Cash flow and net debt movements cont…
The conversion of adjusted profit from operations to operating cash flow remained strong at 93% (2015: 92%). The ratio of free cash flow per share to adjusted diluted earnings per share fell to 73% from 90% in 2015 as the prior year benefited from the receipt in relation to FII GLO.
Below free cash flow, the principal cash outflows for 2016 comprise the payment of the prior year final dividend and the 2016 interim dividend, £140 million higher than prior year at £2,910 million, as well as net investment activities which included the acquisition of Ten Motives. During 2015, the cash outflow from net investing activities was £5,192 million relating to the investment in Reynolds American, the buy-out of the minorities in Souza Cruz and the acquisition of TDR in Croatia.
The other net flows in 2016 principally relate to shares purchased by the employee share ownership trusts and cash flows in respect of certain derivative financial instruments.
These flows resulted in a net cash outflow of £163 million (2015: £4,533 million outflow). After taking account of other changes, especially exchange rate movements, total net debt was £1,973 million higher at £16,767 million at 31 December 2016 (2015: £14,794 million).
(b) Net debt
The Group defines net debt as borrowings including related derivatives, less cash and cash equivalents and current available-for-sale investments. The maturity profile of net debt is as follows:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
£m
|
|
|
|
£m
|
|
|
Net debt due within one year:
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
3,007
|
|
|
|
2,195
|
|
|
Related derivatives
|
|
|
(498
|
)
|
|
|
(46
|
)
|
|
Cash and cash equivalents
|
|
|
(2,204
|
)
|
|
|
(1,963
|
)
|
|
Current available-for-sale investments
|
|
|
(15
|
)
|
|
|
(35
|
)
|
|
|
|
|
290
|
|
|
|
151
|
|
|
Net debt due beyond one year:
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
16,488
|
|
|
|
14,806
|
|
|
Related derivatives
|
|
|
(11
|
)
|
|
|
(163
|
)
|
|
|
|
|
16,477
|
|
|
|
14,643
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net debt
|
|
|
16,767
|
|
|
|
14,794
|
|
The Group remains confident about its ability to access the debt capital markets successfully and reviews its options on a continuing basis.
Cash flow and net debt movements cont…
(c) IFRS cash generated from operations
The cash generated from operating activities in the IFRS cash flows on page 18 includes the following items:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
£m
|
|
|
|
£m
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit from operations
|
|
|
4,655
|
|
|
|
4,557
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
Depreciation, amortisation and impairment costs
|
|
|
607
|
|
|
|
428
|
|
|
Increase in inventories
|
|
|
(638
|
)
|
|
|
(520
|
)
|
|
Decrease/(increase) in trade and other receivables
|
|
|
87
|
|
|
|
(508
|
)
|
|
Increase in amounts receivable in respect of the Quebec Class Action
|
|
|
(242
|
)
|
|
|
(55
|
)
|
|
Increase in trade and other payables
|
|
|
428
|
|
|
|
732
|
|
|
FII GLO receipts (see page 34)
|
|
|
–
|
|
|
|
963
|
|
|
Decrease in net retirement benefit liabilities
|
|
|
(145
|
)
|
|
|
(191
|
)
|
|
Increase in provisions for liabilities and charges
|
|
|
141
|
|
|
|
48
|
|
|
Other non-cash items
|
|
|
–
|
|
|
|
(54
|
)
|
|
Cash generated from operations
|
|
|
4,893
|
|
|
|
5,400
|
|
(d) IFRS net cash and cash equivalents
The net cash and cash equivalents in the IFRS Group cash flow statement on page 18 comprise:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
£m
|
|
|
|
£m
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents per balance sheet
|
|
|
2,204
|
|
|
|
1,963
|
|
|
Overdrafts and accrued interest
|
|
|
(553
|
)
|
|
|
(233
|
)
|
|
Net cash and cash equivalents
|
|
|
1,651
|
|
|
|
1,730
|
|
(e) Liquidity
The Treasury function is responsible for raising finance for the Group, managing the Group’s cash resources and financial risks arising from underlying operations. All these activities are carried out under defined policies, procedures and limits.
The Group targets an average centrally managed debt maturity of at least five years with no more than 20% of centrally managed debt maturing in a single rolling year. As at 31 December 2016, the average centrally managed debt maturity was 8.2 years (2015: 7.9 years) and the highest proportion of centrally managed debt maturing in a single rolling 12-month period was 18.1% (2015: 15.0%).
It is Group policy that short-term sources of funds (including drawings under both the US$3 billion US commercial paper programme and the £1 billion-euro commercial paper programme) are backed by undrawn committed lines of credit and cash. At 31 December 2016, £254 million of commercial paper was outstanding (2015: £505 million).
In March 2016, a one-year extension option was exercised for the £3 billion main bank facility, extending the final maturity to May 2021. The facility was undrawn as at 31 December 2016.
In March 2016, a US$300 million bond was repaid. In July 2016, the Group issued a £500 million bond maturing in 2021, with two bonds issued in September 2016 (a US$650 million bond maturing in 2019 and a £650 million bond maturing in 2052). The Group repaid on maturity a CHF 350 million bond in August 2016 and a £325 million bond in September 2016.
Cash flow and net debt movements cont…
On 19 July 2016, the Group exercised the make-whole provision for its US$700 million bond originally issued in 2008 pursuant to rule 144A. The bond was redeemed on 18 August 2016, prior to its original maturity date of 15 November 2018. This was undertaken to manage the Group’s debt maturity profile, decrease future refinancing risk and reduce the on-going interest expense.
In January 2017, following the announcement that the Group had agreed the terms in relation to the proposed acquisition of the shares not already owned in Reynolds American, a US$25 billion acquisition facility was entered into with a syndicate of banks, split in four tranches as follows: two bridge facilities of US$15 billion and US$5 billion maturing in 2018 and 2019 respectively (each with two six months extensions at BAT’s option), US$2.5 billion term loan maturing in 2020 and US$2.5 billion term loan maturing in 2022. The Group intends to refinance the bridge facilities through debt issuance at the capital market at or around the closing date.
In addition, the Group increased its liquidity position with a new two-tranche £5.7 billion forward starting revolving credit facility, which consists of a 364-day revolving credit facility of £2.84 billion (with a one year extension and one year term out option), and a £2.84 billion revolving credit facility maturing in 2021. This will effectively replace the Group’s existing £3.0 billion revolving credit facility, which will be cancelled upon closing of the acquisition when the new revolving credit facility will become effective.
EARNINGS PER SHARE
Adjusted diluted earnings per share were 18.8% ahead of prior year at 247.5p (2015: 208.4p), as the growth in the Group’s operating profit, higher share of post-tax results of associates and joint ventures, lower tax charge and a reduction in non-controlling interest. Excluding the impact of the relative weakness of sterling on the reported results, adjusted diluted earnings per share increased by 10.4% to 230.0p (2015: 208.4p), at constant rates of exchange. Basic earnings per share were 8.8% higher at 251.2p (2015: 230.9p), benefiting from the growth in the Group’s operating performance and the foreign exchange tailwind on translation of the Group results. The Group incurred higher restructuring charges and an increase in net finance costs, but these were largely offset by the increase in the Group’s share of one-off gains from disposals by Reynolds American.
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Pence
|
|
|
pence
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
- basic
|
|
|
250.2
|
|
|
|
230.9
|
|
|
- diluted
|
|
|
249.2
|
|
|
|
230.3
|
|
|
Adjusted earnings per share
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
248.4
|
|
|
|
208.9
|
|
|
- diluted
|
|
|
247.5
|
|
|
|
208.4
|
|
|
Headline earnings per share
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
205.6
|
|
|
|
210.4
|
|
|
- diluted
|
|
|
204.8
|
|
|
|
209.8
|
|
Basic earnings per share are based on the profit for the year attributable to ordinary shareholders and the weighted average number of ordinary shares in issue during the period (excluding treasury shares). For the calculation of the diluted earnings per share, the weighted average number of shares reflects the potential dilutive effect of employee share schemes.
The presentation of headline earnings per share, as an alternative measure of earnings per share, is mandated under the JSE Listing Requirements. It is calculated in accordance with Circular 2/2015 ‘Headline Earnings’, as issued by the South African Institute of Chartered Accountants.
Earnings per share cont…
Adjusted diluted earnings per share
and
adjusted diluted earnings per share at constant rates of exchange
are calculated by taking the following adjustments into account (see pages 21 to 23):
|
|
|
2016
|
|
|
2015
|
|
|
|
|
pence
|
|
|
pence
|
|
|
|
|
|
|
|
|
|
|
Unadjusted diluted earnings per share
|
|
|
249.2
|
|
|
|
230.3
|
|
|
Effect of restructuring and integration costs
|
|
|
27.5
|
|
|
|
15.7
|
|
|
Effect of amortisation of trademarks and similar intangibles
|
|
|
6.3
|
|
|
|
3.0
|
|
|
Effect of South Korea sales tax challenge
|
|
|
2.6
|
|
|
|
-
|
|
|
Effect of Fox River
|
|
|
1.1
|
|
|
|
-
|
|
|
Effect of Flintkote
|
|
|
-
|
|
|
|
0.2
|
|
|
Effect of associates’ adjusting items
|
|
|
(48.3
|
)
|
|
|
(15.7
|
)
|
|
Effect of adjusting items in net finance costs
|
|
|
5.8
|
|
|
|
(26.3
|
)
|
|
Effect of adjusting items in respect of deferred taxation
|
|
|
3.3
|
|
|
|
1.2
|
|
|
Adjusted diluted earnings per share
|
|
|
247.5
|
|
|
|
208.4
|
|
|
Effect of exchange rate movements
|
|
|
(17.5
|
)
|
|
|
-
|
|
|
Adjusted diluted earnings per share (at constant rates)
|
|
|
230.0
|
|
|
|
208.4
|
|
Diluted headline earnings per share
are calculated by taking the following adjustments into account:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
pence
|
|
|
pence
|
|
|
|
|
|
|
|
|
|
|
Unadjusted diluted earnings per share
|
|
|
249.2
|
|
|
|
230.3
|
|
|
Effect of impairment of intangibles and property, plant and equipment and held-for-sale assets
|
|
|
4.9
|
|
|
|
1.1
|
|
|
Effect of gains on disposal of property, plant and equipment and held-for-sale assets
|
|
|
(1.6
|
)
|
|
|
(2.2
|
)
|
|
Effect of associates’ gain on disposal of asset held-for-sale
|
|
|
(47.1
|
)
|
|
|
(18.7
|
)
|
|
Effect of issue of shares and change in shareholding in associate
|
|
|
(0.6
|
)
|
|
|
(1.2
|
)
|
|
Other
|
|
|
–
|
|
|
|
0.5
|
|
|
Diluted headline earnings per share
|
|
|
204.8
|
|
|
|
209.8
|
|
Earnings per share cont…
In the earnings per share disclosed above, the calculation is based upon the following level of earnings and number of shares:
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Earnings
|
|
|
Shares
|
|
|
Earnings
|
|
|
Shares
|
|
|
|
|
|
£m
|
|
|
|
m
|
|
|
|
£m
|
|
|
|
m
|
|
|
For earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
4,648
|
|
|
|
1,858
|
|
|
|
4,290
|
|
|
|
1,858
|
|
|
- diluted
|
|
|
4,648
|
|
|
|
1,865
|
|
|
|
4,290
|
|
|
|
1,863
|
|
|
For adjusted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
4,615
|
|
|
|
1,858
|
|
|
|
3,882
|
|
|
|
1,858
|
|
|
- diluted
|
|
|
4,615
|
|
|
|
1,865
|
|
|
|
3,882
|
|
|
|
1,863
|
|
|
- diluted, at constant rates
|
|
|
4,289
|
|
|
|
1,865
|
|
|
|
|
|
|
|
|
|
|
For headline earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic
|
|
|
3,819
|
|
|
|
1,858
|
|
|
|
3,909
|
|
|
|
1,858
|
|
|
- diluted
|
|
|
3,819
|
|
|
|
1,865
|
|
|
|
3,909
|
|
|
|
1,863
|
|
DIVIDENDS
Recommendation
The Board recommends a final dividend of 118.1p per ordinary share of 25p for the year ended 31 December 2016. If approved by shareholders at the Annual General Meeting to be held on 26 April 2017, the final dividend will be payable on 4 May 2017 to shareholders registered on either the UK main register or the South Africa branch register on 17 March 2017 (the record date).
General Dividend Information
Under IFRS, the recommended final dividend in respect of a year is only provided in the accounts of the following year. Therefore, the 2016 accounts reflect the 2015 final dividend and the 2016 interim dividend amounting to 155.9p (£2,910 million in total (2015: 150.0p - £2,770 million)).
The following is a summary of the dividends declared/recommended for the years ended 31 December 2016 and 2015.
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Pence per
Share
|
|
|
|
£
m
|
|
|
Pence per
share
|
|
|
|
£m
|
|
|
Ordinary shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 2016 paid 28 September 2016
|
|
|
51.3
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
- 2015 paid 30 September 2015
|
|
|
|
|
|
|
|
|
|
|
49.4
|
|
|
|
908
|
|
|
Final
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 2016 payable 4 May 2017
|
|
|
118.1
|
|
|
|
2,194
|
|
|
|
|
|
|
|
|
|
|
- 2015 paid 5 May 2016
|
|
|
|
|
|
|
|
|
|
|
104.6
|
|
|
|
1,949
|
|
|
|
|
|
169.4
|
|
|
|
3,155
|
|
|
|
154.0
|
|
|
|
2,857
|
|
Dividends cont…
Key dates and South Africa Branch Register
In compliance with the requirements of the London Stock Exchange (LSE) and of Strate, the electronic settlement and custody system used by the JSE Limited (JSE), the following salient dates for the payment of the final dividend are applicable:
|
Event
|
|
Date 2017
|
|
Last Day to Trade (LDT) cum dividend (JSE)
|
|
Tuesday 14 March
|
|
|
|
|
|
Shares commence trading ex-dividend (JSE)
|
|
Wednesday 15 March
|
|
|
|
|
|
Shares commence trading ex-dividend (LSE)
|
|
Thursday 16 March
|
|
|
|
|
|
Record date (JSE and LSE)
|
|
Friday 17 March
|
|
|
|
|
|
Payment date
|
|
Thursday 4 May
|
|
|
|
|
|
No removal requests permitted between the UK main register and the South Africa branch register
|
|
Thursday 23 February to Friday 17 March (inclusive)
|
|
|
|
|
|
No transfers permitted between the UK main register and the South Africa branch register
|
|
Wednesday 15 March to Friday 17 March (inclusive)
|
|
|
|
|
|
No shares may be dematerialised or rematerialised
|
|
Wednesday 15 March to Friday 17 March (inclusive)
|
As the Group reports in sterling, dividends are declared and payable in sterling except for shareholders on the branch register in South Africa whose dividends are payable in rand. A rate of exchange of £:R = 16.32100 as at 21 February 2017 (the closing rate on that date as quoted by Bloomberg), results in an equivalent final dividend of 1,927.51010 SA cents per ordinary share.
South Africa Branch Register: Dividends Tax Information
South Africa Dividends Tax (at a rate of 15%), equivalent to 289.12652 SA cents per ordinary share, will be withheld from the gross final dividend paid to shareholders on the South Africa branch register, unless a shareholder qualifies for an exemption. After Dividends Tax has been withheld, the net dividend will be 1,638.38359 SA cents per ordinary share. The final dividend is regarded as a ‘foreign dividend’ for the purposes of the South Africa Dividends Tax.
At the close of business on 21 February 2017 (the latest practicable date prior to the date of the recommendation of the final dividend), British American Tobacco p.l.c. (the “Company”) had a total of 1,864,374,894 ordinary shares in issue (excluding treasury shares). The Company held 162,645,590 ordinary shares in treasury giving a total issued share capital of 2,027,020,484 ordinary shares.
British American Tobacco p.l.c. is registered with the South African Revenue Service (SARS) with tax reference number 9378193172.
For the avoidance of doubt, Dividends Tax and the information provided above is of only direct application to shareholders on the South Africa branch register. Shareholders on the South Africa branch register should direct any questions regarding the application of Dividends Tax to Computershare Investor Services Proprietary Limited, contact details for which are given in the ‘Corporate Information’ section below.
RETIREMENT BENEFIT SCHEMES
The Group’s subsidiaries operate around 170 retirement benefit arrangements worldwide. The majority of the scheme members belong to defined benefit schemes, most of which are funded externally and many are closed to new entrants. The Group also operates a number of defined contribution schemes.
The present total value of funded scheme liabilities as at 31 December 2016 was £7,155 million (2015: £5,956 million), while unfunded scheme liabilities amounted to £476 million (2015: £364 million). The fair value of scheme assets increased from £6,086 million in 2015 to £7,278 million in 2016.
The overall net liability for all pension and health care schemes in Group subsidiaries amounted to £371 million at the end of 2016, compared to £245 million at the end of 2015.
The actuarial loss of £228 million (2015: £283 million gain) recognised in the Group Statement of Comprehensive Income is principally driven by changes in the discount rates used in the valuation of retirement benefit scheme liabilities at each year end, resulting in a £843 million loss (2015: £377 million gain) offset by increases in the fair value of scheme assets of £615 million (2015: £94 million decrease).
Contributions to the defined benefit schemes are determined after consultation with the respective trustees and actuaries of the individual externally funded schemes, taking into account regulatory environments.
OTHER CHANGES IN THE GROUP
On 20 April 2016, the Group completed the acquisition of 100% of Ten Motives, a UK based e-cigarette business with particular strength in traditional grocery and convenience channels. The fair value of the consideration payable was £56 million of which £6 million is contingent on post-acquisition targets. The fair value and book value of acquired net assets was not materially different except for the recognition of trademarks and similar intangibles of £33 million. Goodwill of £21 million arising on this transaction represents a strategic premium to increase the Group’s share of the UK e-cigarette market.
In January 2017, the Group signed an agreement with CID Adriatic Investments GmbH (CID) for the Group to acquire certain tobacco assets of Fabrika Duhana Sarajevo (FDS), largely brands, and a retail business (Tobacco Press). The Group will also enter into a contract manufacturing agreement with FDS for the continued production of the acquired brands by FDS in Sarajevo. The agreement between the Group and CID is subject to FDS shareholder approval and approval by the relevant regulatory authority. It is expected that this transaction will complete in the first half of 2017.
As disclosed in the Annual Report for the year ended 31 December 2015, page 34, on 5 February 2016, the acquisition of the shares in Souza Cruz not already owned by the Group was approved, with Souza Cruz becoming a wholly-owned subsidiary at that date.
RELATED PARTY DISCLOSURES
The Group’s related party transactions and relationships for 2015 were disclosed on page 190 of the Annual Report for the year ended 31 December 2015. In the year to 31 December 2016, there were no material changes in related parties or in related party transactions except for the matters noted below:
On 17 December 2012, a wholly owned subsidiary of the Group, BATUS Japan Inc. (BATUSJ), entered into an Amendment and Extension Agreement (referred to as the Amendment) with a wholly owned subsidiary of Reynolds American, R.J. Reynolds Tobacco Company (referred to as RJRTC). The Amendment modifies the American blend Cigarette Manufacturing Agreement (referred to as the 2010 Agreement), effective as of 1 January 2010.
Prior to the Amendment, the term of the 2010 Agreement was scheduled to expire on 31 December 2014, subject to early termination and extension provisions. Pursuant to the Amendment, the Manufacturing Agreement would remain in effect beyond 31 December 2014, provided that either RJRTC or BATUSJ may terminate the Manufacturing Agreement by furnishing three years’ notice to the other party, such notice was given in January 2016. As a result of early termination of this agreement the Group agreed to a compensation payment of US$90 million of which US$7 million were paid to RJRTC on 22 September 2016, with the Group recognising the full expense of US$90 million as required by IFRS in 2016. The balance is due in March 2017.
During 2016, the Group received proceeds of £23 million in respect of its participation in the share buy-back programme conducted by Reynolds American. This programme ceased in the fourth quarter of 2016.
FOREIGN CURRENCIES
The principal exchange rates used were as follows:
|
|
|
Average
|
|
|
Closing
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar
|
|
|
1.824
|
|
|
|
2.036
|
|
|
|
1.707
|
|
|
|
2.026
|
|
|
Brazilian real
|
|
|
4.740
|
|
|
|
5.101
|
|
|
|
4.022
|
|
|
|
5.831
|
|
|
Canadian dollar
|
|
|
1.795
|
|
|
|
1.954
|
|
|
|
1.657
|
|
|
|
2.047
|
|
|
Euro
|
|
|
1.224
|
|
|
|
1.378
|
|
|
|
1.172
|
|
|
|
1.357
|
|
|
Indian rupee
|
|
|
91.022
|
|
|
|
98.070
|
|
|
|
83.864
|
|
|
|
97.508
|
|
|
Japanese yen
|
|
|
147.466
|
|
|
|
185.012
|
|
|
|
144.120
|
|
|
|
177.303
|
|
|
Russian rouble
|
|
|
91.026
|
|
|
|
93.591
|
|
|
|
75.429
|
|
|
|
107.646
|
|
|
South African rand
|
|
|
19.962
|
|
|
|
19.522
|
|
|
|
16.898
|
|
|
|
22.839
|
|
|
US dollar
|
|
|
1.355
|
|
|
|
1.528
|
|
|
|
1.236
|
|
|
|
1.474
|
|
CONTINGENT LIABILITIES AND FINANCIAL COMMITMENTS
The Group has contingent liabilities in respect of litigation, taxes and guarantees in various countries. The Group is subject to contingencies pursuant to requirements that it complies with relevant laws, regulations and standards. Failure to comply could result in restrictions in operations, damages, fines, increased tax, increased cost of compliance, interest charges, reputational damage or other sanctions. These matters are inherently difficult to quantify.
In cases where the Group has an obligation as a result of a past event existing at the balance sheet date, it is probable that an outflow of economic resources will be required to settle the obligation and the amount of the obligation can be reliably estimated, a provision will be recognised based on best estimates and management judgement. There are, however, contingent liabilities in respect of litigation, taxes in some countries and guarantees for which no provisions have been made.
While the amounts that may be payable or receivable could be material to the results or cash flows of the Group in the period in which they are recognised, the Board does not expect these amounts to have a material effect on the Group’s financial condition in the next three years.
Taxes
The Group has exposures in respect of the payment or recovery of a number of taxes. The Group is and has been subject to a number of tax audits covering, among others, excise tax, value-added taxes, sales taxes, corporate taxes, withholding taxes and payroll taxes.
The estimated costs of known tax obligations have been provided in these accounts in accordance with Group’s accounting policies. In some countries, tax law requires that full or part payment of disputed tax assessments be made pending resolution of the dispute. To the extent that such payments exceed the estimated obligation, they would not be recognised as an expense.
There are disputes that may proceed to litigation in a number of countries including Brazil, Netherlands and South Africa. A dispute in Bangladesh, which proceeded to litigation in 2014, is on-going, whilst the Group is appealing the ruling in respect of sales taxes and penalties in South Korea.
Group litigation
Group companies, as well as other leading cigarette manufacturers, are defendants in a number of product liability cases. In a number of the cases, the amounts of compensatory and punitive damages sought are significant.
While it is impossible to be certain of the outcome of any particular case or of the amount of any possible adverse verdict, the Group believes that the defences of the Group’s companies to all these various claims are meritorious on both the law and the facts and a vigorous defence is being made everywhere. An adverse judgment was entered against one Group company, Imperial, in the Quebec class actions and an appeal has been made. If further adverse judgments are entered against any of the Group’s companies in any case, all avenues of appeal will be pursued. Such appeals could require the appellants to post appeal bonds or substitute security (as has been necessary in Quebec) in amounts that could in some cases equal or exceed the amount of the judgment. In any event, with regard to US tobacco product liability litigation (which excludes the recent litigation brought against the Company by the shareholders of Reynolds American Inc. and Lorillard Inc.) the Group has the benefit of an indemnity from R. J. Reynolds Tobacco Company, a wholly-owned subsidiary of Reynolds American Inc. At least in the aggregate and despite the quality of defences available to the Group, it is not impossible that the Group’s results of operations or cash flows in a particular period could be materially affected by this and by the final outcome of any particular litigation.
Summary
Having regard to all these matters, with the exception of Fox River, the Group (i) does not consider it appropriate to make any provision or charge in respect of any pending litigation, (ii) does not believe that the ultimate outcome of this litigation will significantly impair the Group’s financial condition.
Full details of the litigation against Group companies and tax disputes as at 31 December 2016 will be included in the Annual Report for the year ended 31 December 2016. There were no material developments in 2016 that would impact on the financial position of the Group.
FRANKED INVESTMENT INCOME GROUP LITIGATION ORDER
The Group is the principal test claimant in an action in the United Kingdom against HM Revenue and Customs (HMRC) in the Franked Investment Income Group Litigation Order (FII GLO). There are 25 corporate groups in the FII GLO. The case concerns the treatment for UK corporate tax purposes of profits earned overseas and distributed to the UK.
The original claim was filed in 2003. The trial of the claim was split broadly into issues of liability and quantification. The main liability issues were heard by the High Court, Court of Appeal and Supreme Court in the UK and the European Court of Justice in the period to November 2012. The detailed technical issues of the quantification mechanics of the claim were heard by the High Court during May and June 2014 and the judgment handed down on 18 December 2014. The High Court determined that in respect of issues concerning the calculation of unlawfully charged corporation tax and advance corporation tax, the law of restitution including the defence on change of position and questions concerning the calculation of overpaid interest, the approach of the Group was broadly preferred. The conclusion reached by the High Court would, if upheld, produce an estimated receivable of £1.2 billion for the Group. Appeals on a majority of the issues were made to the Court of Appeal, which heard the arguments in June 2016. The Court of Appeal determined in November 2016 on the majority of issues that the conclusion reached by the High Court should be upheld. The outcome of the Court of Appeal has not reduced the estimated receivable. Permission has been sought by HMRC to appeal almost all issues on which it was unsuccessful to the Supreme Court.
During 2015, HMRC paid to the Group a gross amount of £1,224 million in two separate payments. The payments made by HMRC have been made without any admission of liability and are subject to refund were HMRC to succeed on appeal. The second payment in November 2015 followed the introduction of a new 45% tax on the interest component of restitution claims against HMRC. HMRC held back £261 million from the second payment contending that it represents the new 45% tax on that payment, leading to total cash received by the Group of £963 million. Actions challenging the legality of the 45% tax have been lodged by both the Group and other participants in the FII GLO which will be heard in 2017.
Due to the uncertainty of the amounts and eventual outcome the Group has not recognised any impact in the Income Statement in the current or prior period in respect of the receipt which, net of the deduction by HMRC, is held as deferred income. Any future recognition as income will be treated as an adjusting item, due to the size of the order, with interest of £25 million for the 12 months to 31 December 2016 (2015: £8 million) accruing on the balance, which was also treated as an adjusting item.
ANNUAL REPORT
Statutory accounts
The financial information set out above does not constitute the Company’s statutory accounts for the years ended 31 December 2016 or 2015. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the Company’s Annual General Meeting. The auditors’ reports on both the 2016 and 2015 accounts were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of Companies Act 2006 or equivalent preceding legislation.
Publication
The Annual Report will be published on bat.com on or around 13 March 2017. A printed copy will later be mailed to shareholders on the UK main register who have elected to receive it. At the same time, shareholders will be notified of the availability of the Annual Report on the website and of the Performance Summary together with other ancillary documents in accordance with their elections. Specific local mailing and/or notification requirements will apply to shareholders on the South Africa branch register.
DISCLAIMERS
This announcement does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any British American Tobacco p.l.c. shares or other securities.
This announcement contains certain forward-looking statements that are subject to risk factors associated with, among other things, the economic and business circumstances occurring from time to time in the countries and markets in which the Group operates. It is believed that the expectations reflected in this announcement are reasonable but they may be affected by a wide range of variables that could cause actual results to differ materially from those currently anticipated.
Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.
DISTRIBUTION OF PRELIMINARY STATEMENT
This announcement is released to the London Stock Exchange and the JSE Limited. It may be viewed and downloaded from our website bat.com.
Copies of the announcement may also be obtained during normal business hours from: (1) the Company’s registered office; (2) the Company’s representative office in South Africa; and (3) British American Tobacco Publications.
Nicola Snook
Secretary
22 February 2017
APPENDIX 1
OTHER TOBACCO PRODUCTS
The Group reports volumes as additional information. This is done with cigarette sticks as the basis, with usage levels applied to other tobacco products to calculate the equivalent number of cigarette units.
The usage rates that are applied:
|
|
Equivalent to one cigarette
|
|
|
|
|
Roll-your-own (RYO)
|
0.8 grams
|
|
Make-your-own (MYO)
|
|
|
|
-
|
Expanded tobacco
|
0.5 grams
|
|
|
-
|
Optimised tobacco
|
0.7 grams
|
|
Cigars
|
1 cigar
|
|
Snus
|
|
|
|
-
|
Pouches
|
1 pouch
|
|
|
-
|
Loose snus
|
2.0 grams
|
Roll-your-own (RYO)
Loose tobacco designed for hand rolling, normally a finer cut with higher moisture, compared to cigarette tobacco.
Make-your-own (MYO)
MYO expanded tobacco; also known as volume tobacco.
Loose cigarette tobacco with enhanced filling properties – to allow higher yields of cigarettes/kg - designed for use with cigarette tubes and filled via a tobacco tubing machine.
MYO non-expanded tobacco; also known as optimised tobacco.
Loose cigarette tobacco designed for use with cigarette tubes and filled via a tobacco tubing machine.
GROUP VOLUME
The Group volume includes 100% of all volume sold by subsidiaries. As previously reported in the case of the joint operation, (known as CTBAT International Limited) between China National Tobacco Corporation (CNTC) and the Group, the volume of CTBAT not already recognised by Group subsidiaries is included in Group volumes at 100% rather than as a proportion of volume sold, in line with the Group’s measurement of market share, which is based on absolute volume sold, both in individual markets and globally.
SHAREHOLDER INFORMATION
FINANCIAL CALENDAR 2017
|
Wednesday 26 April
|
Annual General Meeting at 11.30am
|
|
|
Milton Court Concert Hall, Silk Street, London EC2Y 9BH
|
|
|
|
|
Thursday 27 July
|
Half-Year Report
|
|
|
|
CALENDAR FOR THE FINAL DIVIDEND 2016
|
2017
|
|
|
|
|
|
Thursday 23 February
|
Dividend announced: amount of dividend per share in both sterling and rand; applicable exchange rate and conversion date – Tuesday 21 February 2017; plus additional applicable information as required in respect of South Africa Dividends Tax
(1)
.
|
|
|
|
|
Thursday 23 February to
Friday 17 March
|
From the commencement of trading on Thursday 23 February 2017 to Friday 17 March 2017 (inclusive), no removal requests in either direction between the UK main register and the South Africa branch register will be permitted.
|
|
|
|
|
Tuesday 14 March
|
Last Day to Trade or LDT (JSE)
|
|
|
|
|
Wednesday 15 March to Friday 17 March
|
From the commencement of trading on Wednesday 15 March 2017 to Friday 17 March 2017 (inclusive), no transfers between the UK main register and the South Africa branch register will be permitted; no shares may be dematerialised or rematerialised.
|
|
|
|
|
Wednesday 15 March
|
Ex-dividend date (JSE)
|
|
|
|
|
Thursday 16 March
|
Ex-dividend date (LSE)
|
|
|
|
|
Friday 17 March
|
Record date (LSE and JSE)
|
|
|
|
|
Monday 10 April
|
Last date for receipt of Dividend Reinvestment Plan (DRIP) elections (UK main register only)
|
|
|
|
|
Thursday 4 May
|
Payment date (sterling and rand)
|
Note:
|
|
(1)
|
Details of the applicable exchange rate and the South Africa Dividends Tax information can be found under the heading ‘Dividends’ on page 30.
|
For holders of American Depositary Receipts (ADRs), the record date for ADRs is also Friday 17 March 2017 with an ADR payment date of Tuesday 9 May 2017.
CORPORATE INFORMATION
Premium listing
London Stock Exchange (Share Code: BATS; ISIN: GB0002875804)
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ, UK
tel: 0800 408 0094; +44 370 889 3159
Share dealing tel: 0370 703 0084 (UK only)
Your account: www.computershare.com/uk/investor/bri
Share dealing: www.computershare.com/dealing/uk
Web-based enquiries: www.investorcentre.co.uk/contactus
Secondary listing
JSE (Share Code: BTI)
Shares are traded in electronic form only and transactions settled electronically through Strate.
Computershare Investor Services Proprietary Limited
PO Box 61051, Marshalltown 2107, South Africa
tel: 0861 100 634; +27 11 870 8216
email enquiries: web.queries@computershare.co.za
American Depositary Receipts (ADRs)
NYSE MKT (Symbol: BTI; CUSIP Number: 110448107)
Sponsored ADR programme; each ADR represents one ordinary share of British American
Tobacco p.l.c.
Citibank Shareholder Services
PO Box 43077, Providence, Rhode Island 02940-3077, USA
tel: 1-888-985-2055 (toll-free) or +1 781 575 4555
email enquiries: citibank@shareholders-online.com
website: www.citi.com/dr
Publications
British American Tobacco Publications
Unit 80, London Industrial Park, Roding Road, London E6 6LS, UK
tel: +44 20 7511 7797; facsimile: +44 20 7540 4326
e-mail enquiries: bat@team365.co.uk or
The Company’s Representative office in South Africa using the contact details shown below.
British American Tobacco p.l.c.
Registered office
Globe House
4 Temple Place
London
WC2R 2PG
tel: +44 20 7845 1000
British American Tobacco p.l.c. is a public limited company which is listed on the London Stock Exchange and the JSE Limited in South Africa. British American Tobacco p.l.c. is incorporated in England and Wales (No. 3407696) and domiciled in the UK.
British American Tobacco p.l.c.
Representative office in South Africa
Waterway House South
No 3 Dock Road, V&A Waterfront
Cape Town 8000
South Africa
(PO Box 631, Cape Town 8000, South Africa)
tel: +27 21 003 6576
Forward looking statements
Certain statements in this communication regarding the proposed merger of Reynolds American and BAT (the “
Proposed Transaction
”), the expected timetable for completing the Proposed Transaction, the benefits and synergies of the Proposed Transaction, future opportunities for the combined company and any other statements regarding BAT’s, Reynolds American’s or the combined company’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts are “forward-looking” statements made within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data within this communication. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: whether the conditions to the Proposed Transaction will be satisfied and the Proposed Transaction will be completed on the anticipated timeframe, or at all; the failure to realize contemplated synergies and other benefits from the Proposed Transaction; the incurrence of significant costs and the availability and cost of financing in connection with the Proposed Transaction; the effect of the announcement of the Proposed Transaction, and related uncertainties as to whether the Proposed Transaction will be completed, on BAT’s, Reynolds American’s or the combined company’s ability to retain customers, retain and hire key personnel and maintain relationships with suppliers and on their operating results and businesses generally; the ability to maintain credit ratings; changes in the tobacco industry and stock market trading conditions; changes or differences in domestic or international economic or political conditions; changes in tax laws and rates; the impact of adverse legislation and regulation; the ability to develop, produce or market new alternative products profitably; the ability to effectively implement strategic initiatives and actions taken to increase sales growth; the ability to enhance cash generation and pay dividends; adverse litigation and dispute outcomes; and changes in the market position, businesses, financial condition, results of operations or prospects of BAT, Reynolds American or the combined company.
Additional information concerning these and other factors can be found in Reynolds American’s filings with the U.S. Securities and Exchange Commission (“
SEC
”), including Reynolds American’s most recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and BAT’s Annual Reports, which may be obtained free of charge from BAT’s website www.BAT.com. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof and BAT undertakes no obligation to update or revise publicly any forward-looking statements or other data or statements contained within this communication, whether as a result of new information, future events or otherwise.
No statement in this communication is intended to be a profit forecast and no statement in this communication should be interpreted to mean that earnings per share of BAT or Reynolds American for the current or future financial years would necessarily match or exceed the historical published earnings per share of BAT or Reynolds American, respectively.
Additional information and where to find it
This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Any solicitation will only be made through materials filed with the SEC. Nonetheless, this communication may be deemed to be solicitation material in respect of the Proposed Transaction by BAT.
BAT intends to file relevant materials with the SEC, including a registration statement on Form F-4 that will include a proxy statement of Reynolds American that also constitutes a prospectus of BAT. Investors and security holders are urged to read all relevant documents filed with the SEC (if and when they become available), including the proxy statement/prospectus, because they will contain important information about the Proposed Transaction. Investors and security holders will be able to obtain the documents (if and when available) free of charge at the SEC’s website, http://www.sec.gov, or for free from BAT at batir@bat.com / +44 (0) 20 7845 1000. Such documents are not currently available.
Participants in solicitation
This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Nonetheless, BAT, and its affiliates and each of their directors and executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the holders of Reynolds American common stock with respect to the Proposed Transaction. Information about such parties and a description of their interests are set forth in BAT’s 2015 Annual Report, which may be obtained free of charge from BAT’s website www.BAT.com and the proxy statement for Reynolds American’s 2016 Annual Meeting of Stockholders, which was filed with the SEC on March 23, 2016, Reynolds American’s annual report for the year ended December 31, 2016, which was filed on Form 10-K with the SEC on February 9, 2017 and Reynolds American’s Form 10-K/A, which is to be filed with the SEC on or before May 1, 2017 (such filings by Reynolds American, collectively, “Reynolds SEC filings”). To the extent holdings of Reynolds American securities by such parties have changed since the amounts contained in the Reynolds SEC filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties will also be included in the materials that BAT intends to file with the SEC in connection with the Proposed Transaction. These documents (if and when available) may be obtained free of charge from the SEC’s website http://www.sec.gov, or from BAT using the contact information above.
Non-solicitation
This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
This communication should not be construed as investment advice and is not intended to form the basis of any investment decision, nor does it form the basis of any contract for acquisition or investment in any member of the BAT group, financial promotion or any offer, invitation or recommendation in relation to any acquisition of, or investment in, any member of the BAT group.
British American Tobacco p.l.c.
Preliminary Results 2016
February 23, 2017
CORPORATE PARTICIPANTS
Nicandro Durante
Chief Executive
Ben Stevens
Finance Director
CONFERENCE CALL PARTICIPANTS
Fulvio Cazzol,
Goldmans - Analyst
Adam Spielman,
Citi - Analyst
Owen Bennett,
Jefferies - Analyst
Jonathan Leinster,
Berenberg - Analyst
Rey Wium,
Standard Bank Group Securities - Analyst
David Hayes,
Bank of America Merrill Lynch - Analyst
Chas Manso,
Société Générale - Analyst
PRESENTATION
Nicandro Durante - British American Tobacco plc – Chief Executive
Good morning everyone and welcome to British American Tobacco’s 2016 full year results presentation. I’m Nicandro Durante, Chief Executive of British American Tobacco, and with me this morning is Ben Stevens, Finance Director. And, as always, a warm welcome to those of you who may be listening on the conference call or watching via our website, bat.com.
After taking you through the results presentation there will be an opportunity for those of you in the audience here and also this time for those of you dialled into the conference call to ask questions.
Before I start the presentation I will take it as read that you have all seen and read the disclaimer on slides three and four.
I am pleased to announce that the Group delivered exceptionally good results in 2016, with strong growth across all our key business metrics, despite the continuing difficult economic environment.
EPS for the full year was up nearly 19% at current rates and over 10% at constant rates, exceeding our high single figure earnings growth target. This is an excellent performance given the fact that we have absorbed a 6% transactional FX impact on operating profit. Excluding this, currency neutral EPS would have been up around 16%.
In addition, I am very pleased about the progress we continue to make from our significant investments in the NGP category. We are now present in the five largest vapour markets in Europe and we are already the leading international vapour business.
Our recent launch of our tobacco heating product, Glo, in Japan is going well and early results are very promising. I will provide more detail on this later.
I am also excited about our recent announcement regarding the proposed acquisition of Reynolds American. Strategically, this is a great deal that will create one stronger, truly global tobacco and Next Generation Products business, with a world class portfolio of products and brands that can be leveraged on a global scale. The Board believes this is an attractive transaction for both Reynolds and BAT shareholders.
In recognition of the underlying strength of the business and demonstrating our commitment to growing shareholder returns, we have increased the dividend by 10%, in line with constant currency EPS growth.
I will now hand over to Ben who will take you through the detail of our 2016 results.
Ben Stevens
- British American Tobacco plc - Finance Director
Thank you Nicandro, and good morning everyone.
As Nicandro mentioned, 2016 was an outstanding year, driven by strong volume, revenue and share growth. The relative weakness of Sterling resulted in a translational FX tailwind; however, as previously highlighted, transactional FX remained a challenge, impacting operating profit by approximately 6%.
This slide shows some of our key business metrics. Reported cigarette volume grew 0.2% and organic volume was down only 0.8%, outperforming the industry, which we estimate to be down around 3%. This reflects our continued strong share growth of 50 basis points.
The GDBs delivered another excellent performance, with overall share growth of 100 basis points and volume up 7.5%.
Price mix was 6.7%, driven by good pricing across our markets. Reported revenue was up 12.6% and at constant currency was up 6.9%, with organic revenue growth of 5.3%.
Operating profit grew 9.8% at current rates of exchange and 4.1% on a constant basis, despite the absorption of a 6% transactional currency headwind, excluding this organic operating profit would have risen by around 10%.
Operating margin was down 90 basis points due to the impact of transactional FX, excluding this and with organic adjustments; underlying operating margin was up around 160 basis points. I'll give more detail on this later.
Constant currency EPS was up 10.4% to 230 pence, benefitting from our investment in the enlarged Reynolds American business and the buyout of the Souza Cruz minority. With translational FX turning in our favour in the second half, reported EPS increased strongly to 247.5p, up 18.8%.
Currencies remained a key feature of 2016. With the devaluation of sterling following the Brexit vote, the 4% translational headwind on operating profit in the first half of the year turned into a 15% tailwind in the second half, and a 6% tailwind for the full year.
However, transactional FX remained a challenge and was a 6% impact on operating profit for the full year. This was due to the timing of hedges rolling off and the scale of FX movements relative to the US dollar in a number of countries, including Russia, Japan and Ukraine.
Based on current spot rates and the timing of hedges, we would expect a transactional headwind of around 2% on operating profit for 2017. However, translational FX should remain a tailwind of 9% on operating profit and 10% on EPS at current exchange rates.
Turning now to margins. We continued to make good progress on the margin during 2016 with an underlying improvement of around 160 basis points. This was driven by pricing, together with significant product cost savings and the benefits of TaO efficiencies. However, this was more than offset by the transactional currency impact of around 210 basis points.
Organic margin was down just 50 basis points, and the effect of acquisitions in the prior year, left reported margin down 90 basis points.
As you know, on average over the years, we aim to grow our operating margin between 50 and 100 basis points per year and I remain confident in our ability to achieve this.
Turning now to the regions. Asia Pacific delivered its fourth consecutive year of strong share growth, up 30 basis points. This was driven by the continued momentum of the Global Drive Brands across the region, with strong performances from Dunhill in Indonesia, Kent in Japan, Lucky Strike in Indonesia and Rothmans in Australia and South Korea.
Volume in the region was down only 0.9%, despite significant excise-driven industry declines in Malaysia and Pakistan.
Regional revenue was flat at constant rates and profit was up 1%. This was mainly due to the impact of the excise increases and associated down trading in Malaysia and Australia. This masks strong revenue and profit growth at constant rates in a number of countries including Bangladesh, Pakistan, Vietnam and Sri Lanka. Excluding the impact of transactional FX regional profit would have increased around 6%.
In Australia, despite the down trading environment market share increased, driven by another strong performance from Rothmans.
In Malaysia, corporate share declined as Dunhill in the premium segment was impacted by the excise increase and growth in illicit trade. However, Peter Stuyvesant, the fastest growing brand in aspirational premium, performed well, partly offsetting the decline.
In Japan, BAT grew share, driven by Kent, in an industry down around 5%, due to strong growth in Next Generation Products. Including Next Generation Products, the industry declined around 2%.
Overall, reported revenue and operating profit in the region grew strongly as a result of the translational FX tailwind.
In the Americas, reported revenue grew 5% and profit was flat, driven by good performances from Canada, Chile and the Caribbean.
Volume was down 8.8%, largely due to industry decline in Brazil and Venezuela. However, volume increased in Mexico and Colombia.
At constant rates, regional revenue grew 11%. Profit grew 3% and would have increased by around 6%, excluding the impact of transactional FX.
In Brazil, continued excise and VAT driven price increases, together with a weak macro-economic environment, led to a significant industry volume decline, down trading and growth in illicit trade. Although overall share was down, Minister grew share strongly, capturing its fair share of down trading, and Dunhill increased its share of the premium segment by 50 basis points.
Canada delivered its fourth year of strong profit growth, driven by Pall Mall and a stable performance from DuMaurier.
Profit in Mexico was flat due to delayed pricing, but volume and share grew. Strong pricing offset currency devaluation and inflation in Venezuela, driving a decline in industry volume.
The Global Drive Brands performed well across the region with volume up 7.7% and share up 150 basis points. This was driven by good performances from Lucky Strike in Brazil and Chile, Pall Mall in Mexico and Canada, as well as successful migrations, including Consul to Pall Mall in Venezuela.
Western Europe delivered a strong set of results, as the economic recovery in the region continued.
Revenue grew strongly and was up 21% at current rates, 8% at constant rates, and 3.6% on an organic basis. This was largely driven by pricing in Germany and Romania and a good volume performance across the region.
Volume was up 6.7%, or 2.4% on an organic basis, strongly outperforming the industry, which we estimate to be down around 1.5%.
Share continued to recover and grew 10 basis points, driven by good performances in Romania, Poland and France.
Profit growth in Romania, Germany and Italy helped increase regional profit by 8% at constant rates and 21% at current rates. On a constant organic basis, profit was up 6.9% and, excluding transactional FX, would have increased around 9%.
In Romania, corporate share was up 130 basis points reaching 54.4%, reflecting record shares for Dunhill and Pall Mall.
In Germany, good profit growth was driven by pricing and a strong performance from Lucky Strike.
In Italy, Global Drive Brand share grew, driven by Rothmans and Lucky Strike. Profit was up following good pricing.
The integration of the TDR business is substantially complete, resulting in strong share growth of 120 basis points in Croatia.
EEMEA delivered another strong underlying performance, despite continuing economic and political challenges in the region.
Share growth of 140 basis points drove organic volume growth of 2.1%. This reflects an excellent performance from the Global Drive Brands, in particular Rothmans in Russia and Ukraine. Together with strong pricing, this led to constant currency organic revenue growth of 8.6% and profit growth of 4.3%.
Currency devaluations in Russia, Ukraine and Nigeria, again resulted in a large transactional FX impact. Excluding this, organic operating profit would have grown around 19%.
Corporate share in Russia was up 140 basis points, largely driven by the success of Rothmans, as well as growth in Yava and a stable performance from Kent. Profit was up significantly, despite the impact of transactional FX, as a result of strong pricing and volume growth.
Volume declined in South Africa, where trading remains difficult due to a weak macro-economic environment, currency devaluation and political instability.
In Turkey, share grew for the third consecutive year, driven by Kent and Rothmans. Volume growth, together with good pricing, led to significant profit growth.
Adjusted EPS of 247.5p at current rates was up nearly 19%, driven by growth in operating profit, together with excellent results from our associates, in particular the enlarged Reynolds American business, and an 8% translational currency tailwind.
Net Finance costs increased, mainly due to M&A funding.
The effective tax rate was lower at 29.8% due to a change in mix of profits.
Non-controlling interests were lower as a result of the buyout of the Souza Cruz minority.
Now, on to cash flow. Overall, free cash flow was £3,389 million, which is £92m lower than last year. However, excluding the non-recurring receipt in 2015 of £963m in the UK related to the Franked Investment Income Group Litigation Order, free cash flow was £871m or 35% higher. This was mainly due to higher operating cash flow conversion, up 1.7 percentage points to 93.5%, lower dividends paid to non-controlling interests and higher dividends received from associates.
Depreciation is the main component of non-cash items. Working capital outflows were slightly below last year at £254m, and were mainly due to stock builds linked to the timing of excise driven price increases.
Gross capex of £652m was £61m higher than 2015, largely due to investments in Next Generation Products. This was partly offset by asset sales, giving a net capex of £559m. Based on current rates, we expect gross capex in 2017 to be around £700m due to additional investments in Next Generation Products.
Net interest paid was slightly higher at £537m due to the full year impact of additional financing costs arising from prior year M&A activity.
Tax outflows were marginally below 2015 due mainly to the mix in taxable profits and payment timing.
Dividends paid to non-controlling interests of £147m were £88m lower due to the full year benefit of the acquisition of the Souza Cruz non-controlling interests.
Restructuring and settlement outflows were £231m higher primarily as a result of deposit payments linked to the Quebec Class Action lawsuit.
Dividends from associates were up £392m versus 2015 reflecting the full year benefit from the prior year investment in the enlarged Reynolds business, as well as participating in Reynolds’ share buyback programme.
This delivers free cash flow of £3,389m.
I’d like to finish off by touching on financing and shareholder returns. Net debt increased by £2bn to £16.8bn. The increase is primarily driven by a £1.7bn FX impact due to the devaluation of sterling against the US dollar and the euro. This leaves net debt to EBITDA at 2.9 times.
Following the announcement of our recommended offer for the remaining 58% of Reynolds American, S&P and Moody’s confirmed the Group’s credit ratings at BBB+/Baa2 stable. Given the highly cash generative nature of the business, we would expect to recover to BBB+/Baa1, in the medium term.
We have increased our full-year dividend in 2016 by 10%, whilst at the same time reducing our payout ratio to 68%. This is consistent with our stated intention to gradually return to our long term payout policy of 65%, once currencies turned in our favour. We remain committed to rewarding shareholders with an increasing dividend and continue to see 65% as a sustainable long term payout ratio, given the investment opportunities in the business.
Thank you and I’ll hand you back to Nicandro.
Nicandro Durante - British American Tobacco plc – Chief Executive
BAT has a very successful track record of developing strong brands and growing market share, through a consistent growth on superior consumer understanding, product quality and innovation.
I am pleased to say that this continued during 2016, with a record year of corporate share growth of 50 basis points, as measured by independent third party retail audit data.
This performance continues to be powered by the GDBs, which grew share by an impressive 100 basis points and volume by 7.5% in 2016.
This is on top of the 120 basis points of share growth and 8.5% volume growth the brands achieved in 2015.
Since 2010, our GDBs have added 520 basis points of share globally, with all five brands contributing to this strong performance. The GDBs now represent nearly 49% of our portfolio.
Dunhill performed well in a number of key markets. The brand held share overall and grew slightly within the Premium segment. This was a strong performance, given the impact of industry volume decline and down trading in Malaysia and Brazil, as a result of excise-driven price increases.
In Indonesia, Dunhill continued to grow both volume and share, and it is now the largest international kretek brand in the market with a 4.9% share, up 0.5%.
In Romania, Dunhill also achieved strong volume and share growth to reach a record market share of 6.5%.
Kent grew volume 1% and share 10 basis points as the result of good performances in Japan, Russia and Turkey, as well as the migration from Belmont to Kent in Chile.
In Russia, Kent grew premium segment share, driven by Nano, maintaining premium leadership.
In Turkey, Kent Spark Demi Slims and Kent Switch are driving share and volume growth.
Kent Spark and slimmer variants helped Kent reach a record brand share of over 8% in Japan.
Lucky Strike had another excellent year with volume up 13.5% and share up 10 basis points.
This was driven by strong performances in Germany, France, Chile and Italy, with the Black Series continuing to drive growth.
The brand was launched in Indonesia in May and had already achieved a share of nearly 0.5% by August. Following the migration of Club Mild in the second half, Lucky Strike has grown significantly, reaching a market share of 1.4% in December.
Pall Mall continued its good performance, with share up 10 basis points, driven by Pakistan, Romania, South Africa, Poland and Canada.
In Romania, Pall Mall remains the fastest growing brand in the market, driven by Extra Cut, and reached a record share of over 17%.
In Poland, following the successful launch of Tubes, the brand also reached a record share of 9% in December.
Finally, Rothmans delivered another outstanding performance, growing volume nearly 37% and share 70 basis points. Rothmans is our second largest GDB based on volume and maintaining these growth rates as the brand gets larger will clearly be more challenging.
Rothmans Demi Slims continued to drive the growth of the brand and launches such as Demi Click in Russia and Ukraine have become a major driver of Rothmans’ success in 2016.
In Turkey, Rothmans became the fastest growing brand in the market and, in December, reached a 4% share after only two years.
In Ukraine, it is also the number one brand in the market and in Russia; Rothmans is the fastest growing brand for the third consecutive year.
Turning now to NGPs. We have always said that our strategy is to invest in a range of products across the risk continuum that satisfy different consumer moments. That is why we are investing in both vapour and tobacco heating products.
BAT is already the largest international company in the vaping category, with a portfolio of products and an estimated combined share of 8.2% in the five largest vapour markets in Europe. Vype is now available across ten markets worldwide, with leadership positions in the UK and Poland.
In December last year, we launched Vype Pebble online in Italy, UK, Germany, France and Poland. Pebble starter kits sales are already two to three times higher than ePen sales were in these markets over the same time period.
In the UK, Vype is one of the fastest growing brands in UK retail, growing significantly to 9.5% at the end of the year and our retail share of the UK vapour market is now nearly 40%.
Vype distribution has expanded rapidly in the other European launch markets. It is now available in 5,300 outlets in Germany and 7,800 outlets in France. In Italy, Vype is now available nationwide, reaching 2.7% category share of retail in the first month of national presence.
Vype also continues to grow in Poland, with share in retail increasing from 4.7% in Q1 to 6.6% in Q4, largely driven by growth in liquid sales.
In addition, we are already working on the next platforms of the ePen and Pebble.
In the tobacco heating products area, we have also made excellent progress. As most of you will know, in December 2016 we launched Glo in Sendai, Japan, and results to date have been very encouraging. At the end of the first 10 weeks, Glo already has a 5.4% share in a leading convenience chain in Sendai and a 4.9% share in a second chain after six weeks. The two chains represent approximately 40% of total tobacco category sales in Sendai.
Consumer feedback is that they appreciate the simple and intuitive design, the back-to-back uses between charges and the easy to clean feature. The sensorial experience of both the tobacco and menthol variants also resonates with consumers. With prevailing excise rates, NeoStik margins are around 2.5 times higher than Kent combustibles in Japan.
We are very pleased with these early results and will be rolling out Glo nationally in Japan, in the second half. This will already be version 1.2 of Glo, which incorporates a number of product upgrades.
In Romania, iFuse, launched last year continues to perform well, with awareness, trial and sales growing. The product is now available in 800 outlets across Bucharest. We will launch an upgraded version in the coming months.
We have always said that we see a significant opportunity in NGPs and we are making great progress. We continue to believe that we should offer consumers a range of products in both the vapour and tobacco heating, as we believe that both categories have significant long term growth potential.
Our investment in NGPs continues to increase, and we plan to double our footprint in 2017 and we aim to double it again in 2018. With our strong portfolio of products, we believe we are well on track to capture a significant share of this growing market.
So, in summary, 2016 has been a very strong year for BAT. Excluding translational and transactional currency effects, revenue, profit and EPS, were up 7%, 10% and 16% respectively.
This is a very strong performance which was underpinned by record corporate share growth, driven by an outstanding performance from the GDBs.
We have increased the dividend by 10%, in line with constant currency EPS growth, recognising the underlying strength of the business and demonstrating our commitment to growing shareholder returns.
Although it is only early in the year, the trading environment continues to be tough, with challenging conditions in markets including Brazil, South Africa and Malaysia. But much like last year, we expect profit growth to be skewed to the second half. This is mainly due to the phasing of volume shipments in a number of key markets, including Pakistan as well as the timing of marketing spend and NGP investments.
Nevertheless, at this stage, I am confident of another good year of constant currency earnings growth.
Thank you, we will now open it for questions. First we'll take questions in the room and after that we'll go for those who dial in. So who would like to shot the first question?
QUESTION AND ANSWER
Fulvio Cazzol – Goldmans - Analyst
A couple of questions, could you give us a bit of an idea of how much product mix and geographic mix impacted 2016 revenues please?
And then the second one is on NGPs, could you give us also an indication of how much these contributed to 2016 net revenues for the Group?
And my final question is on the outlook on excise duties across your key markets, should there be anything in particular that you wanted to highlight for 2017 that could impact the volatility? Thank you.
Nicandro Durante - British American Tobacco plc – Chief Executive
In terms of portfolio and geographic mix it was a headwind in both, geographically because we grew substantially in places like South Asia, which is great for the business, the potential is fantastic and some of the high margin markets declined a little bit faster. So I think that the impact in our numbers for geo plus portfolio mix this year was around - the headwind of around 3.5%, both together, more on the geographic mix than the portfolio mix of course, much more.
And the second question about excise duties, well excise duties, we always have some - you know some headwinds at the beginning of the year, we have some this year. So you have an excise increase in Colombia in January 2017, that's going to be a headwind.
We have potentially one in the GCC, Saudi Arabia, that has not been confirmed yet, but there is a possibility that around March and April the government has released already their tax plans and they are talking about a substantial excise increase there.
The third one is in Russia, it's going to have a higher excise increase this year than last year, the pass on excise last year in terms of pricing was already around ten roubles, this year it is going to around 13 to 14 to cope with the excise increase, or a little bit higher. I am not that sure that in terms of consumer price there's going to be that difference, but we'd expect that Russia will decline a little bit faster next year, around 6.5; this year was 5.5 because of that.
So those are the main headwinds that we have. In places like Brazil we'll have a better excise environment. So we think that the industry is going to perform better in 2017 in terms of industry decline than it performed last year, that was around 9% decline, we expect for 2017 the industry to decline 2% because prices, excise price driven increases are going to be much lower.
The third question is about NGPs, I think the impact of NGPs in our numbers was extremely small in '16. 2017 will depend a lot on our performance in the market. But '16 was very small, really small. Adam?
Adam Spielman – Citi – Analyst
First of all a question on margins, you're reiterating the 50 to 100 basis points, can you just talk about that in the light of the fact of where we are with TaO and the savings from TaO? And also I guess what the means with the 2% transaction headwinds in 2017?
And then a separate question, you said on the footprint for NGPs you're going to double this and double this again, can you just explain what you mean by footprint, can you just be a bit more specific about it?
Nicandro Durante - British American Tobacco plc – Chief Executive
I'll go for the second question if you don't mind, we are adding around 11 markets in December 2016, we think that we can be in another 10 to 11 markets in 2017, and you can be in another 20 markets in 2018. So it's doubling '17, doubling '18, the number of the markets that we'll be present.
Adam Spielman – Citi – Analyst
And that will all be new vaping markets?
Nicandro Durante - British American Tobacco plc – Chief Executive
It will be vaping, plus tobacco heating products. For tobacco heating products we expect by the year end of '17 we will be able to launch in around five markets, with further expansion next year. We are learning with the launch in Japan, I have questions, I had some before coming here today about why we don't rollout in Japan faster, why don't we rollout to the other markets faster, but you have to understand that to launch this in December there will be a lot of learnings that you are taking, not only about the product, but also about the market mix. That's why we are going to rollout nationally in Japan in the second half, more the beginning of the second half than the end of the second half, and then we will launch in other markets at the end of the year.
We will come with an improved version of the Glo because we learn a lot, despite being an outstanding performance in the market, but we think that can do even better. So that's the plan.
Ben Stevens
- British American Tobacco plc - Finance Director
Yes, on operating margins I mean obviously we're delighted by growing underlying margin by 160 basis points this year, that's a tremendous achievement I think. The TaO programme we finished the rollout in Indonesia and in the Balkans in January this year, so even the acquisitions like TDR are already now on the TaO programme and we've got better and better at deploying TaO as we've got more and more experienced on it.
But of course that's just deploying the IT system; the actual cost savings come from how well you use that. So for example we're driving out now HR shared services, which is in addition to the TaO platform. That will have margin implications for us. We're getting better and better at sales operations planning as a result of the TaO programme, that means we carry less stock, we make less mistakes in terms of write-offs, things like that.
There are other services we can transfer into the shared service centres, things like tax compliance for example could be done out of shared services. I mean anything that's rule based activity should really sit in a shared service centre and everything that's judgement based activity should sit either in the centre or in the end markets. And we've got a long way to go to do that still, so I'm confident that we can continue to grow our operating margin over the years to come.
Now in terms of reported margin obviously we had a £300m hit on transactional FX this year, that goes down to £100m next year, but it's still a hit, so we've still got to overcome that. And of course the rollout of Next Generation Products will be lots of turnover but we'll be investing in that next year, so that won't come through to margin until 2018. But despite all of those things I remain confident that we can grow operating margin.
Owen Bennett
-
Jefferies - Analyst
A couple of questions please. Firstly, pricing and volume outlook in Brazil in this year please?
And then secondly just coming back to NGP investment, so PM said they're at a point now where they're going to reallocate resources from combustibles to NGPs in certain markets, will you be adopting a similar strategy or will investment be incremental to the combustible business?
Nicandro Durante
- British American Tobacco plc – Chief Executive
Okay the first question is about volume outlook in Brazil, I think that I mentioned before Brazil this year we had industry decline of around 9%, we expect next year to be around 1.5 to 2% only, because you have much lower excise increases in Brazil and much lower price increases in Brazil.
We had one in December and I think that pricing in Brazil are going to be much more manageable and so the impact in the market is going to be much more manageable. So that's the answer for Brazil.
Regarding resource allocation, well we do resource allocation on a daily basis in BAT and we used to do it between regions, among markets, now we do markets, region and categories. But it's not about taking money from combustible, it's about allocating resources in the right markets, in the right brands, in the right segments and when I say segments I'm talking about different categories. So I don't think that's going to be about - I'm launching this for example in Japan and I'll take money from the combustible business in Japan and I'll put it back in the NGP, it doesn't work like that.
So we will try to be smarter and smarter in the way that we allocate investments in a way that you can keep growing and why we keep launching the products.
Jonathan Leinster
– Berenberg – Analyst
I have a more general question, one of your competitors has noted that there seems to be very aggressive pricing actions in Russia recently and when France introduced a sort of turnover tax then some of the major players, including yourselves, didn't pass through that in terms of prices to consumers. In general do you think that price mix or pricing is becoming more aggressive within the industry as people search for market share?
Nicandro Durante - British American Tobacco plc – Chief Executive
Jon, of course I'm not going to talk about specific markets in terms of pricing going forward, we don't talk about that. But what I can say is we have a solid price environment nowadays, we had a good price environment in 2016. We are moving to 2017 - by today we have already 50% of the pricing of the year that you're expecting. So it seems to be a good price environment overall. But I'm not going to be discussing here market by market. But it's a good price environment, not that dissimilar than the one that had last year.
I think that now I think that we take some questions from the ones that have dialled if there is any?
Telephone Operator
Thank you. Our first question comes from the line of Rey Wium from SBG Securities. Please go ahead your line is open.
Rey Wium - Standard Bank Group Securities - Analyst
Good morning guys, also just a question on the NGPs, I just want to get a feel of - you know if I look at numbers from Reynolds, it's had a bit of a drag on operating profit, now I just want to get some clarity at what sort of level do you need to be in terms of volumes or markets penetration for the Next Generation Products to be sort of at breakeven?
And then I also have a quick question on the overall cost of debt, I'm not sure if I missed it, but Ben maybe if you can just give an indication if it was in the order of about 3.6, 3.7% this year?
Nicandro Durante
- British American Tobacco plc – Chief Executive
Okay, let me take your first questions about profitability and NGPs in terms of returns for the company. It is very difficult to answer your question on a global base; you have to look at this on a market by market. So if you look at for example Japan, I just gave you some numbers, our margins in Japan as compared to the consumable margins of tobacco heating products as compared to Kent combustible margins, 2.5, 2.6 times higher. That's very clear that is going to have a fantastic return for us in a short period of time. Probably not in '17 because you'll be launching nationally in the second half of the year, but I expect it to be accretive in terms of profit for next year.
In terms of vaping, and that is easier to talk market by market because if I decide next year to launch in another 100 markets of course we are going to start losing money because the amount of money that I'm going to be investing is going to be substantial. But as I said we expect to launch in another 11 countries this year, another 20 to 25 next year. So it's a very forward kind of expansion for the markets that give us the best returns.
But for example for vaping we launched in Germany last year and we got very good results in terms of market share in Germany, around 7 to 8% after a couple of months. we think that this year we'll start making money in Russia in vaping. So it depends market by market, it depends on the launch costs and things like that. so we expect that THP we will in the second year start making money, in vaping probably 12 to 24 months later we'll start making money as well.
But the margins in vaping as well are much higher than in combustible, which helps.
Rey Wium - Standard Bank Group Securities - Analyst
Okay thanks.
Ben Stevens
- British American Tobacco plc – Finance Director
Rey, our average cost of debt is 3.1%.
Rey Wium - Standard Bank Group Securities - Analyst
Okay, thank you
Telephone Operator
Thank you. Our last question comes from the line of David Hayes of Merrill Lynch. Please go ahead your line is open.
David Hayes - Bank of America Merrill Lynch - Analyst
Morning everyone, thank you. I'm going to go for three if I can. Just firstly on the Global Drive Brands you made the point that the success of Rothmans and the fact that the scale of that now means the growth may slow, I just wonder whether there's scope or plans for another Global Drive Brand to slot in and if that was the case what kind of brand positioning that would have moving forward?
And then the other two, just on the Glo 1.2 the variations that you’re making to the product I wonder if you can I guess simplistically explain maybe some of the things that you've learned and therefore what the new product will have that’s an adaptation of the original?
And then finally I think I probably know the answer to this one but I’ll ask it anyway, just in terms of the Reynolds synergies that you've talked about up till now, I just wonder whether you've done any more work on that and any more access at all following the Board approvals that means you can elaborate on some of the synergy outlooks? Thanks very much.
Ben Stevens
– British American Tobacco plc – Finance Director
I think the answer is no, no, no isn’t it?
Nicandro Durante
– British American Tobacco plc - Chief Executive
Ben just said the answer is no, no, no but I will try to elaborate on that. In the case of Rothmans the answer is no, we don’t expect to have another Global Drive Brands. We think that we have a fantastic portfolio now to meet consumer needs in different price and consumer segments. There is no plans to have another one.
In the case of Glo 1.2 it’s the one that’s going to be rolled out in Japan. Basically there are - I'm just simplifying with two basic features there are some improvements but the two basic features is the extended section length in terms of smoking and the second is a better retention of the consumable on the clean device. Those are the two main changes that you are going to go through.
Glo has been extremely well evaluated but we are always looking for new improvements and in this area the kind of innovations that you need to go through the product is a little bit different than combustibles because you have to keep improving this every six months. So we have already we are working heavily on a Glo 2.0 that should be available at the beginning of next year with some other improvements. So these will come as natural for BAT and as I said before, last year when I was squeezed here about why you haven’t launched and I said it that you are going to launch when you have the right products to go to the market. And then we have already the 1.2, 2.0 in the bag.
And the third question no. We haven’t done any more work on synergies. We can’t do any more work on the synergies with Reynolds unless shareholders approve the deal.
David Hayes - Bank of America Merrill Lynch - Analyst
I guessed that would be all. Thank you very much, cheers.
Telephone Operator
Thank you. I’ll now hand the call back to Nicandro.
Nicandro Durante – British American Tobacco plc - Chief Executive
Can I have one last question? Adam you have one more question or you have two more questions? So Adam?
Adam Spielman – Citi - Analyst
So can I ask a question about innovation excluding Next Generation Products? This year or 2016 volume increased by 12%. I guess would you hope to achieve or is it likely you'll achieve the same sort of volume growth on innovations in the conventional business?
And I guess also in your mind if you weigh up the relative importance of innovation on conventional business versus NGPs are they roughly equal importance or is one of those two buckets more important in your mind?
Nicandro Durante - British American Tobacco plc - Chief Executive
Okay let me start at the beginning by saying that we think we can grow another 12% easily because we have good plans in place. Not only rolling out the innovations that we have already in the market to other markets, to other brands, but also some new stuff coming through the pipe.
Secondly when you talk about importance everything is important. At the end of the day 100% of the profit of the industry nowadays more or less is in combustible. And you look at five years down the road it’s going to be still by a country mile the biggest part of profitability. So innovation in combustible is very important because it’s what going to deliver the funds for us to invest in other categories. So we want to keep innovating in combustible, and we keep offering consumers options to trade up and to come into our brands. This strategy is working by the way. If you look at in terms of operating profit this has been, and I don’t think that we have seen this before, measured by the independent panel Nielsen, the sixth year in which BAT is growing market share, corporate market share, with strong growth with the GDPs. I see no reason for slowing this down so we will keep investing in combustible.
And at the same time we are investing in Next Generation and here it is not about vaping or tobacco heating products, I think that both categories are going to be important. In some of the markets probably vaping is going to grow a little bit faster. As you saw in tobacco heating products, different markets they have different profiles and you know we had products available in different markets at the same time and one grew very fast, the other not. So you see markets will develop in a different way because consumers are different. So we keep investing in the three categories, vaping, tobacco heating products and combustible, and this is a model that has worked for us extremely well so far, no reason to change it.
Chas Manso - Société Générale – Analyst
I think the first question sort of follows on from that. Maybe you could highlight a few of the combustible launches that are already out there that you think will feature in 2017?
And then a couple on Next Generation. On the Sendai trial could you say whether your growth has been incremental to the category or whether it’s sort of taking share?
And more generally I think traditionally you've regarded the opportunity to be greater in vaping than in heat not burning, especially outside of Japan, and now you’re talking about launching into five markets outside Japan. Have your views changed on the potential between the different Next Generation formats?
Nicandro Durante
- British American Tobacco plc - Chief Executive
So the first question you talk about Glo share. It’s not been totally incremental to the category but it has helped the category to grow in Sendai. That’s the answer. But we are in the market for ten weeks; you need to wait a little bit more to have a better reading. We have our reading already after ten weeks but I think that’s too premature to have started drawing a percentage, but it’s very clear that it has been incremental to the category but we haven’t taken everything from - you know it has not been 100% incremental so the category is growing.
The second question about vaping being bigger or tobacco heating products being bigger what we always said is that those two categories have different qualities and they are going to grow in a different pace, it depends on the market. So we always said that in some markets probably vaping is going to do extremely well. Some others like Japan, tobacco heating products are going to do extremely well. Vaping nowadays is the biggest category but I think there is space for both. But you know at the end of the day it’s the consumer that’s going to decide which category is going to grow faster in each of the markets. Our role here is to offer the best products that we can offer with the best marketing mix in order to win in the category when the consumer decides to jump to one of those. That’s my role here, our role here so we are ready for that.
Your first question, can you repeat your first question?
Chas Manso - Société Générale – Analyst
Combustible launches in 2017.
Nicandro Durante - British American Tobacco plc
- Chief Executive
We have a lot of room to grow innovation but just rolling out what we have there. So we have a lot of innovation in the capsule with different capsules, flavours and double capsules and so on and so forth. We have the tube and we have some other innovations as well. So we have a lot to gain. But we will be launching some new stuff in the next year, but for obvious reasons, for competitive reasons, I cannot tell you which markets and which innovations we are going to launch. But watch this space.
Can I have one more question?
Fulvio Cazzol – Goldmans - Analyst
Taking another follow up, you highlighted £700m of capex guidance for '17. Can you give us any indication at all on what capacity you hope to have for the Glo refillables by the end of the year? Is that a number you can disclose?
Ben Stevens - British American Tobacco plc – Finance Director
Well we’re not going to disclose the rollout plans for Glo but obviously we'll be national in Japan by the end of the year and we’ll have plans well underway for launches in the other markets and the capacity planning supports that.
Nicandro Durante - British American Tobacco plc
- Chief Executive
Okay guys thank you for joining us for this conference call and being here present. If you have any more follow up questions you can contact our IR department. Thank you very much for coming.
Ben Stevens – British American Tobacco plc – Finance Director
Thanks guys.
---Conference call ends--
Disclaimer
Forward looking statements
Certain statements in this communication regarding the proposed merger of Reynolds and BAT (the “
Proposed Transaction
”), the expected timetable for completing the Proposed Transaction, the benefits and synergies of the Proposed Transaction, future opportunities for the combined company and any other statements regarding BAT’s, Reynolds’s or the combined company’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts are “forward-looking” statements made within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data within this communication. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: whether the conditions to the Proposed Transaction will be satisfied and the Proposed Transaction will be completed on the anticipated timeframe, or at all; the failure to realize contemplated synergies and other benefits from the Proposed Transaction; the incurrence of significant costs and the availability and cost of financing in connection with the Proposed Transaction; the effect of the announcement of the Proposed Transaction, and related uncertainties as to whether the Proposed Transaction will be completed, on BAT’s, Reynolds’s or the combined company’s ability to retain customers, retain and hire key personnel and maintain relationships with suppliers and on their operating results and businesses generally; the ability to maintain credit ratings; changes in the tobacco industry and stock market trading conditions; changes or differences in domestic or international economic or political conditions; changes in tax laws and rates; the impact of adverse legislation and regulation; the ability to develop, produce or market new alternative products profitably; the ability to effectively implement strategic initiatives and actions taken to increase sales growth; the ability to enhance cash generation and pay dividends; adverse litigation and dispute outcomes; and changes in the market position, businesses, financial condition, results of operations or prospects of BAT, Reynolds or the combined company.
Additional information concerning these and other factors can be found in Reynolds’s filings with the U.S. Securities and Exchange Commission (“
SEC
”), including Reynolds’s most recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and BAT’s Annual Reports, which may be obtained free of charge from BAT’s website www.BAT.com. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof and BAT undertakes no obligation to update or revise publicly any forward-looking statements or other data or statements contained within this communication, whether as a result of new information, future events or otherwise.
No statement in this communication is intended to be a profit forecast and no statement in this communication should be interpreted to mean that earnings per share of BAT or Reynolds for the current or future financial years would necessarily match or exceed the historical published earnings per share of BAT or Reynolds, respectively.
Additional information and where to find it
This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Any solicitation will only be made through materials filed with the SEC. Nonetheless, this communication may be deemed to be solicitation material in respect of the Proposed Transaction by BAT.
BAT intends to file relevant materials with the SEC, including a registration statement on Form F-4 that will include a proxy statement of Reynolds that also constitutes a prospectus of BAT. Investors and security holders are urged to read all relevant documents filed with the SEC (if and when they become available), including the proxy statement/prospectus, because they will contain important information about the Proposed Transaction. Investors and security holders will be able to obtain the documents (if and when available) free of charge at the SEC’s website, http://www.sec.gov, or for free from BAT at batir@bat.com / +44 (0) 20 7845 1000. Such documents are not currently available.
Participants in solicitation
This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Nonetheless, BAT, and its affiliates and each of their directors and executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the holders of Reynolds common stock with respect to the Proposed Transaction. Information about such parties and a description of their interests are set forth in BAT’s 2015 Annual Report, which may be obtained free of charge from BAT’s website www.BAT.com and the proxy statement for Reynolds’s 2016 Annual Meeting of Stockholders, which was filed with the SEC on March 23, 2016, Reynolds’s annual report for the year ended December 31, 2016, which was filed on Form 10-K with the SEC on February 9, 2017 and Reynolds’s Form 10-K/A, which is to be filed with the SEC on or before May 1, 2017 (such filings by Reynolds, collectively, “Reynolds SEC filings”). To the extent holdings of Reynolds securities by such parties have changed since the amounts contained in the Reynolds SEC filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties will also be included in the materials that BAT intends to file with the SEC in connection with the Proposed Transaction. These documents (if and when available) may be obtained free of charge from the SEC’s website http://www.sec.gov, or from BAT using the contact information above.
Non-solicitation
This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
This communication should not be construed as, investment advice and is not intended to form the basis of any investment decision, nor does it form the basis of any contract for acquisition or investment in any member of the BAT group, financial promotion or any offer, invitation or recommendation in relation to any acquisition of, or investment in, any member of the BAT group.
Chief Executive's review of the preliminary results for the year ended 31 December 2016 Nicandro Durante comments on our performance in 2016 The Group delivered a great set of results in 2016, with excellent growth seen across all key business metrics. This was achieved despite a challenging backdrop of adverse foreign exchange rates impacting our cost base and ongoing pressure on consumers’ disposable income in many of our Key Markets. Group revenue was up by 6.9% at constant rates of exchange, driven by good pricing - with price mix exceeding 6%. Reported revenue was 12.6% higher, reflecting the translational tailwind resulting from the relative weakness of sterling. On an organic basis, Group revenue was up by 5.3% at constant rates. At constant rates of exchange, adjusted profit from operations grew by 4.1% and adjusted diluted earnings per share grew by 10.4%. Adjusted profit from operations would have grown by approximately 10% were it not for the significant ongoing effect of adverse foreign exchange movements on our cost base during 2016. Underlying operating margin, excluding transactional foreign exchange and acquisitions, grew by around 160 bps. On a reported basis, it was down by 90 bps to 37.2%.
Agreement to acquire Reynolds American Inc. I am very pleased that we reached an agreement with the Board of Reynolds American in relation to the acquisition of the remaining 57.8% of Reynolds American that the Group does not currently own. This is a significant step towards the completion of this transaction and we look forward to putting the recommended offer to shareholders. Strategically, this deal will create a truly global business with a world class portfolio of tobacco and Next Generation Products which will be available across the most attractive markets in the world. Financially, it will be earnings accretive with enhanced cash generation while maintaining a solid investment grade credit rating. We expect the transaction to close during the third quarter of 2017, subject to obtaining the relevant shareholder and regulatory approvals. Combustible tobacco products Total Group cigarette volume for the full year was up 0.2%, to 665 billion. A 0.8% decline on an organic basis was considerably better than the industry, which we estimate to be down around 3.0%. Strong growth in 2016, with overall market share in our Key Markets increasing by 50 bps, was driven by the continuing momentum of our Global Drive Brands (GDBs). Total volume growth across the GDBs was an outstanding 7.5% and total market share growth was 100 bps. The GDBs now account for 49% of Group cigarette volume, up from 32% in 2011, demonstrating the key role they play in our growth strategy. Next Generation Products In 2016, we made significant progress with our differentiated strategy of developing and marketing a range of outstanding next generation tobacco and nicotine products, across both the Vapour and Tobacco Heating categories. Our Vapour Products business continues to perform very well and, following the geographic expansion of Vype™ in 2016, we are now present in ten markets and have the largest vapour business in the world outside of the US.
In the UK, our category retail share, as independently measured by AC Nielsen, has reached nearly 40% through the growth of Vype™ and the acquisition of Ten Motives. We also have an estimated market share of around 50% in Poland as well as category retail share of over 7% in Germany, over 4% in France and over 2% in Italy. In addition, we launched a new vaping concept in Europe called the Vype Pebble™ which we believe will enhance the overall category and increase consumer penetration. In December 2016, we launched a new-to-world Tobacco Heating Product, called glo™, in Sendai, Japan. Initial results are very encouraging, with glo™ gaining 5.4% volume share in a leading convenience store chain in Sendai after only ten weeks. Further roll-out and product upgrades are scheduled for 2017 and beyond. These innovations, alongside our exciting pipeline, demonstrate our commitment to meeting all of the differing preferences of our consumers, providing them with a choice of outstanding products across the risk continuum. Facing the future with confidence As these results demonstrate, our combustible tobacco business continues to perform extremely well and I am very pleased with the progress we are making in Next Generation Products. Both would be made stronger by our proposed acquisition of Reynolds American, creating what will become a truly global tobacco and Next Generation Products company, delivering sustained long-term profit growth and returns. Nicandro Durante 22 February 2017
Forward looking statements Certain statements in this communication regarding the proposed merger of Reynolds American and BAT (the “Proposed Transaction”), the expected timetable for completing the Proposed Transaction, the benefits and synergies of the Proposed Transaction, future opportunities for the combined company and any other statements regarding BAT’s, Reynolds American’s or the combined company’s future expectations, beliefs, plans, objectives, financial conditions, assumptions or future events or performance that are not historical facts are “forward-looking” statements made within the meaning of Section 21E of the United States Securities Exchange Act of 1934. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual future financial condition, performance and results to differ materially from the plans, goals, expectations and results expressed in the forward-looking statements and other financial and/or statistical data within this communication. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: whether the conditions to the Proposed Transaction will be satisfied and the Proposed Transaction will be completed on the anticipated timeframe, or at all; the failure to realize contemplated synergies and other benefits from the Proposed Transaction; the incurrence of significant costs and the availability and cost of financing in connection with the Proposed Transaction; the effect of the announcement of the Proposed Transaction, and related uncertainties as to whether the Proposed Transaction will be completed, on BAT’s, Reynolds American’s or the combined company’s ability to retain customers, retain and hire key personnel and maintain relationships with suppliers and on their operating results and businesses generally; the ability to maintain credit ratings; changes in the tobacco industry and stock market trading conditions; changes or differences in domestic or international economic or political conditions; changes in tax laws and rates; the impact of adverse legislation and regulation; the ability to develop, produce or market new alternative products profitably; the ability to effectively implement strategic initiatives and actions taken to increase sales growth; the ability to enhance cash generation and pay dividends; adverse litigation and dispute outcomes; and changes in the market position, businesses, financial condition, results of operations or prospects of BAT, Reynolds American or the combined company. Additional information concerning these and other factors can be found in Reynolds American’s filings with the U.S. Securities and Exchange Commission (“SEC”), including Reynolds American’s most recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and BAT’s Annual Reports, which may be obtained free of charge from BAT’s website www.BAT.com. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof and BAT undertakes no obligation to update or revise publicly any forward-looking statements or other data or statements contained within this communication, whether as a result of new information, future events or otherwise. No statement in this communication is intended to be a profit forecast and no statement in this communication should be interpreted to mean that earnings per share of BAT or Reynolds American for the current or future financial years would necessarily match or exceed the historical published earnings per share of BAT or Reynolds American, respectively.
Additional information and where to find it This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Any solicitation will only be made through materials filed with the SEC. Nonetheless, this communication may be deemed to be solicitation material in respect of the Proposed Transaction by BAT. BAT intends to file relevant materials with the SEC, including a registration statement on Form F-4 that will include a proxy statement of Reynolds American that also constitutes a prospectus of BAT. Investors and security holders are urged to read all relevant documents filed with the SEC (if and when they become available), including the proxy statement/prospectus, because they will contain important information about the Proposed Transaction. Investors and security holders will be able to obtain the documents (if and when available) free of charge at the SEC’s website, http://www.sec.gov , or for free from BAT at batir@bat.com / +44 (0) 20 7845 1000. Such documents are not currently available. Participants in solicitation This communication is neither a solicitation of a proxy nor a substitute for any proxy statement or other filings that may be made with the SEC in connection with the Proposed Transaction. Nonetheless, BAT, and its affiliates and each of their directors and executive officers and certain employees may be deemed to be participants in the solicitation of proxies from the holders of Reynolds American common stock with respect to the Proposed Transaction. Information about such parties and a description of their interests are set forth in BAT’s 2015 Annual Report, which may be obtained free of charge from BAT’s website www.bat.com and the proxy statement for Reynolds American’s 2016 Annual Meeting of Stockholders, which was filed with the SEC on March 23, 2016, Reynolds American’s annual report for the year ended December 31, 2016, which was filed on Form 10-K with the SEC on February 9, 2017 and Reynolds American’s Form 10-K/A, which is to be filed with the SEC on or before May 1, 2017 (such filings by Reynolds American, collectively, “Reynolds SEC filings”). To the extent holdings of Reynolds American securities by such parties have changed since the amounts contained in the Reynolds SEC filings, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding the interest of such parties will also be included in the materials that BAT intends to file with the SEC in connection with the Proposed Transaction. These documents (if and when available) may be obtained free of charge from the SEC’s website http://www.sec.gov , or from BAT using the contact information above. Non-solicitation This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. This communication should not be construed as investment advice and is not intended to form the basis of any investment decision, nor does it form the basis of any contract for acquisition or investment in any member of the BAT group, financial promotion or any offer, invitation or recommendation in relation to any acquisition of, or investment in, any member of the BAT group.