at the heart of our strategy and corporate purpose is delivering sustainable growth, encouraging more consumers to transition to reduced risk products and reducing the health impact of our business. We are also on track to achieve our other ESG targets, including carbon neutrality from our operations by 2030.

These strong foundations enable us to embark on the next phase of our journey - Faster Transformation - towards A Better Tomorrow. We are on a path to deliver £5bn of revenue and profitability^ from New Categories by 2025 and are developing opportunities Beyond Nicotine, leveraging our knowledge and capabilities from New Categories.

These foundations also provide the financial flexibility to be more active in our capital allocation to deliver sustainable long-term value for shareholders. With leverage within our target range and expectations for c.£40bn of free cash flow before dividends over the next five years we will continue to invest in a faster transformation and deliver strong returns to shareholders. In addition to maintaining a growing dividend the Board has approved a £2bn share repurchase programme for 2022.

I would like to thank all our people and partners for their continued focus and commitment in delivering our strong results throughout this difficult COVID-19 period. The BAT of tomorrow will be a high-growth, consumer centric, multi-category consumer goods company. We are confident in delivering a Faster Transformation, continued robust financial performance and superior cash returns to shareholders. We are confident of delivering A Better Tomorrow."

2022 outlook:  

· Global tobacco industry volume expected to be down c.2.5%.

· Constant currency revenue growth of 3%-5%.

· Strong New Category revenue growth and further reduction in losses.

· High-single figure constant currency adjusted EPS growth, with growth second half weighted.

· Translational foreign exchange is expected to be broadly neutral on full year adjusted EPS growth.

· Operating cash flow conversion in excess of 90%.

^ Based upon Category Contribution - defined as profit from the sale of brands after directly attributable costs (including marketing expenses) and before the allocation of overheads

CHIEF EXECUTIVE'S STATEMENT

FASTER TRANSFORMATION - TOWARDS A BETTER TOMORROWTM

"2021 has been a pivotal year in our transformation journey to build A Better Tomorrow. We continued to make excellent progress on our strategic commitments while delivering value to all our stakeholders. It is thanks to the resilience of our people and partnerships that we are continuing to capitalise on the opportunities that are transforming our industry.

"We are committed to reducing the health impact of our business through a multi-category approach. As I said in our Half-Year Report in July 2021, delivering on our purpose in the second half of the year would require a focus on developing and delivering consumer-focused products and brands to accelerate momentum. That is exactly what this set of results demonstrates:

· The growth, from 13.5m to 18.3m, in consumers of non-combustible products was our strongest to date;

· Non-combustible products now account for 12% of Group revenues, up from 4% in 2017;  

· Vapour revenue was up 59%*, with our global brand, Vuse, now the leading vapour brand by value share globally;

· Following volume share gains in ENA and Japan, revenue from our THP, glo, was up 46%*; and

· Revenue in Modern Oral, largely through Velo, was up 41%*.

"In 2021, we recorded New Category revenue growth of over 50%*. The performance of our reduced-risk**† portfolio, encompassing our strong global brands, Vuse, glo and Velo, places us on track to reach the business transformation targets we set ourselves of:

· £5bn of revenue and profitability in our New Categories by 2025; and

· 50m consumers of non-combustible products by 2030.

"We are also firmly committed to the ESG targets we have set. These include becoming carbon neutral across our operations (Scope 1 and 2 emissions) by 2030 and net zero across our value chain (Scope 1,2 and 3) by 2050. Sustainability has long been central to our business and ethos. We produced our first ever Social Report 20 years ago and, in 2021, we were recognised as a global sustainability leader for the 20th consecutive year in the Dow Jones Sustainability Indices.

"The next phase of our transformation will focus on creating a sustainable Enterprise of the Future. Across the business, we are seeing the benefits of Quest, our organisational transformation programme. Quest is underpinned by five accelerators and has been designed to enhance our existing strengths and deliver further value from our consumer reach and global presence.

"Through Quest, we continue to develop the capabilities required to build our multi-category business, enhance our future sustainability and deliver our digital transformation, contributing to the delivery of A Better Tomorrow."

FINANCE & TRANSFORMATION DIRECTOR'S STATEMENT

STRONG CASH FLOW DRIVES DELEVERAGE AND ENABLES SHARE BUYBACK.

2021 was the pivotal year in our transformation journey with key milestones achieved in both New Categories and in de-leveraging.

Our accelerating New Category performance is now a sizeable contributor to Group revenue growth, with Non-Combustibles contributing nearly half of total Group revenue growth. Capitalising on this momentum, we further increased New Category investment by £496 million in 2021, while reducing New Category losses for the first time by nearly £100 million, with a clear pathway to profitability by 2025. Investment is funded by continued strong value growth from combustibles together with Quantum savings, which reached £1.3 billion annualised savings, with at least £1.5 billion total annualised savings expected by 2022. 

Constant currency adjusted diluted EPS growth of 6.6% was at the top end of our mid-single digit EPS guidance.  Our robust operating performance enabled us to absorb the net impact of a number of one-off factors during the year. These included the headwinds from the structural change in excise in Australasia, the disposal of our operations in Iran and a transactional foreign exchange headwind of 1.7%, partially offset by the benefit of trade inventory movements in the U.S. (which are expected to unwind in early 2022) mainly linked to the timing of price increases and uncertainty about a potential excise increase. Reported volume in the U.S. was down 5.0%, with underlying volume down approximately 7%.

We have worked hard to generate strong cash flow over recent years with nearly £10 billion of net cash generated from operating activities in 2021. This is our 4th consecutive year of operating cash flow conversion in excess of 95%, enabling us to deliver on our commitment to reduce leverage to c.3x adjusted net debt / adjusted EBITDA in 2021. We are on track to generate around £40 billion of free cash flow before dividends over the next 5 years.

This gives us the flexibility to adopt a more active capital allocation framework to deliver long-term value for shareholders. This will include continuing to grow the dividend and maintaining our target leverage corridor of 2-3x adjusted net debt / adjusted EBITDA, whilst also considering potential bolt-on M&A opportunities and share buybacks to enhance shareholder returns.

The Board will prioritise capital allocation opportunities each year in-line with this new longer-term active capital allocation framework, while continuing to take into account macro and fiscal influences, and potential regulatory and litigation outcomes. As a first step, we have announced a dividend increase of 1.0% to 217.8p and a £2 billion share repurchase programme for 2022.

Our liquidity profile remains strong, with average debt maturity close to 10 years and maximum debt maturities in any one calendar year of around £4 billion. In September 2021 we successfully launched our first €2 billion perpetual hybrid bond transaction. The issuance contributes to the diversification of our sources of funding and further strengthens our capital structure. Our medium-term rating target remains BBB+/Baa1, with a current rating of BBB+/Baa2**.

The next phase of our journey will be enabled by our transformation programme Quest. Through Quest we are building a sustainable Enterprise of the Future, delivering the organisational flexibility to implement and operationalise our growth strategy - from simplifying the business to faster decision-making, powered by our Ethos.

* at constant rates of exchange ** Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

**A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating. 

GROUP OPERATING REVIEW

TOTAL GROUP VOLUME and REVENUE

Use of the term "cc" refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

New Category consumables volume growth accelerated and was up substantially (over 50% in all three categories). Cigarette volume was broadly flat and cigarette volume share down 10 bps with emerging markets beginning to recover from the impact of COVID-19 last year, including Bangladesh, Pakistan, Vietnam, Brazil and Chile, more than offset by volume decline in Indonesia, U.S., Ukraine, Russia and Japan and the sale of our business in Iran partway through the year. Duty paid industry cigarette volume was stable during the year. 

On a reported basis, revenue declined by 0.4% to £25,684 million. Strong revenue growth in New Categories, up 42.4%, was supported by good cigarette pricing (partially offset by negative geographic mix), and value share gains of 10 bps. These were more than offset by a translational foreign exchange headwind of 7.3% and an estimated £260 million impact in Australasia (due to the structural excise change and a competitive pricing environment), offset by an estimated £200 million benefit from trade inventory movements in the U.S. mainly linked to the timing of price increases and uncertainty about a potential excise increase. Excluding the foreign exchange headwind, revenue was up 6.9% on a constant currency basis.

Revenue from non-combustibles now represents 12.4% of Group revenue, up from 10.1% in 2020 (and 4.2% in 2017), reflecting strong New Category revenue growth of 42.4% (or 50.9% at constant rates of exchange).

PROFIT FROM OPERATIONS AND OPERATING MARGIN

Use of the term "cc" refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

Profit from operations on a reported basis was up 2.7% at £10,234 million, driven by an improvement in the Group's operating performance, despite a transactional foreign exchange headwind of 1.7%. The Group's operating performance also benefited from a reduction in one-off charges (2021: £916 million; 2020: £1,403 million) which included, in 2021, costs of £358 million related to the sale of the Group's operations in Iran (as explained on page 20) partly offset by a £35 million credit related to a partial buy-out of the U.S. pension fund and a credit of £59 million related to the Reynolds American dissenting shareholders litigation that was concluded in our favour. However, this improvement in performance was largely offset by a translational foreign exchange headwind of 7%.

Reported operating margin was up 120 bps to 39.8%, largely due to pricing in combustibles, the reduction in adjusting items and cost savings delivered as part of Quantum.

Adjusted profit from operations and adjusted operating margin

Adjusted profit from operations at constant rates was up 5.2%, driven by strong revenue growth, lower losses from New Categories (by nearly £100 million), £595 million of productivity savings driven by Quantum and the benefit of trade inventory movements in the U.S.. This was partly offset by geographic mix, Australasia profit impact, no significant recovery in our Global Travel Retail business (GTR) and the absorption of a 1.7% transactional headwind in the period. Accordingly, adjusted operating margin was down 70 bps at both current and constant rates of exchange. 

CATEGORY PERFORMANCE REVIEW

A STEP CHANGE IN NEW CATEGORIES

Use of the term "cc" refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

VUSE - VAPOUR: Global Value Share leadership1

· Vuse value share up 800 bps vs 2020 to reach 33.5 share in T5* markets 

· Consumer acquisition up 1.8m reaching 8.4m, with growth in all T5 markets

· Vapour volume up 56% with revenue growth of 52% or 59% at constant rates of exchange

· Vuse first global vapour brand independently verified by Vertis2 as Carbon neutral in May 2021 

With strong revenue growth and value share gains across all T5 markets, Vuse achieved global vapour value share leadership in July 2021, with a full year value share of 33.5% (up 800 bps vs 2020) and is now either at or approaching value share leadership in all T5 markets. We consolidated our volume share leadership of devices in all T5* markets, driven by industry leading consumer acquisition up 1.8 million to 8.4 million consumers. 

In the U.S., we reached 32.5% value share, an increase of 760 bps on 2020, approaching value share leadership of the category, driven by the continued success of Alto. Vuse consumables volume grew 67%, materially outperforming the total vapour industry (which was up 21.2%). Our No.1 device volume share (in closed systems) further strengthened to 57.4% up 500 bps compared to 2020. In addition to volume growth, revenue growth of 46%, or 57% on a constant currency basis, was driven by price increases in both consumables and devices during the year, leveraging our Revenue Growth Management (RGM) tool as a key enabler of value creation.

In our other T5* markets, we continued to extend our value share leadership position: 

· In the UK, value share of the total vapour market was 31.0%, down 440 bps vs 2020. Vuse continued to perform well, with value share up 210 bps vs 2020 to reach 16.9%.

· In France, our value share leadership of total vapour extended further to reach 45.7%, up 14.2 ppts vs 2020, driven by both ePen 3 and ePod. 

· In Germany, our value share of total vapour was 59.9%, up 10.1 ppts vs 2020, driven by ePen 3 and ePod.

· In Canada, our value share of total vapour was 80.4%, up 34.3 ppts vs 2020, driven by ePod.

We have continued the rapid expansion of our e-commerce revenue, up 37% compared to 2020, with Vuse ranked No.1 overall in branded consumer search, and web traffic across our T5* markets3. Despite the impact of regulatory changes in the U.S., the number of consumers utilising our subscription programmes globally increased to c.25k, up 43% vs 2020.

In October, Vuse Solo received the first of its kind U.S. Food and Drug Administration (FDA) marketing authorisation for vapour products in Original flavour, confirming that the marketing of Vuse Solo products is appropriate for the protection of the public health, and underscoring years of scientific study and research. The Vuse Alto Premarket Tobacco Application (PMTA), which was submitted nearly a year after Vuse Solo, shares the same foundational science. We are confident in the quality of our applications.

* T5 markets by revenue are the U.S., UK, France, Germany and Canada; they account for 75% of total industry vapour revenue (closed systems).

1 Based on Vype/Vuse estimated value share from RRP in measured retail for vapour (i.e. total vapour category value in retail sales) in the U.S., Canada, France, UK, Germany. In 2021, AC Nielsen rebased the Group's 2020 vapour value share in Germany from 50.1% to 49.9%.

2 Vuse's carbon neutrality has been independently validated by Vertis based on product Life Cycle Assessment data provided by an independent third party. It is based on ePod, ePen, eTank mini, Alto devices and consumables internal sales forecast (calculated March 2021) for 12 months starting from April 2021. It has been delivered through carbon offset through reforestation projects.

3 Source: Similar Web.

CATEGORY PERFORMANCE REVIEW

glo - TOBACCO HEATING PRODUCTS (THP) - Hyper driving further volume share gains globally

· glo THP category volume share up 480 bps in T9* markets vs 2020 to reach 18.1%

· glo consumer acquisition up 2.7m reaching 6.7m with growth in all T9 markets

· glo consumable volume up 79%, over three times industry volume growth of 26%

· glo revenue growth up 34% with year on year and sequential growth accelerating in H2 2021

Driven by the continued success of glo Hyper in Japan and across THP markets in ENA, total consumable volume grew 79% in 2021, with average daily consumption increasing across key markets. glo achieved record THP category volume share in T9 markets of 18.1% vs 2020, up 480 bps with growth in all nine markets.

glo total revenue grew 34% or 46% at constant currency accelerating year on year, and sequentially in H2 versus H1. Since the launch of Hyper in the first half of 2020, glo's performance on key metrics such as brand power and consumer conversion have continued to improve, supporting our ambition for glo to be the fastest growing global THP brand (by volume).

In Japan, volume growth for consumables and devices was driven by Hyper. With improved consumer conversion from trial to active usage of 41%, glo's volume share of the THP category reached 21.2%, up 180 bps on 2020. 

In APME, consumable volume grew 27%, with device volume up 36% as we continued to invest in consumer acquisition. Revenue was up 3%, or 13% at constant rates of exchange, with the significant acceleration in H2 driven by consumable pricing and as we lap the impact of the Sens withdrawal in the prior year comparator. This was partly offset by the partial absorption of excise increases in Japan.

In ENA, glo volume grew 195%, around five times faster than THP industry growth rates of 41% in the region, with consecutive quarterly growth in key markets, driving continued strong revenue growth, up 150% or 167% at constant currency. The region now represents over 50% of our global THP volume and 40% of our global THP revenue.

· In Russia, glo reached 19.3% THP category volume share, up 1,070 bps on 2020.

· In Ukraine, glo reached 20.9% THP category volume share (up 990 bps vs 2020).

· In Italy, glo reached 12.8% THP category volume share, up 870 bps, with Hyper driving 100% of the growth.

· In Romania, we reached 22.1% category volume share, up 530 bps.

Hyper also continued to make good progress in Kazakhstan, Poland, Egypt, the Czech Republic and across other smaller ENA launch markets, and is now in 22 of glo's 25 markets, with further market roll-outs planned in 2022.

* T9 markets by revenue are the Japan, South Korea, Russia, Italy, Romania, Germany, Ukraine, Poland and the Czech Republic; they account for 82% of total industry THP revenue.  

CATEGORY PERFORMANCE REVIEW

VELO - MODERN ORAL - International and U.S. volume share gains

· Continued strong global volume growth up 70.5%, with consumer numbers up 0.6m to 2.1m

· ENA revenue up 44%, with volume up 46% driving volume share to 69.4%, up 380 bps

· U.S. volume up 272%, with volume share of Modern Oral at 11.7%, up 410 bps vs 2020 in a highly competitive market

Our Modern Oral growth accelerated in 2021, with volume up 70.5% and revenue up 38.8%, or 40.6% at constant rates of exchange. Volume share of the Modern Oral category in our T5* markets was 34.7%, in line with 2020.

This was largely driven by the U.S, where volume share of Modern Oral increased by 410 bps, as volume grew 272% to 602 million pouches (2020: 162 million pouches). This growth was due to the portfolio and distribution expansion following the acquisition of the nicotine pouch products of Dryft Sciences LLC (Dryft) in October 2020. These products are now present in over 110,000 stores nationwide, in a highly competitive market.

While we are excited about the long-term potential of the Modern Oral market in the U.S., it currently represents less than 2% of the nicotine industry by revenue (in the U.S.) and 51% and 38% of global Modern Oral volume and value respectively.

The majority of Velo consumers (in the U.S.) adopted the brand as their first in Modern Oral, sourced evenly from combustible, snus, traditional oral and vapour consumers. Our insights suggest that a high percentage of Modern Oral users are already poly-users of other categories.

In ENA, we are volume share leaders of the Modern Oral category in 15 of the 17 markets where we are active. Volume was up 46% with revenue up 43.9%, or 45.6% at constant rates of exchange, as the Modern Oral market continues to grow rapidly, and we continue to expand our industry leading volume share position. We continue to drive innovation in the category, with the success of our Sachet, Black range and Velo Mini launches, as well as new flavours generated alongside consumers in our LAB co-creation hubs in Sweden. The global brand migration to Velo, which had been delayed by the impact of COVID-19, is expected to be completed in H1 2022.

· In Sweden, where Modern Oral has grown to represent 13.5% of the total oral category, our volume share of the Modern Oral category reached 59.6%, an increase of 580 bps on 2020^.

· In Norway, where Modern Oral now represents 28.7% of the total oral category, our volume share of the Modern Oral reached 63.9%, up 180 bps vs 2020.

· In Denmark, where Modern Oral represents 90.5% of the total oral category, our volume share of the Modern Oral category fell by 130 bps to 92.6% in 2021.

Our pilot launches in emerging markets including Pakistan and Indonesia continue to deliver valuable insights, as we roll-out in key urban markets. We believe that Modern Oral is an exciting longer-term opportunity to commercialise reduced risk products**† by offering New Categories as affordable alternatives to adult nicotine consumers.

In Kenya, we continue to engage with the relevant authorities on the regulatory and fiscal framework to support a commercially sustainable re-entry into the Modern Oral category. In Germany, sales of Modern Oral have been suspended pending engagement with the authorities regarding the classification of tobacco-free nicotine pouches.

* T5 markets for Modern Oral are U.S., Sweden, Norway, Denmark and Switzerland.

^ Sweden volume share has been rebased to include Nicotine free pouches in all periods. Accordingly, BAT's FY2020 volume share of Modern Oral was rebased to 53.8%.

** Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.

† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

CATEGORY PERFORMANCE REVIEW

BEYOND NICOTINE

As consumers increasingly seek products offering wellbeing and stimulation characteristics, we are working with our venturing unit, Btomorrow Ventures (BTV), and selected third parties to strengthen our understanding of this market. We are applying these learnings and developing our own portfolio of products addressing consumer needs not just today, but into the future.

BTV has completed 17 investments since launch in 2020, including 9 new investments during 2021, in innovative consumer, new sciences and technology businesses. The companies in which we invest are carefully selected for original ideas across a range of criteria, as well as a cultural fit which allows us to work together to leverage the strength of the BAT Group in helping entrepreneurial candidates accelerate and sustain growth. This approach provides us with evolving capabilities for the future across both our New Categories and Beyond Nicotine.

In March 2021, we entered a strategic collaboration agreement with Organigram Inc., a wholly owned subsidiary of publicly traded Organigram Holdings Inc., focused on research and product development activities of next generation adult cannabis products, with an initial focus on cannabidiol (CBD).

In January 2022, we announced the launch of KBio Holdings Limited (KBio) to accelerate the research, development and production of novel treatments. KBio will leverage the existing plant-based technology capabilities of BAT and Kentucky BioProcessing Inc. (KBP), the existing BAT-owned U.S. plant biologics organisation.

TRADITIONAL ORAL

Group volume declined 3.9% to 8.0 billion stick equivalents. Total revenue was £1,118 million (2020: £1,160 million), down 3.6% due to the impact of foreign exchange. At constant rates, revenue grew 3.0%, driven by continued strong pricing in the U.S. (price mix of 8%) which accounts for 96% of revenue from the category.

In the U.S., Traditional Oral volume declined 5.1% in 2021, with value share of moist up 10 bps and volume share down 50 bps. This was driven by Grizzly which continues to drive value growth through strong pricing.

The Modified Risk Tobacco Product (MRTP) applications for Camel Snus were discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) of the FDA in September 2018. After extensive work with the FDA, we expect that the applications will remain under review until the second half of 2022.

VALUE THROUGH COMBUSTIBLES - Continued global value share gains

· Group value share up 10 bps, driven by the U.S., up 60 bps.

· Volume share down 10 bps, with strong growth in APME more than offset by AMSSA, ENA and U.S.

· Revenue down 3.2% due to foreign exchange, up 4.0% at constant rates.

· Continued strong pricing, partially offset by negative geographic mix.

Group cigarette value share increased 10 bps vs 2020, driven by the continued performance of the strategic cigarette brands in the U.S. (up 80 bps). This combined with higher cigarette value share in Japan, Bangladesh, Germany, Turkey, Taiwan, Pakistan, the Czech Republic, Colombia and Malaysia to more than offset lower value share in Indonesia, Saudi Arabia, Canada, Australia, South Africa, Poland, France and Italy. Group cigarette volume share was down by 10 bps. Pricing continued to be strong, with combustibles price/mix of 4.3%.

Group cigarette volume was largely in line with 2020 at 637 billion sticks (2020: 638 billion sticks). Volume growth in:

· South Africa, as the market recovered from the COVID-19 lockdown and ban of sales in April to August 2020;

· Pakistan, where illicit trade reduced following significant excise-led growth in recent years;

· Bangladesh, driven by the continued strength of the local portfolio; and

· Vietnam, with strong volume recovery post COVID-19 lockdowns in the comparator.

was more than offset by volume decline in:

· Iran, following the sale of the Group's operations in August 2021;

· the U.S., where the Group's cigarette volume was down 5.0% to 69.5 billion sticks (2020: 73.1 billion sticks) partly benefiting from trade inventory movements (mainly linked to the timing of price increases and uncertainty about a potential excise increase) which are expected to unwind in early 2022; and

· Indonesia, where the Group has sought to drive increased value with pricing ahead of the industry.

Our GTR business showed no material signs of recovery due to COVID-19 travel restrictions. 

CATEGORY PERFORMANCE REVIEW

Value share of the strategic cigarette brands was, collectively, up 20 bps although volume declined by 0.3%: 

· Dunhill's value share was down 10 bps as growth in Romania, Pakistan, Taiwan and Brazil was more than offset by declines in Indonesia, South Korea, Australia and Saudi Arabia. Volume was 8.9% lower, largely due to the impact of the tax increases and minimum retail price compliance in Indonesia;

· Kent's value share was stable as growth in Turkey, Russia, South Korea, Saudi Arabia and Ukraine was offset by lower value share in Japan, Romania and Brazil. Volume was down 2.6% as growth in Turkey was more than offset by lower volume in Japan and the Middle East (due to the sale of the business in Iran partway through the year);

· Lucky Strike's value share grew 30 bps, as growth in the U.S. (following launch in December last year), AMSSA (particularly Brazil, Colombia and Chile), Japan, Russia and Germany more than offset lower value share in Indonesia, France and Spain. Volume grew 19.6% driven by Russia, the U.S., Brazil, Algeria and Japan, partially offset by the impact of the tax increases and minimum retail price compliance in Indonesia;

· Rothmans' value share was down by 10 bps as growth in Brazil, the Czech Republic and Malaysia was offset by lower value share in Russia, Australia, New Zealand, Poland, South Korea, South Africa, Ukraine and the UK. Volume was down 3.0% as growth in Brazil and Cuba was more than offset by lower volume in Russia, Ukraine and Kazakhstan; and

· Pall Mall's value share was down 20 bps as growth in Mexico and Germany was more than offset by lower value share in the U.S., Saudi Arabia, Australia, Canada, Chile, Romania and New Zealand. Volume was 2.2% higher, largely driven by Pakistan.

The Group's U.S. domestic strategic combustibles portfolio largely performed well:

· Newport value share increased 70 bps in the U.S., despite a 3.3% volume decline;

· Natural American Spirit value share grew 20 bps compared to 2020. Volume was marginally lower than 2020, down by 0.8%; and

· Camel's value share declined 30 bps in the U.S., with volume 9.0% down against 2020 driven by macroeconomic deterioration and competitive pricing pressure.

Volume of other tobacco products (OTP) declined 9.2% to 18.3 billion sticks equivalent (being 3% of the Group's combustible portfolio).

Revenue from combustibles was down 3.2% at £22,029 million (2020: £22,752 million) with a translational foreign exchange headwind of 7.2% more than offsetting the impact of higher pricing across the Group. Revenue at constant rates of exchange was up 4.0% at £23,669 million (2020: £22,752 million) driven by good pricing notably in the U.S., Turkey, Canada, Germany, Bangladesh and Brazil, and an estimated £200 million benefit from trade inventory movements in the U.S. mainly linked to the timing of price increases and uncertainty about a potential excise increase. This was partly offset by the impact of the structural change in excise and competitive pricing in Australasia (estimated at £260 million) and the disposal of the Group's operations in Iran during the year.

SIMPLIFYING THE BUSINESS - Delivering the enterprise of the future

· Quantum savings target increased to at least £1.5 billion (from £1.0 billion) by the end of 2022

· £1.3 billion total Quantum savings delivered early, driven by £595 million of phase 2 savings in 2021

· Quest is delivering the Enterprise of the Future, an organisation with sustainability at its core

Through Quest, we are building a sustainable Enterprise of the Future, delivering the organisational flexibility to implement and operationalise our growth strategy - from simplifying the business to faster decision-making. Quest is an organisational transformation programme, built around five pillars, designed to deliver the Enterprise of the Future at enhanced speed. Underpinning Quest is:

· Quantum, our programme designed to simplify our business;

· Unleashing innovation through data-driven insights and foresights, leveraging state-of-the-art technologies to ensure we are building the brands of the future;

· Empowering our organisation and attracting and retaining an increasingly diverse workforce;

· Shaping the sustainability agenda through our focus on reducing the health impact of our business and demonstrating excellence across our other ESG measures; and

· Technology and data analytics, which will drive our transformation and unlock commercial value across the entire value chain.

Phases 1 and 2 of the Quantum programme have already delivered greater organisational speed and agility, alongside operational efficiencies and supply chain productivity improvements. We have realised further savings of £595 million this year and delivered total savings of £1.3 billion to date, 12 months earlier than planned. As a result, in 2021, we increased our expected cost savings target to annualised cost savings of at least £1.5 billion by the end of 2022. The savings from Quantum are enabling further increased investment in New Categories and the building of new capabilities. 

REGIONAL REVIEW

The performances of the regions are discussed below. The following discussion is based upon the Group's internal reporting structure. 

UNITED STATES (U.S.):

Use of the term "cc" refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

· Vuse approaching value share leadership in the U.S., reaching 32.5% share, up 760 bps.

· Vuse Solo first to receive FDA vapour marketing authorisation for vapour products, supporting foundational science for other Alto applications.

· Velo consolidated its position in a highly competitive market; distribution reached 110k stores.

· Combustible value share 60 bps higher, led by strategic brands' portfolio value share increasing 80 bps.

Regional Revenue and Profit from Operations

Reported revenue increased 1.9% and was up 9.2% on a constant currency basis. This was driven by our RGM capabilities, pricing in cigarettes and traditional oral and continued strong vapour revenue growth (up 46.4%) together with an estimated £200 million benefit from trade inventory movements mainly linked to the timing of price increases and uncertainty about a potential excise increase. This was offset by combustible volume decline (lapping a strong comparative period) and translational foreign exchange headwinds of 7.3% due to the relative strength of sterling versus the U.S. dollar.

Reported profit from operations rose by 11.9%, with reported margin up 420 bps to 47.6%. This was driven by combustibles pricing, higher revenue and reducing losses from Vuse, savings from Quantum and marketing spend effectiveness measures, and the benefit from trade inventory movements, together with lower one-off charges (as 2021 included net credits in respect of a partial buy-out of the U.S. pension fund (£35 million) and the finalisation of the dissenting shareholders litigation (£59 million), whilst 2020 included a £400 million charge related to cases regarding payment obligations for brands previously sold to a third party). These were partially offset by translational foreign exchange headwinds.

At constant rates of exchange, adjusted profit from operations was up 9.7% with adjusted operating margin up 20 bps to 50.6%.

New Categories

In vapour, Vuse showed outstanding growth in U.S. with value share up 760 bps to reach 32.5%. Consumable volumes increased by 67%, and revenue was up 46%, or 57% at constant rates of exchange. Pricing on consumables in H2 2021 offset the roll-over impact of the negative mix from the successful launch of the quad-pack in H2 2020. Vuse Alto was the driving force of this growth, representing over 90% of Vuse revenues in the U.S. in 2021, up from 83% in 2020. During 2021 the Group maintained device leadership, up 500 bps to reach 57.4% volume share, a strong lead indicator for future consumable volume and revenue growth.

Industry vapour volumes were up 21.2% reflecting a continued recovery from the EVALI crisis in 2019 and the impacts of the flavour ban in early 2020, with industry volumes and revenue now both above 2019 peak levels. 

REGIONAL REVIEW

UNITED STATES (U.S.) cont:

In October 2021, Vuse Solo received the first of its kind U.S. FDA marketing authorisation for vapour products in Original flavour, confirming that the marketing of Vuse Solo products are appropriate for the protection of public health in the U.S.. This represents a key regulatory accomplishment in BAT's journey towards delivering A Better TomorrowTM. The Vuse Alto PMTA was submitted nearly a year after Vuse Solo and shares the same foundational science. We remain confident in the quality of all our applications and expect to hear more on their progress over the course of 2022.

While the Group has no presence in such products in the U.S., it is notable that flavoured disposable vapour products - as well as flavoured products containing synthetic nicotine - have continued to increase both volume share and value share over the period. This remains a concern given flavoured disposable products' increase in share of youth consumption in the U.S., as highlighted in the 2021 National Youth Tobacco Survey.

We support efforts by the FDA to address the increasing availability of synthetic nicotine products and enhance the FDA's enforcement actions against other flavoured disposable vapour products. That includes taking action against those flavoured (excluding menthol and tobacco) cartridge/pod-based vapour products that the FDA announced in 2020 must be withdrawn from the market unless and until they have been granted marketing orders by the agency through the PMTA process. The FDA is under increased scrutiny from Congress to assert its regulatory authority over these types of products, including clarifying the legal framework within which such products should be regulated, which we believe is likely to lead to substantive action by the FDA.

In Modern Oral volume was up 272% with reported revenue down 82% (2021: £2 million; 2020: £10 million) in a highly competitive market, as the Group invested in promotional pricing and the national roll-out of the Velo branded nicotine pouch products. The expanded range of products is now available in over 110,000 stores under the Velo brand. Velo volume share increased 410 bps from 2020 to reach 11.7% in December. While growing year on year, driven by distribution expansion by the Group and other industry participants, the Modern Oral segment remains small, only representing around 1.6% of total nicotine value share. Low levels of average daily consumption due to high levels of poly-usage with other nicotine categories supports the Group's multi-category approach.

Traditional Oral

Traditional Oral revenue reduced by 4.3%. Revenue was up 2.6% excluding the adverse impact of foreign exchange as strong pricing of 7.7% was partially offset by volume decline of 5.1%. Value share of moist was up 10 bps with volume share down 50 bps, as Grizzly continues to drive value growth through strong pricing and leveraging the benefits of our digitally enabled RGM capabilities.

The MRTP applications for Camel Snus were discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) of the FDA in September 2018. After extensive work with the FDA, we expect that the applications will remain under review until the second half of 2022. 

Combustibles

Combustibles revenue was marginally higher than 2020, up 0.9% (or 8.1% at constant rates of exchange), driven by pricing (the Group implemented four rounds of price increases in the year, supported by our RGM capabilities). This was partly offset by a 5.0% decline in volume to 70 billion sticks (2020: 73 billion sticks) which benefitted from trade inventory movements (mainly linked to the timing of price increases and uncertainty about a potential excise increase) which are expected to unwind in 2022. The underlying volume decline, adjusted for the number of selling days and inventory movements, was c.7%. Industry volume was down 6.5%, driven by rising gas prices and the partial unwinding of last year's additional supply chain inventories and stronger consumption trends.

Total cigarette value share increased by 60 bps during the year driven by our premium brands Newport and Natural American Spirit, with combustibles price/mix up 13.1%. In December 2020, we successfully relaunched the iconic brand Lucky Strike broadening our portfolio in the lower priced segment, while complementing Pall Mall and leveraging our RGM capabilities in key states, resulting in Lucky Strike achieving around 1% national share in the first year of launch.

Volume share reduced by 40 bps as we continued to focus on value generation.

On 29 April 2021, the FDA announced that it had set in motion the process of advancing two tobacco product standards regarding menthol in cigarettes and all flavoured cigars. The Group's U.S. business will evaluate any proposed regulation and will participate in any consultation and rulemaking processes by submitting comments grounded in science-based evidence. We believe that the published science does not support regulating menthol cigarettes differently from non-menthol. We believe that the scientific evidence neither shows a difference in health risks between menthol and non-menthol cigarettes, nor indicates that menthol cigarettes adversely affect initiation, dependence or cessation.

REGIONAL REVIEW

ASIA-PACIFIC AND MIDDLE EAST (APME):

Use of the term "cc" refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

· Continued volume momentum with glo Hyper more than offsetting the partial absorption of Japan excise increase

· Combustible volume growth driven by recovery from COVID-19 lockdowns in 2020

· Estimated £260m structural excise change impact and competitive pricing environment in Australasia

Regional Revenue and Profit from operations

Reported revenue declined 7.6% at current exchange rates, but excluding a translational foreign exchange headwind, was in line with 2020 on a constant rate basis. Volume share gains in combustibles and higher combustible volume, up 4.4%, largely driven by the emerging market recovery from the impact of COVID-19 in 2020 (including Bangladesh, Vietnam and Pakistan), were offset by a negative geographic mix effect, the impact of the structural excise change and competitive pricing in Australasia (estimated at £260 million), and the sale of the Group's operations in Iran part way through the year.

Reported profit from operations declined 12.6%, due to the lower revenue; the impact of the sale of the Group's operations in Iran (which resulted in a charge of £358 million being recognised in the period largely due to historical foreign exchange movements being reclassified to the income statement in line with IFRS, as described on page 20), and due to the costs associated with the exit from Myanmar.

Excluding adjusting items (mainly in respect of the one-off exit costs from Iran and Myanmar), adjusted profit from operations fell 1.1% at constant rates of exchange, largely due to the decline in revenue.

New Categories

In THP, consumable volume increased 27% to 9.3 billion sticks (2020: 7.4 billion), driven by glo Hyper's continued momentum. This momentum was partially offset by the impact of harmonisation of excise in Japan, with revenue growth of 2.8% (or 13.0% excluding the impact of currencies). In Japan, the largest THP market in the world, glo is the fastest growing THP brand, by volume, with volume share increasing to 6.8%, up 140 bps compared to 2020. 

Our Modern Oral pilot launches in emerging markets including Pakistan and Indonesia continue to deliver valuable insights as we roll-out in key urban markets. We believe that Modern Oral is an exciting longer-term opportunity to commercialise reduced risk products by offering affordable New Category alternatives to adult nicotine consumers.

Combustibles

Revenue from combustibles fell 9.6% at current rates, and by 2.3% on a constant currency basis, as higher combustible volume and pricing in markets including Bangladesh was more than offset by negative geographic mix, and the combined impact of the structural excise change and highly competitive pricing environment in Australasia.

Value share decreased 20 bps, with volume share up 20 bps, as volume share gains (including in Bangladesh, Japan, Pakistan and Taiwan) more than offset losses in Indonesia (as the Group drove for value growth with pricing ahead of the industry) and Saudi Arabia. 

REGIONAL REVIEW

AMERICAS AND SUB-SAHARAN AFRICA (AMSSA):

Use of the term "cc" refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

· Revenue more than doubled in New Categories, led by Vuse.

· Vuse consolidated value share leadership in key Canadian vapour market.

· Strong cigarette pricing, partially offset by negative mix as volumes recovered from COVID-19 impacts in 2020.

Regional Revenue and Profit from operations

Reported revenue was marginally higher (up 0.8%), as 7.8% constant currency growth was offset by translational foreign exchange headwinds caused by the relative strength of sterling against a number of currencies, particularly the Brazilian real, Argentine peso, Nigerian naira and Kenyan shilling. On a constant currency basis, revenue growth was driven by combustibles pricing and a doubling of Vapour revenue.

Reported profit from operations declined 3.7% to £1,496 million, partly due to a charge of £54 million recognised in Peru in respect of goodwill (a non-cash adjusting item) due to the ongoing difficult trading conditions in that market and the translational foreign exchange headwind described earlier. Excluding adjusting items in both periods (which mainly related to Quantum and, in 2021, Peru goodwill), adjusted profit from operations increased 4.3% on a constant currency basis, as the growth in revenue was partially offset by transactional foreign exchange headwinds and increased incremental investment in New Categories.

New Categories

In vapour, revenue doubled, up 115%, as Vuse consolidated its value share leadership in Canada, with 34.3 ppts share growth compared to 2020, reaching 80.4% in 2021, driven by the success of Vuse ePod and launch of the upgraded 2.0 version. In South Africa, vapour revenue recovered from the prior year sales suspension, alongside cigarettes, as part of the country's COVID-19 response, with volume almost tripling versus 2020, supported by the completion of the brand migration of Twisp to Vuse.

In Kenya, the government has reversed its sales ban and the government has reduced the rate of excise tax on Modern Oral from 106% of factory-made cigarettes to 17%.

Combustibles

The Group's combustible share declined 70 bps on a volume and 70 bps on a value basis driven by Canada, South Africa, Mexico, and Brazil. Combustibles revenue fell 2.8% largely due to a negative translational foreign exchange impact. Revenue grew 4.1% at constant rates of exchange driven by strong combustibles pricing, with RGM driving value in key markets including Canada and South Africa. Negative mix driven by some limited downtrading partially offset pricing increases, as volume continued to recover from the impacts of COVID-19 in 2020 in a number of markets including Colombia and South Africa, with the latter still recovering from the illicit trade increases in 2020. In Brazil, COVID-19 related lockdowns and increased border security led to growth in the duty paid industry, with some growth in consumption at the lower end of the market.

REGIONAL REVIEW

EUROPE AND NORTH AFRICA (ENA):

Use of the term "cc" refers to the variance between the 2021 adjusted performance, at 2020 exchange rates, against the adjusted 2020 performance.

· 80% New Categories revenue growth at constant exchange, with over 40% growth in all three New Categories.

· Strong vapour revenue growth ahead of volume growth, extending our value share leadership.

· glo Hyper driving a more than doubling of THP revenue; Hyper now launched in 18 markets.

· Combustibles volume share down by 30 bps, and value share down by 20 bps.

Regional Revenue and Profit from operations

Reported revenue was marginally higher than 2020 (up 0.1%) at current rates, as 80% New Categories revenue growth and combustible pricing were offset by translational foreign exchange headwinds. On a constant currency basis, revenue was up by 7.3%.

Reported profit from operations decreased by 3.9% as the strong New Category revenue growth, in combination with tight control of overheads and Quantum cost savings, were more than offset by incremental investment in New Categories and foreign exchange headwinds. Adjusted profit from operations was down 1.0% at constant rates of exchange.

New Categories

Vapour revenue increased by 40%, ahead of strong volume growth of 30%, driven by vapour market growth and consumables pricing, with Vuse extending its value share leadership in all key markets. In the UK and France, trade margin optimisation, together with growth ahead of incremental marketing investment led to a reduced drag on regional profit from operations. The Vype brand was successfully migrated to Vuse during the year, completing the transitions of our major markets.

THP volumes almost tripled, with revenue more than doubling, driven by the continued strong momentum and roll out of glo Hyper, which has now been launched in 18 markets in the region. glo continued to grow volume share in key THP markets across ENA, with glo's 2021 share of THP reaching 19.3% in Russia (up 1,070 bps on 2020), 12.8% in Italy (up 870 bps on 2020), 20.9% in Ukraine (up 990 bps on 2020) and 22.1% in Romania (up 530 bps on 2020). Building on its successful launch in H2 2020, glo's THP category volume share is now around or over 20% in most key markets.

In Modern Oral, revenue grew 44%, driven by 46% volume growth, with volume share gains in both the Modern Oral and Total Oral categories in established markets such as Sweden, Norway, Denmark and Switzerland. In Germany, sales of Modern Oral were suspended during the year, pending engagement with authorities regarding the classification of tobacco-free nicotine pouches.

Combustibles

Combustibles revenue fell 6.2% at current rates but grew 1.1% excluding the impact of foreign exchange, as the combustible volume decline of 3.1% was more than offset by price/mix growth. Volume share was down 30 bps (versus 2020), with value share down by 20 bps. Volume share was up in Turkey, Germany and the Czech Republic, but was more than offset by reductions in Russia, Poland, France, Italy, Spain, Romania, the UK, Ukraine and Denmark. 

OTHER FINANCIAL INFORMATION

ANALYSIS OF PROFIT FROM OPERATIONS AND DILUTED EARNINGS PER SHARE BY SEGMENT

Notes to the analysis of profit from operations above:

(1) Adjusting items represent certain items which the Group considers distinctive based upon their size, nature or incidence.

(2) CC: constant currency - measures are calculated based on a re-translation, at the prior year's exchange rates, of the current year's results of the Group and, where applicable, its segments.

NET FINANCE COSTS

Net finance costs were £1,486 million, compared to £1,745 million in 2020. This was a decrease of 14.8%, largely due to:

· charges incurred in 2020 in relation to the redemptions and tender offer to repurchase certain bonds undertaken to de-risk the Group's future financing programme, which did not repeat in 2021; and

· a translational foreign exchange tailwind due to the strength of sterling.

Also in 2021, the Group issued perpetual hybrid bonds totalling €2 billion, recognised, in line with IAS 32 Financial Instruments, as equity. The coupons paid on such instruments are recognised in equity rather than as a charge to the income statement in net finance costs. In 2021, in line with IAS 33 Earnings Per Share, £12 million has been recognised as a deduction to EPS similar to non-controlling interests.

On a constant currency basis, and after adjusting for items including the charges in relation to the redemptions and tender offer (incurred in 2020) and finance costs related to the Franked Investment Income Group Litigation Order (FII GLO, as described on page 40), adjusted net finance costs were £1,520 million, a decrease of 4.5% (2020: £1,592 million). For a full reconciliation of net finance costs to adjusted net finance costs at constant rates, see page 48.

RESULTS OF ASSOCIATES AND JOINT VENTURES

The Group's share of post-tax results of associates and joint ventures decreased from £455 million to £415 million which largely relates to the performance of the Group's main associate, ITC Ltd (ITC) in India. The Group's share of ITC's post-tax results was 4.8% lower at £419 million (2020: £440 million), primarily due to the ongoing difficult trading environment and impact of COVID-19 which continued to negatively impact ITC through unprecedented business disruption, with the results also impacted by a translational foreign exchange headwind.

Included above are adjusting costs of £12 million (2020: net adjusting gain of £13 million). These mainly related to:

· a deemed gain of £6 million (2020: £17 million) on dilution of the Group's holding in ITC (see page 33); offset by

· an impairment of £18 million recognised in 2021 in respect of one of the Group's associates in Yemen, given the ongoing operational challenges in that country; and

· £4 million recognised in 2020, being the Group's share of charges recognised by ITC in respect of the cost of leaf tobacco stocks destroyed in a third-party warehouse fire.

Excluding these and the impact of translational foreign exchange, on an adjusted constant rate basis, the Group's share of post-tax results from associates and joint ventures was higher than 2020, up 3.3% to £456 million. Please refer to page 33 for discussion of the adjusting items within the Group's share of post-tax results from associates and joint ventures. 

OTHER FINANCIAL INFORMATION

TAXATION

The tax rate in the income statement was a charge of 23.9% (2020: 24.3%). The Group's tax rate is affected by the impact of the adjusting items referred to on pages 30 to 33 and by the inclusion of the share of associates and joint ventures post-tax profit in the Group's pre-tax results.

Excluding these, the Group's underlying tax rate for subsidiaries reflected in the adjusted earnings per share on page 36 was 24.7% in 2021 (2020: 24.9%). The decrease largely reflects the prior and current year tax reclaims in Brazil together with mix of profits. A full reconciliation from taxation on ordinary activities to the underlying tax rate is provided on page 49.

EARNINGS PER SHARE

Basic earnings per share were up 6.0% at 296.9p (2020: 280.0p) as the growth in operational performance, a lower effective tax rate and lower net finance costs, combined with lower one-off charges more than offset the impact of translational foreign exchange headwinds.

Before adjusting items and including the dilutive effect of employee share schemes, adjusted diluted earnings per share declined 0.8% to 329.0p (2020: 331.7p). On a constant translational foreign exchange basis, adjusted diluted earnings per share were 6.6% higher at 353.5p. For a full reconciliation of diluted earnings per share to adjusted diluted earnings per share, at constant rates, see page 49.

CASH FLOW

In the Group's cash flow, prepared in accordance with IFRS and presented on page 28, net cash generated from operating activities declined by 0.7% to £9,717 million (2020: £9,786 million) primarily driven by timing of MSA payments in the U.S. and higher tax payments (mainly in Canada and the U.S.) and a translational foreign exchange headwind. These were largely offset by a favourable movement in inventories as stock builds in Australia in 2020 did not repeat. In 2021, the Group paid £248 million related to litigation payments (2020: £464 million) which included, in both 2021 and 2020, payments in respect of Engle and the developments in cases regarding payment obligations under the state settlement agreements with Florida, Texas, Mississippi and Minnesota for brands previously sold to a third party. Also included in the litigation payments in 2020 was the payment in respect of a settlement of an excise dispute in Russia with regard to prior periods.

Operating cash conversion and free cash flow (before and after dividends paid to shareholders)

The Group's operating cash conversion rate (based upon adjusted profit from operations and defined on page 50) was 104% (2020: 103%), partly due to the positive impact of the Australia stock build in 2020 not repeating. Our operating cash conversion was again ahead of our target of at least 90%, demonstrating the ongoing strength of the Group in turning operating performance into cash.

Free cash flow (before the payment of dividends), as defined on page 50, was £7,447 million (2020: £7,295 million), an increase of 2.1%. Lower cash outflows on adjusting items and lower net interest paid in the year (due to the impact of the refinancing programme undertaken in the prior year), were partly offset by higher tax payments and the impact of translational foreign exchange headwinds. Net capital expenditure was marginally higher at £632 million (2020: £605 million). After paying dividends of £4,904 million (2020: £4,745 million), free cash flow (after dividends paid to shareholders), as defined on page 50, was an inflow of £2,543 million (2020: £2,550 million). For a full reconciliation of net cash generated from operating activities to free cash flow before and after dividends, see page 50.  

OTHER FINANCIAL INFORMATION

BORROWINGS AND NET DEBT

Borrowings (which includes lease liabilities) were £39,658 million at 31 December 2021, a decrease of 9.8% (31 December 2020: £43,968 million) largely due to the refinancing undertaken in 2021 (with the €2 billion perpetual hybrid bonds issued in the year recognised as equity), repayment of borrowings in the year (partly due to the cash flow generated by the business after the payment of dividends to shareholders in the period) and a foreign exchange tailwind due to the relative movements of sterling, mainly against the U.S. dollar.

The Group remains confident of its ability to access the debt capital markets successfully and reviews its options on a continuing basis.

The Group's average centrally managed debt maturity was 10.1 years at 31 December 2021 (31 December 2020: 9.9 years), and the highest proportion of centrally managed debt maturing in a single rolling 12-month period was 18.6% (2020: 16.4%).

The Group defines net debt as borrowings (including related derivatives and lease liabilities), less cash and cash equivalents (including restricted cash) and current investments held at fair value. Closing net debt was £36,302 million (31 December 2020: £40,241 million). A reconciliation of borrowings to net debt is provided below.

The movement in net debt includes the free cash flow, after payment of dividends to shareholders, of £2,543 million (31 December 2020: £2,550 million) as described on page 15. Also impacting the carrying value of net debt at the balance sheet date are the net proceeds received from the issuance of the perpetual hybrid bonds (£1,681 million) and cash payments related to share schemes and investing activities totalling £150 million (31 December 2020: £210 million), which, in 2021, included the derecognition of cash held in respect of the sale of the Group's operations in Iran in 2021 (£98 million). Also in 2021, net debt was impacted by other non-cash movements of £11 million and foreign exchange related to the revaluation of foreign currency denominated net debt balances being a net headwind of £124 million (31 December 2020: £69 million tailwind). 2020 also included net debt acquired (£95 million) in respect of the acquisition of a distribution company in the Middle East. These movements can be summarised as follows:

OTHER FINANCIAL INFORMATION

BORROWINGS AND NET DEBT cont…

Adjusted net debt to adjusted EBITDA

For the purposes of assessing the Group's ability to service and repay borrowings, the Group uses the ratio of adjusted net debt to adjusted EBITDA. Adjusted EBITDA is defined as profit for the year (earnings) before net finance costs, taxation on ordinary activities, share of post-tax results of associates and joint ventures, depreciation, amortisation, impairment costs and adjusting items. Please refer to page 51 for a reconciliation of adjusted EBITDA to profit for the year.

The Group also adjusts net debt for the purchase price allocation adjustment to the debt, included within borrowings, acquired as part of the acquisition of Reynolds American Inc. This is an accounting adjustment and does not reflect the enduring repayment of the instrument. The Group Management Board believes that this additional measure, which is used internally to assess the Group's financial capacity, is useful to the users of the financial statements in helping them to see how the Group's financial capacity has changed over the year. The adjusted net debt position is provided below:

The Group's ratio of adjusted net debt to adjusted EBITDA as at 31 December 2021 was 3.0x (2020: 3.3x) or 2.8x on a constant currency basis, as the Group is exposed to translational foreign exchange. In 2021, there was a foreign exchange headwind of £839 million on adjusted EBITDA primarily as result of sterling strengthening from 1.284 $:£ (31 December 2020) to 1.376 $:£ (31 December 2021). The calculation of adjusted net debt to adjusted EBITDA is provided on page 51.

DIVIDENDS

The Board has declared an interim dividend of 217.8p per ordinary share of 25p for the year ended 31 December 2021, payable in four equal quarterly instalments of 54.45p per ordinary share in May 2022, August 2022, November 2022 and February 2023. This represents an increase of 1.0% on 2020 (2020: 215.6p per share), and a pay-out ratio, on 2021 adjusted diluted earnings per share, of 66.2%.

The quarterly dividends will be paid to shareholders registered on either the UK main register or the South Africa branch register and to holders of American Depositary Shares (ADSs), each on the applicable record date below

OTHER INFORMATION

FOREIGN CURRENCIES

The principal exchange rates used to convert the results of the Group's foreign operations to pound sterling for the purposes of inclusion and consolidation within the Group's financial statements are indicated in the table below. Where the Group has provided results "at constant rates of exchange" this refers to the translation of the results from the foreign operations at rates of exchange prevailing in the prior period - thereby eliminating the potentially distorting impact of the movement in foreign exchange on the reported results.

The principal exchange rates used were as follows:

RISKS AND UNCERTAINTIES

During the year, the Board carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that would threaten its business model, future performance, solvency, liquidity and viability. As part of that assessment, the Board reviewed all the risks, both individually and collectively, as they relate to the impact of COVID-19 on the performance of the Group.

The COVID-19 pandemic may have a lasting impact on operations, suppliers, customers and our people. The governments of the countries in which we operate and sell our products will adjust as they tackle the socio-economic impact of the pandemic. This could lead to increased risk of regulation, affect the ability to realise revenue growth due to consumer down-trading, excise increases or higher illicit trade, while also potentially impacting the supply chain, financial markets and customer credit risk. The impact of these risks is difficult to ascertain and is potentially unforeseen during this period of uncertainty. As new working practices are implemented to reflect the current operating environment and associated risks are incorporated into existing Group risks (including principal risks noted below), the Group does not maintain COVID-19 as a separate principal risk.

All Group risks are managed individually and collectively by management and overseen by the Board. In 2021, the Board assessed that it was appropriate to remove the Group principal risk "market size reduction and consumer down trading" due to the Group's strategy to deliver long-term sustainable growth with a range of innovation and less harmful products that stimulate senses of new adult generations. The Group's principal risks remain broadly unaltered compared to 2020 with the exception of the above risk.

The principal risks facing the Group are summarised under the headings of:

· Competition from illicit trade;

· Geopolitical tensions;

· Tobacco, New Categories and other regulation interrupts the growth strategy;

· Litigation;

· Significant increases or structural changes in tobacco, nicotine and New Categories related taxes;

· Inability to develop, commercialise and deliver the New Categories strategy;

· Injury, illness or death in the workplace.

· Disputed taxes, interest and penalties;

· Solvency and liquidity; and

· Foreign exchange rate exposures.

A summary of all the risk factors (including the principal risks) which are monitored by the Board through the Group's risk register will be included in the Annual Report and Form 20-F for the year ended 31 December 2021.  

OTHER INFORMATION

MANAGING THROUGH COVID-19

The Group continues to perform well despite the operational challenges posed by the COVID-19 pandemic, while recognising that GTR continues to be affected by the ongoing travel restrictions in certain parts of the world. Our Board has continued to maintain close oversight of the Group's response to the impact of COVID-19 throughout this period.

Our robust contingency plans and organisational flexibility have ensured that, where operations have been affected by local lockdowns, the supply chain disruption to our ongoing business has largely been mitigated. We have embraced remote working where appropriate and would like to thank our staff around the world for the resilience and agility they have demonstrated. That such progress towards building A Better TomorrowTM has been made during such a challenging period is testimony to the resilience of our staff, customers, partners and suppliers.

We are committed to supporting all our stakeholders throughout the COVID-19 pandemic. In December 2020, an initial New Drug Application for our COVID-19 candidate vaccine was approved by the U.S. Food and Drug Administration (FDA) and we progressed into a Phase 1 study. This study has now been fully recruited and remains ongoing. We expect data to be available during the first half of 2022 and will determine next steps based on these data, but also the rapidly evolving COVID-19 and treatment landscape.

UPDATE ON INVESTIGATIONS INTO MISCONDUCT ALLEGATIONS

From time to time, the Group investigates, and becomes aware of governmental authorities' investigations into, allegations of misconduct against Group companies. The Group co-operates with the authorities' investigations, where appropriate, including with the DOJ and OFAC in the United States, which are conducting an investigation into suspicions of breach of sanctions.

Potential fines, penalties or other consequences cannot currently be assessed. As the investigations are ongoing, it is not possible to identify the timescale in which these matters might be resolved.

UPDATE ON QUEBEC CLASS ACTION AND CCAA

On 1 March 2019, the Quebec Court of Appeal handed down a judgment which largely upheld and endorsed the lower court's previous decision in the two Quebec class actions. Imperial Tobacco Canada Ltd's (ITCAN) share of the judgment is approximately CAD$9.2 billion (£5.4 billion). Also in 2015, the Quebec Court of Appeal upheld the Order for Security, of which ITCAN's share was CAD$758 million (£436 million), which has been paid in full to the Court escrow account as required by the judgment. Following the decision of the Quebec Court of Appeal in Montreal, the Board of Directors of ITCAN reassessed the recoverability of the deposit and the Group recognised a charge against the income statement of £436 million in 2019. As a consequence, in the Group's consolidated balance sheet the deposit has been utilised against the current estimate of the liability.

Further, on 12 March 2019, ITCAN obtained an Initial Order from the Ontario Superior Court of Justice granting it protection under the Companies' Creditors Arrangement Act (CCAA). This has the effect of staying all current tobacco litigation in Canada against ITCAN and other Group companies (the "Stays"). The Stays are currently in place until 31 March 2022. While the Stays are in place, no steps are to be taken in connection with the Canadian tobacco litigation with respect to ITCAN, certain of its subsidiaries or any other Group company.

In addition to Quebec, across Canada, other tobacco plaintiffs and provincial governments are collectively seeking significant damages which substantially exceed ITCAN's total assets. In seeking protection under the CCAA, ITCAN will look to resolve not only the Quebec case but also all other tobacco litigation in Canada under an efficient and court supervised process, while continuing to trade in the normal course.

Under the terms of CCAA, the court appointed FTI Consulting Canada Inc. to act as a monitor. This monitor has no operational input and is not involved in the management of the business. The Group considers that ITCAN continues to meet the requirements of IFRS 10 Consolidated Financial Statements, and, until such requirements are not met, the Group will continue to consolidate the results of ITCAN. The £2.3 billion of goodwill relating to ITCAN on the Group's balance sheet at 31 December 2021 will continue to be reviewed on a regular basis. Any potential future impairment charge would result in a non-cash charge to the income statement that would be treated as an adjusting item.

Please refer to "Contingent Liabilities and Financial Commitments" below (page 38) and the Group's Annual Report and Accounts and Form 20-F for the year ended 31 December 2020, note 27 Contingent Liabilities and Financial Commitments for a full discussion of the case.

BANGLADESH

In Bangladesh, on 25 July 2018, the Appellate Division of the Supreme Court of Bangladesh reversed the decision of the High Court against BAT Bangladesh in respect of the retrospective demands for VAT and Supplementary Duty amounting to approximately £154 million. On 3 February 2020, the certified Court Order was received. The Government filed a Review Petition on 25 March 2020 in the Appellate Division of the Supreme Court of Bangladesh against the judgment. On 9 December 2021, the review petitions were heard and the Appellate Division of the Supreme Court of Bangladesh dismissed the review petitions filed by the National Board of Revenue (NBR) which resulted in BATB winning the cases against the NBR. 

OTHER INFORMATION

CHANGES IN THE GROUP

1. ORGANIGRAM

As previously reported, on 11 March 2021, the Group announced a strategic collaboration agreement with Organigram Inc., a wholly owned subsidiary of publicly traded Organigram Holdings Inc. (collectively, Organigram). Under the terms of the transaction, a Group subsidiary acquired a 19.9% equity stake in Organigram Holdings Inc. (listed on both the Nasdaq and Toronto Stock Exchange under the symbol "OGI") to become its largest shareholder, with the ability to appoint two directors to Organigram Holdings Inc.'s board of directors and representation on its investment committee. The Group accounts for the investment as an associate.

The investment, valued at approximately £129 million, was priced at CAD$3.79 per share which was based on the five-day volume weighted average price of Organigram Holdings Inc.'s shares on the Toronto Stock Exchange ended 9 March 2021 and represents a discount to the closing price of CAD$3.94 on 9 March 2021. The Group's share of the fair value of net assets acquired included £49 million of intangibles, and £30 million of goodwill, representing a strategic premium to enter the legal cannabis market in North America which was provisionally recognised as part of the acquisition.

The Group's investment provides a significant injection of capital for Organigram that will enable it to expand and accelerate its R&D and product development activities, and support business expansion.

A "Centre of Excellence" will be established to focus on developing the next generation of cannabis products with an initial focus on cannabidiol (CBD). The Centre of Excellence will be located at Organigram's indoor facility in New Brunswick, Canada, which holds the Health Canada licenses required to conduct R&D activities with cannabis products. Both BAT and Organigram will contribute scientists, researchers and product developers to the Centre of Excellence which will be governed and supervised by a steering committee consisting of an equal number of senior members from each of BAT and Organigram. Both partners share a commitment to continue to maintain the highest regulatory and ethical standards. Furthermore, as part of the transaction, BAT and Organigram will grant each other a licence to certain intellectual property to enable the development of new and potentially disruptive, novel products. Both parties will have the ability to independently commercialise any products developed as a result of the collaboration under their own brands.

During 2021, Organigram acquired all of the issued and outstanding shares of The Edibles & Infusions Corporation (EIC) for an initial consideration of CAD$22 million, payable in shares. Organigram also acquired all of the issued and outstanding shares of Laurentian Organic Inc. (Laurentian) for an initial consideration of CAD$36 million, payable in cash and shares. The impact on the Group's stake in Organigram was not material. As a result of these transactions, the Group's shareholding was reduced to 18.8%. Potential additional shares are payable on both transactions upon the acquired businesses achieving certain earnout milestones. The transactions and results of these changes are immaterial to the Group and organic measures, excluding the results of these acquisitions, are not presented.

2. B.A.T. Pars Company - IRAN

On 25 June 2021, the Group agreed to dispose of its Iranian subsidiary, B.A.T. Pars Company PJSC (BAT Pars) to DTM ME FZE LLC. The transaction was completed on 6 August 2021. Consideration is subject to the completion accounts process, with payment deferred until September 2022.

The Group results include those from BAT Pars until 6 August 2021. The Group incurred charges in respect of the disposal of £358 million, which has been recognised as a non-cash, adjusting item. This relates to foreign exchange previously recognised in reserves (£272 million) that has been reclassified, in line with IFRS, to the income statement and £86 million of other costs which mainly relates to the write-off of assets on disposal. Excluding these items, the impact of the sale on the Group's operations was not material and no inorganic adjustment has been presented.

3. PT Bentoel Internasional Investama Tbk (Bentoel)

On 5 October 2021, Bentoel announced its intention to delist from the Indonesia Stock Exchange and go private by conducting a Voluntary Tender Offer (VTO). As part of this, in two phases in November and December 2021, the Group acquired an additional 0.2% of shares in Bentoel from independent shareholders at a cost of £4 million and terminated the total return swap.

CHANGES TO THE MAIN BOARD

As previously announced, Luc Jobin succeeded Richard Burrows as Chairman of British American Tobacco p.l.c.. This was with effect from the conclusion of the Company's Annual General Meeting (AGM) on 28 April 2021. Also as previously announced in 2021, Jerry Fowden resigned from the Board as a Non-Executive Director with effect from 1 April 2021.

Krishnan "Kandy" Anand will join the Board as an independent Non-Executive Director and member of Nominations and Remuneration Committees with effect from 14 February 2022. Dr Marion Helmes will step down as a Non-Executive Director with effect from the conclusion of the 2022 AGM and will not stand for re-election at the 2022 AGM.  

OTHER INFORMATION

GOING CONCERN

A description of the Group's business activities, its financial position, cash flows, liquidity position, facilities and borrowings position, together with the factors likely to affect its future development, performance and position, are set out in this announcement. Further information will be provided in the Strategic Report and in the Notes on the Accounts, all of which will be included in the 2021 Annual Report and Form 20-F.

The Group has, at the date of this announcement, sufficient existing financing available for its estimated requirements for at least 12 months from the date of approval of this condensed consolidated financial information. This, together with the ability to generate cash from trading activities, the performance of the Group's Strategic Portfolio, its leading market positions in a number of countries and its broad geographical spread, as well as numerous contracts with established customers and suppliers across different geographical areas and industries, provides the Directors with the confidence that the Group is well placed to manage its business risks successfully through the ongoing uncertainty and risks associated with COVID-19 and its impact on the current financial conditions and the general outlook in the global economy.

After reviewing the Group's forecast financial performance and financing arrangements, the Directors consider that the Group has adequate resources to continue operating for at least 12 months from the date of approval of this preliminary announcement and that it is therefore appropriate to continue to adopt the going concern basis in preparing the Annual Report and Form 20-F.

EXTERNAL RECOGNITION IN RESPECT OF SUSTAINABILITY

The Group continues to be recognised for its ESG performance, building on the numerous ESG-related awards BAT has won in the past:

A rating and award may be subject to withdrawal or revision at any time. Each rating and award should be evaluated separately of any other rating or award. The methodologies of any rating or award presented here may not be the same as those of other ratings, awards or methodologies that may be used by our stakeholders, and may emphasize different aspects of ESG practices and performance, and, thus, may not be representative of our ESG performance in all respects. 

OTHER INFORMATION

ADDITIONAL INFORMATION

In addition to this short-form press release, the Group wishes to inform the reader that additional information will be available in documents filed with the LSE and SEC on 11 February 2022 and which should be referred to in addition to this short-form press release. Additional information includes:

· The Group's audited Financial Statements;

· Exchange rates;

· Reconciliations of all non-GAAP measures from the most relevant IFRS equivalent;

· Information regarding contingent liabilities and financial commitments;

· Information for shareholders on dividends;

· Information with regards to the Group's principal risks;

· Key dates in respect of the year ending 31 December 2022; and

· Glossary and definition of key terms.

This information will be an extract of information that will be included in the Group's Annual Report and Accounts (and Form 20-F) for the 12 months ended 31 December 2021 which is expected to be published on 8 March 2022.

ENQUIRIES

Webcast and Conference Call Participant Passcode: BAT PrelimsA webcast of the results presentation is available via www.bat.com/latestresults on 11 February 2022 from 08.30 GMT, followed by a Q&A session.

If you wish to listen to the presentation via a conference call facility please use the dial-in details below: