Annual Report and Form 20-F 2021
Annual Report and Form 20-F 2021
Explore the story of our year
Featuring downloadable versions
of this report, along with our
sustainability summary report and
other content – all accessible on
desktop, tablet and mobile.
www.bat.com/reporting
Go online
www.bat.com
@BATplc
youtube.com/welcometobat
Accelerating
A Better Tomorrow
Accelerating A Better Tomorrow
™
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
04
20
Sustainability
years
of
reporting
2021 was a pivotal year, marking our20th year in the Dow Jones
Sustainability Indices and 20 years since we produced our first SocialReport.
We’ve learned a lot alongthe way. Now we are buildingon these strong
foundations to accelerate progress towardsasustainable future and
createABetter Tomorrow™ forallour stakeholders.
Co-founded the
Eliminating Child
Labour in Tobacco
Growing (ECLT)
Foundation and
developed our first
policy to address
childlabour
International Marketing
Standards developed
Established the BAT
Biodiversity Partnership
Stakeholder dialogue
programme initiated
2000
2001
2002
2003
First tobacco
company listed
in the Dow Jones
Sustainability Indices
First Social Report
published for 2001
Employment
Principles
established
Reviewed our
globalpolicies
in dialogue with
stakeholders
Our first oral tobacco
product launched
Developed our first
Sustainability Agenda
using a best practice
materiality assessment
Set our first long-term
2030/2050 carbon
reduction targets
2005
2004
2007
Spread duplicated in Annual Report
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
05
CO
2
e
2013
2014
20192016
2017
Our first vapour
product launched
in the UK
Our first tobacco
heating product
launched
CO
2
e targets
approved by the
Science-Based
Targets Initiative
Signed up to the
UN-backed Race
to Zero global
campaign
Listed in the Dow
Jones Sustainability
Indices for the 20th
consecutive year
Thrive farmer
livelihoods
programme
developed
Enhanced global
ethics programme,
‘Delivery with
Integrity’, introduced
Carbon
Neutral
operations
(Scope 1 and 2)
50 million
non-combustible
product consumers
Accelerating
£5 billion
in New Category revenues
100%
of plastic packaging capable
of being reusable, recyclable or
compostable and unnecessary
single-use plastic removed
Zero
child labour ambition for our
tobacco supply chain
Net Zero
value chain
In October 2021, we signed
up to the UN-backed Race
to Zero global campaign,
committing to set science-
based targets aiming
for net zero value chain
emissions by 2050
2050
Our A Better Tomorrow
TM
ambitions in numbers
2030
2025
2021
2022
BAT
celebrates
120th
anniversary
Spread duplicated in Annual Report
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
04
20
Sustainability
years
of
reporting
2021 was a pivotal year, marking our20th year in the Dow Jones
Sustainability Indices and 20 years since we produced our first SocialReport.
We’ve learned a lot alongthe way. Now we are buildingon these strong
foundations to accelerate progress towardsasustainable future and
createABetter Tomorrow™ forallour stakeholders.
Co-founded the
Eliminating Child
Labour in Tobacco
Growing (ECLT)
Foundation and
developed our first
policy to address
childlabour
International Marketing
Standards developed
Established the BAT
Biodiversity Partnership
Stakeholder dialogue
programme initiated
2000
2001
2002
2003
First tobacco
company listed
in the Dow Jones
Sustainability Indices
First Social Report
published for 2001
Employment
Principles
established
Reviewed our
globalpolicies
in dialogue with
stakeholders
Our first oral tobacco
product launched
Developed our first
Sustainability Agenda
using a best practice
materiality assessment
Set our first long-term
2030/2050 carbon
reduction targets
2005
2004
2007
Spread duplicated in Annual Report
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
05
CO
2
e
2013
2014
20192016
2017
Our first vapour
product launched
in the UK
Our first tobacco
heating product
launched
CO
2
e targets
approved by the
Science-Based
Targets Initiative
Signed up to the
UN-backed Race
to Zero global
campaign
Listed in the Dow
Jones Sustainability
Indices for the 20th
consecutive year
Thrive farmer
livelihoods
programme
developed
Enhanced global
ethics programme,
‘Delivery with
Integrity’, introduced
Carbon
Neutral
operations
(Scope 1 and 2)
50 million
non-combustible
product consumers
Accelerating
£5 billion
in New Category revenues
100%
of plastic packaging capable
of being reusable, recyclable or
compostable and unnecessary
single-use plastic removed
Zero
child labour ambition for our
tobacco supply chain
Net Zero
value chain
In October 2021, we signed
up to the UN-backed Race
to Zero global campaign,
committing to set science-
based targets aiming
for net zero value chain
emissions by 2050
2050
Our A Better Tomorrow
TM
ambitions in numbers
2030
2025
2021
2022
BAT
celebrates
120th
anniversary
Spread duplicated in Annual Report
BAT Annual Report and Form 20-F 2021
d
To reduce the
health impact
of our business by offering
a
greater choice
of enjoyable
and
less risky
products
for
ourconsumers.
We are clear that combustible cigarettes pose serious health risks.
The only way to avoid these risks is not to start or to quit. However, we
encourage those who would otherwise continue to smoke to switch
completely to scientifically-substantiated, reduced-risk alternatives.
*†
In order to deliver this, BAT is transforming into a truly multi-category
consumer products business, with a mission to stimulate the senses
of new adult generations.
Our Purpose
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be
made as to these products without agency clearance.
Sustainability isn’t new at BAT. 2021 was a pivotal year, marking
our20th year in the DowJones Sustainability Indices and 20
years since producing our first Social Report. We’ve learned a lot
alongthe way. And now we are building on these strong foundations
to accelerate progress towards a sustainable future and create
ABetter Tomorrow™ for all our stakeholders.
20
years of
Sustainability
reporting
Strategic Report
Governance Report
Financial Statements
Other Information
01
BAT Annual Report and Form 20-F 2021
Inside This Report
Strategic Report
Overview
Chairman’s Introduction
02
Responding to the COVID-19 Pandemic
03
Chief Executive’s Review
04
Finance and Transformation Director’s Overview
07
Our Year in Numbers
09
Investment Case
10
Strategic Management
Our Global Business
12
Our Consumer-Centric Multi-Category Portfolio
14
Our Business Model
16
Non-Financial Information Statement
18
Engaging with our Stakeholders
20
UK Companies Act: Section 172(1) Statement
21
Our Markets and Megatrends
22
The Foundations of our Evolved Strategy
24
A Strategy for Accelerated Growth
26
Short-Term Deliverables
to Fuel A Better Tomorrow
TM
28
Simplify the Business
29
Delivering A Better Tomorrow
TM
For Consumers
34
Our Vapour Products
35
Our Tobacco Heating Products
37
Our Modern Oral Products
39
Our Traditional Oral Products
41
Our Combustible Products
42
Beyond Nicotine
44
For Society and the Environment
45
46
47
48
49
of Our Business
50
52
54
Robust Governance
56
TCFD Reporting
58
For Employees
68
Ethos
69
70
For Shareholders and Investors
74
75
80
Other
82
84
Business Environment
Group Principal Risks
92
Governance
Directors’ Report
Chairman’s Introduction on Governance
98
Governance
99
Board of Directors
100
Management Board
102
Leadership Overview
103
Board Activities in 2021
104
Board Engagement with Stakeholders
106
Principal Decisions Made by the Board
110
Governance Framework
111
Division of Responsibilities
112
Board Effectiveness
114
Nominations Committee
116
Audit Committee
120
Remuneration Report
Annual Statement on Remuneration
128
Responsibility of Directors
@
166
Financial Statements
Group Financial Statements
Independent Auditor’s Report
167
Group Companies and Undertakings
282
Parent Company Financial Statements
@
292
Other Information
Additional Disclosures
299
Shareholder Information
353
British American Tobacco p.l.c. (No. 3407696)
Annual Report 2021
This document constitutes the Annual Report and Accounts of British American Tobacco
p.l.c. (the Company) and the British American Tobacco Group prepared in accordance with
UK requirements and the Annual Report on Form 20-F prepared in accordance with the US
Securities Exchange Act of 1934 (the Exchange Act) and the rules promulgated thereunder for
the year ended 31 December 2021, except that certain phrases, paragraphs or similar sections
denoted with a ‘@’ symbol do not form part of the Annual Report on Form 20-F as filed with
the US Securities and Exchange Commission (the SEC) and certain phrases, paragraphs
or similar sections denoted with a ‘»’ symbol do not form part of the Annual Report and
Accounts. In addition, the Report of Independent Registered Public Accounting Firm on pages
176 and 177 will only be included in the Annual Report on Form 20-F. Moreover, the information
in this document may be updated or supplemented only for purposes of the Annual Report on
Form 20-F at the time of filing with the SEC or later amended if necessary. Any such updates,
supplements or amendments will also be denoted with a ‘»’ symbol. Insofar as this document
constitutes the Annual Report and Accounts, it has been prepared and is presented in
accordance with, and reliance upon, applicable English company law and the liabilities of the
Directors in connection with this report shall be subject to the limitations and restrictions
provided by such law.
This document is made up of the Strategic Report, the Governance Report, the Financial
Statements and Notes, and certain other information. Our Strategic Report, pages 2 to
97, includes our purpose and strategy, global market overview, business model, global
performance, as well as our financial performance and principal Group risks. The Strategic
Report has been approved by the Board of Directors and signed on its behalf by Paul McCrory,
Company Secretary. Our Governance Report on pages 98 to 166 contains detailed corporate
governance information, our Committee reports
@
and our Responsibility of Directors
@
.
The Directors’ Report on pages 98 to 127 (the Governance pages)
@
, page 166 (Responsibility of
Directors)
@
and 299 to 379 (the Additional Disclosure and Shareholder Information pages) has
been approved by the Board of Directors and signed on its behalf byPaulMcCrory, Company
Secretary. Our Financial Statements and Notes are on pages 167 to 281. The Other Information
section commences on page 299.
This document provides alternative performance measures (APMs) which are not defined
or specified under the requirements of International Financial Reporting Standards (IFRS).
We believe these APMs provide readers with important additional information on our
business. We have included a Non-GAAP measures section on pages 304 to 313 which
provides a comprehensive list of the APMs that we use, an explanation of how theyare
calculated, why we use them and a reconciliation tothe most directly comparable IFRS
measure where relevant.
British American Tobacco p.l.c. has shares listed on the London Stock Exchange (BATS) and
the Johannesburg StockExchange (BTI), and, as American Depositary Shares, on the New York
Stock Exchange(BTI).
The Annual Report is published on bat.com. A printed copy is mailed to shareholders on the
UK main register who have elected to receive it. Otherwise, shareholders are notified that
the Annual Report is available on the website and will, at the time of that notification, receive
a short Performance Summary (which sets out an overview of the Group’s performance,
headline facts and figures and key dates in the Company’s financial calendar) and Proxy Form.
Specific local mailing and/or notification requirements will apply to shareholders onthe South
Africa branch register.
References in this publication to ‘British American Tobacco’, ‘BAT’, ‘Group’, ‘we’, ‘us’and ‘our’
when denoting opinion refer to British American Tobacco p.l.c. and when denoting business
activity refer to British American Tobacco Group operating companies, collectively or
individually as the case may be.
The material in this Annual Report is provided for the purpose of giving information about
the Company to investors only and is not intended for general consumers. The Company,
its Directors, employees, agents or advisers do not accept or assume responsibility
to any other person to whom this material is shown or into whose hands it may come
andany such responsibility or liability is expressly disclaimed. The material in this Annual
Report is notprovided for product advertising, promotional or marketing purposes.
This material doesnot constitute and should not be construed as constituting an offer
to sell, or a solicitation of an offer to buy, any of our products. Our products are sold only
incompliancewith the laws of the particular jurisdictions in which they are sold.
References in this document to information on websites, including the web address of BAT,
have beenincluded as inactivetextual references only. These websites and the information
contained therein orconnected thereto are not intended to be incorporated into or to form
part of the AnnualReport and Form 20-F.
Cautionary statement
This document contains forward-looking statements. For our full cautionary statement,
please see page 352.
Explore the story
ofour year
Featuring downloadable
versions of this report,
along with our ESG report
and other content – all
accessible on desktop,
tablet and mobile.
www.bat.com/reporting
BAT Annual Report and Form 20-F 2021
02
Chairman’s Introduction
Accelerating A Better Tomorrow
TM
Overview
Welcome to our combined Annual Report
and Form 20-F for 2021.
2021 has been a year of accelerated
delivery, important strategic progress and
continued adaptation – all achieved in the
face of the ongoing pandemic.
Our teams around the world have worked
tirelessly to deliver strong results across
the business. Their efforts have helped
ensure we continue to perform well as we
build A Better Tomorrow
TM
by reducing the
health impact of the business, and, in so
doing, creating value for all stakeholders.
My appointment as Chairman was a great
honour. I have enormous respect for the
responsibilities that come with the role and
I will do my utmost to provide thoughtful
leadership to the Board and support for
Jack Bowles and his team as we advance
BAT’s transformation.
The strong position BAT occupies is a mark
of the work done by my predecessor as
Chairman, Richard Burrows. During his
tenure, Richard did an outstanding job of
guiding the Group through challenging
times. I want to thank him, on behalf of the
Board, for his dedication.
Having served as a Non-Executive Director
prior to my appointment as Chairman,
I am fortunate to have worked with
many colleagues on the Board for some
time. I believe we have a wide-ranging
combination of diversity, expertise,
experience and knowledge that will help
steer BAT through a landscape that is both
uncertain and full of opportunities.
Enhancing Organisational
Cultureand Capabilities
The Board is very encouraged by the
progress we have made this year in terms
of talent and culture. We have continued to
embed our ethos and have strengthened
skills in numerous key areas, notably digital
capabilities and the supply chain of our
NewCategory products.
Our people have continued to demonstrate
resilience and effectiveness in very
testing conditions. Their commitment to
our transformation has brought tangible
improvements to execution across the Group.
Jack and his leadership team have
developed a very coherent and compelling
cultural agenda founded on purpose and
responsibility. This has helped unite and
inspire colleagues. Our purpose to build
ABetter Tomorrow
TM
encapsulates why
weexist and what we aspire to accomplish
as an organisation.
Strong ESG Foundations
BAT has been on its sustainability journey
for more than 20 years. Sustainability and
ESG are a core part of our long-term business
strategy and are ingrained in our identity as a
responsible, purpose-led business.
We continue to invest significant resources
and energy in our sustainability agenda.
BAT has set ambitious targets, including
reaching 50 million consumers of its
non-combustible products by 2030, and
becoming carbon neutral in its operations
for Scope 1 and 2 by 2030 and net zero
across its wider value chain for Scope 1, 2
and 3 by 2050.
The performance of our New Category
products has propelled the number of
non-combustible product consumers to
18.3 million, ensuring we are well on track to
meetour 2030 target of 50 million consumers.
Our commitment to delivering carbon
neutrality was highlighted earlier this year
when Vuse became the first global carbon
neutral vape brand
*
.
Dividends and Share Buyback
The Board has declared a dividend of 217.8p
per ordinary share, payable in four equal
instalments of 54.45p per ordinary share,
to shareholders registered on the UK main
register or the South Africa branch register
and to American Depository Shares (ADS)
holders, each on the applicable record dates.
The dividends receivable by ADS holders in
US dollars will be calculated based on the
exchange rate on the applicable payment
dates. Further information on dividends can
be found on pages 79 and 354.
The Board has also announced a £2 billion
share repurchase programme for 2022,
as part of our commitment to enhance
shareholder returns.
Board Composition
Krishnan ‘Kandy’ Anand will join the Board
as an independent Non-Executive Director
and member of the Nominations and
Remuneration Committees from 14 February
2022. Dr Marion Helmes will step down as a
Non-Executive Director from the conclusion
of the 2022 Annual General Meeting and will
not stand for re-election.
Looking Forward
2021 was a pivotal year for BAT.
Our performance was strong, we are
building capabilities, actively managing
our portfolio and transforming our
culture. We expect 2022 to be a year of
further strategic progress and we remain
confident that we will meet our medium-
term targets as we continue to build
ABetterTomorrow
TM
.
Luc Jobin
Chairman
BAT has been on its sustainability journey
for more than 20 years. Sustainability and
ESG are a core part of our long-term business
strategy and are ingrained in our identity as
aresponsible, purpose-led business.
* As verified by Vertis based on product Life Cycle
Assessment data provided by an independent third
party, taking into account the Group’s purchase of
carbon credits through reforestation projects.
03
Other Information
Financial Statements
Governance Report
Strategic Report
BAT Annual Report and Form 20-F 2021
As the globalCOVID-19 pandemic continues to evolve, so does the Group’s
response. We remain fully committed tosupporting all our stakeholders
throughout the pandemic and have responded rapidly to the evolving situation,
taking action to protect their interests.
Keeping the Group Operating
inaTime of Crisis
The COVID-19 pandemic continues to
impact the lives of many people around
the world, with temporary restrictions and
lockdowns across many countries leading
to changes in consumer behaviour and in
our operating environments.
The Group continues to navigate the
challenges associated with the pandemic
with effective crisis management and
risk management processes in place, and
remains a financially resilient business.
Our Board has maintained close oversight
of the Group’s response to the impact of
COVID-19 throughout this period.
The Group remains financially robust,
@
with the 65% dividend pay-out ratio
of long-term earnings maintained.
This demonstrates the confidence in the
Group’s ability to continue to navigate
COVID-19 with the associated macro and
socio-economic challenges and uncertainty
this international crisis brings.
@
Looking After our People
Throughout the pandemic, we have prioritised
the health and wellbeing of our people.
We have not furloughed any staff or utilised
any government schemes (or subsidies) as a
result ofthe pandemic, other than in respect
of the deferral of tax instalment payments,
largely in the U.S. in 2020.
We continue to strictly adhere to guidance
from governments and public health
authorities, as well as our own health and
safety risk assessments, to ensure that our
workplaces are COVID-19 secure.
Our digital transformation has enabled us
to continue to utilise remote home working
when needed, ensuring all employees
and customers stay connected, while
continuing to invest in the development
of new capabilities through virtual
training programmes.
In many parts of the world, including our
global headquarters in the UK, we have
introduced a hybrid working model as
appropriate and as the local regulations allow.
We have implemented COVID-19-secure
workplace measures for employees who have
returned to their workplace. These include
regular cleaning and sanitising, temperature
checkpoints and COVID-19 testing.
For all employees, we are also making sure
they are aware of the extensive wellbeing
support available to them, including:
–
Online medical consultations;
–
Counselling services; and
–
Mental health support.
Vaccine Development
In December of 2020 an initial New Drug
Application for our COVID candidate vaccine
was approved by the U.S. Food and Drug
Administration (FDA) and we progressed into
a Phase 1 study. This study has now been fully
recruited and remains ongoing. We expect
data to be available during Q1 of 2022 and will
determine next steps based on these data,
but also the rapidly evolving COVID-19 and
treatment landscape.
In addition to the ongoing clinical studies,
further pre-clinical work was also completed
which reinforced the potential of the plant-
based platform. The team successfully
produced 19 different monoclonal antibodies
that met pharmaceutical requirements in
about 10 days, demonstrating the flexibility,
consistency and speed of the plant-based
system to produce clinical-quality antibodies.
To accelerate the research, development and
production of novel treatments, BAT launched
KBio Holdings Limited (KBio) in January 2022.
The company has been created to leverage
the existing and extensive plant-based
technology capabilities of BAT and Kentucky
BioProcessing Inc (KBP), the existing BAT-
owned U.S. plant biologics organisation.
Testing and Logistical Support
The forms of direct support we have
deployed to address the global impact
of COVID-19 have continued to evolve.
We have:
–
Provided personal protective
equipmentand other essential items
tocommunities in which we operate;
–
Loaned testing equipment to the
UK government;
–
Provided access to 3D printers to help
produce protective face shields; and
–
Donated to many funds around the
world focusing on supporting local
COVID-19 responses.
Supporting our Suppliers
andCommunities
Protecting the communities where we
operate is an important pillar of our
response to the pandemic.
We have harnessed our strengths in
science, engineering and logistics to
support national responses to COVID-19.
We have distributed thousands of
items of PPE, sanitation kits, food and
other essential items to our contracted
farmers and their communities.
We have also leveraged our existing farmer
communication channels, including mobile
apps, web portals, local media spots, videos
and fact sheets, to rapidly deploy essential
COVID-19 information, often to remote
rural communities.
Some tobacco growing communities may
be particularly vulnerable to both the virus
and the economic implications of a global
pandemic. We are taking great care that we
don’t increase the immediate vulnerability
of these communities and are committed
to supporting them during the inevitable
economic recovery that will follow.
Our response to the
COVID-19 Pandemic
BAT Annual Report and Form 20-F 2021
04
Overview
Chief Executive’sReview
A pivotal year on our journey to build A Better Tomorrow
TM
Dear Stakeholders,
2021 was a pivotal year in BAT’s
transformation. Our commitment to change,
while delivering value to stakeholders,
can beseen in the progress that has been
madeon our strategic priorities.
We
@
increased New Category revenue by
over 40% (or over 50% excluding foreign
exchange)
@
, reached a total of 18.3 million
(up 4.8 million) consumers of our non-
combustible products, New Categories
losses^ reduced for the first time,
contributing to earnings growth
@
and we
brought Group leverage down to c.3x
@
.
Foreign exchange has been a significant
headwind on our reported results, with
revenue down 0.4%. However, at constant
rates of exchange, we have delivered
strongfinancial results, with revenue up
6.9%
@
and with operating cash conversion
ahead of our target of at least 90%
@
.
As part of a new longer-term active capital
allocation framework, we have announced a
£2 billion share repurchase programme for
2022, in addition to maintaining a growing
dividend. This reflects our commitment to
enhance shareholder returns.
I would like to thank all our people and
ourpartners for their continued focus
andcommitment in delivering our
strong results throughout this difficult
COVID-19 period.
With strong foundations in place, we
nowembark on the next phase of our
journey – Faster Transformation – towards
A Better Tomorrow
TM
: £5 billion of revenue
and profitability from New Categories by
2025 and development of opportunities
Beyond Nicotine, leveraging our knowledge
and capabilities from New Categories.
Building A Better Tomorrow
TM
Our purpose of building A Better Tomorrow
TM
by reducing the health impact of our
business means that we are committed
toour business transformation.
During 2021, our focus has been on
developing and delivering consumer-
focused products and brands:
–
The growth, from 13.5 million to
18.3 million, in consumers of non-
combustible productswas our strongest
to date;
–
Non-combustible products now account
for 12% of Group revenue, up from 4%
in 2017;
–
Revenue from our vapour products was
up 52%, with our global brand, Vuse,
now the leading global vapour brand by
value share;
–
Following volume share gains in ENA and
Japan, revenue from our THP, glo, was up
34%; and
–
Revenue in the Modern Oral category,
largely through Velo, was up 39%.
As consumer preferences and technology
rapidly evolve, the availability of
scientifically-substantiated, less risky
*†
products is crucial to effective tobacco
harm reduction and we are determined to
transform our business.
ESG Front and Centre
Sustainability has been central to our
business and ethos for more than
two decades.
In 2001, we established our first group-wide
environment, health and safety systems,
the BAT Biodiversity Partnership and a
programme of independently facilitated
social dialogue. This year, we published
our20
th
ESG Report.
2021 was a pivotalyearinBAT’s
transformation. Our commitment
tochange, while delivering value to
stakeholders, can be seen in the
progress thathas been made on
ourstrategic priorities.
Aspart of a new longer-
term active capital allocation
framework,
we have announced
a £2 billion share repurchase
programme for 2022, to
enhance shareholder returns,
in addition to growing our
dividend.
With strong foundations
in place,
we now embark on
the next phase of our journey
– Faster Transformation
–
towards A Better
Tomorrow
TM
.
* Based on the weight of evidence and assuming
a complete switch from cigarette smoking.
These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak, and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made as
tothese products without agency clearance.
As consumer preferences
and technology rapidly evolve,
the availability of scientifically-
substantiated, less risky
*†
products is crucial
to effective
tobacco harm reduction and
weare determined to transform
our business.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
05
Our strategy has a clear focus on
environmental, social and governance
(ESG) priorities, including addressing
climate change and excellence in
environmental management, delivering
a positive social impact and ensuring
robustcorporate governance.
We have many bold ESG targets, including
becoming a carbon neutral business by
2030 and making all plastic packaging
reusable, recyclable or compostable
by 2025.
In 2021, we also signed up to the UN-
backed Race to Zero global campaign
and committed to setting science-based
targets aiming for net zero value chain
emissions by 2050.
Our sustainability actions have long been
recognised externally and, in 2021, we were
named in the Dow Jones Sustainability
Indices (DJSI) for the 20th consecutive year.
We continue to strive for excellence and
look for new ways to reduce our resource
use, preserve the natural environment,
improve thelives of farmersand
communities, and uphold robust
corporategovernance standards.
Our Performance for Year Ended
31 December 2021
We performed strongly across our
key indicators during the year ended
31 December 2021.
Due to a foreign currency headwind of 7.3%,
revenue was lower than 2020 (down 0.4%)
at £25,684 million. At constant rates of
exchange, the Group revenue increased 6.9%.
Currency headwinds also impacted profit
from operations, increasing by 2.7% to
£10,234 million with diluted earnings per
share up 6.0%.
Excluding adjusting items and the impact
of foreign exchange, adjusted profit from
operations, at constant rates of exchange,
grew by 5.2% and adjusted diluted earnings
per share grew by 6.6%.
Reported operating margin grew by 120
bps to 39.8%. On an adjusted basis, it fell by
70bps at current rates.
We have continued to demonstrate the
ongoing strength of the Group in turning
operating performance into cash
@
with
operating cash conversion of 104% (partly
due to the structural excise changes in
Australia), aheadof our target of at least
90%, being a key contributor in delivering
ourdeleveraging ambitions
@
.
^ Based upon Category Contribution – defined as profit
from the sale of brands after directly attributable costs
(including marketing expenses) and before the allocation
of overheads
Delivering a Step Change
inNewCategories
Fundamental to building A Better Tomorrow
TM
is the acceleration of our transformation
and investing to provide our consumers
with enjoyable, less risky
*†
products.
We encourage those consumers who
would otherwise continue to smoke
to switch completely to scientifically-
substantiated, reduced-risk alternatives
*†
.
Each of our New Category brands grew
revenue by more than 30%, with total
New Categories revenue up 42.4% to
£2,054 million. Excluding the impact of
foreign exchange, adjusted revenue from
New Categories, at constant rates of
exchange, grew 50.9%.
The performance of our reduced-risk
*†
portfolio of New Category products,
encompassing our strong global brands,
Vuse, glo and Velo, places us on track to
reach the targets we set ourselves of:
–
£5 billion of revenue and profitability
inour New Categories by 2025; and
–
50 million consumers of non-combustible
products by 2030.
Driving Value from Combustibles
The continued performance of our
combustibles business will generate
the funds necessary to invest in New
Categories and transform the business.
Group cigarette value share increased
by10 bps compared with 2020, driven by
the continued positive performance of
thestrategic cigarette brands in the U.S.
(up 80 bps).
Group cigarette volume share fell 10bps.
Pricing continued to be strong, with
combustibles price/mix of 4.3%.
Group cigarette volume was largely in
line with 2020, down just 0.1% to 637 bn
sticks, (with the industry estimated to be
broadly in line with 2020), driven by our
performance in emerging markets and
partly due to trade inventory movements in
the U.S. (mainly linked to the timing of price
increases and uncertainty about a potential
excise increase) which are expected to
unwind in early 2022.
@
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
Group cigarette
value share
increased by
10 bps
compared
with 2020,
driven by the
continued positive performance
of the strategic cigarette brands
in the U.S. (up 80 bps).
Each of our
New Category
brands grew revenue by more
than
30%, with total New
Categories revenue up 42.4%
to£2,054 million.
We
performed strongly
across our key indicators
during the year ended
31December 2021.
Our strategy has a
clear
focus on environmental, social
and governance (ESG) priorities,
including addressing climate
change and excellence in
environmental management,
delivering a positive social
impact and ensuring robust
corporate governance.
BAT Annual Report and Form 20-F 2021
06
Simplifying the Business
The next phase of our transformation
to build A Better Tomorrow
TM
focuses
on creating a sustainable Enterprise of
the Future.
Across the business, we are already
seeing the benefits of our organisational
transformation programme, Quest, which
has been designed to enhance our existing
strengths and extract further value for the
business. The five Quest accelerators are:
–
Quantum
, our multi-year simplification
programme, which continues to drive
efficiencies and, in 2021, enabled
incremental annual savings of
£595 million;
–
Unleashing Innovation
is becoming
increasingly ingrained across the
business. Our digital hubs, corporate
venturing initiative and innovation
centres are helping us stay ahead, while
our continued investment in R&D enables
us to satisfy or anticipate consumer
preferences and generate growth for the
business across all categories;
–
Empowering our Organisation
and
enabling our people to deliver remains
a key driver of growth. We are providing
more tools and training across the
business to support and drive new ways
of working;
–
Shaping Sustainability
continues to
be front and centre in our decision-
making, finding ways of accelerating and
connecting our sustainability journey
with our purpose; and
–
Technology and Digital
is advancing at
speed, with new digital channels, data
and analytics supporting growth of our
New Categories in e-commerce with
margins above other retail channels and
higher customer loyalty.
Confidence in Our Future
The BAT of tomorrow will be a high-
growth, consumer goods company: global,
consumer-centric and multi-category.
We are confident in delivering a faster
transformation, continued robust financial
performance and superior cash returns to
shareholders in what remains a turbulent
external environment.
Quest is delivering this enterprise of the
future, an organisation with sustainability
at its core, founded on strong global brands,
driven by innovation, enabled by digital tools
and technology, simplified by Quantum, and
powered by our people.
Through this transformation we are
committed to generating sustainable
shareholder and societal value – building
ABetter Tomorrow
TM
.
Jack Bowles
Chief Executive
Chief Executive’sReview
Continued
Overview
@
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
Across the business, we are
already seeing the
benefits of our
organisational transformation
programme, Quest.
Quest is delivering this
enterprise of the future, an
organisation
with sustainability
at its core, founded on strong
global brands, driven by
innovation, enabled by digital
tools and technology, simplified
by Quantum, and powered by
our people.
Through this transformation
we are committed to
generating
sustainable shareholder
andsocietal value – building
ABetter Tomorrow
TM
.
The next phase of our
transformation to build
ABetter Tomorrow
TM
focuses
on creatingasustainable
Enterpriseof the Future.
The
BAT of tomorrow will be
a high-growth, consumer goods
company:
global, consumer-
centric and multi-category.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
07
Finance and Transformation
Director’s Overview
Group Transformation
Underpinned by Financial Delivery
2021 was a pivotal year in our
transformational journey. We have
delivered a step change in New Categories,
reconfigured our business capabilities
for the future, delivered value through
combustibles and deleveraged the balance
sheet. We believe these achievements
position us well for the future, and have
allowed us to deliver growth in our key
financial indicators (excluding translational
foreign exchange impacts) inthe year.
Pricing and New Categories
DriveRevenue Growth
Revenue declined 0.4% to £25,684 million
compared to 2020 (while 2020 was
marginally lower than 2019, down 0.4% to
£25,776 million).
Revenue from New Categories was up 42.4%
in 2021 and 14.9% in 2020, while combustibles
pricing remained strong (particularly in the
U.S.), with Group price/mix of 4.3% in 2021
compared to 7% in 2020. Price/mix was lower
largely due to negative geographic mix as
markets began to recover from the impact
of COVID-19, the impact of structural excise
changes and a competitive environment in
Australasia (estimated at £260 million) and
the disposal of the Group’s operations in
Iran. These were partly offset by the benefit
of trade inventory movements in the U.S.
(the impact of which is estimated to be
£200 million and expected to unwind in 2022).
A translational currency headwind, due to
the relative strength of sterling, negatively
impacted both periods, by approximately
7.3% in 2021 and 3.5% in 2020.
On a constant currency basis, revenue
was up 6.9% in 2021 and 3.3% in 2020, with
2020 also negatively impacted by COVID-19
(approximately 2.5%) due to the disruption
and restrictions affecting certain markets
(including South Africa and in Global
Travel Retail).
Growth in Profit from Operations
While InvestinginNew Categories
Profit from operations increased by 2.7%
to £10,234 million, with 2020 up 10.5%
to £9,962 million. Revenue growth, a
reduction in losses from New Categories
and operational efficiencies achieved under
the Group’s restructuring programme
(Project Quantum) were partly outweighed
by the translational foreign exchange
headwinds and a transactional foreign
exchange headwind of 1.7%. 2021 included
a number of one-off items, including in
respect of the disposal of the Group’s
subsidiary in Iran (£358 million related
to foreign exchange losses and asset
write-off costs), an impairment charge of
£54 million in Peru and a combined credit
in the U.S. of £94 million (related to the
partial buy-out of the pension fund and the
finalisation of the dissenting shareholders
litigation). However, these were lower than
those recognised in 2020 in respect of
goodwill impairment (£209 million largely
related to Malaysia) and charges in the
U.S. (£400 million) largely related to the
state settlement agreements in respect of
brands sold to a third party inaprior period.
Our operating margin was 120 bps higher at
39.8% in 2021 (2020: up 380 bps to 38.6%).
On an adjusted constant currency basis,
profit from operations grew by 5.2% (2020:
up 4.8%). This was driven by higher revenue
and efficiencies delivered in both 2021 and
2020 as part of Project Quantum
@
(which
increased its delivery expectations from
£1 billion to £1.5 billion)
@
and lower losses
from New Categories. Adjusted operating
margin (at current rates) fell 70 bps to
43.4% (2020: up 100 bps to 44.1%), partly
due to the proportionate growth in New
Categories revenue (with the Group
continuing to invest in those categories),
higher revenue in lower margin markets and
a transactional foreign exchange headwind
of 1.7%.
Revenue growth from
NewCategories performance
and strong combustibles
pricing, particularly in the U.S.,
more than offset by foreign
exchange headwinds.
@
We have increased our
Quantum enabled savings
expectations from £1 bn
to£1.5bn.
@
Profit from operations
wasup 2.7% (2020:up 10.5%), as
growth in revenue and reduction
in losses from New Categories,
a strong combustibles pricing
environment and operational
efficiencies were partly offset
byforeign exchange.
In this pivotal year, we have grown
New Categories revenue, invested in the
future of the business and deleveraged.
This has allowed us to continue toreward
shareholders with higher dividends and
announce a £2 billion share repurchase
programme. Webelieve we are well placed
tomaximise our future potential.
Financial Review
BAT Annual Report and Form 20-F 2021
08
Finance and Transformation
Director’s Overview
Continued
Financial Review
Future Funding De-Risked
ThroughProactive Action
Our liquidity profile remains strong, with
average debt maturity close to 10 years
and maximum debt maturities in any one
calendar year of around £4 billion.
In September 2021, the Group issued
perpetual hybrid bonds totalling €2 billion.
These euro-denominated securities
contribute to a more efficient alignment
of the Group’s earnings currency.
They also contribute to the diversification
of the Group’s sources of funding and
further strengthens its capital structure.
The issuance provides the additional
benefit of supporting the deleveraging
journey with the addition of a small benefit
to the credit metrics.
@
Our medium-term
rating target remains BBB+/Baa1, with a
current rating ofBBB+/Baa2
@
*.
Net finance costs in 2021 were £1,486 million,
a decrease of 14.8% on 2020 (£1,745 million,
itself an increase of 8.9%). The reduction in
2021 was partly driven by a foreign exchange
tailwind. However, 2020 included net
charges of £142 million in respect of the early
redemption and tender offer in that year as
the Group reduced future refinancing risk
by raising £8.9 billion in the US dollar, euro
and sterling markets, using the proceeds to
repurchase and redeem £3.1 billion of bonds.
This de-risked the future repayment profile
by securing lower interest rates and future
liquidity in uncertain times. On an adjusted,
constant rate basis, net finance costs declined
4.5% in 2021 (2020: up 5.9%).
As part of the Group’s de-risking of future
funding, during 2020 gross interest cover
ceased to be a covenant in the Group’s
debt facilities.
EPS Growth Underpins
DividendIncrease
On a reported basis, basic EPS was up
6.0% at 296.9p (2020: up 12.1% at 280.0p)
with diluted EPS up 6.0% to 295.6p (2020:
up 12.0% to 278.9p), largely due to the net
reduction in adjusting charges in 2021 and
lower net finance costs, which more than
offset the impact of foreign exchange on
the Group’s operations.
Excluding the adjusting items (discussed on
pages 76 and 77) and the effect of foreign
exchange on the Group’s results, adjusted
diluted earnings per share, at constant
rates, increased by 6.6% to 353.5p, with
2020 ahead of 2019 by 5.5%.
Cash Generation Drives
DebtDeleveraging
We continue to focus on a balanced
approach of deleveraging, while investing
for the future and providing a return via
dividends to shareholders.
The Group’s cash conversion ratio,
based upon net cash generated from
operations, was 95% (2020: 98%)
@
and
the operating cash conversion ratio was
104% (2020: 103%)
@
. The Group realised
£9.7 billion (2020: £9.8 billion) of net cash
generated from operating activities,
@
or £2.5 billion (2020: £2.6 billion) of free
cash flow after dividends – which is a
measure the Group uses to assess total
cash generated by the Group with which
torepay borrowings.
@
Consequently, in 2021, total borrowings
(including lease liabilities) have reduced from
£43,968 million in 2020 to £39,658 million in
2021, due to the net repayment of borrowings
in the year (including refinancing via issuance
of perpetual hybrid bonds) and a currency
tailwind of £409 million (2020: tailwind of
£219 million). @We continued to deleverage
our balance sheet with adjusted net debt
to adjusted EBITDA ratio improved from
3.3times to 3.0 times.
@
Active Capital Allocation
Framework
Our deleverage and cash flow generation
provide the flexibility to adopt a more active
capital allocation framework to deliver long-
term value for shareholders.
This will include:
–
continuing to grow the dividend:
–
mainitaining our target leverage
corridor
@
of 2-3x adjusted net debt /
adjusted EBITDA
@
;
–
potential bolt-on M&A opportunities; and
–
share buybacks to enhance
shareholder returns.
The Board will prioritise capital allocation
opportunities each year in-line with
this new longer-term active capital
allocation framework, while continuing
to take into account macro and fiscal
influences, and potential regulatory and
litigation outcomes.
As a first step, we have announced a
dividend increase of 1.0% to 217.8p (with
a dividend pay-out ratio of 66.2%) and a
£2 billion share repurchase programme
for 2022.
Tadeu Marroco
Finance and Transformation Director
We remain committed to
consistent and sustainable
long-term 3-5% revenue
growth(excluding currency)
anda growth in dividend.
Dividends per share
increasing by a further 1.0%,
underpinned by the financial
strength of our business .
Cash flow generation
remains extremely robust,
allowing us to deleverage while
investing for the future.
The Group continues to
deliver against the financial
objectives. This has allowed
theGroup to continue to
rewardshareholders with
growth individends and
announce a £2 billion share
repurchase programme
all while investing in
A Better Tomorrow.
* A credit rating is not a recommendation to buy, sell
or hold securities. A credit rating may be subject
to withdrawal or revision at any time. Each rating
should be evaluated separately of any other rating.
@
form part of BAT’s Annual Report on Form 20-F as
filed with the SEC.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
09
IFRS-GAAP
Non-GAAP
KPI
Our performance metrics
Target/Ambition
2021
%
2020
%2019
Consumer
Number of Non-Combustible
Product Consumers
50 million consumers by 2030
18.3m
13.5m
10.5m
Market Share
Cigarette and THP volume share growth (bps)
Grow by 0-10 bps (2021)
+10 bps
+30 bps
+20 bps
•
Cigarette and THP value share growth (bps)
+20 bps
+20 bps
+30 bps
Volume
Cigarettes (bn sticks)
637
0%
638
-5%
668
Other Tobacco Products (bn stick equivalents)
18
-9%
20
-2%
21
Vapour (mn 10ml units/pods)
535
+56%
344
+52%
226
THP (bn sticks)
19
+79%
11
+19%
9
Modern Oral (mn pouches)
3,296
+70%
1,934
+62%
1,194
Traditional Oral (bn stick equivalents)
8
-4%
8
-1%
8Financial
Revenue (£m)
25,684
-0.4%
25,776
-0.4%
25,877
•
Adjusted Revenue at cc (%)
1,2
3-5% CAGR
+6.9%
+3.3%
• •
Revenue from New Categories (£m)
£5 billion by 2025
2,054
+42.4%
1,443
+14.9%
1,255
•
Revenue from New Categories at cc (%)
1
+50.9%
+15.4%
• •
Profit from Operations (£m)
10,234
+2.7%
9,962
+10.5%
9,016
•
Adjusted Profit from Operations atcc (%)
1, 2
Increase 4.0% to 6.5% (2021)
+5.2%
+4.8%
• •
Operating Margin (%)
39.8%
38.6%
34.8%
•
Adjusted Operating Margin (%)
2
43.4%
44.1% 43.1%
•
Diluted Earnings per Share (p)
295.6
+6.0%
278.9
+12.0%
249.0
•
Adjusted Diluted Earnings per Share (p)
2
@
5-10% CAGR
@
329.0 -0.8%
331.7
+2.4%
323.8
• •
Adjusted Diluted Earnings per Share at cc (%)
1, 2
@
5-10% CAGR
@
+6.6%
+5.5%
• •
Dividends per Share (p)
217.8
+1.0%
215.6
+2.5%
210.4Dividend Pay-Out Ratio (%)
@
65% of long-term earnings
@
66%
65% 65%
Net Cash Generated from Operating Activities (£m)
9,717
-0.7%
9,786
+8.8%
8,996
•
@
Free Cash Flow after Dividends (£m)
2,543
-0.3%
2,550
+32.7%
1,921
•
Cash Conversion (%)
95%
98%
100%
•
@
Operating Cash Conversion (%)
85-95% each year on average
104%
103%
97%
• •
Borrowings, including Lease Liabilities (£m)
39,658
-9.8%
43,968
-3.1%
45,366
•
@
Adjusted Net Debt to Adjusted EBITDA (ratio)
2
Around 3.0x by year end 2021
3.0x
3.3x
3.5x
• •
@
Adjusted Return on Capital Employed (%)
2
9%
10%
9%
Total Shareholder Return (rank)
17 of 24
20 of 23 21 of 23
•
ESG
Find our key ESG goals, targets and metrics
in our ESG Roadmap on page 47.
Our Year in Numbers
Please refer to pages 304 to 313 for definitions of the Non-GAAP measures. See the section ‘Non-Financial Measures’ on page 302 for moreinformation on these non-financial KPIs.
1. Where measures are presented ‘at constant rates’ or ‘at cc’, the measures are calculated based on a re-translation, at the prior year’s exchange rates, ofthe current year results
of the Group and, where applicable, its segments. See page 83 for the major foreign exchange rates used for Group reporting.
2. Where measures are presented as ‘adjusted’, they are presented before the impact of adjusting items. Adjusting items represent certain items of income and expense which
the Group considers distinctive based on their size, nature or incidence.
BAT Annual Report and Form 20-F 2021
10
Investment Case
Overview
Transformation Driving
SustainableGrowth
Delivering growth by reducing harm
andexpandingour portfolio
Reducing the Health and Environmental
Impact ofour Business
Creating value for all our stakeholders
£5bn
New Categories revenue
targeted by
2025
Net Zero
across the supply
chain
(scope 3) by
2050
Carbon
Neutral
Scope 1 and Scope 2 (CO
2
e
emissions) by 2030
20
th
consecutive year in the
Dow
Jones SustainabilityIndices
50mn
Non-Combustible product
consumers
targeted by
2030
1.1 bn
consumers
in global
combustibles market with
the potential
to convert to
reduced-risk products
*†
12%
Group revenue from
Non-Combustibles
100%
of
plastic packaging
capable of beingreusable,
recyclable orcompostable
and unnecessary single-use
plastic removed
by
2025
* Based on the weight of evidence and assuming a complete switch from cigarette smoking.
These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are
subject to FDA regulation and no reduced-risk claims will be made as to these products
without agency clearance.
^
A rating, whether by Refinitiv or any other organisation, is not a recommendation to buy, sell
or hold securities. A rating may be subject to withdrawal or revision at any time. Each rating
should be evaluated separately from any other rating. In addition, the criteria used in ratings
may differ among ESG rating organisations. Companies may also supply different information
to such organisations (or none at all) and this lack of consistency may impact rankings.
Companies may also supply different information to such organisations (or none at all) and
this lack of consistency may impact rankings.
Our corporate purpose is to build A Better Tomorrow
TM
. Reducing
the health impact of our business, by encouraging those smokers
who would otherwise continue to smoke to switch completely
to scientifically -substantiated, reduced-risk alternatives
*†
, is the
greatest contribution we can make to society. This means growing
our New Categories business as fast as possible and developing
opportunities Beyond Nicotine to consolidate our position as ahigh
growth, multi-category consumer products company.
Revenue growth in the global nicotine industry is accelerating through
the development of New Categories, which offer reduced-risk
alternatives to combustible products.
*†
To capitalise on this growth, our established consumer-centric, multi-
category strategy is activated on a global scale, leveraging our insights
on consumer satisfaction, innovation needs and taste. We are building
strong global brands, specifically positioned in each target consumer
segment. In addition, we are taking a disciplined approach to our Beyond
Nicotine strategy to further drive our transformation and long-term
business sustainability.
We have set ourselves ambitious targets to reach 50 million consumers of
our non-combustible products by 2030, with revenue reaching £5 billion
(and profitability) from New Categories by 2025. These ambitions will
bemet through the delivery of our three clear strategic priorities:
–
to drive a step change in New Categories, to accelerate growth
supported by increased investment;
–
to generate value through Combustibles, to provide the
capabilities and funding; and
–
to simplify the Group, to create a stronger, faster, more
agile organisation.
Our work to reduce the health and environmental impact of the
business will drive growth and create shared value, delivering
results that benefit shareholders and wider society.
We will continue to create a stronger BAT by:
–
focusing on excellence in environmental management;
–
delivering a positive social impact; and
–
adhering to robust corporate governance.
This builds on our strong ESG foundations including our status as:
–
the first tobacco company to produce a Sustainability Report
in 2001;
–
publication of a Human Rights focus report in 2020, the first of its
kind by a tobacco company to be aligned with the UN framework
of Human Rights reporting;
–
named in the Dow Jones Sustainability Indices for 20 consecutive
years; and
–
named third highest ESG-rated FTSE 100 company by Refinitv
in2020^.
Our commitments are anchored in challenging targets against
which we will track and share the progress of our transformation –
including achieving Net Zero across our supply chain by 2050.
Meanwhile, our ‘delivery with integrity’ programme is focused
onensuring that our ethical standards are never compromised
forthesakeof results.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
11
Creating the Enterprise of the Future
Leveraging proven expertise and developing
newcapabilities to deliver our ambitions
Continuing our Track Record
of Delivery
Commitment to deliver returns
andcashtoshareholders
18.3m
consumers of our
non-
combustible products
3-5%
medium-term
revenue
growth
target (at cc)
High Single Digit
medium-term adjusted diluted
EPS growth
target(at cc)
@
6%
dividend CAGR
over10 years
>11m
points ofsale
>150mn
daily consumer
interactions
@
£1.5bn
annualised savings
targetedby
2022
@
>90%
operating cash
conversion
targeted
annually
@
>175
markets
in which
we operate
9%
adj. diluted
EPS average growth
(atcc)
over 10 years
@
onForm 20-F as filed with the SEC.
Our New Category portfolio benefits from decades of insights
and expertise that have driven our No. 1 global revenue position
in combustibles (excl. China). This combined with increased
investment behind newcapabilities gives us confidence that
we can deliver our medium- to long-term ambitions.
Our three global New Category brands leverage the benefits
of our world-class R&D and our manufacturing, distribution,
marketing and brand building capabilities, which are supported
by our unrivalled global footprint across 175+ markets, with more
than 11 million points of sale, reaching more than 150 million
consumers daily.
Together with our long-standing experience operating within
complex regulatory, legal and fiscal frameworks, these provide
BATwith a compelling competitive advantage to drive portfolio
growth and transformation within the wider tobacco industry.
@
Through Project Quantum, our ongoing business simplification
and efficiency programme, we aim to achieve a minimum of
£1.5 billion of annualised savings by the end of 2022 to invest in
new capabilities
@
. Building on Quantum’s success to date, Quest
will accelerate our organisational and business transformation
programme, driving next generation innovations:
–
new digital capabilities;
–
empowering our people; and
–
enhancing our future sustainability.
Through Quest, we are creating the Enterprise of the Future.
We are attracting new senior talent from a diverse range of
industries globally to further enhance our capabilities, which
willenable us to deliver on our growth ambitions over the
mediumto long term.
We are confident in our growth outlook, and have
aproven track record of performance whatever
theexternal environment.
Over the last 10 years, we have delivered 9% adjusted diluted
EPS growth (at constant rates) and a 6% dividend CAGR and are
confident in our medium-term targets of 3-5% revenue growth,
increased operating margin and high-single digit adjusted EPS
growth (at constant rates).
This will be driven by:
–
accelerated New Category revenue growth;
–
continued value growth in combustibles; and
–
business simplification to eliminate cost and improve returns,
tobecome a stronger, simpler, more agile organisation.
@
With strong profitability, >90% operating cash conversion and
leverage at c.3x adjusted net debt / adjusted EBITDA
@
, we have
adopted a more active capital allocation framework to deliver
long-term value for shareholders. This will include:
–
continuing to grow the dividend;
–
maintaining our target leverage corridor
@
of 2-3x adjusted net
debt / adjusted EBITDA
@
;
–
considering potential bolt-on M&A opportunities; and
–
share buybacks to enhance shareholder returns.
BAT Annual Report and Form 20-F 2021
12
Our Global Business
ENA £6.0bn
APME £4.2bn
AmSSA £3.8bn
U.S. £11.7bn
United States
of America
U.S.
Americas and
Sub-Saharan Africa
AmSSA
Strategic Management
Our performance across
New Categories is accelerating
and we now have over 18m
consumers of non-combustible
products.
The U.S. business continues
its accelerated journey towards
ABetter Tomorrow
TM
. We delivered
a year of outstanding results,
withvapour fast approaching
value leadership.
The growth of New Categories
across AmSSA, including our
Canadian subsidiary cementing
its leadership of the closed system
vapour category, demonstrates our
excellent post-COVID-19 recovery.
Paul Lageweg
Director,
New Categories
Guy Meldrum
President and
CEO (Reynolds
American Inc.)
Luciano Comin
Regional Director,
AmSSA
To build A Better Tomorrow
TM
, our marketplace analysis delivers insights
regarding consumer trends and segmentation, which facilitates our
geographic brand prioritisation across over 175 markets. Our business is
divided into four complementary regions, with a balanced presence in both
high-growth emerging markets and highly profitable developed markets.
To achieve a step-change in New
Categories, we are creating the Enterprise
of the Future – building new capabilities
around the world focused on science,
innovation and digital information.
Consumer preferences and technology
are evolving rapidly, and we are staying
ahead ofthe curve with our digital hubs,
the creation of innovation hubs and further
development of our world-class R&D
laboratories. We are also leveraging the
expertise of our external partners and are
looking forward to exciting results from our
venturing initiative, Btomorrow Ventures.
Revenue by region
£25.7bn
Total revenue
for more key detail on our
Regional Performance,
see pages 84 to 91
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
13
Europe and
North Africa
Asia-Pacific and
Middle East
ENA
APME
Map is accurate as at 31 Dec 2021 and is representative
ofgeneral geographic regions and does not suggest that
theGroup operates in each country of every region.
141
nationalities
175+
markets
150m
daily consumer interactions
18.3m
non-combustible
product consumers
52,000+
employees
In 2021, we published the
6-month results from our one-
year study of our flagship THP, glo.
The biggest study we have ever
undertaken, it makes a significant
contribution to the evidence-base
for this category.
I’m delighted that APME
approached 4m active
consumers of non-combustible
products in 2021, driven by a
strong performance from our
New Category platforms.
Across ENA, revenue from
New Categories grew 74%,
powered by the roll-out of glo
Hyper. It augurs well that, in
key THP markets, our segment
share is approaching overtaking
combustibles.
Johan
Vandermeulen
Regional Director,
ENA
Michael (Mihovil)
Dijanosic
Regional Director,
APME
Our supply chain has shown exceptional resilience
against major global challenges, including the semi-
conductor shortage and unprecedented logistics
volatility. This is testament to our industry-leading
capabilities, collaboration with our suppliers and the
commitment of our people throughout the pandemic.
Zafar Khan
Director, Operations
Dr David O’Reilly
Director, Scientific
Research
BAT Annual Report and Form 20-F 2021
14
BAT is a leading consumer-centric, multi-category consumer goods business
dedicated to stimulating the senses of adult consumers worldwide. Our portfolio
reflects our commitment to meeting the evolving and varied needs of today’s adult
consumer who seeks sensorial enjoyment for different moods and moments.
Revenue by productcategory
Strategic Portfolio
These are our key brands in both the
combustible andnon-combustible
categories. This ensures focus and
investment on the brands and categories
that will underpin the Group’s future
performance. The strategic portfolio is:
Non-Combustibles
All brands within New Categories and the
strategic traditional oral brands in moist
and snus.
Combustibles
Dunhill, Kent, Lucky Strike, Pall Mall,
Rothmans, Newport (US), Natural American
Spirit (US), Camel (US).
The Group sold 637 billion
cigarette sticks and 18 billion
OTP (stick equivalents) in
2021. The Group operates
in over 175 markets, with
42fully integrated cigarette
manufacturing facilities in
40 markets.
Vapour
THP
Handheld, battery-powered
devices that heat a liquid (called
an e-liquid, usually containing
nicotine) and creates a vapour
tobe inhaled.
THPs do not burn tobacco, so
no smoke (which is a key source
of toxicants) is produced.
Research indicates that by
heating tobacco rather than
burning it, THPs have the
potential to be reduced-risk
compared to smoking.
Traditional Oral products
contain tobacco, but there is
no burning. There is strong
epidemiological evidence, from
countries such as Sweden,
that switching completely to
snus can reduce risk compared
to smoking.
This is our most recent
innovation across oral products
– offering consumers a
satisfying experience with a
range of different flavours.
Two formulations are available:
one containing lower levels of
tobacco, and one that contains
nicotine but no tobacco.
Modern
Oral
Traditional
Oral
Our Reduced-Risk Portfolio (Non-Combustibles)
*†
Combustibles
New Categories
Our Consumer-Centric
Multi-Category Portfolio
New Categories £2.1bn
Traditional Oral £1.1bn
Combustibles £22.0bn
Other £0.5bn
Strategic Management
£25.7bn
Total revenue
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made
astothese products without agency clearance.
Category
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
15
30
markets where
our vapour
products are
currently available
25
markets where
our THPs
are currently
available
23
markets where
our modern oral
products are
currently available
3
markets where
our traditional
oral products are
currently available
U.S. specific
Global Drive Brands
Market Footprint
BAT Annual Report and Form 20-F 2021
16
A Better
Tomorrow
TM
for:
Society
Consumers
Employees
Shareholders
and investors
Read more about
these Stakeholders
on pages 20 and 21
07
Market
08
Sell
09
Insights
01
Insights
03
Innovate
05
Manufacture
06
Move
04
Source
02
Science
SPOTLIGHT:
Source
Direct
product
materials
1,500+
tier 1 suppliers of filters,
paper, adhesives,
vapour devices,
e-liquids, etc.
Strategic lower tier
Batteries,
packaging, etc.
Indirect
goods and
services
30,000+
suppliers of logistics,
marketing, IT services,
facilities management, etc.
Subject to the industry’s Sustainable
Tobacco Programme, supported
by farm-level monitoringand,
in selected countries,
humanrightsimpact assessments
Tobacco
Tobacco
Subject to human rights risk
assessments and independent
audits by Intertek for those
withthe highest risks
Other materials,
goodsand services
42%
third parties:
sourcing from 250,000+
farmers
58%
BAT leaf
operations,
contracting
75,000+ farmers
Total
tobacco
sourced
Our Nine-Step Business Model
Strategic Management
Our global business understands our diverse consumers, develops products to satisfy
their preferences and ultimately distributes them across over 175 markets.
Seven key enablers support us in turning powerful insights intoproducts that provide
enjoyment to our consumers, while engagement helps our key stakeholders benefit
from our sustainable growth.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
17
Seeing Over
theHorizon
As one of the most long-standing
and established consumer goods
businesses in the world, we have a
unique view of the consumer across
our product categories, which is
increasingly driven by powerful data
and analytics. These insights ensure
that the development and responsible
marketing of our products is fit to
satisfy consumer needs.
Driven by our unique and data-driven
consumer insight platform (PRISM),
we focus on product categories and
consumer segments across our global
business that have the best potential
for long-term sustainable growth.
Link to risks
Tobacco, New Categories and other
regulation interrupts growth strategy
Inability to develop, commercialise and
deliverthe New Categories strategy
Accelerating Tobacco
Harm Reduction
World-class science is needed to
substantiate the quality, safety
and reduced-risk potential of our
New Category products. This is
crucial for building consumer trust
and encouraging adult smokers
to completely switch to less
risky alternatives
*†
.
We have an extensive scientific
research programme in a broad
spectrum of scientific fields,
including molecular biology,
toxicology and chemistry. We are
transparent about our science and
publish details of our research
programmes on our dedicated website,
www.bat-science.com,andtheresults
of our studies in peer-reviewed journals.
Link to risks
Inability to develop, commercialise and
deliverthe New Categories strategy
Read more about our science
on pages 19, 31, 35, 37, 39
and 50
Staying Ahead
oftheCurve
As consumer preferences and
technology rapidly evolve, we rely
on our growing global network of
digital hubs, innovation hubs, world-
class R&D laboratories, external
partnerships and our corporate
venturing initiative, Btomorrow
Ventures, to stay ahead of the curve.
Driving sustainable growth is at the
core of our innovation. We make
significant investments in research
and development to deliver
innovations that satisfy or anticipate
consumer preferences and generate
growth for the business.
Led by our strength in developing
consumer insights, each innovation
helps us on our journey to build A
Better Tomorrow™ by reducing the
health impact of our business.
Link to risks
Inability to develop, commercialise and
deliver the New Categories strategy
Sourcing Materials
Responsibly
The majority of our tobacco is sourced
by our own BAT leaf operations
through direct contracts with over
75,000 farmers. The remainder is
from third-party suppliers that, in
turn, contract with an estimated
264,000 farmers. The vast majority of
tobacco farms in our supply chain are
smallholder family farms.
Beyond tobacco, we source product
materials like paper and filters for
cigarettes and, for our New Category
products, we have a growing supply
chain in consumer electronics and
e-liquids. We also have a vast number
of suppliers of indirect goods and
services that are not related to our
products, such as for IT services and
facilities management.
Link to risks
Geopolitical tensions;
Injury, illness or deathin the workplace;
Solvency and liquidity
Read more about oursupply
chain on pages 52 to 55
Utilising our Global
Manufacturing Footprint
We manufacture high-quality
products in facilities all over the world.
We also ensure that these products
and the tobacco leaf we purchase are
in the right place at the right time.
Our New Category products are
manufactured in a mix of our own
and third-party factories. We work
to ensure that our costs are globally
competitive and that we use our
resources as effectively as possible.
Link to risks
Injury, illness or death in the workplace
Disputed taxes, interest and penalties
Foreign exchange rate exposures
Geopolitical tensions
Solvency and liquidity
Marketing our
ProductsResponsibly
Tobacco and nicotine products should
be marketed responsibly to adult-
only consumers and not designed to
appeal to youth.
Through a globally responsible
approach to marketing, we help
to raise standards and prevent
underage access, while growing our
market share and encouraging adult
consumers to choose our products
over our competitors.
Our International Marketing Principles
(IMP) govern our marketing across
all product categories. They include
strict requirements to be responsible,
accurate and targeted at adult
consumers only. Our IMP are applied
even when they are stricter than
local laws.
Link to risks
Tobacco, New Categories and other
regulation interrupts growth strategy
Inability to develop, commercialise and
deliver the New Categories strategy
Litigation
Foreign exchange rate exposures
Read more about reponsible
marketing on page 57
Moving our Products
Seamlessly Everywhere
By applying modern technologies,
including AI and machine learning, we
ensure our products are where they
are needed when they are needed.
Our products are sold around the
world and we distribute them
effectively and efficiently using a
variety of distribution models suited
to local circumstances and conditions.
These distribution models include
retailers, supplied through our direct
distribution capability or exclusive
distributors, and our Direct-to-
Consumer business – which has been
accelerated through the deployment of
owned e-commerce sites.
Link to risks
Tobacco, New Categories and other
regulation interrupts growth strategy
Inability to develop, commercialise and
deliver the New Categories strategy
Litigation
Foreign exchange rate exposures
Significant increases or structural changes
in tobacco, nicotine and New Categories
related taxes
Offering Consumer
Choice
We have a powerful brand portfolio
that we are proud of. Our global
brands are well positioned, with
leading-edge insights, science
and innovation behind our
product pipeline.
We offer adult consumers a range
of products, including combustible
products, vapour, modern oral and
THPs, in markets around the world.
Our range of high-quality products
covers all segments, from value-for-
money to premium.
Link to risks
Competition from illicit trade
Significant increases or structural changes
in tobacco, nicotine and New Categories
related taxes
Foreign exchange rate exposures
Geopolitical tensions
Disputed taxes, interest and penalties
05
Manufacture
03
Innovate
04
Source
02
Science
01 and 09
Insights
07
Market
06
Move
08
Sell
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are subject to FDA regulation and no reduced-risk claims
willbe made astothese products without agency clearance.
BAT Annual Report and Form 20-F 2021
18
Strategic Management
A Better Tomorrow
TM
for:
Our Business Model
Continued
Read more about
these Stakeholders
The greatest contribution
we can make to society is by
reducing the health impact
of our business. We will do
this by encouraging those
smokers who would
otherwise continue to smoke
to switch completely to
scientifically-substantiated,
reduced-risk alternatives
*†
.
Achieving this sustainably,
working to reduce our
impacton the environment,
iscentral to delivering
ABetter Tomorrow™.
Measured by
–
18.3m consumers of non-
combustible products
–
75% of plastic packaging
that is reusable, recyclable
or compostable
–
42.7% reduction in
Scope 1 & 2 emissions from our
2017 baseline
Measured by
–
25 countries where tobacco
heating products are available
–
30 countries where vapour
products are available
–
23 countries where modern oral
products are available
Measured by
–
Accredited as Global Top Employer
by the Top Employers Institute
–
79% Engagement Index score in
our Your Voice employee survey
–
0.20 Lost Workday Case Incident
Rate (LWCIR) vs 0.22 in 2020
–
Proportion of women in
management roles grew to 39%
Measured by
–
3-5% revenue growth over the
medium term;
–
@
high-single digit adjusted EPS
growth at constant rates of
exchange, over the medium term;
–
65% dividend payout ratio; and
–
deleveraging the balance sheet to
within our 2-3x adjusted net debt/
adjusted EBITDA range.
@
Our consumers are at the core
of everything we do and our
success is underpinned by
addressing their preferences,
offering them a choice of
enjoyable, innovative and less
risky products
*†
.
We employ 52,000+ people
worldwide. Attracting and
retaining an increasingly
diverse workforce and
providing a welcoming,
inclusive working
environment are key drivers
in BAT’s transformation
journey to build A Better
Tomorrow™.
Our focus is on providing
a dynamic, inspiring and
purposeful place to work.
We are committed to
delivering sustainable and
superior returns to our
shareholders and investors.
It is essential that we
maintain the support of our
shareholders and investors
to enable access to capital.
This allows us to implement
our strategy and achieve
ourbusiness objectives.
Suppliers Customers
Our customers include retailers,
distributors and wholesalers who
are essential for driving growth
and embedding responsible
marketing practices.
Across the BAT Group, we work with
thousands of different suppliers
worldwide. Our suppliers are
valued business partners and we
believe, by working together, we can
raise standards, drive sustainable
practices, create shared value and
build A Better Tomorrow
TM
for all.
Non-financial information statement
Environmental matters
pages 48 and 52 to 53
Our business model is
set out on page 16
See pages 92 to 97 for
Group Principal Risks
Social matters
pages 48 to 50, 54 to 55
Employees
pages 58 to 63
Respect for human rights
pages 48 and 54 to 55
Anti-bribery and anti-corruption matters
pages 48 and 56 to 57
Further details of our Group
policiesandprinciples can be
foundatwww.bat.com
Consumers
Society
Shareholders
&Investors
Our People
Our reporting in the following areas includes information about the
policiesandprinciples that govern our approach, due diligence processes,
outcomes and non-financial performance indicators:
Non-financial information reporting required
underthe UK Companies Act isincluded in
theStrategic Report as referenced below:
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
19
SPOTLIGHT:
Science
Tobacco and nicotine
products that involve
no combustion
Tobacco and nicotine
products that
involve combustion
Conventional
cigarettes
Tobacco Heating
Products (THPs)
Traditional
oral products
Modern
Oral Products
Vapour products
(E-cigarettes)
Nicotine products
that contain no
tobacco and involve
no combustion
The toxicant continuum
†
Level of toxicants
High
Low
NRT
Why Harm Reduction Matters
‘Tobacco Harm Reduction’ is an
important public health strategy that
aims to minimise the harm caused
by combustible products. Key to this
is encouraging adult smokers, who
would otherwise continue to
smoke, to switch completely to
scientifically-substantiated, reduced-
risk alternatives
*†
.
For harm reduction to be effective,
alternatives are needed that deliver
comparable satisfaction in nicotine
delivery, use, and sensorial aspects.
To enable consumer choice, we have
three New Category alternatives
available – vapour products, tobacco
heating products and modern
oral products – backed by world-
class science.
Assessing the Reduced-Risk
Potential of our Products
* †
To achieve tobacco harm reduction,
reduced-risk assessments need to be
supported by robust science. That’s
why we created our leading scientific
research programme – and openly
shareits findings.
Most non-combustible products remain
relatively new to the market. This means
they lack the epidemiological data
required to establish harm reduction
potential over decades of use. It’s
necessary to take a weight-of-evidence
approach, based on the emissions,
exposure and risk levels of each product.
Our rigorous, peer-reviewed, scientific
assessment framework follows
nine steps.
World-Class Science
forABetterTomorrow
TM
For more than 60 years, research
and development has been a critical
part of our business. The table to the
right highlights how we aim to create
ABetterTomorrow
TM
through world-
class science. We invest in R&D to
deliver innovations that satisfy or
anticipate consumer preferences.
This helps us generate business
growthacross all our categories.
But themain focus of our investment
isin reduced-risk products
* †
.
* Based on the weight of evidence and assuming a complete switch from cigarette smoking.
These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are subject to
FDA regulation and no reduced-risk claims will be made astothese products without agency clearance.
Emissions
1
. Combustion
studies
2. Emissions
studies
3. Toxicological
studies
Exposure
4. Use behaviour
5. Clinical:
Pharmacokinetic
Studies
6. Clinical:
Exposure
Long-term:
Epidemiological
data
Risk
7. Clinical: Individual risk
8. Population risk:
Post Marketing Surveillance
(PMS)
9. Epidemiological
modelling
Our multi-disciplinary risk assessment framework
Weight of importance in demonstrating RRP status*
Time
Product development
and innovation
using scientific advances and
new technologies to satisfy
evolving consumer needs
and preferences.
Product
stewardship
to ensure quality and consumer
safety based on robust
science and toxicological
risk assessments.
Scientific evaluation
ofrisk reduction
to support evidence-based
regulation and provide
consumers with the
information they need to
makeinformed decisions.
Collaborative
development of product
standards
to ensure a consistent approach
to product quality and safety
across the industry and build
consumer confidence.
BAT Annual Report and Form 20-F 2021
20
Engaging with ourStakeholders
Engaging with Our Stakeholders
As preferences and attitudes change
in an evolving industry, understanding
our consumers is essential to
both successful portfolio and
business growth.
It is essential that we maintain the
support of our shareholders and
bondholders to maintain access to
capital. This allows us to implement
our strategy and achieve our
business objectives.
The quality of our people is a major
reason why our Group continues to
perform well. We understand the
value of listeningand responding
to feedbackfrom our people to
maintaininga fulfilling, rewarding
andresponsible work environment.
–
Consumer panels, focus groups
and interviews
–
Consumer care helplines
–
Responsible advertising
and marketing
–
Real-time digital platforms
–
Annual General Meeting
–
Investor relations programme
and shareholder engagement
on proposed new Directors’
Remuneration Policy
–
Institutional shareholder meetings
–
Capital Markets Days
–
Investor roadshows
–
Results announcements
–
Annual Report & Form 20-F
–
ESG Report
–
Stock exchange announcements
–
Shareholder information on website
–
Director market and site visits
–
Virtual forums
–
Employee town halls
–
Global and regional webcasts
–
‘Your Voice’ employee survey
–
Works councils and European
Employee Council meetings
–
Graduate and management
trainee events
–
Individual performance reviews
–
Speak Up channels
–
Product harm, addiction and
social considerations
–
Product quality
–
Affordability and price
–
Ingredients/nicotine levels
–
Plastics/post-consumption
product waste
–
COVID-19 impacts
–
Business performance
– ESG Agenda
–
Corporate governance
–
Strength of Group leadership
–
Board succession planning
– Reward
–
Career development
–
Diversity and inclusion
–
Corporate responsibility
–
Health and safety
–
Business ethics
–
Regular dialogue and
communications with shareholders
and investors
–
Robust corporate governance
–
Enhanced ESG reporting
–
Continual improvement of our
Delivery with Integrity programme
–
Our range of enjoyable and
innovative products
–
Product quality and safety standards
–
International Marketing Principles
–
Development of
innovative products
–
Product stewardship, quality and
safety standards
–
Clear and accurate
product information
–
International Marketing Principles
–
Circular economy strategy and
product sustainability initiatives
–
Extensive communications and
virtual engagement with our people
worldwide during the pandemic
–
Board review of and feedback on
workforce engagement
–
Training and
development programme
–
Diversity & Inclusion Strategy
–
Delivery with Integrity programme
–
Inability to develop, commercialise
and deliver New Categories
–
Significant excise increases
–
Solvency and liquidity
–
Foreign exchange rate exposures
–
Disputed taxes, interest and penalties
–
Litigation
–
Injury, illness or death in the
work place
–
Geopolitical tensions
Why this
stakeholder is
important to us
Examples of
how we engaged
in2021
What matters
to our
stakeholders
How we
respond
Principal risk
impact
Read more on pages 34 to 44
and 109
Read more on pages 106 to 107 and
128 to 132
Read more on pages 72, 73, 108
and 165
Shareholders
and investors
Consumers
Our people
We work with, take into account and respond to the views and concerns
of our stakeholders, adapting to emerging risks and striving to meet the
expectations placed upon us as a multinational business.
Listening to our stakeholders helps us better understand their views and
concerns, and enables us to respond to them appropriately. It gives us
valuable inputs to, and feedback on, our strategic approach, as well as
ourpolicies, procedures and ways of working.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
21
Effective relationships with farmers
and suppliers of tobacco leaf, product
materials and indirect services are
essential to an efficient, productive
and secure supply chain.
Our customers include retailers,
distributors and wholesalers who
are essential for driving growth
and embedding responsible
marketing practices.
We seek to be part of the debate that
shapes the regulatory environment
in which we operate, and to work
collaboratively to develop joint
solutions to common challenges.
–
Extension Services farmer support
–
Ongoing dialogue and
relationship management
–
‘Supplier Voice’ survey, events and
supplier summits
–
Strategic partnerships
–
Ongoing dialogue and
account management
–
‘Customer Voice’ survey
–
Audits/performance reviews
–
Sales calls & visits by trade reps
–
B2B programmes
–
Meetings and ongoing dialogue
–
Submissions to government and
advisory committees
–
Multi-stakeholder partnerships
and working groups , such as the
ECLT Foundation
–
External Scientific Panel
–
Peer-reviewed research
–
Attending events at the COP 26
climate summit in the UK
–
Community investment programmes
and NGO partnerships
– Productivity/quality/cost
–
Sustainable agriculture
–
Farmer livelihoods
–
Human rights
–
Health and safety
–
Climate change/
environmental impacts
–
COVID-19 impacts
–
Route-to-market planning
–
Contingency planning
–
Cost, price and quality
–
Stock availability
–
Consumer buying behaviour
–
Youth access prevention
–
COVID-19 impacts
–
Product regulation
–
Tax/excise/illicit trade
–
Responsible marketing
–
Public health impacts
–
Human rights
–
Climate change/
environmental impacts
–
COVID-19 impacts
–
Supplier Code of Conduct
–
Thrive sustainable agriculture and
farmer livelihoods programme
–
Leaf operational standards for PPE
and child labour prevention
–
Farmer Extension Services support
and training
–
COVID-19 support
–
Customer loyalty programmes
and incentives
–
Global Youth Access Prevention
(YAP) Guidelines
–
COVID-19 support
–
Standards of Business Conduct
(SoBC)
–
Delivery with Integrity programme
–
Carbon neutrality target for 2030
and net zero for 2050
–
Human rights and climate
impact assessments
–
Community investment
programmes and
charitable donations
–
COVID-19 support
–
Inability to develop, commercialise
and deliver New Categories
–
Geopolitical tensions
–
Inability to develop, commercialise
and deliver New Categories
–
Geopolitical tensions
–
Significant excise increases
–
Geopolitical tensions
–
Competition from illicit trade
–
Significant excise increases
–
Regulation that inhibits growth
UK Companies Act:
Section 172(1) Statement
Our Directors have a duty,
individually and collectively as
the Board, to act as they consider
most likely to promote the success
of the Company for the benefit of
our members as a whole.
As part of this duty, our Directors
must have regard for likely long-
term consequences of decisions
and the desirability of maintaining
a reputation for high standards of
business conduct. Our Directors
must also have regard for our
employees’ interests, business
relationships with our wider
stakeholders, the impact of our
operations on the environment and
communities in which we operate
and the need to act fairly between
shareholders. Consideration of
these factors and other relevant
matters is embedded into all
Board decision-making, strategy
development and risk assessment
throughout the year.
Our key stakeholders and primary
ways in which we engage with
them are set out in the table to
the left. Pages 106 to 109 and 163
to165 provide further explanation
of our Board’s approach to
understanding stakeholder interests
to enable relevant considerations
to be drawn on inBoard discussion
anddecision-making.
Where the Board delegates
authority for decision-making
to management, our Group
governance framework
discussedon page 103 mandates
consideration of these factors and
other relevant matters as a critical
part of delegated authorities.
Examples of some of the
ways thatthese factors have
shaped Group strategy and
initiatives during the year are
illustrated in the table to the left.
Examples of how these factors
have been takeninto account
in Board decision-making and
strategy development during
theyear are provided on page 110.
Read more on pages 3, 48, 53 to 55
and 109
Read more on pages 3, 57 and 109 Read more on pages 36, 45 to 67
and 109
Suppliers Customers
Governments
and wider society
BAT Annual Report and Form 20-F 2021
22
Our Markets and Megatrends
Strategic Management
Consumer Expectations
It is widely accepted that most of
the harm associated with tobacco is
caused by inhaling the smoke produced
by its combustion — not by nicotine.
Around the world, adult consumers
are increasingly driven by health
considerations, looking for products
and experiences more tailored to
their lifestyle.
As part of this, they are seeking
new options that pleasurably
provide nicotine but with reduced
risk
*†
including new and potentially
unfamiliar delivery formats such as
patches and pouches.
Scientific Evidence
There is wide agreement among many
policymakers and bodies within the
public health community on the need
for a wide and robust science, to which
we are keen to contribute, to inform
policy and educate consumers about
reduced-risk products.
*†
Consumers must have access to
clear, factual information so they are
aware of all of their options and to help
build trust in reduced-risk products*†.
Rigorous science can establish
whether products are safer or less risky
compared with smoking cigarettes.
Regulatory and Policy Regimes
Science increasingly points to the likely
individual and public health benefit of
reduced-risk products as an alternative
to smoking.
*†
For these products to realise their
potential, they must be supported by
effective regulatory and policy regimes
that enable responsibly-managed
growth and promote informed
consumer choice.
Impacts on Biodiversity
There is increasing awareness of the
interconnectivity between climate
change and biodiversity. The threats
posed by climate change, including
longer periods of drought and more
extreme heat, are directly linked to a
second challenge: biodiversity loss and
ecosystem degradation.
However, biodiversity, through its
support of ecosystem services, also
makes an important contribution
to both climate-change mitigation
and adaptation.
As a business, we recognise that we
have both an impact and a dependence
on biodiversity, through our business
operations and use of ecosystem
services, such as forest products, soil
and water. We have a long-standing
commitment to protecting biodiversity,
including the prevention of deforestation
and fragmentation of habitats.
Agriculture
Crops such as tobacco need suitable
soil, water, sunlight and heat to grow.
In some areas, climate change may
benefit the types of crops that are
typically planted there or allow farmers
to shift to crops that are currently grown
in warmer areas. Conversely, more
extreme temperatures and weather
events, especially floods and droughts,
can harm crops and reduce yields.
Substantial investments in adaptation
of farming practices and the adoption
of new methods will be required to
offset yield losses. Examples might
include crop rotation to match water
availability, adjusting sowing dates
to rainfall and temperature patterns
and using crop varieties suited to
changed conditions.
The Internet of Things
The Internet of Things (IoT) – an
ecosystem of smart devices that work
together and are connected 24/7– is
changing the way people consume
news, make connections and shop.
By 2025, over 40 billion devices are
expected to be connected to the IoT.
E-commerce platforms, available on
the move, have led the established
social platforms to adapt their
business models to leverage social
commerce, enabling retailers to extend
their reach and build brand awareness
and loyalty.
Post-pandemic Realities
The pandemic has accelerated the
shift towards a more digital world
and led to changes in the way we
live. These changes includes online
shopping behaviours and shift in the
way people work that are likely to have
lasting effects.
Convenience of choice and delivery and
the savings that easy comparison can
offer have boosted online shopping
since the onset of the pandemic.
While physical stores have gradually
reopened, this trend will continue
as the benefits of e-commerce to
buyers and sellers become even
more widespread and are adopted by
new businesses and product types.
Companies which invest in their
online business are likely to emerge as
market leaders.
Meanwhile, many businesses around
the world are having to deal with
the“hybrid” in-person/remote work
model that has the potential to become
the new normal in many workplaces.
We are a global business, operating at scale, in a fast-paced world. Our markets are shaped by
long-term consumer, economic, cultural and social trends, as well as the regulatory environment.
Generational differences and shifts in taste are continuing to emerge, as health and wellness
become ever-more important. We continue to respond to this changing environment by
advancing our strategy and long-term priorities.
Megatrend:
Product Innovation
Megatrend:
Climate Change
Megatrend:
Technological Progress
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
23
Global combustible regulation
As one of the world’s most regulated and
taxed industries, tobacco contributes billions
of dollars to government treasuries annually.
Manufacturers are subject to wide-ranging
regulation, varying considerably from
market to market.
Over the years, legislators have largely
focused on the introduction of plain
packaging, product-specific regulations,
graphic health warnings on packs, tougher
restrictions on smoking in enclosed public
places and bans on shops displaying
tobacco products at the point of sale.
They have also begun considering
and adopting regulations aimed at
menthol flavourings.
Environmental concerns resulting from litter
associated with cigarette consumption
have led to an increased number of policy
initiatives, with the EU leading the way with
its Single-Use Plastic legislation.
Impact of COVID-19
Beyond disruption to supply chains,
the short-term impact of COVID-19
on the tobacco industry is likely to be
relatively limited.
The impact on volumes is expected to be
felt unequally across geographies, with
resilience seen in more developed markets
while developing markets experience
potentially greater numbers of consumers
turning to the illicit market. A case in point is
the U.S., where, although the general trend
is a gradual decline in annual volumes, the
Federal Trade Commission, in its annual
Cigarette Report, said that manufacturers
sold 203.7 billion cigarettes in 2020, up from
202.9 billion in 2019 – an increase of 0.4%.
Production of the principal raw material
– tobacco leaf – remains broadly
diversified across a number of continents.
The industry has proven adept at dealing
with supply-side shocks.
Global New Categories Market
Over recent years, innovation in the tobacco
and nicotine marketplace has developed
new nicotine products that do not involve
the combustion of tobacco leaf and the
inhalation of smoke. These growing smoke-
free categories include vapour products,
tobacco heating products (THP) and
modern oral nicotine pouches.
The success of these New Categories in
offering viable alternatives to displace the
use of cigarettes is based on many factors.
One is their ability to offer consumers
satisfaction in circumstances where
using combustible tobacco is no longer
permittedor socially acceptable.
Another istheir ability to offer a less risky
but fulfilling alternative to cigarettes.
There is also a growing focus on leading a
healthier, personalised lifestyle among the
new generation of adult consumers. This,
in addition to technological innovation, is
expected to further accelerate the growth
of new categories, as these products better
meet evolving preferences and demands.
Evidence of this shift can be seen in global
revenues from vapour and THPs, with both
currently standing at around U.S.$21 billion,
an increase from 2019 of U.S.$0.8 billion and
U.S.$5.8 billion, respectively.
Traditional oral products show steady,
incremental growth. Meanwhile, growing
sales of Modern Oral nicotine pouches
registered an accelerated volume expansion
especially in established oral tobacco
markets such as the U.S. and Scandinavia.
With a global value of U.S.$1.2 billion in 2020,
the category is projected to expand to over
U.S.$6 billion by 2025.
New Categories Regulations
At a global level, the THP and
vapour markets are still emerging.
Regulation is growing alongside the growth
in the categories, but perception and
attitudes towards these products have
been mixed and regulation is often not
designed around their characteristics and
potential for risk reduction
* †
.
Whereas some regulators, including
those in the UK and New Zealand, aim
to encourage their use as less risky
alternatives to cigarettes, while being
mindful of the risks of youth usage, other
governments view them with greater
scepticism, with some imposing bans
Beyond Nicotine
The emerging and rapidly growing market
for well-being and ‘new active’ products
is expected to continue to grow as the
consumer trend towards bespoke lifestyles
evolves. One such market, cannabidiol
(CBD), is expected to gain wider use, as
evidenced by its recent growth in market
size and certain governments, such as that
of Germany, considering the legalisation
ofits recreational use.
Overview
Today, the tobacco and nicotine
market serves a growing base of more
than one billion adult consumers.
Generational differences and shifts in taste
are continuing to emerge, as health and
wellness become ever-more important.
We anticipate growth in new categories
of products, including – and beyond –
tobacco and nicotine. Consumers expect
these to provide stimulation and pleasure,
in ways previously associated with
combustible products. Webelieve such
growth will offset the predicted decline in
cigarette consumption.
Global Combustible Market
The most recent sales data for the legal
global tobacco market (2020) indicate it
was worth approximately U.S.$850 billion.
The largest global tobacco category
remains combustible cigarettes. With over
2.7 billion cigarettes consumed annually
(excl. China), it is valued at U.S.$484 billion
in 2020. Over 19% of the world’s adult
population (incl. China) still chooses to
smoke and will likely continue to do so
unless offered suitable alternatives.
However, excluding China, the global
cigarette market experienced a 4.2%
volume decline in 2020 vs 2019. This is
largely due to increased regulation and
changing societal attitudes to smoking.
The illicit market
A further reason for the decline of legal
tobacco volumes is the continued rise in
illicit product consumption. While global
(excl. China) illicit cigarette penetration
declined from 11.9% in 2019 to 11.7% in 2020
as border closures and mobility restrictions
resulting from the pandemic hindered
consumer access to black market products,
analysts expect illicit volume growth
to return in several markets as travel
measures ease, pressures on disposable
income grow and governments raise excise.
Price differentials between markets,
regulatory changes and broader
macroeconomic pressures have the
potential to further exacerbate the problem.
It is generally accepted that there is a
direct correlation between steep or ad
hoc increases in taxes and illicit sales.
The current sanctions in many countries
often fail to deter criminals in search
of profit.
See pages 92 to 97 to read more about
ourPrincipal Group Risks
For further discussion regarding the regulation
ofour business, please see pages 340 to 344
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not
risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made as to
these products without agency clearance.
** All data sources on this page are from Euromonitor
International and based on 2020 data (the latest full year
available) unless otherwise stated.
BAT Annual Report and Form 20-F 2021
24
The Foundations of
our Evolved Strategy
We are committed to providing A Better Tomorrow
TM
for all our
stakeholders. Our ambition is to deliver long-term sustainable
growth with a range of innovative andless harmful products that
stimulate the senses of new adult generations.
>175
markets in which
weoperate
>150m
daily consumer
interactions
For decades, combustible products satisfied a
need for sensorial enjoyment for many individuals.
Whileoccasions for tobacco consumption are
nowreduced, new opportunities have arisen:
–
new products provide us with an opportunity
to capture, in a focused way,the consumer
moments previously associated with tobacco;
and
–
evolving and fragmenting consumer needs
provide us with opportunities for additional
growth in a variety ofnew categories.
Our wide range of capabilities make us
exceptionally well-placed for future growth:
–
our unique global marketing and
distribution reach;
–
our track record of R&D and innovation;
–
our decades’ worth of consumer insights
andbrand-building expertise; and
–
our New Categories business aims
togenerate£5bn in revenue in 2025
.
>11m
points of sale across
over 175 markets
20 years ago
combustible products fulfilled a multitude
ofconsumer moments
Strong
Foundations
Satisfying Consumer Tastes
andMoments
Strategic Management
Morning
Night
AfternoonEvening
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
25
Our new growth opportunities will capitalise on our
core business strengths, creating clear boundaries
for our portfolio development:
–
reducing the health and environmental
impacts of our business;
–
leveraging our global marketing reach
and scale;
–
building on our knowledge of delivery
platforms and technology;
–
relying on our experience in managing complex
regulatory and scientific matters; and
–
meeting stringent strategic and
financial metrics.
A wider portfolio of products that offer sensorial
enjoyment for different moods andmoments
will allow us to capture the consumer moments
previously associated with tobacco use, as well as
satisfy new evolving consumer needs, through:
–
scientifically-substantiated, reduced-risk
*†
tobacco and nicotine products;
–
building the brands of the future; and
–
ultimately, a portfolio of products beyond
nicotine that leverages our proven expertise.
* Based on the weight of evidence and assuming a complete switch from cigarette
smoking. These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus,
are subject to FDA regulation and no reduced-risk claims will be made as to these
products without agency clearance.
Beyond
nicotine
Tobacco
New nicotine
categories
Social acceptability
Usage
A Developing
Portfolio
Parameters to Guide
GrowthOpportunities
Science and
regulatory expertise
BAT’s global
marketing
reach
Leveraging
delivery
platforms
Strategic and financial
attractiveness
Positive environmental
contribution
New Category
Growth
Opportunities
Reduced health impact
compared to cigarettes
Less
Switch
Additional
BAT Annual Report and Form 20-F 2021
26
Stimulating
the Senses
ofNew Adult
Generations
OUR MISSION
Where
Inspirational foresights
Remarkable innovation
Powerful brands
Connected organisation
People & partnerships
US focus
HOW WE WIN
High
Growth
Segments
Priority
Markets
How
In 2021, 12% of Group revenue was from non-combustible products. This was achieved
through a multi-category approach which is the very essence of our purpose to build
ABetter Tomorrow
TM
– providing adult consumers with a range ofenjoyable and less risky
*†
choices for every mood and moment.
The model below outlines the key components of how we are building A Better Tomorrow
TM
,
from our mission to stimulate the senses of adult consumers worldwide and the outcomes
this will deliver for stakeholders, to the ethos that guides our decision making.
A Strategy for AcceleratedGrowth
Our Mission
Stimulating the Senses
ofNewAdultGenerations
Today, we see opportunities to capture
consumer moments which have, over time,
become limited by societal and regulatory
shifts, and to satisfy evolving consumer
needs and preferences.
Our mission is to anticipate and satisfy this
ever-evolving consumer: provide pleasure,
reduce risk, increase choice and stimulate
thesenses of adult consumers worldwide.
Remarkable Innovation
As consumer preferences and technology
evolve rapidly, we rely on our growing global
network of digital hubs, innovation super
centres, world-class R&D laboratories,
external partnerships and our corporate
venturing initiative to stay ahead of the curve.
Powerful Brands
For over a century, we have built trusted
and powerful brands that satisfy our
consumers and serve as a promise for
quality and enjoyment. We will build the
brands of the future by focusing on fewer,
stronger and global brands across allour
product categories, delivered through
our deep understanding and segmenting
ofour consumers.
Connected Organisation
Few companies can claim over 150 million daily
consumer interactions, over 11 million retail
points of sale and a global network of expert
employees around the world. Cultivating an
ecosystem that directly connects us with
consumers and stakeholders, especially
through the power of digital technology,
ensures we can build the brands of the
future, deliver access to markets and
fosterinnovations that offer sensorial
enjoyment andsatisfy consumer needs.
Must Wins
High Growth Segments
Driven by our unique and data-driven
consumer insight platform (PRISM), we will
focus on product categories and consumer
segments across our global business
that have the best potential for long-term
sustainable growth.
Priority Markets
By relying on a rigorous market
prioritisation system (MAPS), we will focus
the strengths of our unparalleled retail and
marketing reach, aswell as our regulatory
and scientific expertise, on those markets
and marketplaces with the greatest
opportunities for growth.
How We Win
Inspirational Foresights
Built on our successful history, we have
a unique view of the consumer across
all of our product categories, which is
increasingly driven by powerful data
and analytics.
These insights ensure that the development
and responsible marketing of our products
is fit to satisfy consumer needs.
Strategic Management
* Based on the weight of evidence and assuming
a complete switch from cigarette smoking.
These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made
astothese products without agency clearance.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
27
2021 was indeed a pivotal year, with constant
currency New Category revenue growth of over
50%combined with our reaching a total of 18.3 million
consumers (up 4.8 million) of our non-combustible
products. It is clear that our transformation towards
ABetter Tomorrow
TM
is accelerating.
Kingsley Wheaton
Chief Marketing Officer
ETHOS
Consumers
enjoyable choicesfor every mood
andmoment, todayand tomorrow
Society
reduced overall health
&environmental impact
Employees
a dynamic, inspiring and
purposefulplace to work
sustainable and superior returns
KEY STAKEHOLDER
OUTCOMES
OUR PURPOSE
Empowered
Bold
Fast
Diverse
Responsible
Our Purpose
By stimulating the senses of new
adult generations, our purpose is to
create ABetterTomorrow
TM
for all
our stakeholders.
We will create A Better Tomorrow
TM
for:
Consumers
By responsibly offering enjoyable and
stimulating choices for every mood and
every moment, today and tomorrow;
Society
By reducing the health impact of our
business by offering a range of alternative
products, aswell as by reducing our
environmental andsocial impacts;
Employees
By creating a dynamic, inspiring and
purposeful place to work; and
By delivering sustainable and
superior returns.
For more information about our purpose
seeinside front cover
People and Partnerships
Our highly-motivated people are being
empowered through a new ethos that is
responsive to constant change, embodies
a learning culture and is dedicated to
continuous improvement. But we cannot
succeed on our own, and our partnerships
with farmers, suppliers and customers
arealso key for ensuring sustainable
futuregrowth.
US Focus
The United States comprises nearly half
of our global business. It is also the single
largest economy in the world, the largest
single centre for technology and the key
driver of global consumer trends, and
is where we have the deep consumer
understanding and financial strength to
support the delivery of our mission to
stimulate consumer senses around the
restof the world.
Short-Term Deliverablesto
FuelABetter Tomorrow
TM
1
Business
@
Our ongoing simplification programme,
Project Quantum, is expected to realise
£1.5 billion of annualised savings through
simplification and efficiencies by the end
of 2022.
@
For more key detail
see pages 29 to 33
1
NewCategories Performance
With our unique cross-category consumer
understanding, we are clear there is a huge
opportunity for our New Categories.
For more key detail
see pages 35 to 40
1
Drive Value
From Combustibles
We drive value from Combustibles to fuel
our investment in, andtransition revenue to,
New Categories.
For more key detail
see pages 42 to 43
BAT Annual Report and Form 20-F 2021
28
Short-Term Deliverables to
Fuel A Better Tomorrow
TM
Strategic Management
Our purpose is to build A Better Tomorrow
TM
by reducing the health impact of our business
through offering a greater choice of enjoyable and less risky products
* †
for our consumers.
Toaccelerate this, we must become a stronger, simpler and faster organisation, which will
beachieved through the delivery of three short-term priorities.
1
Ensure a Step Change
in NewCategories
Performance
Over the years, consumer
momentsthat used to be satisfied
by cigarettes have been replaced
byother products.
With our unique cross-category consumer
understanding, we are clear there is a huge
opportunity to recapture these moments
with a broader portfolio of products that
are less risky than combustible products.
*†
We are clear that any portfolio expansion
will leverage our strengths. We will
maximise and seek to constantly improve
our delivery platforms in vapour, THP
and modern oral, thereby reducing the
health impact and making a positive
environmental contribution.
We aim to increase our consumers of
non-combustible products from 11 million
(2019) to 50 million by 2030, driving revenue
from New Categories to at least £5 billion
by 2025.
We are building new capabilities around the
world focused on science, innovation, and
digital information. Consumer preferences
and technology are evolving rapidly, and
we are staying ahead of the curve with
our digital hubs, the creation of innovation
super centres, and further development of
our world-class R&D laboratories. We are
also leveraging the expertise of our external
partners, and are looking forward to exciting
results from our venturing initiative
.
Drive Value
From Combustibles
Our ambition is to increasingly
transition our revenues from
cigarettes to New Categories
overtime.
In order to fund the development of our
New Categories, we will continue to focus
on generating value from our Combustibles
business, driving sustainable increases
in revenue, with volume share and value
share growth.
Our performance is a direct function of
the strength of our brand portfolio. We will
continue to develop and invest in our brands
for equity and future value by offering
winning brand and product propositions,
enabled by purposeful innovation.
Revenue Growth Management is a
critical enabler to unlock future value, and
our resource allocation is focused and
prioritised to deliver better results with
fewer initiatives.
We will further consolidate our portfolio
ofstrategic brands and deliver efficiencies
through a much leaner portfolio, with far
fewer stock-keeping units designed to
a margin.
Simplify the
Business
@
Our ongoing simplification
programme, Project Quantum,
is expected to realise £1.5 billion
of savings through simplification
andefficiencies by2022.
@
Through Quantum we have fundamentally
re-evaluated how we are organised
and have reduced management
layers to eliminate duplication and
entrenched accountability.
We continue to create new capabilities
and release valuable funds for further
investment in our growth ambition,
ensuring the Group is stronger, faster
andmore agile.
We are steadfast in realising operational
efficiencies, supply chain productivity and
afocus on excellence in our route-to-market.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak, and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made
astothese products without agency clearance.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
29
Short-Term Deliverables to Fuel A Better Tomorrow
TM
To enable us to deliver on our commitments
and to become a simpler, faster and
stronger organisation, we embarked on our
Quantum journey in 2019. Quantum is our
ongoing simplification programme that
is fuelling New Category investment and
delivery against our financial guidance.
The first phase of Quantum delivered a
large-scale organisational change and
the journey continued in 2020 and 2021.
This has enabled us to remain agile in a
fast-paced and ever-changing environment.
The effects of the global pandemic have
demonstrated the importance of retaining
simplification at the heart of our agenda.
In 2021, we continued to realise benefits
from Quantum, generating more than
£595 million of savings in the year.
These benefits came through various
simplification initiatives:
–
In our UK Headquarters, we have
implemented a new organisational
design. This has been key to ensuring
decision-making where the knowledge
sits and seizing the opportunities from
synergies and integration.
–
In our markets, we have assessed
and streamlined our footprint
through an Operating Model review.
This optimisation of our footprint
is expected to deliver more than
£100 million of annualised savings,
enabling a sharper focus on
New Categories.
–
Our initiatives addressing both our
Centre and End Markets are underpinned
by our BAT Digital Business Services*
(DBS) transformation and enabled by
Technology & Digital simplification.
–
In 2021, our DBS organisation has
built new capabilities in consumer,
customer, and Business Intelligence
areas. Simultaneously, within our existing
capabilities, DBS delivered optimisations
to drive excellence and efficiency.
We are continuing our Technology & Digital
transformation with a focus on automation
and data-driven optimisation. In the past
year, we have saved more than 100,000
hours in total, ensuring undisrupted
delivery of our commitments. Technology
& Digital will continue to underpin our
simplification journey.
We have delivered our £1 billion savings
commitment from Quantum 12 months
earlier than planned.
@
As a result, we have
increased our target to £1.5 billion gross
savings over three years (2020-2022).
We are therefore well on track to deliver the
target £1.5 billion saving commitment from
Quantum by 2022.
@
All the elements which underpin our
simplification agenda will sharpen the focus
on core capabilities critical for delivering
our A Better Tomorrow™ strategy while
enabling us to fuel the growth in New
Categories to become a stronger, simpler
and faster organisation.
Highlights
–
Quantum enabled more than
£595 million gross savings
through organisational change
and productivity initiatives
–
@
The previous target of £1 billion
gross savings over three years
(2020-2022) has been increased
to £1.5 billion
@
–
BAT Digital Business Services
is transforming by building new
capabilities while simplifying the
existing ways of working
–
Technology and Digital focus on
simplification and automation
saved more than 100,000 hours,
ensuring undisrupted delivery of
our commitments despite the
global pandemic
@ Denotes phrase, paragraph or similar that does not form
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
* Prior to 2021, Digital Business Services was called Global
Shared Services.
BAT Annual Report and Form 20-F 2021
30
Simplifying the Business and Accelerating
theEnterprise oftheFuture
BAT is moving towards the Enterprise of the Future – a global, consumer-centric,
multi-category company, with sustainability at its core. We are redefining
ourselves, not by the products we sell, but the consumer needs that we meet.
We are creating brands with purpose, and are reshaping our product
portfolio, building a multi-category portfolio of non-combustible products
backed by science, and expanding “beyond nicotine”. We are driven by digital
transformation, technology and innovation, and by our people, living our ethos.
Quest is accelerating our transformation towards the Enterprise of the Future:
it is delivering the capabilities required to build our multi-category platform
business, enhance our future sustainability and deliver our digital transformation.
It is underpinned by five accelerators.
Deliver
Q
uantum
U
nleash
Innovation
Strategic Management
E
mpowered
Organisation
Shaping
S
ustainability
T
echnology &
Digital
Quantum is generating
the resources to be
reinvested in our New
Categories by optimising
our organisational
design; leveraging
our shared services;
embedding productivity
discipline; and delivering
Revenue Growth
Management (RGM)
and Marketing Spend
Effectiveness (MSE)
initiatives.
Unleash Innovation
is delivering a step
change in critical
capabilities, enabling
BAT to further build and
successfully execute
consumer focused and
remarkable innovation.
Utilising Quantum
productivity savings,
we are fuelling an
ambitious portfolio
transformation towards
a multi-category
product company.
Developing our people,
teams and culture is
at the heart of Quest.
The Empowered
Organisation
programme is building
an engaged, agile
and high-performing
organisation with
capabilities to deliver our
Enterprise of the Future.
Shaping Sustainability
is accelerating our
corporate journey
towards a sustainable
enterprise, fulfilling our
A Better Tomorrow™
purpose. Developing
world-class science
to support our new
portfolio and embedding
industry leading ESG
ambitions is at the heart
of this programme.
Technology & Digital
underpins all Quest
initiatives to accelerate
our transformation
towards a top quartile,
digitally-enabled
consumer packaged
goods (CPG)
business. Our digital
transformation is
focusing on digital
marketing; agile
organisation; value from
data & analytics and
intelligent automation
at scale.
Five ‘Accelerators’
to enable the Enterprise
of the Future…
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
31
We Are Well On-track with our
Journey Across all Accelerators
@
Quantum productivity savings
targethas increased from £1 billion
to£1.5 billion in 2021
@
Quantum is continuing to simplify the
organisation and generate funds to fuel
growth in New Categories. In 2021, our
new organisational design was announced
and implemented, focused on simpler
ways of working in our UK Headquarters.
Our DBS Hubs are transforming to drive
efficiencies in existing capabilities and
build additional capabilities at the same
time. We have reviewed and streamlined
our End Markets’ Operating Model,
simplifying and optimising our business
footprint.
@
Our previous productivity target
of £1 billion gross savings over three years
(2020-2022) could therefore be increased
to £1.5 billion
@
. Additionally, we continue to
deploy our Revenue Growth Management
and Marketing Spend Effectiveness tools,
which have delivered £100m+ value creation
in U.S. and other key markets in relation
to pricing, assortment, promotions and
trade investment.
Unleash Innovation is transforming
ourcapabilities to win as a multi-
category business
As we evolve the range of consumer needs
we serve, we are transforming capabilities
in R&D and across the value chain to ensure
BAT is positioned to make a step change
in innovation. This transformation takes a
multifaceted approach from sharpening
the insights and foresights approach
that drives our technology and product
investments; how we are actively managing
the innovation portfolio; how we partner
externally; and also how we execute with
excellence across our innovation pipeline.
We have achieved many milestones, including
the initiation of our New Categories R&D
Transformation, the launch of our “Innovation
Hub” in Trieste, Italy, with further hubs
planned, hosting a manufacturing site for our
New Category products, a digital boutique,
innovation lab and centre of excellence
for digital transformation and marketing.
Additionally, our venture organisation
Btomorrow Ventures is leading investments
in creative and innovative companies aligned
with our vision for A Better Tomorrow
TM
.
Empowered Organisation is
strengthening our talent pool
In 2021, the Empowered Organisation
Programme launched a new Employee Brand
Proposition which is fully aligned with our
A Better Tomorrow
TM
strategy along with a
modern best-in-class career website.
Our focus on developing our people led
to continuous investment in learning &
development. This resulted in a global
portfolio of 57 programmes all delivered
100% virtually, while providing online learning
tools to all managers and global graduates
enabling anytime anywhere access to
learning and development support from both
internal and external experts. We have also
implemented a transformational leadership
assessment across all management helping
our people to develop qualities required
that are bigger, broader, more complex
and challenging. We have recruited more
than 1,300 new people in 2021 to further
accelerate our transformation.
Our dedicated focus on Diversity & Inclusion
also led to an industry-first National
Equality Standard (NES) and Global Equality
Standard (GES) certification. This is a
reflection of our focus on our D&I strategy
and of our inclusive culture and practices.
Shaping Sustainability continues
toput sustainability front and centre
ofeverything we do
In 2021, Vuse became the first global carbon
neutral vape brand*, demonstrating our
commitment to carbon neutrality and to
reducing our impact on the environment.
Vuse Solo became the first vaping product
to receive marketing granted orders from
the U.S. Food and Drug Administration
(FDA), which confirms that the marketing
of Vuse Solo products is appropriate for
the protection of the public health and is
evidence of our robust, world-class science.
We are building awareness and confidence
in the science that underpins our New
Category products, engaging with external
stakeholders (including regulators) to
ensure these new products can help build
A Better Tomorrow
TM
. In 2021, we also
accelerated our targets, including to have
100% of operations sites be zero waste
to landfill by 2025; and to be net zero
across our value chain by 2050. We are
proud that our ESG efforts continue to be
recognised externally.
Technology & Digital is creating
new channels to connect with
our consumers and enabling the
simplification of our organisation
Through digital marketing initiatives, our
e-commerce footprint is developing quickly,
with consumer subscription programmes
growing in priority New Category markets,
enabling us to provide a more personalised
experience for our consumers. End-to-end
simplification through automation has
improved our data analytics capabilities,
our enterprise agility and efficiency, and
our ability to respond faster to an ever-
changing environment. We continue to
digitally transform manufacturing in order
to reduce waste, lessen energy usage,
limit stoppages to production and save
personnel time. Our ongoing ranking in the
Gartner Supply Chain Top 25 demonstrates
how the digital transformation and increased
automation of our supply chain ishaving a
positive impact.
100m+
value creation in U.S. and other
keymarkets in areas related to pricing,
assortment, promotions and trade
investment.
@
£1.5bn
Quantum productivity savings
target (2020-2022), up from £1bn
@
* As verified by Vertis based on product Life Cycle
Assessment data provided by an independent third party,
taking into account the Group’s purchase of carbon credits
through reforestation projects.
BAT Annual Report and Form 20-F 2021
32
Technology & Digital Unlockingthe Enterprise
of the Future
Strategic Management
1.8m
New Categories followers on Social media
Consumers and Customers Manufacturing and Supply Chain
Finance, HR and Legal
+20 ppt
increase in demand forecasting accuracy
(YoY) for New Categories through
deployment of advanced statistical
forecasting technologies
75%+
increase in hours saved through
digitalbots and automation
ofback-officeactivities
300+
employees trained in Design
Thinking, driving innovative
and agile ways of working
>50%
agile delivery of technology
solutions across our
organisation
200
new roles with new
capabilities in Global
BusinessSolutions
12,800
online connections during
four-day Automation Summit
with 45 speakers and over 20
hours ofcontent
Digital Transformation across BAT is about leveraging technology to deliver
value for all our stakeholders. We are investing in digital skills, providing tools
and capabilities to our people and driving an entrepreneurial mind-set, which
is essential for identifying and scaling up solutions across the enterprise to
maximise the value of our investments.
Our business has delivered exceptional results
enabledby the further acceleration of our digital
transformation in 2021. Our focus is to leverage data
&insights, apply technology, and agile new ways
ofworkingto unlock commercial value at pace.
Marina Bellini
Director, Digital and Information
+200%
consumer engagements increase
throughHyper personalisation and
dynamiccontent pilots
£30m
generated through scale up of digital
innovation ideas across the enterprise
>1,000
employees trained as Citizen Developers,
democratising automation through
aculture of self-sufficiency
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
33
–
Social listening and
responding capabilities
deployed in 48 countries to
enable sentiment tracking
and ability to influence our
brands’ share of positive
mentions – enhancing
brand reputation and
industry-leading Youth
Access Prevention.
–
World-class Enterprise Data
Platform (EDP) – building the
foundation for automation
and analytics.
–
Leveraging deep consumer
insights to develop
personalised consumer
journeys – enabling the
delivery of compelling
communications to the right
consumer at the right time
and 200 million automated
and personalised messages.
For example, targeting and
journey management of 15+
micro-consumer segments
across 25+ consumer
journeys helped to add
760,000 THP consumers
in Japan.
14.2m
contactable adult New
Category consumers
–
Global deployment of a
mobile-first, best in class
New Categories e-commerce
user experience, winning
four e-commerce awards
for user experience and
website design.
–
Over 45 direct-to-consumer
owned e-commerce store
fronts –with a further 45+
branded and unbranded
sites worldwide.
–
Connected Consumer
Devices successfully tested
in 2 markets – creating
enriched experiences, higher
loyalty and strong digital
relationships, resulting in new
revenue streams and a shift
to D2C channels.
–
New consumer Loyalty
capability successfully
piloted – opening the path
for seamless cross-channel
activation and collaboration
with Customer and Big
Tech Partners
–
Global Trade Platform
enabling B2B engagement
across 75 countries, 15,000
trade partners and servicing
two million retailers
+42%
increase of active subscribers
of New Categories
–
Over 5,000 employees, 50
startups, 100’s of suppliers
and tech partners can
now leverage BAT’s global
BTomorrow Innovation
Platform for researching and
reporting innovations.
–
World-class conversion
rate of proofs-of-concept;
scale is double the average
rate of other corporations,
demonstrating the
commitment of BAT regions
and functions to delivering
efficiently and quickly
on innovations.
–
Our investment in Control
Tower and Logistics Visibility
technologies continue to
improve how we proactively
manage supply chain risks.
–
Our continued investments in
digitalising our manufacturing
facilities are driving cost
reductions and improving
operational sustainability.
Deployment of IoT technology
isenabling smart management
of energy and water across
our factories, reducing energy
consumption by as much as
50% in pilot locations.
+23 pts
improvement in Dow Jones
Sustainability Index Cyber
Security score, close to best in
class in Industry
Digital innovation
accelerating digital
transformation
Digital and data
delivering value across
BAT, accelerating our
Transformation to
a Better Tomorrow
TM
.
Deepening Consumer
engagement
acceleratedby Social
andBig Data Insights
Continuing significant
investments in our
marketing technology
delivered new capabilities
within social listening,
social activation, and
integrated data and
analytics platforms.
Best-in-class
commercial digital
experience and launch of
new connected services
Expanding our modern
marketing technology
stack with new capabilities
to build lifetime value
through subscriptions,
loyalty and added-value
connected services.
Leveraging Technology and Data to Grow at Speed
We have over 150 million daily consumer interactions and over 11 million retail points of sale.
Digital channels and capabilities allow us to connect with them, ensuring better consumer engagement
with brands, innovations and services that can stimulate the senses of new adult generations.
BAT Annual Report and Form 20-F 2021
34
for consumers
By responsibly offering enjoyable and
stimulating choices for every mood and
every moment, today and tomorrow.
Our consumers are at the core of
everything we do and our success
is underpinned by addressing their
preferences, offering them a choice
of enjoyable, innovative and less
risky products
*†
through:
–
a wide choice of high-quality
and stimulating products for
every mood and moment;
–
brands they can trust that are
manufactured to high-quality
and safety standards;
–
reduced-risk alternatives to
combustible products;
*†
–
transparent, clear and
accurateinformation, based
on robust science, about the
relative risks; and
–
responsible marketing that
doesn’t engage or appeal
to youth.
BAT Annual Report and Form 20-F 2021
† No observed genotoxicity under these test conditions.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
35
Strategic Management
Highlights
–
Vuse achieves Global
value leadership
–
Vuse value share up 800 bps vs
2020 to reach 33.5% share in our
Top 5 markets.
–
Consumer acquisition up 1.8m
reaching 8.4m, with growth in
allTop 5 markets.
–
Vapour volume up 56% with
revenue 59% higher at constant
rates of exchange.
–
Vuse first global vapour brand
independently verified by Vertis
as carbon neutral
^
in May 2021.
The Scientific Evidence
*
There is growing consensus among many in the
public health community and academia about
the role of vapour products as a reduced-risk
*†
alternative to smoking. This is supported by a
wealth of global reviews, studies and reports.
In the UK, for example, Public Health
England
3
issued a series of expert reviews
of the latest evidence, concluding: “based
on current knowledge, vaping is at least 95%
less harmful than smoking”. According to
theUK’s Office for National Statistics, vaping
now stands at 6.3% of the population, and
smoking levels have dropped to 14.1%, from
23% in 2012, which means the UK has one of
the lowest smoking incidences in Europe.
In 2021, we published a comprehensive review
of the scientific evidence for vaping products,
their potential health effects, and their role in
tobacco harm reduction. This is a summary of
more than 300 peer-reviewed scientific papers
and other evidence published by around 50
institutions over the past decade.
According to adult population modelling
studies cited in the review, a significant
reduction in premature deaths could be
achieved if current smokers switched
exclusively to vaping rather than
continuingtosmoke cigarettes.
30
Number of markets where the Group’s
vapour products are sold
Our Vapour
Products
*
Vapour products are battery-powered
devices that heat liquid formulations –
e-liquids – to create a vapour which is inhaled.
Most e-liquids contain water, propylene
glycol and glycerol, flavourings and nicotine,
although some e-liquids don’t contain any
nicotine. The products contain no tobacco
and no combustion takes place.
the current best estimate is
that e-cigarettes are around 95%
less harmful than smoking.
Public Health England
3
,
2015
Short-Term Deliverables to Fuel A Better Tomorrow
TM
None
2
None
1
Mutagenicity (Whole Aerosol)
9%
Cytotoxicity
0%
Oxidative Stress
yH2AX (DNA Damage)
Cigarette = 100%
Toxicology tests
Cigarette vs ePen 2
Notes:
1. No observed mutagenicity under these test conditions.
2. No observed genotoxicity under these test conditions.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak, and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made
astothese products without agency clearance.
^ As verified by Vertis based on product Life Cycle
Assessment data provided by an independent third party,
taking into account the Group’s purchase of carbon credits
through reforestation projects.
3. Public Health England was replaced in Oct 2021 by UK
Health Security Agency and Office for Health Improvement
and Disparities
Vapour Top 5 markets
U.S., UK, France, Germany and Canada.
BAT Annual Report and Form 20-F 2021
36
Vuse Certified as Carbon Neutral
Vuse is one example of how we are
driving our ESG purpose. We are very
proud that Vuse has been independently
certified by Vertis as the first global carbon
neutral
^
vapour brand. We have removed all
unnecessary single use plastics from our
Vuse packaging and implemented Device
Take Back schemes in all our vapour markets
– examples of our many projects aimed at
making Vuse one of the most sustainable and
trusted vaping brand worldwide with a clear
consumer-led purpose.
Regulation and PMTA
The future of tobacco harm reduction has
always depended on robust science, and
ensuring that this is accessible to audiences
outside the scientific community is critical.
This need is growing stronger than ever
– with a number of cases of acute lung
diseases (referred to as EVALI) reported
among vapers in the U.S. in 2019, consumers
want to be clear on the risk profile of these
products. In addition, consumer perceptions
of nicotine are evolving with many consumers
over-estimating the risks associated with
nicotine generally.
This also demonstrates the importance of
having, and enforcing, a robust and effective
regulatory framework that ensures high
product standards and prevents access
and appeal to youth – things we have long
advocated. Robust science has to be at
the centre of any regulatory development
and engagement.
We are fully committed to working in a
regulated market, where adult consumers
can be confident that marketed tobacco
products are appropriate for the protection of
the public health and underpinned by science.
This approach is underscored by the U.S.
Food and Drug Administration’s Premarket
Tobacco Product Application (PMTA) process.
PMTAs are based on a summary of all
research findings to demonstrate that the
marketing of a product meets the FDA’s
criteria as “appropriate for the protection
ofthe public health”.
In October 2021, Vuse Solo received the
first of its kind FDA marketing authorisation
for vapour products in Original flavour.
This confirmed that the marketing of
Vuse Solo products is appropriate for
the protection of the public health, the
culmination of years of scientific study
and research. The Vuse Alto PMTA,
which was submitted nearly a year after
Vuse Solo, shares the same foundational
science. We are confident in the quality of
our applications.
We support efforts by the FDA to both
address the increasing availability of
flavoured synthetic nicotine products and
enhance enforcement actions against
flavoured disposable vapour products.
The FDA is under increased scrutiny from
Congress to act against these types of
products, including clarifying the regulatory
framework within which such products
should be regulated and enforced, which
we believe is likely to lead to substantive
action by the FDA.
Performance Summary
Vapour continued its strong momentum
driven by Vuse. Total volume of consumables
was up 56% to 535 million units, having
grown 52% (to 344 million units) in 2020.
Combined with consumable pricing across
all T5 markets, this drove revenue up 52%
to £927 million, or 59% at constant rates of
exchange, with 2020 up 52% to £611 million (or
an increase of 53% at 2019 rates of exchange).
In 2021, Vuse achieved global vapour value
share leadership (in July 2021) with a full year
value share of 33.5% (up 780 bps vs 2020).
Vuse is now at or approaching value share
leadership in all T5 markets. We consolidated
our volume share leadership of devices in
all T5 markets, driven by industry leading
consumer acquisition up 1.8 million to
8.4 million consumers.
In the U.S., we are approaching vapour
value leadership, driven by Vuse Alto, with
total vapour value share for the year up 760
bps to 32.5%, maintaining the momentum
of 2020 which was up from 16.6% in 2019.
Vuse consumables volume grew 67% in 2021,
having grown 70% (to 174 million units) in
2020, outperforming the total vapour industry
in both years (up 21% in 2021 and down 13%
in 2020). In 2020, the industry in the U.S.
was impacted by the EVALI crisis in 2019 and
implementation of flavour regulations in early
2020. We retained leadership (by volume) of
closed system devices, with growth of 500
bps to 57.4% compared to 2020.
We performed well in 2021 and 2020 in the
other top vapour markets, and extended
our leadership positions, with all T5 Vype
migrations to Vuse completed during the
year. Specifically:
–
in the UK, total vapour value share of the
category was 31%, compared to 36% in
2020. Vuse performed well, with value
share up 210 bps to 16.9% driven by both
ePen 3 and ePod;
–
in France, vapour value share reached 45.7%
in 2021, an increase of 14.2 ppts (versus 2020),
driven by ePen 3 and ePod;
–
in Canada, having gained value share
leadership in 2020, we continued to grow,
with total vapour value share up 34.3 ppts to
80.4% in 2021, driven by ePod; and
–
in Germany, our value share of total vapour
was 59.9%, up 10.1 ppts (2020: 49.9%),
driven by ePen 3 and ePod.
In January 2021, we pilot-launched our first
CBD vaping product (Vuse CBD Zone) as a
city test in Manchester, England, providing
valuable insights into the product and
consumer behaviour.
We continued the expansion of e-commerce
@
(up 37% on 2020)
@
, with Vuse ranked No.1
overall for branded consumer search and web
traffic across all our T5 markets. Despite the
impact of regulatory changes in the U.S.,
the number of consumers utilising our
subscription programme globally increased
to around 25,000, up 43% compared to 2020.
Proportion of vapour revenue
by region in 2021
(£m)
2021
£m
2020
£m
U.S.
561
383
AmSSA
141
65ENA
207
148
APME
18
15
Total
927
611
Strategic Management
Short-Term Deliverables to Fuel A Better Tomorrow
TM
Continued
2020 value share in Germany has been rebased by AC Nielsen
from 50.1% to 49.9%.
^ As verified by Vertis based on product Life Cycle Assessment
data provided by an independent third party, taking into
account the Group’s purchase of carbon credits through
reforestation projects.
@
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
37
Highlights
–
glo THP category volume share
up 480 bps in Top 9 markets vs
2020 to reach 18.1%.
–
glo consumer acquisition up
2.7m reaching 6.7m with growth
in all T9 markets.
–
glo consumable volume up
79%, over three times industry
volume growth of 26%.
–
glo revenue growth up 34%
with year on year and sequential
growth accelerating in H2 2021.
The Scientific Evidence
*
By heating tobacco rather than burning,
THPs offer a reduced risk
*†
alternative
compared to smoking for those who
completely switch. To date, most research
has been conducted by industry scientists,
but an increasing number of independent
reports are broadly aligned with these
findings and support the role of THPs as a
less risky
*†
alternative to smoking.
For example, a study commissioned by the
UK Department of Health in 2017 found
that people using THPs were exposed to
around 50–90% less of the “harmful and
potentially harmful” compounds compared
with conventional cigarettes. In 2018,
Public Health England
**
, while highlighting
the need for more research, found that
“compared with cigarettes, heated tobacco
products are likely to expose users and
bystanders to lower levels of particulate
matter, and harmful and potentially
harmful compounds”.
Compared with cigarettes,
heated tobacco products are likely
to expose users and bystanders to
lower levels of particulate matter,
and harmful and potentially
harmful compounds.
.
Public Health England
**
,
2018
25
Number of markets where the Group’s
Tobacco Heating Products are sold
4%
3%
WHO (9 priority toxicants)
4%
FDA (18 priority toxicants
4%
HEALTH CANADA (main 44 toxicants)
FDA (93 harmful and potentially harmful constituents)
Cigarette = 100%
Toxicants of interest
Cigarette vs glo
THPs heat tobacco to generate a nicotine-
containing aerosol, with a tobacco taste,
which the user inhales. Because the
tobacco is heated instead of burned, the
resulting aerosol comprises mainly water,
glycerol, nicotine and tobacco flavours –
dramatically different to cigarette smoke.
Our Tobacco Heating
Products
(THPs)
*
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak, and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made
astothese products without agency clearance.
** Public Health England was replaced in Oct 2021 by UK
Health Security Agency and Office for Health Improvement
and Disparities
THP Top 9 markets
Japan, South Korea, Russia, Italy, Romania,
Germany, Ukraine, Poland andthe
Czech Republic.
BAT Annual Report and Form 20-F 2021
38
Our commitment to reducing the health
impact of our business is helping to deliver
ground-breaking scientific advances and
supports consumer choice.
The results of 329 tests and studies
we have conducted have generated
evidence that supports our belief that glo
is a reduced-risk product compared to
continuing to smoke cigarettes
*†
.
While glo is not risk free and nicotine is
addictive, the aerosol contains considerably
fewer and lower levels of certain toxic
substances compared to cigarette smoke,
and has a significantly reduced impact in
various toxicology tests.
As more long-term data is needed to
support the category, we undertook a year-
long clinical study to evaluate the reduced
risk potential of glo. The six-month results
were published in a peer-reviewed journal
in 2021. The data from the study provides
the first real-world evidence that people
switching from cigarettes to exclusive
use of glo can significantly reduce their
exposure to certain toxicants and indicators
of potential harm related to several
smoking-related diseases, compared
withcontinuing to smoke.
Designed with Purpose
Our new glo pro, Hyper, and Hyper+ models
feature induction heating, enabling devices to
reach their operating temperatures of around
240-280
C faster. This makes them more
efficient and enjoyable for consumers to use.
The system also requires fewer
components susceptible to temperature
degradation, enabling the use of a wider
range of temperatures, which are still
substantially lower than temperatures
needed for combustion. This helps to unlock
a broader range of sensory experiences.
This more-powerful heating system
produces a much faster and more precise
device, offering consumers more flexibility,
while still tightly controlling temperature
and avoiding combustion.
Performance Summary
Driven by the continued success of glo
Hyper in Japan and across ENA, total
consumable volume grew 79% to 19.1 billion
sticks in 2021. In 2020, consumables grew
by 19% to 10.7 billion sticks, having been
impacted by the withdrawal of Sens in that
period. Excluding Sens, THP consumable
volume would have increased 29% in 2020,
demonstrating an acceleration in 2021
as average daily consumption increased
across our key markets.
In 2021, glo achieved record THP category
volume share in the T9 markets, up 480
bps in 2021 to 18.1%, with growth in all
T9 markets.
This performance was underpinned by glo
Hyper, which was launched in April 2020
initially in Japan (and accounts for 72% of
the glo portfolio), with subsequent launches
in other markets (notably in ENA) from the
second half of 2020 and continuing in 2021.
glo Hyper is the first-to-world THP launched
with induction heating which provides a
step change in consumer satisfaction with
30% more tobacco, faster heating and a
boost button. The success of glo Hyper was
achieved despite the impact of COVID-19
restrictions as the launches and ongoing
marketing campaigns were successfully
switched to digital platforms.
Revenue increased 34.4% to £853 million
(2020: down 12.9% to £634 million) largely
driven by the higher volume, with growth
increasing sequentially between the first
and second half of 2021. The decrease in
2020 was largely due to the decision to
withdraw glo Sens from the market (being
a reduction to revenue of £50 million) and
the impact of excise harmonisation in
Japan. Excluding the impact of the relative
movements in sterling, at constant rates
ofexchange impacting both years, revenue
grew 46% in 2021, compared to a decrease
of 12.7%in2020.
In APME, where the most mature THP
markets are, our consumable volume grew
27%, with device volume up 36% as we
continued to invest in consumer acquisition.
Revenue was up 2.8% or 13.0% at constant
exchange, with acceleration in the second
half of 2021 driven by consumable pricing
and as we lap the impact of the Sens
withdrawal in the prior year comparator,
partly offset by excise increases in Japan
in October. In Japan, glo’s category volume
share of THP reached 21.2%, an increase of
180 bps on 2020 (2020: 19.4%).
In ENA, which has seen strong industry
volume growth of 41% in 2021, we grew
around five times faster than the market,
with glo volume up 195%, with consecutive
quarterly growth in our key markets.
Accordingly, revenue increased 150% or
167% at constant currency, having grown
143% (or 159% at constant rates of exchange)
in 2020. Notably in Russia, glo’s volume share
(of THP) was up 1,070 bps at 19.3%, while
in Ukraine our volume share of THP was
20.9% (an increase of 990 bps) on 2020.
Furthermore, in Italy, glo reached 12.8% THP
category volume share, up 870 bps, with
Hyper driving 100% of the growth, and in
Romania glo reached 22.1% category volume
share, up 530 bps on 2020.
COVID-19 continued to impact our
consumer engagement plans in 2020 and
2021, yet we still made good progress
in Kazakhstan, Poland, Egypt, the Czech
Republic and across other smaller ENA
launch markets, and Hyper is now in 22 of
glo’s 25 markets, with further market roll-
outs planned in 2022.
Proportion of THP
revenue by region in 2021
(£m)
2021
£m
2020
£m
U.S.
1
1
AmSSA
–
–
ENA
341
136
APME
511
497
Total
853
634
Strategic Management
Short-Term Deliverables to Fuel A Better Tomorrow
TM
Continued
@
part of BAT’s Annual Report on Form 20-F as filed with
the SEC.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
39
Highlights
–
Continued strong global
volume growth (up 70.5%),
withconsumer numbers up
0.6m to 2.1m
–
ENA revenue up 44%, with
volume up 46% driving volume
share to 69.4%, up 380 bps
–
US volume up 272%, with
volume share of Modern Oral
at 11.7%, up 410 bps vs 2020 in
ahighly competitive market
The Scientific Evidence
*
Laboratory chemical studies for our
Modern Oral products show they produce
substantially lower levels of toxicants than
cigarette smoke and even lower levels than
snus – a traditional oral tobacco product
which is already regarded as a reduced risk
*†
alternative to smoking. Toxicology tests
assessing the biological effects of our
Modern Oral products on human cells also
show they have little effect relative to snus
and cigarettes.
In 2021, we published new peer-reviewed
evidence, which suggests our Modern
Oral tobacco-free nicotine pouches have
a toxicant profile that is comparable to
nicotine replacement therapy products
(NRT). The pouches were also found to have
a toxicant profile that is far lower than snus.
Smokeless tobacco
productsare much cleaner and
lesshazardous than cigarettes.
Theiruse could reduce harm to
smokers if they switched entirely
to these products.
Professor Neal Benowitz
Professor of Medicine at the University
ofCalifornia, San Francisco
None
None
*
Positive
1
Positive
1
Positive
3
Mutagenicity (toxtracker)
Cytotoxicity
0%
0%
100%
2
Oxidative Stress
yH2AX (DNA Damage)
Cigarette = 100%
Toxicology tests
Cigarette vs Velo
Notes:
1. Toxtracker assay (rtkn and bscl2).
2. At equivalent nicotine doses (7.85µg/ml velo vs. 4.34µg/ml cigarette).
3. High content screening.
Our Modern Oral
Products
*
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo,
Grizzly, Kodiak, and Camel Snus, are subject to FDA
regulation and no reduced-risk claims will be made
astothese products without agency clearance.
23
Number of markets where the Group’s
Modern Oral products are sold
Modern Oral Top 5 markets
U.S., Sweden, Norway, Denmark
and Switzerland
In recent years, a new category
of Modern Oral products has
emerged. These come in the form
of nicotine pouches that are placed
under thelipso that nicotine can
beeffectively absorbed.
BAT Annual Report and Form 20-F 2021
40
This study compared BAT’s nicotine
pouch products to both snus and NRTs.
Each was tested for 26 compounds, some
of which are known harmful and potentially
harmful constituents (HPHCs). For our
products, 22 of the 26 compounds tested
were below measurable limits. For NRTs,
20-22 compounds were below measurable
limits, whereas snus was found to have 11
compounds below measurable limits.
On the basis of our evidence and informed
by the wealth of independent evidence
regarding snus, switching completely to
Modern Oral products can be expected to
reduce the risk of smoking-related disease
when compared to continued smoking.
That is why we are investing so much in
refining and improving these innovative
products. This is part of our commitment
to providing adult consumers with a
wide range of enjoyable and less risky
*†
alternatives to cigarettes.
Our Products
Our Modern Oral products are white in
colour and contain high-purity nicotine,
water and other high-quality food-grade
ingredients, including eucalyptus and pine
tree fibres, flavouring and sweeteners.
Originating in Scandinavia, Velo is now a
leading global brand of nicotine pouches.
These typically appeal to a broader
audience than traditional oral tobacco,
and because of their affordability and
lack of batteries, they can be particularly
popular in low-to-middle income countries.
For example, our subsidiary in Indonesia
has delivered encouraging results
from its expansion activities in Jakarta.
Following a promising performance in
June 2020, the test has been expanded to
5,000 consumers, which is being closely
monitored to gain consumer insights.
We are also delivering a step-change in
Modern Oral manufacturing. Truly living
our ethos, our Modern Oral factory in
Pécs, Hungary, put together a bold plan
to implement food industry standards
for Modern Oral manufacturing. This has
enabled us to ensure the availability of
products that comply with regulations in
different countries.
With a cross-functional team across
quality, production, engineering and EHS
teams delivering technical changes and
process improvements, Pécs became
the first site in BAT’s history to obtain
the ISO 22000 certification for food
safety standard.
Performance Summary
Having consolidated our leadership
position in Modern Oral outside the U.S.
and expanded the U.S. portfolio with the
Dryft acquisition in 2020, 2021 has been a
year of further growth in volume and value.
Our growth accelerated globally in 2021,
with volume up 71% to 3.3 billion pouches
(2020: up 62% to 1.9 billion pouches).
Revenue increased 39% to £274 million
(2020: up 57% to £198 million). Excluding
the impact of foreign exchange, this was
anincrease of 41% in 2021 and 57% in2020,
on a constant rates basis.
Volume share of the Modern Oral category in
our T5 markets was 34.7%, in line with 2020.
This was largely driven by the U.S.,
where our volume share of Modern Oral
increased by 410 bps as volume grew 272%
to 602 million pouches (2020: up 45% to
162 million pouches). This growth was due
to the acquisition of the nicotine pouch
products of Dryft Sciences, LLC (Dryft)
in October 2020. These products are now
present in over 110,000 stores nationally,
driving volume share expansion to 11.7%,
up 410 bps on 2020 in a highly competitive
market. Due to discounting to drive
consumer trial, which is recognised as a
deduction to revenue under IFRS, revenue
declined 82% to £2 million, having grown
14% to £10 million in 2020.
While we are excited about the long-term
potential of the Modern Oral market in the
U.S., it currently represents less than 2% of
the nicotine industry by revenue in the U.S.)
and 51% and 38% of global Modern Oral
volume and value share, respectively.
The majority of Velo consumers (in the U.S.)
adopted the brand as their first in Modern
Oral, sourced evenly from Combustible,
snus, Traditional Oral and Vapour
consumers. Our insights suggest that a
high percentage of Modern Oral users are
already poly-users of other categories.
In ENA, we are volume share leaders
of the Modern Oral category in 15 of
the 17 markets where we are active.
Revenue increased by 44% (2020: up 59%)
or 46% (2020: up 59%) at constant rates of
exchange. We continue to drive innovation
in the category, with the success of our
Sachet, Black range and Velo Mini launches,
as well as new flavours generated alongside
consumers in our LAB co-creation hubs
in Sweden.
Furthermore:
–
In Sweden, where Modern Oral has
grown to represent 13.5% of the total
oral category, our volume share of the
Modern Oral category reached 59.6%, an
increase of 580 bps on 2020**;
–
In Norway, where Modern Oral now
represents 28.7% of the total oral
category, our volume share of the
Modern Oral category grew to 63.9%, up
180 bps on 2020, having declined 270 bps
in 2020 from 64.8% in2019; and
–
In Denmark, where Modern Oral now
represents 90.5% of the total oral
category, our volume share of Modern
Oral category fell 130 bps to 92.6%.
Our pilot launches in emerging markets
(including Pakistan and Indonesia) continue
to deliver valuable insights, as we roll-out in
key urban markets. We believe that Modern
Oral is an exciting longer-term opportunity
to commercialise reduced risk products*†
by offering affordable New Category
alternatives to adult nicotine consumers.
In Kenya, we continue to engage with the
relevant authorities on the regulatory and
fiscal framework to support a commercially
sustainable re-entry into the Modern
Oral category.
In Germany, sales of Modern Oral have been
suspended pending engagement with the
authorities regarding the classification of
tobacco-free nicotine pouches.
Proportion of Modern Oral
revenue by region in 2021
(£m)
2021
£m
2020
£m
U.S.
2
10
AmSSA
–
1
ENA
266
185
APME
6
2
Total
274
198
Strategic Management
Short-Term Deliverables to Fuel A Better Tomorrow
TM
Continued
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free
and are addictive.
** Sweden volume share has been re-based to include Nicotine free pouches in all periods. Accordingly, our 2020 volume share
of Modern Oral was re-based to 53.8%.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no
reduced-risk claims will be made astothese products without agency clearance.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
41
Our Products
We also sell a range of traditional oral
products, including Swedish-style snus and
American moist snuff, available in loose
tobacco form or as pre-packed pouches.
We have long sold snus in Sweden and
Norway through our Fiedler & Lundgren
business, whose brands include Granit
andMocca; and in the US we market snus
under the Camel brand. Our American
moist snuff products include our flagship
Grizzly brand, as well as the premium
moistsnuff brand Kodiak.
The Modified Risk Tobacco Product
(MRTP) applications for Camel Snus
were discussed by the Tobacco Products
Scientific Advisory Committee (TPSAC) of
the FDA in September 2018. After extensive
additional work with the FDA, we expect
that the applications will remain under
review until the second half of 2022.
Performance Summary
In 2021, volume was lower (down 3.9%) on
the prior year (at 8.0 billion stick equivalents),
with 2020 0.9% lower than 2019.
Total revenue declined 3.6% to £1,118 million
(2020: up 7.2% to £1,160 million), as pricing
in both 2021 and 2020 was more than
offset in 2021 by a translational foreign
exchange headwind of 6.6% due to the
relative strength of sterling in the year.
On aconstant rates basis, revenue grew
3.0% in 2021 and 7.7% in2020.
In the U.S., which accounts for
approximately 96% of the Group’s revenue
from Traditional Oral, volume declined 5.1%
in 2021 (2020: down 1.3%). Value share of
moist was up 10 bps, while volume share
was down 50 bps, compared to 2020.
This followed a decline in value share in
2020 of 25 bps. The improvement in 2021
was driven by Grizzly through the use of
RGM capabilities which stabilised the
performance from the second half of 2020
and delivered value growth in 2021.
Outside the U.S., being 4% of Group
revenue from the category, volume was
6.1% higher in 2021, driven by Sweden where
the Group’s volume share (as a proportion
of total oral) increased 50 bps (2020: down
80 bps). This was driven by growth in
Lundgrens in both periods offset, in 2020,
by declines in the remainder of the portfolio.
Our Traditional Oral
Products
The most common products in
traditional oral are largely moist oral
tobacco popular in the US, with the
main brands of Grizzly and Kodiak.
These products are less finely ground
than another traditional oral product
referred to as Swedish-style snus.
Both of these traditional oral products
are available in loose form, as well as
in pre-packed pouches.
Proportion of traditional oral
revenue by region in 2021
(£m)
2021
£m
2020
£m
U.S.
1,077
1,126
AmSSA
–
–
ENA
41
34
APME
–
–
Total
1,118
1,160
BAT Annual Report and Form 20-F 2021
42
Strategic Management
Short-Term Deliverables to Fuel A Better Tomorrow
TM
We are focused on growing our
strategic brands of Dunhill, Kent, Lucky
Strike, Pall Mall, Rothmans, Newport
(U.S.), Natural American Spirit (U.S.)
andCamel (U.S.) which now account
for 66% of our combustible volume.
Our combustibles business is founded
on understanding and meeting the
preferences of adult smokers in all
parts of the world.
Our Combustible
Products
Highlights
–
Group value share up 10 bps,
driven by the U.S. up 60 bps.
–
Volume share down 10 bps.
–
Strong price/mix +4.3%.
Value and Volume Share
Group cigarette value share increased
10bps in 2021 (2020: up 20 bps), driven by
the continued performance of the strategic
cigarette brands in the U.S. (up 80 bps),
with total U.S. value share up 60 bps.
This combined with higher cigarette value
share (in Japan, Bangladesh, Germany,
Turkey, Taiwan, Pakistan, the Czech
Republic, Colombia and Malaysia) to more
thanoffset lower value share in Indonesia,
Saudi Arabia, Canada, Australia, South
Africa, Poland, France and Italy.
Group cigarette volume share was
down 10bps in 2021 (2020: up 40 bps).
The decrease in 2021 was driven by the U.S.
(as we focussed on value generation), South
Africa, Australia, Saudi Arabia, Brazil, New
Zealand and Russia more than offsetting
growth in Bangladesh, Pakistan, Turkey
and Japan. In 2020, this was an increase of
40 bps as growth in Bangladesh, Mexico,
Vietnam, Russia and Turkey was partly
offset by lower volume share in Indonesia
and Saudi Arabia.
Volume Performance
In 2021, Group cigarette volume was in line
with 2020, at 637 billion sticks (2020: down
4.6% to 638 billion), with the total cigarette
market also estimated to be largely in line
with 2020, having declined between 5.0-
5.5% against 2019.
In 2021, cigarette volume grew in South
Africa (which recovered from the impact
of the COVID-19 lockdown and sales ban in
2020), Pakistan (due to lower illicit trade),
Bangladesh (due to the strength of the
local portfolio) and Vietnam (as the market
recovered from COVID-19). However, these
were more than offset by the disposal of
the Group’s operations in Iran partway
through the year, while volume was lower
in both Indonesia (as the Group focussed
on value delivery with pricing ahead of the
industry) and the U.S.
In the U.S., Group cigarette volume was
down 5.0% to 69.5 billion, having increased
0.5% to 73.1 billion in 2020. The movement
in 2021 was partly benefiting from trade
inventory movements (mainly linked to the
timing of price increases and uncertainty
about a potential excise increase) which are
expected to unwind in 2022.
In 2020, Group cigarette volume
was also negatively impacted by the
COVID-19 production and other supply
chain restrictions.
Proportion of combustibles
revenue by region in 2021
(£m)
2021
£m
2020
£m
U.S.
10,015
9,926
AmSSA
3,435
3,535
ENA
5,024
5,356APME
3,555
3,935
Total
22,029
22,752
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
43
This affected sales in several markets
including Canada and Mexico. While not
a significant part of the Group, travel
restrictions due to COVID-19 impacted
our Global Travel Retail (GTR) business
(which did not recover in 2021), negatively
impacting Group cigarette and THP
volume by an estimated 1.0% (in 2020
compared to 2019). Furthermore, volume
declined in Indonesia (due to the impact
of tax increases and minimum retail price
compliance) and in Pakistan where illicit
trade grew significantly following excise-led
price increases in prior years. These were
partly offset by growth in Brazil (where
enhanced border security and restricted
population mobility due to COVID-19 led to
an increase in duty paid volume), in Turkey
(driven by Kent and the local portfolio), and
in Bangladesh (driven by the continued
strength of the local portfolio).
Developed markets were generally relatively
resilient, with little evidence of accelerated
downtrading despite the pressures of
COVID-19.
Strategic Brand Performance
The performance was underpinned by the
strategic cigarette brands, with value share
20 bps higher in 2021 (2020: up 40 bps):
–
Dunhill’s overall value share was down
10 bps (2020: down 10 bps) as growth in
Romania, Pakistan, Taiwan and Brazil was
more than offset by declines in Indonesia,
South Korea, Australia and Saudi Arabia.
Volume was 8.9% lower (2020: down
17%), largely due to the impact of the
tax increases and minimum retail price
compliance in Indonesia;
–
Kent’s value share was stable (2020:
stable) as growth in Turkey, Russia, South
Korea, Saudi Arabia and Ukraine was
offset by lower value share in Japan,
Romania and Brazil. Volume was down
2.6% (2020: up 2.0%) as growth in Turkey
was more than offset by lower volume
in Japan and the Middle East (due to
the sale of the business in Iran partway
through the year);
–
Lucky Strike’s value share grew 30bps
(2020: up 10 bps), as growth in the
U.S. (following launch in December
2020), AMSSA (particularly Brazil,
Colombia and Chile), Japan, Russia and
Germany more than offset lower value
share in Indonesia, France and Spain.
Volume grew 19.6% (2020: down 2.0%)
driven by Russia, the U.S., Brazil, Algeria
and Japan, partially offset by the impact
of the tax increases and minimum retail
price compliance in Indonesia;
–
Rothmans’ value share was 10 bps lower
(2020: up 10 bps) as growth in Brazil, the
Czech Republic and Malaysia was offset
by lower value share in Russia, Australia,
New Zealand, Poland, South Korea, South
Africa, Ukraine and the UK. Volume was
3.0% lower (2020: up 6.1%) as growth in
Brazil and Cuba was more than offset
by lower volume in Russia, Ukraine and
Kazakhstan; and
–
Pall Mall’s value share was 20 bps lower
(2020: stable) as growth in Mexico and
Germany was more than offset by lower
value share in the U.S., Saudi Arabia,
Australia, Canada, Chile, Romania and
New Zealand. Volume was up 2.2% (2020:
down 6.0%) largely driven by Pakistan.
The Group’s US domestic strategic
combustible portfolio performed well:
–
Newport value share increased 70 bps
(2020: up 50 bps), while volume declined
3.3% (2020: up 2.3%);
–
Natural American Spirit performed
wellwith value share up 20 bps (2020:
up 20 bps). Volume was marginally lower
than 2020 (down 0.8%), having increased
6.0%in 2020 vs 2019; and
–
Camel’s value share declined 30 bps
in the US (2020: stable) with volume
9.0% down (2020: up 1.2%), driven by
competitive pricing pressures.
Volume of other tobacco products
(OTP) declined 9.2% to 18.3 billion sticks
equivalent (2020: 1.7% decline), being 3% of
the Group portfolio (2020: 3%).
Revenue
In 2021, revenue from combustibles
was down 3.2% at £22,029 million
(2020: £22,752 million, down 1.1%).
2021 benefited from an estimated
£200 million benefit from the U.S.
trade inventory movement discussed
earlier. This was more than offset by the
estimated £260 million impact of structural
excise change and competitive pricing in
Australasia and the impact of the sale of
the Group’s operations in Iran (as described
on page 196). While pricing in both years
was strong, this led to 2021 price/mix at
4.3% being lower than 2020 (7.3%).
A translational foreign exchange headwind
of 7.2% led to the decline in revenue in 2021
from combustibles.
Revenue in 2020 was also negatively
impacted by the COVID-19 volume
disruption and a translational foreign
exchange headwind of 3.7%. COVID-19
continued to affect the Group as travel
restrictions impacted GTR in 2021 and 2020.
After adjusting for the short-term impact
of excise on bought-in goods (impacting
2019) and the currency headwinds,
adjusted revenue from combustibles at
constant rates of exchange was up 4.0%
to £23,669 million. In 2020, this was an
increase of 2.8%.
Change in cigarette volume share
inkeymarkets
(
bps)
-10 bps
2021
-10bps
2020
+40bps
Definition:
Annual
change in cigarette volume share – being
the number of cigarettes bought by consumers of the Group’s
brands in key markets as a proportion of the total cigarettes
bought by consumers in those markets (see page 302).
Change in cigarette value share
inkeymarkets
(
bps)
+10 bps
2021
+10bps
2020
+20bps
Definition:
Annual
change in cigarette value share – being the
value of cigarettes bought by consumers of the Group’s brands
in key markets as a proportion of the total value of cigarettes
bought by consumers in those markets (see page 302).
42
Number of cigarette factories
in 40 countries
BAT Annual Report and Form 20-F 2021
44
Beyond
Nicotine
Our mission is to ‘stimulate the senses
of new adult generations’ and we
remain committed to reducing the
health impact of our business.
As well as offering less risky
* †
nicotine-
based alternatives, we see a new range
of non-nicotine based products forming
an expanding part of our portfolio.
As consumers increasingly seek products
offering wellbeing and stimulation
characteristics, we are working with our
venturing unit, Btomorrow Ventures (BTV),
and selected third-parties to strengthen
our understanding of this market. We are
applying these learnings and developing
our own portfolio of products addressing
consumer needs not just today, but into
the future.
BTV has completed 17 investments
sincelaunch in 2020, with 9 new
investments during 2021, in innovative
consumer, new sciences and technology
businesses andone fund investment.
The companies in which we invest are carefully
selected for original ideas across a range of
criteria, as well as a cultural fit which allows
us to work together to leverage the strength
of the BAT Group in helping entrepreneurial
candidates accelerate and sustain growth.
This approach provides us with evolving
capabilities for the future across both our
New Categories and Beyond Nicotine.
In March 2021, we entered a strategic
collaboration agreement with Organigram
Inc., a wholly owned subsidiary of publicly
traded Organigram Holdings Inc., focused on
research and product development activities
of next generation adult cannabis products,
with an initial focus on cannabidiol (CBD).
As described on page 213, under the terms
ofthe transaction, a Group subsidiary
acquired a 19.9% equity stake in Organigram
Holdings Inc. (listed on both the Nasdaq and
Toronto Stock Exchange under the symbol
“OGI”) to become its largest shareholder.
In January 2022, we announced the launch
of KBio Holdings Limited (KBio) to accelerate
the research, development and production
of novel treatments for rare and infectious
diseases. KBio will leverage the existing
plant-based technology capabilities
of BAT and Kentucky BioProcessing
Inc. (KBP), the existing BAT-owned U.S.
plant biologics organisation.
Find out more
at www.btomorrowv.com
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no reduced-risk claims will be made astothese products without agency clearance.
Strategic Management
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
45
BAT Annual Report and Form 20-F 2021
By reducing the health impact of
our business by offering a range
ofalternative products, as well
asby reducing our environmental
andsocialimpacts.
Sustainability is front and centre
in all that we do. As we set about
creating the enterprise of the future,
we are driving a step-change in our
sustainability ambition. We have
developed a set of goals and targets
that will act as a catalyst for action
and build A Better Tomorrow
TM
for
all our stakeholders. These include:
–
increasing our number of
non-combustible product
consumers to 50 million
by 2030;
–
achieving carbon neutrality
for our business operations by
2030 (Scope 1 and 2) and net
zero across our value chain
(Scope 1, 2 and 3) by 2050; and
–
net positive impact on forests
in our tobacco supply chain
by 2025.
for society and
theenvironment
BAT Annual Report and Form 20-F 2021
46
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
14
Delivering a
positive
SOCIAL
impact
Farmer livelihoods
Human rights
Health & safety
People & culture
ESG Front and Centre
Our Sustainability Agenda is integral to our Group strategy and purpose to
build A Better Tomorrow
TM
. It reflects our commitment to reducing the health
impact of our business as our principal focus area. This is underpinned by
excellence across environmental, social and governance (ESG) priorities.
Our strategic approach is drivenby
extensive stakeholder insights. Each year,
wecommission an independent assessment
to identify our most material ESG topics.
Through this robust process, we engage
with a wide range of stakeholders to
understand what matters most to
them, complemented with ongoing risk
monitoring, research and benchmarking.
This ensures we keep pace with emerging
topics and stakeholder expectations.
Outlined below are the priority areas that
form the core of our Sustainability Agenda.
These are backed by clear and measurable
goals and targets for each area, as detailed
in our
ESGRoadmap
on the next page.Details of how we identify our focus areas
can be found in
Materiality
on pages 106-107.
S
H
Excellence in
ENVIRONMENTAL
management
Climate change
Waste
Water
Biodiversity & afforestation
Robust
corporate
GOVERNANCE
Business ethics
Responsible marketing
Regulation & policy
engagement
Reducing the
HEALTH
impact ofour businessConsumer
choice
World-class
science
Standards
& regulation
Creating shared value for
Employees
Shareholders
Society
Consumers
Our Sustainability Agenda
E
G
Spread duplicated in Annual Report
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
14
Delivering a
positive
SOCIAL
impact
Farmer livelihoods
Human rights
Health & safety
People & culture
ESG Front and Centre
Our Sustainability Agenda is integral to our Group strategy and purpose to
build A Better Tomorrow
TM
. It reflects our commitment to reducing the health
impact of our business as our principal focus area. This is underpinned by
excellence across environmental, social and governance (ESG) priorities.
Our strategic approach is drivenby
extensive stakeholder insights. Each year,
wecommission an independent assessment
to identify our most material ESG topics.
Through this robust process, we engage
with a wide range of stakeholders to
understand what matters most to
them, complemented with ongoing risk
monitoring, research and benchmarking.
This ensures we keep pace with emerging
topics and stakeholder expectations.
Outlined below are the priority areas that
form the core of our Sustainability Agenda.
These are backed by clear and measurable
goals and targets for each area, as detailed
in our
ESGRoadmap
on the next page.Details of how we identify our focus areas
can be found in
Materiality
on pages 106-107.
S
H
Excellence in
ENVIRONMENTAL
management
Climate change
Waste
Water
Biodiversity & afforestation
Robust
corporate
GOVERNANCE
Business ethics
Responsible marketing
Regulation & policy
engagement
Reducing the
HEALTH
impact ofour businessConsumer
choice
World-class
science
Standards
& regulation
Creating shared value for
Employees
Shareholders
Society
Consumers
Our Sustainability Agenda
E
G
Spread duplicated in Annual Report
Strategic Management
ESG Front and Centre
are calculated in accordance with the Greenhouse Gas
(GHG) Protocol Corporate Standard. For further details
of our energy and emissions methodologies. please see
www.bat.com/reporting
1. UK-based activities include 2,276 tonnes of Scope 1 CO
2
e
emissions (2020: 2,200) and 173 tonnes of our Scope 2
CO
2
e emissions (2020: 398). See pages 52-53 and 61 for
details of the principal measures taken for the purposes of
increasing energy efficiency across the Group.
2. Due to the complexity of consolidating and verifying Scope
3 data in accordance with the GHG Protocol, we report one
year behind. As such, 2021 Scope 3 data will be reported in
the 2022 Report.
3. Energy consumption from activities for which the
Company is responsible (in million KwH): 2021: 1,508,
2020: 1,572, 2019: 1,820. Of the total figure reported for
the Group for 2021, 10 million kWh is from the UK-based
activities (2020: 10 million KWh). Energy consumption
resulting from the purchase of electricity by the Company
for its own use (in million KwH): 2021: 972, 2020: 996,
2019: 1,054. Of the total figure reported for the Group
for 2021, 16 million kWh is from the UK-based activities
(2020: 17 million kWh).
Details of how we identify our focus areas
can befound in the Materiality section of our
2021ESGReport at
www.bat.com/esgreport.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
47
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
15
Our ESG Roadmap
Topic
Goals and targets
Metrics
Progress tracking
Status
2021
2020 2019
Harm
reduction
£5 bn by 2025
in New Categories revenues
New Category revenues (£bn)
2.1
1.4 1.3
50m by 2030
consumers of our non-combustible products
No. of consumers
18.3
13.5
10.5
Climate
change
Net Zero
achieve carbon neutral operations (Scope1
and 2 CO
2
e emissions) by2030and net zero
emissions acrossour value chainby 2050
Scope 1 CO
2
e
emissions
(thousand tonnes)
325
342
396
Scope 2 CO
2
e (market-based)
emissions (thousand tonnes)
170
199
386
Total Scope 1 & 2 CO
2
e
emissions (thousand tonnes)
495
541
782
Scope 1 and scope 2 CO
2
e
emissionsintensity ratio (tonnes
per £m revenue)
19.3
20
30.4
Scope 3 CO
2
e
emissions (thousand
tonnes) including biogenic
emissions and biogenic removals
†
NA
5,587
6,781
30% by 2025
of total energy from renewable sources
100% by 2030
of electricity sourced for operations sites
that is renewable
Total direct energy use (GwH)
2,480
2,568
2,874
Renewable energy as a % of total
direct energy use
28.6
26.8
10.8
% of electricity sourced for
operations sites that is renewable
64.4
61.1%
10.7%
Waste
100% by 2025
of operations sites to achieve
zerowasteto landfill
Waste sent to landfill
(thousand tonnes)
11.93
12.73
13.95
% of operations sitesreporting zero
waste to landfill
35
27
NA
Water
-35% by 2025
of total amount of water withdrawn
(vs2017 baseline)
Total water withdrawn(mn cubic
metres m
)
3.76
4.03
4.51
Biodiversity
& afforestation
Net Zero Deforestation
by 2025
aiming for net zero deforestation of managed
forests in our supply chain and net positive
impact on forests in our tobacco supply chain
% of sources of wood used by our
contracted farmers for curing fuels
that are from sustainable sources
99.9
99.7 99.6
% paper and pulp volumes that is
certified as sustainably sourced
‡
89
NA NA
Farmer
livelihoods
Livelihoods
committed to enabling prosperous
livelihoods for all farmers in our
tobaccosupply chain
% of tobacco farmers reported
to grow other crops for food or as
additional sources of income
95.6
93.4
92
Human
rights
Zero by 2025
aiming for zero child labour in our
tobaccosupply chain by 2025
% of farms with incidents of child
labour identified
0.7**
0.50
0.57
Health
& safety
Zero
aiming for zero accidents Group-wide
each year
Number of work-related accidents
(including assaults) resulting in
injury, causing absence of one shift
or more*
95
114
186
Lost workday case incident rate*
0.20
0.22
0.27
Number of serious injuries
and fatalities to employees
and contractors
31
39
38
People
& culture
45% by 2025
increase the proportion of women in
management roles to 45%
% of female representation in
management roles
39
38
37
Business
ethics
100%
aiming for full adherence to our Standards
ofBusiness Conduct (SoBC)
Number of established
SoBC breaches
99
116
130
Responsible
marketing
100%
aiming for full adherence to our Youth Access
Prevention (YAP) Guidelines
% of markets aligned to the YAP
Guidelines***, where our products
are sold
100
100 100
†
Due to the complexity of consolidating and verifying Scope 3 data from our suppliers and other third-party sources, we report figures one year behind our other metrics.
‡
New metric/target in 2021.
*
In 2021, we changed the reporting period for our health and safety data to cover December to November period each year (previously January to December). This is to align with our
environmental reporting and to enable more time for the consolidation and verification of our data for reporting. To enable year-on-year comparison, we have re-stated our 2020 data to align
with this new reporting period: Number of work-related accidents :114 (was 131) and Lost Workday Case Incident Rate: 0.22 (was 0.21).
**
100% of cases reported as resolved by end of the growing season.
***
Waivers from YAP Guidelines are granted where there is a government ban on point-of-sale materials or YAP retailer engagement cannot be ensured due to practical or cultural limitations.
S
G
E
H
Find our full set of targets, goals and metrics
onpages
[109-116]
.
On track or met target
Acceleration required
Ongoing focus area
Spread duplicated in Annual Report
Find our full set of goals, targets, metrics, data scope and
definitions inour 2021 ESG Report at
www.bat.com/ESGreport.
1
1
1
1
2
3
BAT Annual Report and Form 20-F 2021
48
Name (*Board endorsed)
Summary of areas covered
Stakeholder groups
Standards of Business
Conduct (SoBC)*
Sets out our policies for: Speak Up, respect in the workplace,
humanrights, health, safety and welfare, environment, lobbying and
engagement, conflicts ofinterest, anti-bribery and corruption (ABAC),
gifts and entertainment, political contributions, community investment,
corporate assets and financial integrity, competition and anti-trust,
anti-money laundering and tax evasion, sanctions, anti-illicit trade,
dataprivacy andinformation security.
Our People
Governments and Wider Society
Supplier Code of Conduct*
Covers: human rights, health and safety, environmental sustainability,
responsible marketing, anti-illicit trade, ABAC, gifts and entertainment,
conflicts of interest, tax evasion, sanctions, data privacy and cyber risk.
Customers
Suppliers
Environmental Policy* Our commitments to following high standards of environmental
protection, adhering to the principles of sustainable development and
protecting biodiversity covering our direct operations and supply chain,
including agricultural, manufacturing and distribution operations.
Our People
Suppliers
Customers
Governments and Wider Society
International Marketing
Principles (IMP)*
The standards that govern marketing across all our product categories
and including the requirement for all our marketing to be targeted at
adultconsumers only.
Consumers
Customers
Suppliers
Youth Access Prevention
(YAP) Guidelines
Support our strict IMP requirement to only direct marketing at adult
consumers by setting out clear requirements for YAP activities in all
markets where our products are sold.
Consumers
Customers
Biodiversity Statement
Sets out the principles we follow to manage our biodiversity footprint
across our operations.
Suppliers
Governments and Wider Society
Circular Economy
Position Statement
Our commitment to applying circular economy principles across
ouroperations and product categories.
Consumers
Governments and Wider Society
Operational standard on
child labour prevention
Detailed guidance and procedures for our leaf operations in tackling
therisk ofchild labour in our tobacco supply chain.
Suppliers
Our People
Governments and Wider Society
Community
Investment Framework
Sets out the Group strategy for community investment and charitable
donations, aligned to the United Nations Sustainable Development Goals.
Our People
Governments and Wider Society
Group Quality
Policy Statement
Formalises how we strive to deliver defect-free products, processes
andcapabilities that create sustainable value for our brands.
Consumers
Governments and Wider Society
ESG Framework
Our Board has strategic oversight of our
Sustainability Agenda and ESG priorities.
The Board is supported by the Audit
Committee, which monitors performance,
risks and adherence to our standards.
The Audit Committee is underpinned by
ourRegional Audit and CSR Committees.
Our Management Board, chaired by the
Chief Executive, has overall responsibility
for overseeing the implementation of
Group strategy and policies, including
those relating to ESG. Members of the
Management Board are responsible for
overseeing delivery against ESG targets
forareas under their individual remit.
Management of ESG priorities are
embedded across relevant business areas
at Group, regional and local levels.
This approach provides a flexible channel
for the structured flow of information,
monitoring and oversight of ESG at the level
and format best suited to the context.
Our Group policies (indicated by* in the
table below) are endorsed at Board-level
and aligned with international standards.
Our Group policies are adopted by all Group
companies and support the effective
identification, management and mitigation
of risks and issues for our business in these
and other areas.
They are underpinned by a range of
principles, statements, operational
procedures, standards, guidelines
and controls to help ensure effective
implementation of our policy commitments.
Full details and downloads of our policies and
standards can be found at bat.com/principles.
We have a clearly defined governance framework to ensure Board-level
oversight and management of our Sustainability Agenda and ESG priority
areas across the Group. This provides a flexible channel for the structured
flow of information, management and oversight of ESG from local business
units up to Board level.
Strategic Management
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
49
A rating and award is not a recommendation to buy,
sellor hold securities. A rating and award may be subject
to withdrawal or revision at any time. Each rating and
award should be evaluated separately of any other rating.
The methodologies of any rating or award presented here
may not be the same as those of other ratings, awards
ormethodologies that may be used by our stakeholders,
and may emphasize different aspects of ESG practices and
performance, and, thus, may not be representative of our
ESG performance in all respects.
Awards and Recognition
2021 was a pivotal year for sustainability at BAT. It marks the 20th year of
our inclusion in the Dow Jones Sustainability Indices, as well as the 20th
anniversary of publishing our first Social Report. We are proud of how much
we have achieved over the last 20 years. Today, we are building on these
strongfoundations to accelerate progress towards A Better Tomorrow
TM
.
15. Our listing in the Dow Jones Sustainability Indices (DJSI) is based on November 2021 score in the S&P Global Corporate Sustainability Assessment.
16. SAn MSCI ESG Rating is designed to measure a company’s resilience to longterm, industry material environmental, social and governance (ESG) risks.
17. A Sustainalytics score of zero out of 100 represents the lowest ESG risk. BAT’s ESG Risk Rating places the company in the 16th percentile of the industry group which we are assessed in.
Sustainability Ratings
MSCI
We achieved a ‘BBB’ rating in
the most recent MSCI ESG
Ratings. This helps investors
identify and understand
financiallymaterial ESG
portfolio risks.
16
Dow Jones Sustainability Indices (DJSI)
We have achieved inclusion in the indices for 20 consecutive
years. In 2021, we were the only company in our industry listed
in the prestigious World Index, representing the world’s top
10%ESG performers.
15
Sustainalytics
We achieved a score of 26.8 in the most recent Sustainalytics
ESG Risk Ratings. This gives investors insights into financially
material ESG risks in their portfolios.
17
Vigeo Eiris
We scored 48% (up by 1pp
from 2020) in the most
recent Vigeo Eiris rating.
This evaluates organisations’
integration of ESG factors into
their strategies, operations
and management.
Best-in-class
ISSScore
We achieved the highest
rating for the ISS Social
Disclosures QualityScore.
This identifies best-
in-class sustainability
disclosure practices.
A- scores in CDP Climate
and Water assessments
In 2021, we achieved A- scores
in the CDP Climate and Water
assessments. We were honoured to
once again be named on the CDP
Supplier Engagement Leader Board
in 2021.This recognise our actions
to engage our suppliers to manage
climate risk and reduce carbon
emissions in oursupply chain.
Awards and Recognition
Gold Class Sustainability Award
We were once again awarded the
highest Gold Class in the S&P Global
Sustainability Yearbook 2021.
Global Top Employer
We have been recognised as a Global
Top Employer for four consecutive
years, acknowledging our commitment
to best-in-class working environments
and career opportunities.
National and Global Equality Standard
In 2021, we were the first in our industry
to achieve UK National Equality
Standard and Global Equality Standard
accreditation. Both are rigorous
benchmarks for diversity and inclusion.
Financial Times Diversity
Leaders Report
We were named a Diversity Leader by the
Financial Times in 2021. This recognises
the top 10% of companies for achieving
adiverse and inclusive workforce.
Sustainable Product Award for Vuse
In 2021, Vuse, our global number vaping brand,
won the Sustainable Product Award in the
prestigious 2021 SEAL Business Sustainability
Awards. SEAL recognises innovative and
impactful products that are ‘purpose-built
forasustainable future’
Financial Times Climate Leader
We were named as a 2021 Climate
Leader by the Financial Times in
an inaugural European ranking.
This recognises the top 300 of more
than 4,000 companies across Europe.
BAT Annual Report and Form 20-F 2021
50
Strategic Management
Reducing the Health
Impact ofOur Business
Why harm reduction matters
We know combustible products pose
serious health risks. The only way to avoid
those risks is to not start – or to quit –
smoking. Yet more than 1.1 billion people
today continue to consume tobacco and
nicotine products globally. ‘Tobacco harm
reduction’ is a well-recognised public
health strategy that aims to minimise the
harm caused by combustible cigarettes
by encouraging adult smokers, who would
otherwise continue to smoke, to switch
completely to scientifically substantiated,
reduced-risk alternatives
*†
.
Some 100 million adult smokers worldwide
have already switched to reduced
risk tobacco and nicotine products.
We encourage those who would otherwise
continue to smoke, to switch. This means
enabling consumer choice through making
available a range of alternatives to smoking
that deliver comparable satisfaction in
nicotine delivery, use and sensorial aspects.
For example, some studies suggest that
vapour products are more successful than
nicotine replacement therapy in providing
a satisfactory alternative to cigarettes
1,2
despite not being smoking cessation
products nor marketed as such.
These products need to be supported
by world-class science and industry-
leading standards.
Responsible, science-backed and well-
thought-through regulation is also crucial
for enabling adult consumers to access
and enjoy reduced-risk products
*†
with
confidence, while governments and health
bodies can be assured that these products
are manufactured to high safety and
quality standards.
We have a clear purpose to build A Better Tomorrow™ by reducing the health impact
ofourbusiness. That’s why we are changing: creating new products, backed by science
andindustry-leading standards, that provide adult smokers with less risky alternatives
*†
.
The Key Enablers for Harm Reduction
Consumer choice
Smokers are most likely to switch
and replace smoking with less risky
alternatives
*†
when they find one that
meets their own preferences.
That’s why we are transforming
to a multi-category portfolio
of non-combustible products,
tailored to meetthe preferences
of adult consumers. This includes
Vapour Products, Tobacco Heating
ProductsandModern Oral Products.
World-class science
World-class science is crucial to
providing a robust evidence-base to
substantiate the role of New Category
products in tobacco harm reduction.
We apply our peer-reviewed scientific
framework to assess the emissions,
exposure and risk of our products.
And we openly share our science
and publish our research in peer-
reviewed journals.
Standards and regulation
Wide availability of less risky
*†
products depends on having the right
regulatory and market conditions, as
well as high standards and responsible
industry practices.
We hold ourselves to high standards
and hope these will become an
industry benchmark and the basis
for future regulation. So we share our
approach, information and expertise
with industry groups, standards
bodiesand regulators.
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free
and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are subject to FDA regulation and no
reduced-risk claims will be made astothese products without agency clearance.
2021 performance highlights
£2.1bn
in New Category revenues, up by
42% vs 2020
18m
consumers of our non-combustible
products, up by 4.8m vs 2020
£304m
invested in research and
development
H
1. Cox et al, (2019). Effects of e-cigarettes versus nicotine
replacement therapy on short-term smoking abstinence
when delivered at a community pharmacy. Addict Behav
Rep 2019.
https://doi.org/10.1016/j.abrep.2019.100202
.
2. Hajek et al. (2019). A Randomized Trial of E-Cigarettes
versus Nicotine-Replacement Therapy. N Engl J Med 2019.
https://doi.org/10.1056/NEJMoa1808779
.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
51
Consumer choice
We are creating new products, backed by
science and industry-leading standards,
that provide adult smokers with less
risky alternatives
*†
.
Fuelled by our deep consumer insights,
innovation is a driving force within our
business, enabling us to anticipate trends
to meet evolving consumer needs.
We do this through our growing global
network of digital hubs, innovation super
centres and world-class R&D laboratories.
Collaborations with external partners and
our corporate venturing initiative are also
helping us to stay ahead of the curve.
For example, in 2020, we established
our Open Innovation team, as part of our
New Categories R&D function. Working in
partnership with BTomorrow Ventures, the
Group’s corporate venture capital unit, the
team is focused on identifying partners
(including start-ups) that have innovative
technologies and materials that hold
promise for our product pipeline.
Find out more about our New Category products
onpages 35 to 40
World-class science
For more than 60 years, research and
development has been a critical part of our
business. We invest almost £350 million
a year in R&D to deliver innovations that
satisfy or anticipate consumer preferences.
The main focus of our R&D investment is on
developing and scientifically-substantiating
New Category products to assess their
reduced-risk profile
*†
.
We use a wide range of analytical
techniques, specialised laboratory
technology and expertise to test our
products and ensure they meet high
quality standards. This is supplemented
by collaborations with global external
researchers who bring independent and
specialist expertise that augments and
enhances our internal capabilities.
We follow strict best practice standards for
all our scientific research. And, regardless
of the results, we submit to high-quality,
peer-reviewed journals owned by leading
publishers, with well-respected standards
for how they run the peer-review process.
We work to make our science accessible
and understandable to a wider audience.
We refreshed our dedicated bat-science.
com website in 2021, and published a new
Science and Innovation Report. We also
introduced new quarterly science updates
to provide the latest information in this
rapidly evolving area in a concise way.
Find details of our world-class science on pages 35,
37 and 39
Standards and regulation
Regulation of New Category products
continues to evolve. Globally, there are
regulators passing progressive laws
that allow and encourage adult smokers
to switch to New Category products,
and some regulators who view them
more cautiously. As the science and
evidence to substantiate these products
grows, we expect to see more countries
passing progressive regulations, further
accelerating New Category growth.
We believe a stakeholder-inclusive, whole-
of-society dialogue that includes regulators,
policymakers, consumers and the industry
is key to developing effective policies that
can accelerate tobacco harm reduction as
fast as possible. Any regulation around New
Category products should be founded in
science, not opinion.
We hold ourselves to high standards
and hope these will become an industry
benchmark and are used as the basis for
future regulation. That’s why we share our
approach, information and expertise with
industry groups, governmental technical
advisory committees, standards bodies and
other key stakeholders.
How we think New Category products
should be regulated
1. An evidence-based approach
allowing robust science to lead to greater consumer choice,
qualityand confidence.
2. Proportionate regulation
where science-based evidence and risk are understood and
differentiatedtoguide regulatory policy.
3. Freedom to innovate
to ensure products can evolve to meet changing
consumer preferences.
4. Engagement, dialogue and communication
to ensure regulators and consumers can make
well-informed decisions.
5. Responsible marketing freedoms
that facilitate the acceleration of movement of consumers
fromcombustible to non-combustible products.
New Category regulation
intheU.S.
We welcomed the opportunity to
participate in the U.S. FDA’s Premarket
Tobacco Product Application (PMTA)
process for New Category products.
PMTAs are based on a summary of all
research findings to demonstrate that
the products meet the FDA’s criteria as
“appropriate for the protection of the
public health”.
The FDA evaluates PMTAs against
a rigorous, science-driven standard
to determine that marketing of the
products is “appropriate for the
protection of the public health”.
In October 2021, we were pleased to
receive the first ever such authorisation
for our Vuse Solo product in
Original flavour.
The Velo PMTAs currently are under
review by the FDA. In many areas, these
share foundational science and so we
remain confident in the quality of these
products and our applications.
SPOTLIGHT
BAT Annual Report and Form 20-F 2021
52
Excellence in
Environmental Management
We have a global footprint and rely on natural resources to run our business. Securing
resources in a climate-resilient supply chain is key to delivering our business strategy.
We are driving environmental excellence for a greener tomorrow.
Tackling climate change
Climate change is a global issue
impacting the planet and society, as well
our business and supply chain. We have
an integrated climate strategy focused
on building climate-resilience across our
value chain.
By 2030/2050:
Carbon neutral
operations (Scope 1 and 2 CO
2
e
emissions) by 2030 and net zero carbon
emissions across our value chain (Scope
1, 2 and 3) by 2050.
Eliminating waste
Circularity – and driving a zero-waste
economy – is at the core of our bold
stance to deliver a greener tomorrow.
From using less plastic and recycling
more, to being smarter in how
ourproducts are designed.
By 2025:
100% plastic packaging to be
capable of being reusable, recyclable or
compostable; and 100% of our operations
sites to be zero waste to landfill.
Biodiversity and afforestation
We work with our contracted farmers
to protect biodiversity and forest
resources and support community-
based afforestation programmes around
the world.
By 2025:
Net zero deforestation of
managed forests in our supply chain; and
net positive impact on forests in our tobacco
supply chain.
Sustainable water stewardship
From eliminating loss and leaks to
increasing water recycling, we are
decreasing water use in our operations.
And we are helping our contracted
farmers to irrigate their crops
more sustainably.
By 2025:
100% of manufacturing sites
to be Alliance for Water Stewardship
certified; and 35% reduction in amount
ofwater withdrawn (vs 2017 baseline).
Find our key ESG goals, targets and metrics in our
ESG Roadmap on page 47
Strategic Management
Our Environmental Policy is adopted
by all our Group companies. It outlines
our commitment to high standards of
environmental protection, adhering to the
principles of sustainable development and
protecting biodiversity.
Tackling Climate Change
Our ambition to be a carbon neutral (Scope
1 and 2) business by 2030 is supported by
a range ofoperational targets. Already,
we’re making significant progress with a
reduction of 42.7% in Scope 1 and 2 CO
2
e
emissions against our 2017 baseline.
We also recognise the importance of
looking beyond the operations we directly
control – so we have set a target for net
zero carbon emissions across our value
chain by 2050.
To deliver these stretching targets, we have
an integrated climate strategy covering both
our own business operations and our wider
value chain. This includes utilising multiple
opportunities, from on-site renewable
energy generation and purchasing
renewable electricity, to transitioning
our distribution fleet to electric and
hybrid vehicles.
In addition, in 2021, we incorporated internal
carbon pricing into business plans to ensure
the impact on environmental performance
and targets is formally considered and
quantified. This has supported the
prioritisation of sustainability projects such
as on site renewable energy generation.
By the end of 2021, 32 of our operations
siteswere purchasing 100% renewable
electricity and 19 were generating
renewable energy on-site, such as with
solar panels. As of last year, we had on-site
generation solar coming online in Pakistan,
Indonesia, Germany, and South Korea.
In places likeSouth Africa, solar plays an
important role in the overall site’s electricity
decarbonisation. In 2021 the site generated
green electricity equivalent to avoiding
1,840 tCO
2
. Factories in Brazil and Chile,
and Switzerland’s manufacturing and
commercial sites also passed independent
carbon neutral certification in 2021 against
PAS 2060 – an internationally recognised
certification on carbon neutrality.
In our tobacco supply chain, we support
over 75,000 contracted farmers globally,
helping them to reduce emissions through
innovative technologies and ‘carbon-smart’
farming practices throughout the growing
cycle. We also continue to actively work
with our largest 30 direct product materials
suppliers that represent 15% of CO
2
e
emissions for this part of our supply chain.
In 2021, they participated in adetailed, one-
to-one assessment of their current ESG
practices and performance, with a strong
focus on carbon emissions, aswell as
waste, water and biodiversity.
Our products are intrinsically linked to
our sustainability ambitions. By building
sustainable brands with purpose, we are
bringing our consumers on our journey with
us. So, in 2021, we were proud to announce
that Vuse was certified as the first global
carbon neutral vape brand
1
.
Eliminating Waste
Our Circular Economy Position Statement
sets out our key principles across our
operations and product categories. In 2021,
we developed new Circular Economy
Guidelines and training to provide our people
with a common understanding and details of
how to apply these principles across different
business areas, products and geographies.
We have conducted studies to map our
waste footprint intensity across our value
chain and have established cross-functional
sustainability workstreams for all our
product categories.
We are focused on eliminating unnecessary
single-use plastic across all packaging
and, by the end of 2021, had achieved a 13%
reduction in total weight.
1. Based on ePod, ePen, eTank mini, Alto devices and
consumables internal sales forecast (calculated March
2021) for 12 months starting from April 2021.
E
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BAT Annual Report and Form 20-F 2021
53
Examples of initiatives undertaken include:
removing silicone caps from e-liquid
pods, replacing plastic trays with a pulp
based alternative and removing plastic
film overwrap.
We’re also aiming for 100% of plastic
packaging to be capable of being reusable,
recyclable or compostable by 2025 – by the
end of 2021, this was achieved for 75% of
our packaging.
To help drive responsible disposal, we have
take-back schemes for consumers to return
our vapour and THP devices in all markets
where they are available.
In 2021, we also supported 12 consumer
education and awareness-raising initiatives to
prevent cigarette butt littering in five countries.
And we are actively looking for new, innovative
ways to tackle the issue. For example, we
are partnering with an innovate start-up to
test a new solution to processing factory
waste and cigarette butts from the streets
to extract the cellulose acetate.
In our operations, we’re driving a zero
waste to landfill mindset with an ambitious
target for 100% of sites to achieve this by
2025. Despite challenges in some locations
that have limited recycling and waste
management facilities, 35% of our sites had
reached zero waste to landfill by the end of
2021, and a further 7% are close to achieving
this and are recycling at least 95% of total
waste generated.
Our Integrated Work Systems (IWS) are
crucial in helping to achieve this through
optimising our overall performance,
minimising machine unplanned downtime,
reducing waste, optimising energy and
water usage and saving personnel time
and effort. Significant benefits have been
obtained in the last year ranging from a 5 to
15% reduction in waste to a smaller carbon
footprint, 4pp efficiency improvement,
lower energy consumption and utility costs,
and the saving of 1,000s of working hours.
Sustainable Water Stewardship
While our manufacturing facilities are not
particularly water intensive compared to
other industries, with the changing climate,
water scarcity is a growing concern.
Our sites implement a range of initiatives to
eliminate water losses and improve water
efficiency. As a result, we have been making
steady progress decreasing water use, with
an 27.6% reduction achieved from our 2017
baseline year. At the same time, we’ve also
increased theamount of water we recycle
to 16.7% (compared to 15.3% in 2020).
To accelerate progress and deliver further
water stewardship opportunities, we
are members of the Alliance for Water
Stewardship (AWS). AWS is a global
collaboration of businesses, NGOs and
thepublic sector that are contributing
to the sustainability of local water-
resources through adoption of the global
AWS Standard.
We have committed to 100% of our
manufacturing sites being certified against
the AWS standard by 2025. In 2021, 11 sites
achieved AWS certification and a further
23 sites are expected to complete the
certification process during 2022.
Water stewardship in tobacco growing
Water management is vital to sustainable
farming, especially given that agriculture
accounts for an average of 70% of
freshwater withdrawals globally.
Rainwater is commonly sufficient for
watering many tobacco crops – due to
thevariety of locations in which we source
our tobacco, only 31% require irrigation.
Our leaf operations in these areas are
actively looking at ways to work with
our contracted farmers to reduce water
usage, with different techniques applied
depending on the local circumstances and
growing conditions.
Our global leaf agronomy centre in Brazil is
playing a vital role in researching, developing
and customising cutting-edge innovations
to drive water efficiency in tobacco growing.
For example, innovative ‘floating’ systems
for growing tobacco seedlings, based on
hydroponics, use about 85% less water
per hectare. These have been successfully
introduced to some 17,000 contracted
farmers in six countries, with trials underway
in six more countries.
We have also developed innovate drip
irrigation technology, that increases water-
usage efficiency by up to 90% – so far, this
is being used by our contracted farmers in
six countries.
Biodiversity and Afforestation
Our Biodiversity Statement sets out
the principles we follow to manage our
biodiversity footprint across our operations.
In 2021, we announced a new commitment
for net zero deforestation of managed
forests across our tobacco and paper- and
pulp-based product supply chains by 2025.
This means that for every tree that is chopped
down, we will aim for another to be planted by
ourselves or others in our supply chain. In our
tobacco supply chain, we take this further
by aiming to have a net positive impact on
forests by 2025. This means that not only
will a tree be planted for each one used, but
we will strive to have a net positive impact –
planting more trees than are removed.
To achieve these ambitious targets, our
leaf operations and third-party suppliers
continue to work with tobacco farmers
inour supply chain to provide training
in forest and biodiversity management,
distribute tree saplings for a sustainable
source of fuel for curing and help farmers to
switch tolocally available alternative fuels.
In 2021, monitoring of our contracted farmers
wood fuel use for tobacco curing showed that
99.9% is from sustainable sources.
In addition, wesupport afforestation,
biodiversity and environmental conservation
programmes around the world as part of our
wider community-based initiatives. In 2021,
this included 18 projects in 13 countries,
including long-standing afforestation
programmes in Bangladesh, Brazil, Kenya,
Pakistan and Vietnam that have collectively
distributed an estimated 380 million trees
over the last 40 years.
In our paper- and pulp-based product supply
chain, we are committed to working with
suppliers that can demonstrate that the material
is sourced sustainably, with certification from
the Forest Stewardship Council (FSC) or the
Programme for the Endorsement of Forest
Certification (PEFC). So far, this is the case
for 89% of the paper and pulp volumes we
purchase – we aim to reach 100% by 2025
aspart of ournet zero deforestation target.
In addition, we signed-up in 2021 as a
signatory to Business for Nature’s Call to
Action, a global coalition uniting influential
organisations and forward-thinking
businesses to amplify calls for collective
action to reverse nature loss in this decade.
Digital farmer sustainability
management
We are leveraging the power of
technology to enhance and accelerate
our connectivity with our contracted
farmers and farming communities.
Our Farmer Sustainability Management
(FSM) system is a digital platform
that supports the work of our field
technicians by enabling a consistent
approach to farm monitoring and overall
sustainability management.
Our field technicians visit our contracted
farmers approximately once a month
during the growing season, acting as a
direct link between the farmers and BAT.
Details of each farm visit are recorded
in FSM, including any issues identified
and details of prompt actions taken to
remediate them.
In 2021, the majority of issues
recorded in FSM (96.5%) related to
the safe handling, use and storage
of agrochemicals.
SPOTLIGHT
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54
Strategic Management
Community investment
In many parts of the world, we partner with
NGOs and other stakeholders on projects
to support the local communities where
we operate. These programmes focus
on a range of issues, such as women’s
empowerment, financial inclusion, access
to healthcare, clean water and sanitation
and supporting national responses to the
COVID-19 pandemic.
Our community investment policy in our
SoBC is supported by our Community
Investment Framework, which sets
out our how Group companies should
develop, deliver and monitor community
investment programmes. In 2021, the
Framework was revised to align our
community investment strategy with
the UN Sustainable Development Goals.
Across the Group, £19 million was reported
for community investment programmes in
2021, including £12.6 million in cash spend
and a further £6.4 million estimated for in-
kind donations. This includes £0.96 million
given for charitable purposes by UK
Group companies.
Human Rights
Our integrated human rights strategy
is aligned to the UNGPs and includes
policies, due diligence, grievance channels
and remediation procedures for our own
business operations and supply chain.
Our Human Rights policy forms part of
our Standards of Business Conduct and is
reflected in our Supplier Code of Conduct.
This is complemented by our operational
standard on child labour prevention, which
provides detailed guidance and procedures
for our leaf operations in tackling the risk of
child labour in our tobacco supply chain.
Tobacco supply chain
The most significant challenges for
human rights are in our tobacco supply
chain and this has been a priority area
forusformany years.
Human rights issues in agriculture can be
complex, and we know that the situation
on the ground can be nuanced and that
remediation requires cooperation and
dialogue, rather than confrontation. This is
why our approach emphasises working
with families and communities to find
sustainable solutions while respecting local
context and the challenges of operating
small, family-run farms.
Delivering a Positive
Social Impact
We have an important role to play in delivering a positive social impact for our employees and
people across our supply chain. By enhancing farmer livelihoods, respecting human rights and
ensuring a safe, diverse and inclusive working environment, we can help ensure the long-term
sustainability of our business and build a fairer tomorrow for society.
Farmer livelihoods
Rural poverty is recognised as a root
cause for issues such as child labour.
We support our contracted farmers to
enhance livelihoods and food security.
And our community programmes
help to build long-term resilience for
rural communities.
Human rights
Our business and supply chain touch
several industries with important
human rights impacts. Our approach is
aligned to the UN Guiding Principles for
Business and Human Rights (UNGPs) and
focuses on strong policies, due diligence
and remediation.
By 2025:
Aim for zero child labour and zero
forced labour in our tobacco supply chain
People and culture
We focus on building an inclusive and
supportive culture that attracts, engages
and retains diverse and talented people,
develops the next generation of leaders
and creates a fulfilling, rewarding and
responsible work environment.
By 2025:
Increase the proportion of
women in management roles to 45%
Health and safety
We are committed to providing a
safe working environment for all
ouremployees and contractors, and to
enabling access to personal protective
equipment (PPE) for our contracted
tobacco farmers
Each year:
Aim for zero accidents
Group-wide
S
Find our key ESG goals, targets and metrics in our
ESG Roadmap on page 47.
Farmer Livelihoods
If farmers have sustainable living incomes,
farming is more attractive to the next
generation. It also reduces the risks of
exploitation, as well as child and forced
labour, and helps encourage improved
adherence to safety and environmental
standards. That’s why enhancing farmer
livelihoods is such an important priority
area of our Sustainability Agenda
and is central to our tobacco supply
chain strategy.
Our Extension Services of expert field
technicians support our 75,000+ contracted
farmers throughout the growing cycle,
helping to develop their skills, promote
better yields and build their resilience.
This includes providing new tobacco
varieties that produce higher quality leaf
and increase yields by up to 20%, as well
as mechanised solutions and technology
to help farmers scale up production and
reduce manual labour.
We have been measuring farmers’ yields,
profit margins and revenues from tobacco
as part of our
Thrive
assessments since
2015. In 2021, we took a step-change
in building upon, and strengthening,
this approach, undertaking further
assessments of the living income
generation in our farmer base.
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This is where our direct contracts with
farmers enables us to have a real impact.
Our field technicians visit our contracted
farmers approximately once a month during
the growing season. As well as providing
agronomy and livelihoods support, this is an
important way of monitoring the farms.
In 2021, a total of 1,790 incidents of child
labour were identified on 0.7% of our
contracted farms and those supplying our
strategic third-party suppliers. The majority
related to under-18s working on tasks
such as preparing bales, watering and
weeding, and harvesting and stitching
tobacco. Of these, 100% were reported as
resolved, where a remediation plan that
considers the individual circumstances
is implemented with the farmer.
Wherever possible, this plan involves local
community or school support. In a small
number of cases, where there is persistent
non-compliance, the farmer’s contract is
not renewed for the next growing season.
We maintain a relentless focus on
addressing the root causes. Our leaf
operations and strategic third-party
suppliers deliver human rights training and
communication programmes for farmers
and community members. More than
350,000 people were reported to be
engaged via this training in 2021.
We support a range of local community-
based programmes in collaboration with
local stakeholders. These include child
labour prevention programmes in Brazil,
Kenya and Mexico. We also continue
as active members of the Eliminating
Child Labour in Tobacco Growing
(ECLT) Foundation which, since 2011,
has supported over one million children,
farmers and families.
In addition, human rights impact
assessments, aligned to the UNGPs, have
been conducted in six of our tobacco
sourcing countries, covering nine suppliers –
India and Indonesia in 2019, Mozambique in
2020, and Macedonia, Turkey and Zimbabwe
in 2021. Collectively, these assessments
have engaged over 2,200 rights-holders and
are a best practice approach to identifying,
assessing and responding to actual and
potential human rights impacts, including
the root causes and how they manifest.
Product materials supply chain
Beyond tobacco, we source product
materials like paper and filters for cigarettes
and, for our New Category products, we
have a growing supply chain in consumer
electronics and e-liquids. Labour factors
are considered right at the outset, before
we even start working with a new supplier.
This includes mandatory scoring criteria as
part of the supplier selection process.
Once selected, suppliers must then
undergo an independent labour audit
performed by our partner Intertek.
The audit assesses workplace conditions,
and we expect suppliers to achieve
a minimum score of 70% to qualify.
We maintain a rigorous focus on human
rights in the supply chain and conduct
an annual risk assessment on 100%
of our existing materials suppliers.
Using independent human rights indices
developed by Verisk Maplecroft, we assess
suppliers’ inherent risk exposure based
on their country location and the goods or
services they provide. Suppliers identified
as high risk are then prioritised for audits.
In 2021, 142 audits were conducted by
Intertek on our suppliers in 38 countries.
Over the last three years, 22% of our
product materials suppliers have
undergone at least one independent labour
audit, and we’re committed to achieving
100% by 2025.
Human rights risk assessments
The policies, procedures and controls
adopted by Group companies help to
substantially mitigate human rights risks
in our businesses. We recognise that
circumstances in some countries present
a higher risk for human rights issues, such
as where regulation or enforcement is
weak, or there are high levels of corruption,
criminality or unrest.
We have a defined process in place to
identify and carefully monitor BAT operations
in high-risk countries. This process includes
an annual risk assessment of all countries
with Group company employees present,
using Verisk Maplecroft’s human rights
indices (including its Modern Slavery Index).
Our operating companies in each high-risk
country identified must complete a human
rights assessment, confirming compliance
with Group policies, standards and controls
and providing details of measures in place
toenhance human rights management.
The process is reviewed by the Audit
Committee at each stage, including action
plans for any areas for improvement
identified. In 2021, our operations in 26
countries were identified as high risk from
a human rights perspective and completed
the risk assessment.
Health and Safety
We are always working to protect the health,
safety and wellbeing of people – through the
COVID-19 pandemic and beyond – as well
as striving for zero accidents Group-wide.
We have a mature and well-established
approach, based on risk management
and assessment, employee training and
awareness, and tailored initiatives for
specific issues and higher-risk areas.
For example, in Trade Marketing &
Distribution, the highest risks relate to
road traffic accidents, particularly in
countries with poor road infrastructure
and driving behaviour, or attacks and
assaults from armed robberies where our
goods have a high street value. So, we
have a comprehensive driver safety and
security programmes in place, including
regular training and awareness campaigns,
telematic systems in all our vehicles and
clear security protocols.
Overall, total accidents across the Group
reduced by 19% – from 155 accidents in
2020, down to 126 in 2021. Sadly, however,
there were 3 fatalities in 2021 to one
employee and two contractors in Brazil,
Mexico and Bangladesh (compared to
three contractors in 2020). In addition,
4 members of the public lost their lives in
road traffic accidents involving BAT vehicles
in Bangladesh, Honduras, Poland and
Zambia. Our drivers were found not to be
at fault in three cases, while an employee
in Zambia was charged with dangerous
driving and is facing disciplinary action.
Find out about our Group risk factors related to
workplace health and safety on page 96.
People and Culture
Attracting and retaining an increasingly
diverse workforce and providing a
welcoming, inclusive working environment
are key drivers in BAT’s transformation
journey to build A Better Tomorrow™.
We are creating value for our employees
byhaving a diverse range of excellent
people, engaged teams and being a great
place to work.
We have extensive health and wellbeing
support available to our employees,
including medical and counselling services,
and health insurance. We also offer regular
webinars and information on a range
of topics, including mindfulness, stress
management and financial wellbeing.
During the COVID-19 pandemic, this
support has played an even more important
role in keeping our people connected
and supporting one another during such
difficult times.
Find out details of our approach to people and
culture on pages 68-73.
BAT Annual Report and Form 20-F 2021
56
Strategic Management
Delivery with Integrity
Our
Delivery with Integrity
global
compliance programme promotes
an ethical culture and communicates
expectedbehaviours as set out in our SoBC.
Over the past five years, we have
strengthened our procedures and
guidelines across areas including ABAC,
anti-money laundering and tax evasion,
competition law, sanctions and data
privacy. With these strong foundations in
place, we are now focusing on automation
and data analytics to identify and mitigate
such risks as they arise, improving the
lifecycle risk management of the third
parties BAT engages with.
Read more about our Group risk factors related to
corporate behaviour and compliance with sanctions
regimes and competition laws on pages 317 to 339.
While policies and procedures are key to
a consistent approach to compliance, we
know that engagement and awareness are
crucial to sustaining a culture of integrity
across the Group. That’s why we have
focused on ensuring everyone at BAT
understands their role from day one in the
organisation and that this is sustained
throughout the year.
Our SoBC app provides easy access to
SoBC policies, procedures and guidance,
as well as our global ‘Speak Up’ channels,
which are multilingual. From 2022, the app
now incorporates our Supplier Code of
Conduct in 15 languages to help increase
accessibility for suppliers. To date, the app
has been downloaded more than 27,500
times. In 2021, we launched our new SoBC
e-induction training and automated conflicts
of interest disclosure requirement for all
new management-level employees. We also
launched new training targeted at relevant
employees on areas such as sanctions,
competing fairly and ethically and data privacy.
In 2021, we held two global integrity events
at the start and middle of the year. The first
week-long campaign focused on the role
of line managers in leading by example as
SoBC role models. It also included our new
campaign – ‘Speak-Listen-Act’ – focused
on raising awareness of our Speak Up
channels and for them to be seen as a
trusted tool by our people. Later in the year,
our global 24-hour ‘integrity pledge’ event
focused on reaffirming our commitment to
ethical behaviour, with employees making
personal pledges across the Group.
Robust Governance
Robust governance is key to our sustainable long-term growth. We are committed
to achieving our business objectives in an honest, transparent and accountable way,
and sustaining a culture of integrity in everything we do. Our policies and standards
set out how we do this consistently, everywhere we operate.
Business ethics
Unethical behaviour can damage our
business, reputation and consumer
trust. We have a strong culture of
responsible behaviour, underpinned by
our ethos and Standards of Business
Conduct. Our Group-wide Delivery with
Integrity programme helps everyone at
BAT understand and play their role in
maintaining our standards.
Responsible marketing
Responsible marketing practices are
crucial for ensuring only adult consumers
access and use our products. We have
strict International Marketing Principles
in place for all our product categories and
work with our retail partners on youth
access prevention programmes.
Regulation and policy
engagement
Effective regulation needs dialogue
between governments and industry,
and we have a legitimate role to play
in policy-related debate that affects
our business. By sharing our expertise,
engaging transparently and with high
regard for accuracy and integrity, we can
make a valuable contribution to policy
development relating to our industry.
Find our key ESG goals, targets and metrics in our
ESG Roadmap on page 47.
2021 performance highlights
94%
industry-leading score in the Codes of
Conduct category of the Dow Jones
Sustainability Index assessment
(Score date: 12 November 2021)
100%
of markets aligned to the YAP
guidelines***, where our products
aresold
Business Ethics
Our Standards of Business Conduct
(SoBC) express the high standards we
are committed to upholding. Our SoBC
comprise our policies referenced on page
48, including anti-bribery and corruption
(ABAC), political contributions, anti-money
laundering and tax evasion, and is available
in 14 languages. SoBC awareness and
understanding are promoted through regular
training and communications. Our SoBC
are complemented by our Supplier Code
of Conduct, which outlines the minimum
standards expected of our suppliers.
We conduct a detailed review of our SoBC
and Supplier Code of Conduct every two
years to ensure they remain at the forefront
of best practice, with the most recent
review taking place in 2021.
This included external benchmarking
against peer companies, external legal
reviews in the UK and US, anddrew on
extensive insights from investor ratings
and indices. The updated versions of
our SoBC and Supplier Code of Conduct
were approved by the Board in 2021 and
took effect from January 2022. This was
supported by their adoption by our Group
companies and roll-out to Group company
employees worldwide.
Our Group entities complete an annual
assessment of audit controls to assess
and confirm they have complied with SoBC
controls and compliance procedures.
SoBC compliance is monitored through the
year by our Corporate Audit Committee and
Regional Audit and CSR Committees, and
quarterly by the Audit Committee.
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57
We ended the year with our global SoBC
compliance campaign. Our Group company
employees completed a formal SoBC
sign-off during which they completed
training and assessment, affirmed their
commitment to the SoBC and declared
any new or existing personal conflicts of
interest. In 2021, this was successfully
completed by 100% of our Group
company employees.
Over 24,000 did this through our online
SoBC portal and remaining Group company
employees were given various options to
complete the process, including via our
SoBC app. The app has proved important
in helping everyone to participate in
training and sign-off safely, given COVID-19
continued to hinder usual face-to-face
gatherings in many of our markets.
Speak Up and SoBC compliance
Our SoBC and Supplier Code of Conduct
make it clear that our employees, partners
and suppliers should speak up if they
have a concern about actual or suspected
wrongdoing, including in relation to
accounting or auditing matters. We will
always listen to these concerns and do not
tolerate victimisation or reprisals of any
kind against anyone raising a concern; such
conduct is itself a breach of the SoBC and
is a serious disciplinary matter. Our speak
up channels include an independently
managed Speak Up online portal and
telephone hotlines, available 24 hours
a day. Speak Up channels can be used
in confidence, and anonymously where
preferred, and are available in multiple
local languages.
Not all contacts made via our SoBC Portal
involve alleged SoBC breaches; some
relate to questions regarding the SoBC
or other matters. In 2021, there were 581
SoBC contacts (2020: 554), of which 304
SoBC contacts were assessed as alleged
SoBC breaches and reported to the Audit
Committee (2020: 321), including 145
contacts where the person raising the case
chose to remain anonymous.
Our SoBC Assurance Procedure defines
how all reports of alleged SoBC breaches
should be investigated and remediated
fairly and objectively. And our Business
Integrity Panel promotes a consistent
approach to investigation and remediation
of all alleged breaches of the SoBC. For the
detailed investigations conducted into all of
the reported cases in 2021:
–
No wrongdoing was found in 154 cases
(2020: 158);
–
The investigation continued at year-end
for 51 cases (2020: 47); and
–
99 cases were established as breaches
and appropriate action taken (2020: 116).
We take strong action for all cases
established as breaches, which will vary
from case to case depending on the
circumstances. In 2021, established SoBC
breaches resulted in 46 people leaving the
Group and 72 written warnings. In addition,
where any weakness in internal controls
is identified, appropriate measures are
taken to strengthen them. Our SoBC,
and information on the total number of
breaches reported under it, are available
atbat.com/sobc.
Please refer to the Governance Report for more
information about Board and Audit Committee
oversight and monitoring of SoBC compliance.
Responsible Marketing
Our International Marketing Principles
(IMP) govern our approach to marketing
our products across the Group. Our IMP
are applied consistently everywhere
we operate, even when they are stricter
than applicable local laws. All marketing
materials are subject to review by our
Legal & External Affairs (LEX) function.
Our Supplier Code of Conduct also includes
a requirement for our suppliers, agents and
third parties to comply with the IMP.
To support our strict requirement to only
direct marketing at adult consumers, our
markets are expected to adhere to our
global Youth Access Prevention (YAP)
Guidelines. These apply to all markets
where our products are sold, including
where distributed through third parties.
IMP and YAP compliance is monitored by
our Regional Audit and CSR Committees
and by the Audit Committee annually. All of
our markets reported alignment with our
YAP Guidelines in 2021. We report further
on compliance in our 2021 ESG Report at
www.bat.com/esgreport
.
As we accelerate our transformation,
driving growth in New Categories, building
strong brands of the future and digitising
our business, our new e-commerce
and social media channels are playing
an ever more prominent role in our
marketing strategy.
Digitisation around the world has been
rapidly accelerated by the COVID-19
pandemic and, in this changing
environment, we continue to embed new
digital channels and ensure our people
and partners have the right tools and
capabilities to support IMP and YAP
compliance. Our digital marketing toolkit
includes in-depth guidance on topics such
as content standards, social media and
search engines, and ensuring robust online
age verification procedures. And our digital
marketing hub supports our markets by
providing guidance on how to achieve long-
term consumer satisfaction and product
awareness in a responsible way.
In 2021, we reinforced this work with new
toolkits and guidance, such as for applying
our YAP Guidelines and age verification
standards on our own and third-party
e-commerce sites. We also launched a
new training programme, called iCommit,
covering measures for digital channels with
a mix of theory and practical training, based
on real-life scenarios.
Regulation and Engagement
Our SoBC includes our Lobbying
and Engagement Policy and Political
Contributions Policy, adopted by all Group
companies and applicable to all Group
company employees. These policies
require all our engagement activities with
external stakeholders to be conducted with
transparency, openness and integrity.
We are committed to conducting all
our engagement activities with external
stakeholders with transparency, openness
and integrity. For global regulatory
priorities, the views we advocate are the
same as those we publish on our website,
and we have long supported the OECD’s
Principles for Transparency and Integrity
in Lobbying. We also respect the call for
transparent and accountable interaction
between governments and the tobacco
industry established in Article 5.3 of the
World Health Organization’s Framework
Convention on Tobacco Control (FCTC).
We are open about what we think and
always try to offer constructive solutions
that will best meet the objectives of
regulation, while minimising any negative
unintended consequences.
Regulatory engagement by our businesses
is monitored throughout the year by our
Regional Audit and CSR Committees.
The Management Board’s Regulation
Committee, chaired by the Legal and
External Affairs Director, meets three times
a year and is responsible for reviewing key
regulatory and excise trends, Group priority
focus areas, and the execution of global
plans regarding regulation and monitoring
progress. Our Board is kept updated
on regulatory engagement activities
during the year. Details of any political
contributions are reported twice each
year to the Audit Committee. The Group
does not make contributions to UK or EU
political organisations or incur UK or EU
political expenditure. Details of political
contributions outside these jurisdictions
are set out on page 127.
Find details of our other governance
priorities, including data privacy and
cyber security, in our 2021 ESG Report at
www.bat.com/esgreport
.
*** Waivers from YAP Guidelines are granted where there
is a government ban on point-of-sale materials or YAP
retailer engagement cannot be ensured due to practical
or cultural limitations.
BAT Annual Report and Form 20-F 2021
58
TCFD Reporting
We recognise the importance of providing consistent and reliable climate-related information to investors and
other stakeholders. We have aligned our reporting with the recommendations and recommended disclosures
of the Task Force on Climate-related Financial Disclosures (TCFD). A summary of our response to each of the
TCFD recommendations and recommended disclosures, together with references to further information in
this report, is set out below. Our reporting against other frameworks, including the Sustainable Accounting
Standards Board (SASB) framework, can be found at
www.bat.com/esgreport
.
Strategic Management
Since 2019, we have worked with an
external consultancy with expertise in TCFD
reporting and climate scenario modelling
to deliver an iterative process to identify,
measure, manage, assure and report on
climate-related risks and opportunities.
We have taken a phased approach, integrating
TCFD into our Group risk management
process. This included generation of a
climate related gap analysis to highlight
and understand key areas for improvement.
We selected appropriate climate scenarios
and performed initial high-level, scenario-
based modelling of material risks and business
impacts, to prioritise the climate-related risks
and opportunities for BAT.
In 2021, we undertook detailed financial
modelling to further understand the timing
and materiality of these key risks and
opportunities. This process included:
–
Selection of risks and opportunities for
deep dive modelling based on relative
strategic importance, and availability of
value adding methodologies and data.
This process was supported by two
external consultancies. We will broaden
and deepen this analysis in future years
as data and methodologies improve.
–
Engagement with colleagues across
the Group, which was crucial to
gather data and test assumptions.
Multiple workshops and interviews were
held with teams across the organisation,
including our Management Board, and
our Risk Management, Finance, Treasury,
New Categories, Legal, Government
Affairs, Investor Relations, Supply Chain
and Leaf teams.
An overview of our approach to identifying,
assessing and managing climate risk is
provided on page 59.
Governance
Board oversight
The Board is collectively responsible for
the sustainable, long-term success of
the Company and the Group’s strategic
direction, purpose, values and governance.
This includes responsibility for the Group's
strategy and ensuring that resources are in
place to meet the objectives and to manage
risks, including internal controls.
The Board has approved all Group
environmental targets, including our carbon
emissions targets, and receives an update
on progress and performance twice a year
from the Director, Operations. In 2021,
the Board also received a deep-dive ESG
briefing covering our climate strategy,
progress against our climate-related goals
and targets, and approach to reporting in
alignment with the TCFD framework.
The Audit Committee is responsible for
reviewing the effectiveness of the Group’s
risk management and internal controls
systems, including those relating to climate
change. The Audit Committee also receives
reports from the Group’s Regional Audit
and CSR committees and Corporate
Audit Committee, which monitor the
effectiveness of business risk management
and internal controls across the regions and
the central functions.
Our Management Board, chaired by
our Chief Executive, is responsible for
overseeing the implementation of the
Group’s strategy and policies set by the
Board, and for creating the framework
for the day-to-day operation of the
Group’s subsidiaries.
Details of key climate-related matters considered by
the Board in 2021 can be found on page 105 and 120
Management’s role
The assessment and management
of climate-related risks is embedded
across relevant business areas at Group,
regional and local levels, with appropriate
management oversight at each level, as
shown on the chart on page 59.
This approach provides a flexible channel
for the structured flow of information,
monitoring and oversight of climate-related
risks and environmental matters at the level
and format best suited to the context.
All relevant employees, from the
Management Board to managers at
Group, regional and local level, have
individual performance objectives that
are linked to remuneration, including
delivery against ESG- and climate-related
priorities and metrics, that form part of
their responsibilities.
The Management Board receive regular
updates on material risks and strategic
plans, including those relating to climate
change, along with associated risk
mitigation plans. This includes regular
monitoring by the Group Risk Management
Committee, chaired by the Finance and
Transformation Director.
The Chief Marketing Officer has overall
responsibility for the delivery of the
Group Sustainability Agenda, supported
by the Business Communications and
Sustainability (BC&S) team, including the
Head of ESG and sustainability subject-
matter experts.
The Shaping Sustainability Programme
Board oversees the cross-functional
delivery of the ‘Shaping Sustainability’ of
our QUEST transformation programme.
Members of the programme board include
the Chief Marketing Officer, the Director,
Operations and the Group Head of BC&S.
This is underpinned by a drive team,
including the Head of ESG and Head of
Operations Development and Sustainability.
The Director, Operations has overall
responsibility for delivery of the Group’s
climate strategy and environmental targets,
supported by the Group Head of Operations
Development and Sustainability, and the
Operations Sustainability team, including
the central Sustainability team and regional
sustainability managers.
Reporting units that contribute to 98%
of Group Scope 1 & 2 CO
2
e emissions
(incorporating all factories and green
leaf threshing plants) report quarterly,
those contributing to around 2% of Group
Scope 1 & 2 CO
2
e emissions report semi-
annually and annual reporting is completed
by units reporting less than 0.3% of
emissions. Monitoring and reporting of
consolidated Group performance and
metrics is completed quarterly by the
Group Operations Sustainability team.
Each directly-reporting business unit of
the Group (DRBU) has an Environment,
Health & Safety (EHS) Steering Committee,
with overall responsibility to deliver
environmental targets at site level held
by the General Manager or site manager.
EHS is also a standing agenda item for
management meetings and governance
committees at area, regional and
global levels.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
59
TCFD at a glance
Summary of our response
Governance:
Disclose the organisation’s governance around climate-related issues and opportunities.
a) Describe the board’s oversight of climate-related
risks and opportunities.
b) Describe management’s role in assessing and
managing climate-related risks and opportunities.
Our Board has oversight of our climate-related risks
and opportunities. The Board reviews the Group’s
environment strategy, targets and performance
twice per year and reviews the Group risk register,
which includes climate-related risks, annually.
In 2021, the Board also received a deep-dive ESG
briefing covering our climate strategy, performance
and approach to reporting in alignment with the
TCFD framework. The Audit Committee reviews the
Group risk register twice per year.
The assessment and management of climate-
related risks is embedded across relevant business
areas and markets at Group, regional and local levels.
Read more on page 58 Read more on page 60
Strategy:
Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses,
strategy,and financial planning where such information is material.
a) Describe the climate-related risks and
opportunities the organisation has identified
overthe short, medium, and long term
b) Describe the impact of climate-related risks and
opportunities on the organisation’s businesses,
strategy, and financial planning.
c) Describe the resilience of the organisation’s
strategy, taking into consideration different
climate-related scenarios, including a 2°C or
lower scenario.
We have identified 11 climate-related risks and
opportunities. For each, the level of likelihood
and impact has been analysed across three time
horizons: short-term (2020-2025), medium-term
(2026-2035) and long-term (2036-2050).
We have assessed the impact of these risks and
opportunities on our strategy and financial planning.
The results show that, while there are financial
risks that would need to be managed, these are not
substantive enough to require a material change to
our business model.
We have conducted an assessment of the resilience
of our strategy, taking into consideration two
climate-related scenarios: sustainable transition
(based on a global temperature increase scenario of
1.5°C) and climate change inaction (based on a global
temperature increase scenario of 3°C or more).
Read more on pages 61-64 Read more on pages 64-67 Read more on pages 62-64
Risk management:
Disclose how the organisation identifies, assesses, and manages climate-related risks.
a) Describe the organisation’s processes for
identifying and assessing climate-related risks.
b) Describe the organisation’s processes for
managing climate-related risks.
c) Describe how processes for identifying, assessing,
and managing climate-related risks are integrated
into the organisation’s overall risk management.
DRBUs and functions identify risks and
opportunities, including climate-related physical
risks, which are captured on risk registers and
assessed against the materiality thresholds
defined by our Risk Management Framework.
Transitional risks of climate change have been
assessed centrally and are included as a risk on our
Group risk register.
Mitigation plans are required to be in place to
manage risks identified, and progress against
those plans is monitored. At Group level, specific
responsibility for managing each identified risk is
allocated to a member of the Management Board.
Our processes for identifying, assessing, and
managing climate-related risks are integrated into
our Risk Management Framework. This includes
regular reviews of the Group risk register by our
Group Risk Management Committee, chaired by the
Finance and Transformation Director. The Group risk
register is also reviewed annually by the Board and
biannually by Audit Committee.
Read more on pages 62-66 Read more on pages 62-66 Read more on pages 62-66
Metrics and targets
: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities
where such information is material.
a) Disclose the metrics used by the organisation to
assess climate-related risks and opportunities in
line with its strategy and risk management process.
b) Disclose Scope 1, Scope 2, and, if appropriate,
Scope 3 greenhouse gas (GHG) emissions, and
the related risks.
c) Describe the targets used by the organisation to
manage climate-related risks and opportunities
and performance against targets.
We have clearly defined metrics for each of our ESG
priority areas, including climate change, against
which we report on our performance and progress
each year.
We disclose Scope 1, Scope 2 and Scope 3 emissions
and the related risks in our reporting.
Our targets to manage climate-related risks and
opportunities include targets for carbon neutrality
across our operations (Scopes 1 and 2) by 2030 and
net zero carbon emissions across our value chain
(Scopes 1, 2 and 3) by 2050. These are supported by a
range of other environmental targets against which
we report our performance and progress each year.
Read more on pages 47 and 61 Read more on pages 47 and 61 Read more on pages 47 and 61
These local management meetings and
committees report into the Operations
Sustainability Forum, chaired by the
Director, Operations. This acts as a conduit
for tracking delivery of environmental
targets and gaining visibility of new and
emerging risks posed by climate change.
The Operations Sustainability Forum
oversees business plans to mitigate risks
identified, reviews performance and tracks
progress of our regions and business units
in delivering the Group’s environmental
targets. The Environmental Sustainability
Committee, also chaired by the Director,
Operations, is responsible for reviewing
environmental roadmaps and strategies for
the Operations Leadership Team.
Read more about our Quest programme for
accelerating our transformation towards the
Enterprise of the Future on pages 30-31
BAT Annual Report and Form 20-F 2021
60
TCFD Reporting
Continued
Strategic Management
Governance of ESG & Sustainability
Board of Directors
–
Six scheduled meetings per year
–
Responsible for the long-term sustainable success of the
Company and for the Group’s strategic direction, purpose,
values and governance – including climate strategy
Leaf Sustainability
Forum
–
Meets around four times
per year
–
Chaired by the
Group Head of Leaf
and composed of
senior leadership
–
Reviews strategic
direction and targets for
addressing ESG risks
across the leaf supply
chain, and performance
against leaf supply
chain targets
Audit Committee
–
Five scheduled meetings per year
–
All members are independent, Non-Executive Directors
–
Monitors and reviews the effectiveness of the Group’s
accounting, internal accounting controls, auditing matters
and business risk system
Operations
Sustainability Forum
–
Meets around six times
per year
–
Chaired by the Operations
Director and composed of
senior leadership
–
Reviews performance
against environmental and
social metrics and targets
Supply Chain Due
Diligence Committee
–
Meets around three times
per year
–
Chaired by the Group
Head of Procurement
and composed of
senior leadership
–
Reviews direct materials
supply chain performance
(excl. leaf) against
environmental and social
metrics and targets
Environmental
Sustainability
Committee
–
Meets around six times
per year
–
Chaired by the Operations
Director and composed of
senior leadership
–
Reviews environmental
roadmaps, strategies,
risks and opportunities
Management Board
–
Meets at least seven
times per year
–
Chaired by the
Chief Executive and
comprises the Executive
Directors and 11 senior
Group executives
–
Responsible for
overseeing the
implementation
of Group strategy,
policies and monitoring
Group operating
performance, including
in relation to climate and
the environment
Corporate Audit
Committee (CAC) and
Regional Audit & CSR
Committees (RACCs)
–
Meet at least twice a year
–
CAC chaired by a
Regional Director and
RACCs by an Executive
Director of the Company
– all are composed of
Group executives
–
Reviews the effectiveness
of the accounting, internal
control and business
risk identification and
management systems
within the central
business functions for the
CAC and the regions for
the RACCs
Shaping Sustainability
Programme Board
–
Meets around six times
per year
–
Chaired by the Chief
Marketing Officer
and composed
of Management
Board Directors and
senior leadership
–
Oversees the
implementation of the
Group’s transformation
programme and
Sustainability Agenda
Group
Risk Management
Committee
–
Meets twice per year
–
Chaired by the Finance
and Transformation
Director and composed of
senior leadership
–
Oversees assessment
and monitoring of risks to
the Group
Group Sustainability Department
–
Group Head of Business Communications & Sustainability,
Head of ESG and sustainability subject-matter experts
–
Develops the Group Sustainability Agenda and supports
business functions, regions and markets in driving
its implementation
Business Functions, Regions and Markets
–
Implementation and execution of the Group Sustainability
Agenda, including by Leadership Teams and cross-functional
workstreams and programmes
–
Tracking and monitoring performance
Board
oversight
Leadership
team
oversight
Management
oversight
Management
Board
oversight
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
61
Strategy
Our purpose to build A Better Tomorrow
TM
and our Group strategy is set-out on pages
26-27. Our Sustainability Agenda, with
climate change as a key priority under the
environmental pillar, is set out on page 46.
Taking an active approach to tackling
climate change isn’t new at BAT.
As a business that depends on natural
resources, we have been focusing on
addressing our environmental impacts and
preparing our business for the risks ahead
for over 20 years. Yet with the impacts of
climate change rapidly increasing, we are
making a step-change in our ambition and
accelerating the pace of progress.
In 2021, we signed up to the UN-
backed Race to Zero global campaign.
This campaign aims to halve global carbon
emissions by 2030 and achieve net zero
carbon emissions by 2050. BAT has
previously committed to Science Based
Targets, aligned to a 2
o
C pathway; subject
to approval from the Science Based Targets
initiative (SBTi), we intend to align our
targets to a 1.5
o
C pathway in 2022.
To meet our ambitions for carbon neutrality
across our operations by 2030 (Scopes 1
and 2 CO
2
e emissions) and across our value
chain by 2050, we have an integrated climate
strategy, highlighted below, covering our
own operations and our wider value chain.
This focuses on reducing our impact on the
environment, addressing climate-related
risks and opportunities, and building climate
resilience for the future.
Key attributes of our climate strategy include:
–
the performance of climate scenario
analysis to inform our understanding of
risks and opportunities;
–
the performance of life cycle
assessments of our products and the
incorporation of end of life treatment
to reduce their environmental impact.
Reducing the use of embodied carbon
and single use plastic, and increasing
recyclability to reduce the level of
waste generated;
–
enhancing the resilience of our internal
supply chain and wider value chain to
maintain access to critical raw materials,
and insulating our business from the
impact of supply constraint-driven
inflationary pressures;
–
the environmental impact of our direct
operations, including the reduction of
CO
2
e generated by our sites and fleet
through energy saving initiatives and
increased use of renewable energy (both
purchased and self generated), as well
as reducing the waste generated and
maximising the share of waste directed
to recycling;
–
ensuring effective and efficient use of
natural resources throughout our value
chain, including where possible greater
use of green energy and reduction of
water usage and waste generation.
This supports the allocation of these
critical natural resources to food
generation and other activities, and
reduces our susceptibility to energy cost
premiums and future carbon taxes; and
–
continued investment in R&D activity to
underpin product innovations , technical
deployment of agronomy best practices,
low carbon curing technologies and
farming techniques based on science.
Financial planning is key to the execution
of our strategy. Through our embedded
governance, we consider the impact of
climate change on future anticipated
operating costs (including the cost of
regulation), access to capital and potential
growth opportunities to facilitate resource
allocation and to ensure that decision
making is robust.
In 2021, internal carbon pricing (ICP) was
incorporated into our financial appraisal to
facilitate delivery against our glidepaths.
These actions position us to be successful
now and into the future as climate
challenges arise.
To further enhance our strategy to
mitigate the impacts of climate change,
we performed an assessment of risks and
opportunities using two climate evolution
scenarios and over three time horizons.
The approach taken to this assessment,
outcomes, and mitigations are set out
below on pages 62 to 64.
Governance
Social
Harm Reduction
BAT ESG Report 2021
40
Policies, Data and Assurance
Introduction and Strategy
Our Sustainability Agenda
Environment
Our Climate Strategy
As a business that depends on natural
resources, we’ve been taking an active
environmental approach for more than 20
years. Now, we’re accelerating our pace.
Our bold ambition for carbon neutral operations
by 2030 is supported by arange of targets
covering energy, waste, water and biodiversity.
We also recognise the importance of looking
beyond the operations we directly control.
Especially since supply chain emissions
(Scope 3 emissions) represent around 91%
of the Group’s total carbon footprint. So we
have an even more ambitious target: to be
Net Zero across our value chain by 2050.
To deliver this, we have an integrated climate
strategy covering both our own business
operations and our wider value chain, as seen
in the graphic opposite.
As part of our continued engagement on
climate change, in 2021, we attended the
COP26 climate summit in the UK. This is an
important part of our strategy in engaging with
stakeholders and demonstrating our support
for taking collective action to tackle climate
change and the key role business can play.
For further information on our climate
strategy as well as our response to the
requirements of the Task-Force for Financial-
related Climate Disclosures (TCFD), refer to
pages
[58-63]
of our 2021 Annual Report.
Race to Zero
Limiting the rise in average global
temperature to 1.5°C above pre-industrial
levels requires major, widespread action.
In 2021, we signed up to the UN-backed
Race to Zero global campaign
1
. This is
the largest ever alliance aiming to halve
global emissions by 2030 and achieve net
zero carbon emissions by 2050.
As part of this, we are committed to
realigning our existing carbon neutral
targets with the 1.5°C trajectory and
to accommodate net-zero criteria
and definitions, subject to approval by
the Science-Based Targets Initiative
(SBTi). Previously, our targets were SBTi
approved based on a 2°C trajectory.
By working together with our suppliers,
contracted farmers and business
partners, we can help develop solutions
to bring about lasting change and
accelerate progress to net zero and
ABetter Tomorrow™ for all.
You can see our roadmap for achieving
our net zero ambitions opposite.
Our Roadmap to Net Zero
Excellence in
Environmental
Management
Continued
SPOTLIGHT
Enter into
longer-term
power-
purchase
agreements
Increase
renewable energy
sourcing
Roll out electric
and hybrid vehicles
in our fleet
Invest in on-site
renewable energy
generation
projects
Climate
scenario analysis
for key tobacco-
growing areas
Life cycle
assessments
for our product
categories
Help farmers deploy
innovative, low-carbon
curingtechnologies and
farming techniques
Build a
climate-resilient
supply chain
In our
decision
making
Our impact
on Climate
Climates impact on us
Invest in
energy efficiency
projects and
management systems
For our
operations
For our
value
chain
E
mi
ssions (mn tCO2
e)
9
Current Baseline
7.82 mn tCO
2
e
0
1
–1
17 18 19 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50
2
3
4
5
6
7
8
Actual
Projected
Neutralisation
Compensation
1.5ºC Pathway
Future Baseline
6.11 mn tCO
2
e
BAT Annual Report and Form 20-F 2021
62
TCFD Reporting
Continued
Strategic Management
Climate scenario modelling
Identification
Identification of risks and opportunities
posed by climate change is an ongoing
process and draws upon internal and
external expertise, resources and other
information, including:
–
Internal senior management spanning
all functions of the Group, based at
DRBU, Regional, and Group level;
–
External consultants supporting our
preparations for and resilience to
climate change;
–
Relevant industry publications outlining
expected impacts of climate change on
our key inputs (including agriculture);
–
Relevant regulation (enacted or draft)
that may impact the Group’s products,
locations, or operations;
–
TCFD guidance on potential risks and
opportunities; and
–
Existing risks and opportunities identified
and managed as part of our Group risk
management processes.
A comprehensive list of potential climate
related risks and opportunities were
identified and refined down to 11 material
risks and opportunities detailed on page
64, using the methodology defined in the
Group Risk Management Framework and
overseen by the Group Risk Management
Committee. This materiality assessment
will be reassessed annually to ensure
it remains appropriate in the context
of a dynamic business and physical
environment, and to take account of
improved data or modelling which may
become available.
Assessment
We have considered the impact of risks and
opportunities arising from climate change
and the overall resilience of our business,
calibrating these against two potential
climate scenarios and three time horizons.
The two climate scenarios are aligned
with the UN Intergovernmental Panel on
Climate Change (IPCC) methodology, and
greenhouse gas concentration trajectories
known as Representative Concentration
Pathways (RCP) 2.6 and 8.5, with differing
levels of transitional and physical risk
arising from each trajectory.
Climate scenario models used
Warming 1.5ºC
–
Early decisive action by society to
reduce global emissions
–
Coordinated policy action towards
low-carbon economy
–
Actions sufficient to limit global
warming to 1.5ºC in line with the
long-term temperature goal in the
Paris Agreement
Warming >3ºC
–
Governments fail to introduce
further policies to address climate
change beyond those already
known and in place
–
Global temperature increase above
3ºC by 2050
Scenario 1
Sustainable Transition
Scenario 2
Climate Inaction
Greater transition risk Greater physical risk
Tackling
Climate Change
100%
renewable electricity
sourcing in all our operations
sites
*
by 2030
Our goals
NET ZERO
carbon neutral operations (Scopes 1
and 2) by 2030 and net zero carbon
emissions across our value chain
by 2050. Alignment of emissions
with a 1.5
o
C trajectory (pending
SBTi approval).
* Operations sites refers to all BAT-owned
cigarette manufacturing factories, sites
manufacturing other tobacco products,
snus, modern oral and liquids and green leaf
threshing (GLT) tobacco processing sites.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
63
Our Sustainability Agenda
Policies, Data and Assurance
Introduction and Strategy
Governance
Social
Environment
Harm Reduction
BAT ESG Report 2021
108
BAT Greenhouse Gas Emissions
Total Emissions (thousand tonnes tCO
2
e)
Emission Source
Category
2017
2018 2019 2020
Scope 1
–
415
396
342
Scope 2 Market-based
–
426
386
199
Scope 2 Location-based
–
490
453
418
Total Scope 3
–
6,956
6,781
5,587
Purchased Goods and Services
Category 1 Total
4,363
4,049 4,011
Purchased goods – Directs (excluding NGP)
Category 1
1,550
1,488
1,140
Purchased goods – NGP
Category 1
43
55
47
Purchased Services
Category 1
35
107
720
Purchased Tobacco Leaf – Combustibles
Category 1
2,550
2,184
1,966
Tobacco Leaf – NGP
Category 1
18
5 2
Other Purchased Goods & Services
Category 1 167
210
135
Capital Goods
Category 2 Total
519
463
177
Fuel and Energy Related Emissions
Category 3 Total
177
166
134
Upstream Transportation & Distribution
Category 4 Total
192
197
225
Waste Generated in Operations
Category 5 Total
5 5 9
Business Travel
Category 6 Total
38
33
8
Employee Commuting
Category 7 Total
27
23
53
Use of Sold Products
Category 11 Total
662
587
641
End-of-Life Treatment of Sold Products
Category 12 Total
967
1,253
324
Franchises
Category 14 Total
5 5 5
Note:
Total emissions include biogenic and biogenic removals
Whilst the impact of climate change
is indefinite, for the purposes of
assessment, we considered these risks and
opportunities across three time horizons:
short term (2021 – 2025), medium term
(2026 – 2035), and longer term (2036 –
2050). These time horizons reflect how
these risks and opportunities are internally
considered and prioritised and are aligned
to a number of our key ESG-related targets.
Climate-related risks and opportunities
have the potential to impact our business
over time. Through the identification
and measurement processes outlined
above, which are aligned to TCFD
recommendations, we are taking the
necessary steps to assess the likelihood
and severity of these impacts to enable us
to maximise positive impacts and minimise
adverse impacts on our business.
Scenario analysis was performed to
model how the impact and likelihood
of our material risks and opportunities
might change under each time horizon
and climate scenario. We identified three
climate-related opportunity areas and
eight climate-related threats, which span
transitional and physical risks in nature.
The results of the scenario analysis
performed is shown on page 64.
Material risks are those that could have
a significant effect on our operations,
strategy and financial planning if they are
not managed appropriately. In contrast,
material opportunities may improve our
financial performance over time in the
event they can be realised.
Through our ESG strategy we aim to
effectively manage the impact of our
business on the planet over time.
We have also undertaken a deep-dive
modelling and financial impact analysis
on six risks and opportunities, drawing on
internal and external data sources, such
as carbon pricing projections, potential
future surcharges on single-use plastics
in our products, Group financial data,
energy consumption and costs by BAT
site, business growth projections and
consumer trends. This allowed us to
refine our initial qualitative assessment
and quantify the expected financial
impact based on assumptions of future
developments. We will continue to revisit
these assumptions to reflect new and
emerging developments.
Specifically, in relation to future access
to tobacco and nicotine, a detailed
assessment of future growing conditions
was undertaken across our 10 largest
tobacco source countries, utilising a
UN IPCC model for climate change.
Regional temperature behaviour,
precipitation and soil water levels (surplus
or deficit) were assessed, enabling us to
estimate the likely impact on crop yields,
and the cost of, or access to, tobacco in
the future.
BAT Greenhouse Gas Emissions
BAT Annual Report and Form 20-F 2021
64
The analysis demonstrated that whilst
there were some favourable and
unfavourable impacts on yield, the potential
financial impact on annual cost of tobacco
is less than 5% and current climate change
trajectories indicate it is unlikely that the
Group would face reduced production
capacity as a consequence of consistent
supply constraints. We believe the impacts
on yield can be effectively mitigated
through agronomy action plans to avoid
yield driven cost of production increases.
In 2021, we also built on our decades of
experience in agriculture to develop a
new carbon-smart farming programme.
This takes a strategic approach focused
on reducing emissions from tobacco
farming and leveraging the positive effect
agriculture could have in removing carbon
from the atmosphere.
Scenario analysis highlighted the increased
cost of compliance with emerging
regulation, cost of green energy and carbon
taxation arising from Government policies
seeking to deliver a Sustainable Transition
(Scenario 1). Potential adverse impacts
from higher costs and reduced access
to both insurance and capital markets
were identified.
Given the nature of transition risks, we
anticipate the magnitude of these risks
will be lower, and impact delayed, under
Climate Inaction (Scenario 2) as little or no
change to current regulation is projected.
We will continue to update both our
scenario analysis and business plans to
ensure our business remains resilient and
best able to mitigate the impact of climate
policies as they emerge.
Material climate-related risks and opportunities identified
Type
Scenario
Level of likelihood/impact by
2020
– 2025
2026
– 2035
2036
– 2050
Opportunities
associated with transitioning to low carbon economy
Products
& services
Increased revenues due to shift in consumer
preferences resulting in access to new and
emerging markets and increased demands
forour products*
1.5ºC
>3-4ºC
Energy
sourcing
Reduced costs due to use oflower-emission
sourcesof energy within our direct operations*
1.5ºC
>3-4ºC
Resource
efficiency
Reduced costs due to use of more efficient
production and distribution processes
1.5ºC
>3ºC
Transition risks
associated with transitioning to low carbon economy
Emerging
regulation
Increased costs due to newcarbon pricing
mechanisms on the emissions within our
value chain
1.5ºC
>3-4ºC
Emerging
regulation
Increased costs due to mandates on, and
regulation of, products and services*
1.5ºC
>3-4ºC
Market
Increased costs due to contraction of insurance
markets, higher premiums or losses arising from
uninsured assets
1.5ºC
>3-4ºC
Market
Increased costs due to increasing energy prices
impacting direct operating costs as well as the
cost of raw materials*
1.5ºC
>3-4ºC
Market
Increased costs and/ or reduced access to capital
markets due to climate change driven increases to
operating costs and ESG concerns from investors
1.5ºC
>3-4ºC
Physical risks
associated with physical impacts of climate change – either acute
risks(such as relating to extreme weather events) or chronic risks (such as relating
tolonger-term shifts in climate patterns and higher temperatures)
Acute
Decreased revenues due to increased severity
and frequency of extreme weather events such as
cyclones and floods, leading to agricultural supply
chain disruption and reduced production capacity
1.5ºC
>3-4ºC
Chronic
Decreased revenues due to water stress
leadingto agricultural supply chain disruption
andreduced production capacity*
1.5ºC
>3-4ºC
Chronic
Decreased revenues due to changes in precipitation
patterns and extreme variability in weather patterns
leading to agricultural supply chain disruption and
reduced production capacity*
1.5ºC
>3-4ºC
Low
Medium
High
*Advanced financial scenario modelling conducted
TCFD Reporting
Continued
Strategic Management
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
65
Policies, Data and Assurance
Governance
Social
Harm Reduction
BAT ESG Report 2021
43
Introduction and Strategy
Our Sustainability Agenda
Environment
Carbon-smart farming
In 2021, we built on our decades of
experience in sustainable agriculture, to
develop a new carbon-smart farming
programme. This takes a strategic
approach focused on both reducing
emissions from tobacco farming and,
crucially, leveraging the positive effect
agriculture could have in removing
carbon from the atmosphere.
The latter can be achieved by planting
trees, as well as through methods like
cover crops and conservation tillage
that may keep the soil covered and
undisturbed, to reduce the possibility of
carbon escaping.
As well as storing carbon, these
methods may also increase water-
retention capacity, improving drainage
and making the soil richer and more
fertile. This results in increased yields
and better-quality crops for farmers
helping to boost their profits.
Many of our contracted farmers
already use these best practices.
The challenge has been to find effective
ways to measure impact and quantify
the amount of carbon they remove,
compared to how much they emit.
To me it is an honour
to be one of the first
farmers participating in this
programme. I’m excited to learn
new conservation practices to
deploy on my farm. And I think
getting to see real data showing
the tangible impact this will
have in both reducing and
removing carbon emissions will
be a game-changer and provide
new opportunities for income
generation.
Laercio Celestino Adami
BAT contracted tobacco farmer,
Brazil
SPOTLIGHT
So, in 2021, we conducted a detailed
analysis to estimate removals resulting
from carbon-smart farming best practice,
against international methodologies, such
as those of the Intergovernmental Panel on
Climate Change (IPCC) and Greenhouse
Gas (GHG) Protocol.
We are now working in partnership with
a specialist consultancy to validate this
approach and to monitor, report and verify
the results. This will enable us to develop a
system that can be easily applied by small
farmers. The systems will form the basis
of our carbon-smart farming programme,
empowering our contracted farmers to
incorporate carbon-smart farming into
their business model.
It will also provide us with verified data
to measure progress against our 2050
ambition and to validate the impact of
different carbon-smart strategies. In 2021,
35 of our contracted farmers in Brazil
signed-up as the first pilot group for the
programme. We will expand the pilot
to farmers in Bangladesh, Mexico and
Pakistan in 2022. Learnings from the pilots
will help in further developing and scaling-
up the programme as part of our wider
climate strategy.
Find out about how we’re aiming for net
positiveimpact on forests in our tobacco
supplychain by 2025 in
Biodiversity and
Afforestation
on page 55.
Excellence in
Environmental
Management
Continued
BAT Annual Report and Form 20-F 2021
66
While the products we offer continue
to evolve, we will continue to need to
access raw materials, including tobacco
and tobacco extracts. This increases our
exposure to the physical risks of climate
change due to the increased risk of asset
production disruption, damage or loss.
In contrast to transition risks, physical risks
are most severe under Climate Inaction
(Scenario 2) given this scenario sees a world
where warming exceeds a 3°C threshold,
increasing the frequency and severity of
climate-related events and likely financial
impact on our business. In response, more
extensive mitigation may be required
including investments in working capital to
increase our supply chain resilience.
While a sustainable transition (Scenario 1) is
not anticipated to fully shield our operations
from such climatic events, we assessed
these may be less frequent and more
controllable through tailored adjustments
to our existing risk management policies.
While there are challenges ahead, we
believe that the Group is well placed to
address them. Supported by our global
reach, supply chain flexibility, diverse
product portfolio, leading brands and
capital strength, we believe that we have
the resilience and agility to transition and
create new growth opportunities.
The insights gained from the modelling
performed further strengthen the
importance and relevance of our climate
strategy and net zero carbon emissions
target to mitigate these risks. We will
continue to review each material climate-
related risk and opportunity and build
upon our existing mitigation strategies to
enhance the resilience of our business to
climate change.
Risk Management
Our Risk Management Framework and
procedures are clearly defined and well-
established across the Group.
Risk registers, based on a standardised
methodology, are used at Group, functional,
and DRBU level to identify, assess, monitor
and mitigate the risks (both financial and
non-financial).
Risks, including climate-related risks, are
assessed and prioritised at three levels by
reference to their impact (high/medium/
low) and likelihood (probable/possible/
unlikely), as defined in our Group Risk
Management Manual. Mitigation plans
are required to be in place to manage the
risks identified, and progress against those
plans is monitored. Decisions on how to
manage the risk are based on a variety
of considerations including risk score,
our ability to influence or control the risk,
and cost and effectiveness of mitigation.
The risk registers are reviewed on a bi-
annual basis.
At the Group level, specific responsibility for
managing each identified risk is allocated
to a member of the Management Board.
The Group risk register is reviewed bi-
annually by the Group Risk Management
Committee, chaired by the Finance and
Transformation Director. In addition, the
Group risk register is reviewed annually
by the Board and biannually by the
Audit Committee.
During 2021, we continued to integrate and
embed climate-related risks into our Group
risk management procedures. This followed
an update to our Group risk register in 2020
to incorporate transitional risks of climate
change as a Group risk.
Each of our DRBUs and functions is
required to identify and assess risks and
opportunities, including climate-related
physical risks, which are captured on
risk registers and assessed against the
materiality thresholds defined in our Risk
Management Framework. Additionally, the
transitional risks of climate change have
been assessed centrally and are captured
on our Group risk register in accordance
with our Risk Management Framework.
Transitional risks of climate change takes
into account factors including net zero
commitments, stakeholder interests
and emerging and current climate-
related regulations.
In recognition of ESG being fundamental
to all that we do in the organisation and
the global risks of climate change, in 2021
our risks were updated to incorporate ESG
factors across all relevant risks across
the Group.
In 2022, we plan to further enhance our
assessment of the transitional and physical
climate risks and opportunities through
conducting further analysis.
It is envisaged that the transitional climate
risk will remain as a separate risk, and the
physical climate risks and opportunities
will be reflected further as necessary, in
individual DRBU and functional risks.
See our Group risk factor for climate change on page
321 and details of our risk management and internal
control procedures on pages 124.
TCFD Reporting
Continued
Strategic Management
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
67
* Via the Science Based Targets Business Ambition for 1.5C Campaign.
** Science Based Targets must represent reductions needed to restrict global warming to 1.5 degrees Celsius from pre-
industrial levels. BAT had previously committed to Science Based Targets, aligned to a 2°C pathway, and has existing targets
to become carbon neutral across its operations by 2030 and value chain by 2050. These will be realigned
to the 1.5°C pathway (subject to SBTi verification)and accommodate net-zero criteria and definitions.
Metrics and Targets
We have been reporting against energy and
carbon emissions metrics since 2001 and
set out our first long-term targets in our
2007 Annual Report to reduce Scopes 1 and
2 CO
2
e emissions intensity by 50% by 2030
and 80% by 2050 against our 2000 baseline.
By the end of 2017, we had achieved a 42.7%
reduction from that baseline.
In 2019, we set new long-term CO
2
e targets,
and gained the Science Based Targets
initiative’s (SBTi) formal approval for these.
Since then, we have developed our
commitment to addressing climate
change, including accelerating our existing
environmental targets to 2025 and
committing to be carbon neutral across
our operations (Scopes 1 and 2) by 2030
and net zero across our value chain (Scopes
1, 2 and 3) by 2050. In addition, we have
incorporated internal carbon pricing into
business plans to ensure the impact on
environmental performance and targets
are formally considered and quantified.
This has supported the prioritisation of
sustainability projects such as on-site
renewable energy generation.
These actions are complemented by a
range of other environmental targets
and metrics, covering areas such as
renewable energy, eliminating waste,
water stewardship and biodiversity
and afforestation.
Our goals, targets and metrics are
summarised in our ESG Roadmap on
page 47, including performance in 2019,
2020 and 2021 in relation to carbon
emissions, renewable energy, waste,
water, and biodiversity to demonstrate
trends and how we are consistently
delivering improvements to our
environmental performance.
In 2021, we signed up to the UN-backed
Race to Zero campaign
*
. Race to Zero is the
largest ever alliance aiming to halve global
emissions by 2030 and achieve net zero
carbon emissions by 2050. The campaign
represents over 4,000 businesses
estimated to cover nearly 25% of global CO
2
emissions and more than 50% of GDP.
Limiting the rise in average global
temperature to 1.5°C above pre-industrial
levels requires major and widespread
action and companies have an important
role to play
**
. We are realigning our existing
CO
2
e emission targets with this trajectory
and set a new target for net-zero carbon
emissions across our value chain (Scopes 1,
2 and 3) by no later than 2050.
Next Steps
We recognise that the impact of climate
change is uncertain and will be affected
by multiple factors including severity
of climate variation and extent of
government regulation.
Through the adoption of the TCFD
recommendations we have sought to
analyse, as best as possible, the impact
of potential outcomes considering two
climate scenarios over the short, medium,
and long term time horizons, however our
assessments will need to continually evolve
to respond to new information and insights.
In light of this evolving landscape, our work
will continue in 2022 to further strengthen
our approach including the consideration of
the following focus areas:
–
further embedding climate-related
considerations into our business and
strategic decision making, financial
planning, as well as governance and risk
management frameworks;
–
continuing to identify opportunities
to further strengthen our activities to
manage and mitigate climate-related
risks and build climate-change resilience;
–
continuing to work with our suppliers
to enhance data relating to our Scope
3 emissions;
–
continuing to monitor ESG measures
and drive performance across our
comprehensive suite of objectives across
all areas of ESG;
–
continuing to identify, assess, manage,
and disclose climate-related risks
and opportunities;
–
reviewing our metrics and targets
to ensure they remain aligned with
our strategy and risk management
processes, and best practice guidelines;
–
enhancing our assessment of the
transitional and physical climate risks and
opportunities through further analysis;
and
–
tailoring future disclosures, taking into
account key government, investor,
and other stakeholder frameworks
and guidance.
68
BAT Annual Report and Form 20-F 2021
for employees
By creating a dynamic, inspiring
andpurposeful place to work.
Attracting and retaining an
increasingly diverse workforce
and providing a welcoming and
inclusive working environment are
key drivers in BAT’s transformation
journey. We are creating value for
our employees by:
–
providing opportunities for a
rewarding career with a major
international business;
–
creating a diverse and inclusive
workplace culture that treats
everyone equally; and
–
listening to their views and
safeguarding their wellbeing.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
69
Ethos
We are
Bold
–
Dream big – with
innovative ideas
–
Make tough decisions
quickly and proudly
stand accountable
for them
–
Resilient and fearless
to compete
We are
Fast
–
Speed matters.
Set clear direction and
move fast
–
Keep it simple.
Focus on outcomes
–
Learn quickly and
share learnings
We are
Empowered
–
Set the context for
our teams and trust
their expertise
–
Challenge each other.
Once in agreement,
wecommit collectively
–
Collaborate and
hold eachother
accountable to deliver
We are
Responsible
–
Take action to reduce
the healthimpact of
our business
–
Ensure the best
quality products for
our consumers, the
best place to work
for our people, and
the best results
for shareholders
–
Act with integrity,
never compromising
our standards
and ethics
We are
Diverse
–
Value different
perspectives
–
Build on each others’
ideas, knowledge
and experiences
–
Challenge ourselves
to beopen-minded
recognising
unconscious bias
Our purpose is to build A Better Tomorrow
TM
by reducing the health impact of our
business through offering a greater choice of enjoyable and less risky products
for our consumers.
A key driver to delivering this is our Ethos, which guides our culture and
behaviours across the entire Group. Developed with significant input from our
employees, it ensures an organisation that is future fit for sustainable growth.
These five key principles – bold, fast, empowered, diverse, responsible – underpin
how we deliver on both our purpose and our strategy.
Hae In Kim
Director, Talent, Culture and Inclusion
Our ongoing commitment to fostering
a diverse and inclusive culture at BAT is
underpinned by our ethos, which encourages
our employees to be Bold, Fast, Empowered,
Responsible and Diverse. Our transformation
isdriven by our people. By combining
existingandnew capabilities, we are radically
redefiningour organisation. Together, we
willbuild A Better Tomorrow.
BAT Annual Report and Form 20-F 2021
70
People and Culture
Strategic Management
Total
Main Board
7
Global headquarters
81
Management level globally
141
Nationalities represented
Senior managers:
CompaniesAct2006
For the purposes of disclosure under
Section 414C(8) of the Companies
Act 2006, the Group had181 male
and 42 female senior managers as
at31 December 2021. Senior managers
are defined here as the members of
the Management Board (excluding the
Executive Directors) and the Directors
of the Group’s principal subsidiary
undertakings. The principal subsidiary
undertakings, as setout in the Financial
Statements, represented approximately
66% of the Group’s employees and
contributed over 89% of Group revenue
and 100% ofprofitfrom operations
in 2021.
Employee retention
In 2021, total voluntary turnover
ofmanagement-grade employees was
1,236, representing 8.6% of our Group’s
total management population.
Voluntary turnover rate for all employees
across our Group in 2021 was 9.1%.
Diversity
Representation of women on senior
leadership teams was 24% in 2019, 27%
in 2020 and 27% in 2021.
Main Board
Total Group Employees
Senior Leadership Teams
Male 426
Female 158
Male 6
Female 4
Male 35,256
Female 16,794
10
584
52,050
73.3%
66.7%
68.6%
26.7%
33.3%
31.4%
Group diversity as at 31December 2021
Investing in Leaders
We are accelerating our transformation
agenda and delivering A Better Tomorrow
TM
by attracting the right talent with new
experiences and developing our ‘must win’
capabilities.
In 2021, we launched our new Employer
Brand – ‘Be the change’ – reflecting our
corporate purpose and Ethos. The new
brand has been brought to life through our
social media channels and on our revamped
website –
careers.bat.com
. The updated
site leverages the latest technologies to
personalise a candidate’s experience, with
round-the-clock support in 14 languages.
In 2021, 44% of our external recruits brought
new capabilities into the organisation to
accelerate our business transformation.
Our unwavering commitment and
investment into the development of
leadership and functional ‘must win’
capabilities has resulted in an average of
17.9 training hours delivered per full-time
equivalent (FTE), with an average of £311
invested per FTE in 2021. This included 239
training programmes delivered across our
leadership, functional and digital portfolios.
All functional ‘must win’ capabilities have
foundational learning programmes in place,
creating a level playing field of knowledge
and skills, with 31% of programmes
developing advanced level capabilities.
In the leadership space, over 6,600
employees attended our core leadership
programmes, including four international
cohorts of our Women in Leadership
programme and two cohorts of our Global
Graduate Academy.
To enable quantity, while ensuring quality of
all our programmes, we have shifted all our
programmes to 100% virtual format.
This has been a game-changer, making it
more accessible for more people across
the Group. Our digital learning platform,
The GRID, is the gateway to our learning
portfolio – accessible to 100% of our
management population, providing
digital learning anytime, anywhere.
In addition, over 13,000 managers
have completed our leadership
potential assessment – Leadermeter,
which enables early identification of
talent for accelerated development.
You can read about our Group risk factor related to
talent on page 320
Inclusive Culture
We are focused on creating a supportive
and inclusive culture where all our people
can flourish.
Our SoBC Respect in the Workplace
Policy makes clear our commitment to
providing equal opportunities to, and
fair treatment of, all our employees and
to creating an inclusive workforce by
promoting employment equality. The policy
was updated in 2021 to include enhanced
provisions relating to not practising any
form of unlawful discrimination, providing
fair wages and benefits and supporting
employees’ work-life balance. Our revised
SoBC takes effect from January 2022.
We are official signatories to the UK Race
at Work Charter for supporting equality and
race in the workplace. We are also certified
as a level 1 Disability Confident Committed
employer under the UK Government’s
accreditation scheme. This demonstrates
our commitment to providing equal
opportunities for disabled employees,
training and development for them, and
reasonable adjustments and support in the
workplace and in recruitment processes.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
71
Pillar 1
Driving ownership
andaccountability
Ensuring ownership of, and
accountability for, our D&I
strategy across all business
areas and leadership teams
is key to driving progress and
achieving our 2025 ambitions.
Our Director for Talent, Culture and
Inclusion has overall responsibility for
all employee and human resources
matters, while our Management
Board oversees the development
and management of talent within the
Group’s regions and functions.
Our D&I governance structure
ensures clear accountability for our
business leaders and leadership teams
for achieving our 2025 ambitions.
This includes a D&I dashboard and
quarterly reviews by our Management
Board to ensure close monitoring of
progress and plans. Diversity also
remains fully embedded in our talent
review processes and meetings across
all levels of the Group.
Our ‘Diversity Champions’ continue
to be key in driving D&I initiatives
throughout the organisation. Our
‘Mastering Inclusion’ training helps
to further empower our people and
increase their awareness. In 2021, more
than 8,300 employees completed the
training. We also launched a new D&I
toolkit for all our managers in 2021, as
well as LGBT+ and Race and Ethnicity
Allyship Guides.
We focus on building diverse
talent pipelines at all levels of the
organisation through recruiting,
developing and retaining the
bestdiverse talent.
In 2021, the proportion of women in
management roles was 39% and
27% on senior leadership teams – we
are committed to increase these by
2025 to 45% and 40%, respectively.
To achieve this, we are focused on
recruiting, developing and retaining
the best female talent.
In 2021, 47% of our external
management-level recruits were
women. Women also comprised
51% of our new graduate intake in
2021, helping to build a sustainable
pipeline of future female leaders.
We also provide a range of
training, mentoring, coaching and
sponsorship programmes to support
women’s development.
As well as striving for gender balance,
we focus on diversity of nationalities
and ethnicities. Our target is for
at least a 50% spread of distinct
nationalities in all our regional and
functional leadership teams. We have
141 different nationalities, from a
wide range of ethnic backgrounds, in
management roles across the Group.
To realise our diversity
ambitions, we know we
must have enablers in place
that provide a supportive
environment for people to thrive
and realise their full potential.
We provide women and diverse groups
with an opportunity to connect,
engage and share experiences, such as
through our Women in BAT UK and our
B-United LGBT+ communities. And our
Parents@BAT programme continues
to provide a range of benefits to
support new parents working in all
BAT businesses worldwide. In 2021, the
return rate from parental leave was
95% for women and 99% for men.
We work to continually raise
awareness of diversity issues through
campaigns and events that showcase
best practice and provide platforms
for role models to amplify their profiles
across the Group. For example, each
year, we celebrate events such as
National Inclusion Week, International
Women’s Day and International Day of
Women and Girls in Science.
Following a successful pilot in the
UK in 2020, we launched our IGNITE
programme in eight more countries
in 2021. IGNITE focuses on supporting
experienced professionals returning to
the workplace after a career break.
Pillar 2
Building diverse
talent pipelines
We are proud to be a diverse global company and, as our Ethos shows,
diversity is one of our core values. As we transform our business, we need
fresh, diverse skills, perspectives and mindsets to challenge the status quo
and drive innovation. Our diversity and inclusion (D&I) strategy is built on
the following three pillars and underpinned by an inclusive culture.
Pillar 3
Creating enablers
Read about our Global Graduate Programme
atwww.bat-careers.com/graduates
Our D&I Strategy
BAT Annual Report and Form 20-F 2021
72
People and Culture
Continued
Strategic Management
Global Top Employer
BAT has been accredited as a Global
Top Employer for the last four
consecutive years.
Financial Times Diversity Leader
BAT has been ranked in the top 10%
of companies in 2021 for achieving a
diverse and inclusive workforce.
Global Equality Standard certified
In 2021, we achieved accreditation
under the Global Equality Standard,
as well as the UKNational
Equality Standard.
Workforce Engagement
Ensuring we have open engagement,
where we can listen and learn from our
people, is crucial to an inclusive culture.
The Group has a range of well-established
engagement channels worldwide covering
the Group’s global workforce
1
, including:
–
market and site visits by our Directors
and Management Board members to
meet local employees;
–
town halls and listening sessions;
–
meetings with works councils,
trade unions and the European
Employee Council;
–
global, functional and regional webcasts,
and webcasts and podcasts with the
Chief Executive and Management
Board members;
–
our global ‘Your Voice’ employee survey
every two years, most recently in 2021;
–
our annual global leaders meeting with
the top 120 senior leaders across the
Group; and
–
global, independently-managed
and multilingual Speak Up channels,
discussed further on page 57.
These engagement channels are
implemented as appropriate for the
composition of local workforce populations,
at market, regional or functional levels.
With COVID-19 continuing to affect our ways
of working throughout the year, workforce
engagement forums in 2021 continued to be
conducted primarily through virtual formats,
leveraging the success of Group digital
transformation initiatives.
Given the scale, spread and diversity of the
Group’s workforce, the Board considers
it effective to use these established
engagement channels, augmented by
Group-wide reporting structures to capture
feedback from engagement at market,
regional and functional levels.
Employee feedback from workforce
engagement channels is collected
across the Group and analysed to define
priority themes. Consolidated feedback
and themes from engagement are
reviewed by our Board each year, as
part of our Workforce Voice in the
Boardroom programme.
This focuses on ensuring the Board
understands the views of our workforce,
and reviews details of the key themes
identified and how we have responded.
Feedback from the Board, with associated
action planning, is cascaded back across
our workforce and the Board is kept
updated on progress against identified
actions during the year.
Find out about how our Board engages with our
global workforce on page 108
The overarching themes identified
from engagement in 2021 related to
transformation, innovation and staying
connected (particularly in the context of the
COVID-19 pandemic). We have responded
to this feedback with a range of initiatives,
including enhanced communications
activities to increase our connectivity and
provide greater visibility of the Group’s work
around transformation and innovation.
For example, we held a virtual TIME:
Technology Inspiring a Modern Enterprise
Automation summit in 2021, demonstrating
how our digital transformation can empower
our people. Broadcast live and available to
all Group company employees, the four-day
summit saw speakers from the business
and tech world join BAT senior leaders
to discuss how automation is changing
our lives.
We also held a global competition for
employees to develop creative and engaging
videos about the Group’s strategic purpose.
This provided an opportunity for employees
to share what makes them proud to work
for BAT and what it means to be part of
the Group’s transformation. In addition,
we published a new Science & Innovation
Report in 2021 and introduced quarterly
science updates, providing our employees
with details of the latest developments
in tobacco harm reduction science and
innovation in a concise and engaging way.
Your Voice
In our 2021 Your Voice global employee
survey, we were pleased to surpass our 2019
response rate with 93% of all employees
globally choosing to respond (7% higher
than our global FMCG comparator group).
Our 2021 Your Voice results outperform our
FMCG comparator group in most categories,
with strong results in diversity and inclusion,
people management, corporate responsibility
and empowerment. Our 2021 results were
1% higher than our FMCG comparator group
for our Employee Engagement Index and 4%
higher than our FMCG comparator group for
our High Performance Index. These results
reflect a connected, committed, energised
and high performing organisation.
We use these results as the basis
for further shaping the priorities of
the organisation.
1. The Board has taken account of the requirements of
the UK Corporate Governance Code in its approach to
engagement with the Group’s workforce. We define the
Group’s workforce as comprising all Group company
employees and individuals contracted directly to
undertake permanent and temporary roles.
Corporate Equality Index
In 2021, for the second consecutive
year, our business in the U.S.
and Mexico scored100% on the
Human Rights Campaign Foundation’s
Corporate EqualityIndex for LGBT+
workplace equality
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
73
Our policies and principles
Our Employment Principles
Our Employment Principles set out a
common approach for our Group companies’
policies and procedures, recognising that
each Group company must take account of
local labour law and practice, and the local
political, economic and cultural context.
In developing our Employment Principles, we
have sought the views of a cross-section of
internal and external stakeholders, and have
consulted with employee representatives
and (where relevant) with our works councils.
All Group companies have adopted our
Employment Principles and, through our
internal audit processes, are required to
demonstrate how these are embedded into
the workplace.
In addition to our Employment Principles,
our Board Diversity Policy applies specifically
to our Board and Management Board,
discussed at page 119.
Responsible restructuring
Our Employment Principles make clear
that, where restructuring is necessary, we
are committed to doing so in a responsible
manner. Where such situations do occur,
our companies adopt responsible local
approaches and procedures to address
each instance, such as severance pay and
outplacement support to help displaced
employees find alternative employment.
In 2021, we continued Project Quantum
to restructure our business globally by
redesigning management layers and
eliminating duplications, while simultaneously
reinvesting in new capabilities and roles to
ensure delivery of our strategy.
Rewarding People
Our SoBC makes clear our commitment
to providing fair, clear and competitive
wages and benefits. In line with good equal
pay practices, we have clearly defined
pay scales for all roles across the Group
worldwide. This approach ensures pay,
bonuses and benefits are consistently
applied and not influenced by factors such
as gender or ethnicity.
Reward is a key pillar in ensuring that we
have the right people to drive the business
forward. Reward is necessarily local and
we strongly support this through global
frameworks to ensure leading edge policies,
processes and technology are available to
all markets.
Base pay rewards core competence relative
to skills, experience and contribution to the
Group, while annual bonuses, long-term
incentives, recognition schemes and ad
hoc incentives provide the right mix to
ensure that sustained high performance is
recognised and rewarded.
Our annual bonus and long-term
incentive plans are aligned throughout
the organisation, with eligible employees
participating in plans with the same
performance metrics as the Executive
Directors, supporting line of sight
throughout the organisation. We also
offer our UK employees the chance to
share in our success via our Sharesave
Scheme, Partnership Share Scheme
and Share Reward Scheme, and operate
several similar schemes for employees in
our Group companies. Our approach to
rewarding Group company employees is
discussed further at page 163.
Find details of our Directors’ Remuneration Policy
onpages 152-165
Equal Pay for Equal Work
We have been reporting data relating to UK
gender pay gaps since 2017 in accordance
with UK statutory requirements. For 2021,
we have extended the scope of our
voluntary reporting to include, for the first
time, gender pay gap data for an additional
eight markets, representing approximately
40% of our Group company employees.
We have also published ethnicity pay gap
data for UK employees for 2021.
We recognise that we have a gender
pay gap in the UK, which refers to the
percentage difference between the
average pay for men and women and is not
to be confused with equal pay for equal
work. This situation is particular to the UK,
which is home to our global headquarters,
where at present we have more men than
women in senior leadership roles.
Gender pay data from our international
markets provides a broader assessment
of our business and demonstrates that
pay gaps are negligible or are in favour
of women. In addition, we worked with
a specialist consultancy in 2021 to
conduct a Pay Equity Review on the data
across nine countries, including the UK.
The consolidated results show men and
women are paid within 1% of one another
for doing the same work or work of equal
value across those countries. This confirms
that our global efforts to provide fair
compensation based on legitimate
drivers of pay are working. In early 2022,
we gained independent accreditation
for our Pay Equity Review from Fair Pay
Workplace, a non-profit organisation.
Certification demonstrates a further
commitment to Pay Equity, moving from
self-disclosure to demonstrable actions.
Find out more, including our statutory UK gender
pay gap data, in our 2021 Diversity and Inclusion
Report, available at www.bat.com/genderpayreport
Summary of areas covered
Stakeholder groups
Employment Principles
*
Employment practices, including commitments to diversity, reasonable
working hours, family-friendly policies, employee wellbeing, talent,
performance, equal opportunities, and fair, clear and competitive
remuneration and benefits and responsible restructuring.
Our People
Health and Safety Policy
*
Health, safety and welfare of all employees, other members of our
workforce andthird-party personnel.
Our People
Suppliers
Customers
Standards of Business
Conduct (SoBC)
*
Topics including respect in the workplace: promoting equality and
diversity; preventing harassment and bullying; fair wages and benefits;
and supporting work-life balance; as well as human rights, health, safety,
welfare and compliance with our Group Data Privacy Procedures.
Our People
Group Data
Privacy Procedure
The manner in which BAT processes personal data about all individuals,
including consumers, employees, contractors and employees
of suppliers.
Our People
Consumers
Suppliers
Customers
* These policies and principles are endorsed by our Board, are adopted by all Group companies and support the effective identification, managementand mitigation of risks and issues for our
business in these and other areas. Available at bat.com/principles.
74
BAT Annual Report and Form 20-F 2021
for shareholders
and investors
By delivering sustainable
andsuperiorreturns.
We are confident in our growth
outlook and have a proven record of
performance, whatever the external
environment. We aim to deliver:
–
3-5% constant currency revenue
growth over the medium term;
–
@
high-single digit constant
currency adjusted EPS growth;
–
65% dividend pay-out ratio of
long-term earnings;
@
–
enhance shareholder returns via
share repurchase programmes;
and
–
deleverage of the balance sheet
@
to 2-3x adjusted net debt/
adjusted EBITDA
@
.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
75
Financial Performance
Summary
Reconciliation of revenue to adjusted revenue at constant rates
2021
2020 2019
£m
Change %
(vs 2020)
£m
Change %
(vs 2019)
£m
Revenue
25,684
-0.4%
25,776
-0.4%
25,877
Adjusting items
– – – –
(50)
Adjusted revenue
25,684
-0.4%
25,776
-0.2%
25,827
Impact of exchange
1,877
894
Adjusted revenue at constant rates
27,561
+6.9%
26,670
+3.3%
25,827
Non-GAAP Measures
In the reporting of financial information, the
Group uses certain measures that are not
defined by IFRS, the Generally Accepted
Accounting Principles (GAAP) under which
the Group reports. The Group believes that
these additional measures, which are used
internally, are useful to users of the financial
information in helping them understand the
underlying business performance.
The principal non-GAAP measures which
the Group uses are adjusted revenue,
adjusted revenue from New Categories,
adjusted profit from operations,
adjusted diluted earnings per share,
@
operatingcash flow conversion ratio, and
free cash flow (before and after) dividends
@
.
Adjusting items are significant items in
revenue, profit from operations, net finance
costs, taxation and the Group’s share of
the post-tax results of associates and
joint ventures which individually or, if of a
similar type, in aggregate, are relevant to
an understanding of the Group’s underlying
financial performance. As an additional
measure to indicate the results of the
Group before the impact of exchange rates
on the Group’s results, the movement
in adjusted revenue, revenue from New
Categories, adjusted profit from operations,
adjusted net finance costs and adjusted
diluted earnings per share are all also
shown at constant rates of exchange.
These non-GAAP measures areexplained,
defined and reconciled from the most
comparable GAAP metric onpages 304
to 313 and note 2 in the Notes on the
Accounts. As reported in 2020, from 2021
adjusted revenue from the Strategic
Portfolio ceased to be a KPI.
Revenue
In 2021, revenue was £25,684 million (down
0.4%), with 2020 also marginally lower
(down 0.4%) than 2019 at £25,776 million.
New Categories performed well in both
years with revenue up 42.4% in 2021 and
14.9% in 2020. Strong pricing in combustibles
drove price/mix of 4.3% in 2021 (2020: 7%),
with 2021 lower than 2020 due to negative
geographic mix as markets began to recover
from COVID-19, an estimated £260 million
impact in Australasia (due to a structural
change in excise and competitive pricing
environment) and the negative impact of
the sale of the Group’s operations in Iran,
partially offset by an estimated £200 million
benefit from trade inventory movements in
the U.S. mainly linked to the timing of price
increases and uncertainty about a potential
excise increase. Cigarette volume was
largely in line with 2020 at 637 billion sticks
(2020: 4.6% decline to 638 billion sticks).
COVID-19 was a headwind in 2020
of approximately 2.5%, largely due to
restrictions in South Africa and a number of
other markets across the Group, including
the Group’s Global Travel Retail (GTR)
business. During 2021, GTR continued
to be impacted by the ongoing global
travel restrictions.
Translational foreign exchange impacted
both years, being a headwind of 7.3% in
2021 and 3.5% in 2020, due to the relative
strength of sterling, which more than offset
the operational performance and led to the
decline in both years. Excluding the impact
of currency (and excise on bought-in goods
which affected 2019), adjusted revenue at
constant rates of exchange increased 6.9%
(2020: up 3.3%).
–
New Categories revenue growth and strong pricing in combustibles offset by currency
headwinds, with revenue down 0.4%;
–
Profit from operations was up 2.7%. On an adjusted, constant currency basis, profit from
operations grew 5.2%, despite afurther incremental increase in New Category investment;
–
Diluted EPS up 6.0%. Adjusted diluted EPSup6.6% atconstant rates of exchange;
–
Deleveraging continued
@
to 3.0x
@
, driven by strong cash generation;
–
Dividend per share up 1.0% at 217.8p; and
–
Share repurchase programme of £2 billion announced for 2022.
Revenue
(£m)
£25,684m
-0.4%
2021
-0.4%
2020
-0.4%
£25,684m
£25,776m
Definition:
Revenue recognised, net of duty,
exciseandother taxes.
IFRS-GAAP
Non-GAAP
KPI
•
•
•
Change in adjusted revenue
at constant rates
(%)
+6.9%
2021
+6.9%
2020
+3.3%
Definition:
Change in revenue before the impact ofadjusting
items and the impact of fluctuations in foreign exchange rates.
IFRS-GAAP
Non-GAAP
KPI
•
•
•
BAT Annual Report and Form 20-F 2021
76
Financial Performance Summary
Continued
Financial Review
IFRS-GAAP
Non-GAAP
KPI
•
•
•
IFRS-GAAP
Non-GAAP
KPI
•
•
•
Profit From Operations
Profit from operations increased 2.7%
to£10,234 million, compared to an
increaseof 10.5% to £9,962 million in 2020,
largely driven by a translational foreign
exchange headwind due to the relative
strength of sterling compared to the
Group’s operating currencies, including the
US dollar. During 2021, ProjectQuantum
(the Group’s restructuring and efficiency
programme) delivered savings of
£595 million in 2021, following £660 million
in 2020.
Raw materials and other consumables
costs
decreased 0.9% to £4,542 million
in 2021, following a decline of 0.3% to
£4,583 million in 2020. In 2021, our raw
material costs were negatively impacted by
a transactional foreign exchange headwind
of 1.7%, offset by savings and translational
tailwind (on costs). The decrease in 2020
was mainly due to the end of the contract
manufacturing agreement which, due to
excise recognition on bought in products
under that arrangement, led to an increase
(in prior years) in revenue and in raw
materials and other consumables costs.
Employee benefit costs
declined 1.0%
to £2,717 million (2020: down 14.8% to
£2,744 million). The reduction was partly
due to translational foreign exchange,
offsetting wage inflation and to operational
efficiencies achieved through Quantum.
Depreciation, amortisation and
impairment costs
decreased by £374 million
to £1,076 million in 2021 compared to a
decrease of £62 million to £1,450 million
in 2020. This includes the amortisation
and impairment charges of £306 million
(2020: £339 million) largely related to
the trademarks and similar intangibles
capitalised following recent acquisitions.
Also included were goodwill impairment
charges of £54 million in Peru and £3 million
following the exit from Myanmar (both in
2021) and £197 million (in 2020) in respect
of Malaysia, recognised due to the ongoing
operational challenges in those markets.
Other operating expenses
declined
by £199 million to £7,468 million (2020:
decrease of £184 million to £7,667 million).
The Group continued to incrementally increase
the investment behind New Categories,
with an increase in 2021 (compared to
2020) of £377 million, itself an increase on
2019 of £346 million, in part funded by the
efficiencies delivered by Quantum.
Adjusting items
included within profit
from operations
totalled £916million in2021
(2020: £1,403 million). These related to:
–
trademark amortisation andimpairment
(2021: £306 million; 2020: £339 million);
–
other litigation costs of £80 million
(2020: £487 million) which in 2021 was
in respect of other litigation costs of
£54 million (2020: £87 million) including
Engle progeny and the net charge
from settlements in Turkey and South
Korea (£26 million). 2020 also included
a £400 million charge largely in respect
of developments in cases regarding
payment obligations under the state
settlement agreements with Florida,
Texas, Minnesota and Mississippi for
brands previously sold to a third party;
–
restructuring and integration costs of
£150 million (2020: £408 million) partly
related to Quantum which will simplify
the business and create a more efficient
and agile organisation to support the
growth of New Categories;
–
a credit, in 2021, of £59 million as an
accrual related to the Reynolds American
dissenting shareholders was released on
successful conclusion of that complaint;
–
a credit, in 2021, of £35 million following
the partial buy-out of the pension fund in
the U.S.; and
–
charges in respect of the sale of the
Group’s operations in Iran (£358 million)
in 2021, largely in respect of the write-off
of certain assets and the reclassification,
from reserves to the income statement,
of foreign exchange.
The Group also recognised charges in
respect of the impairment of goodwill of
£57 million in 2021 (related to Peru and
Myanmar) and £209 million in 2020 (mainly
in respect of Malaysia and Twisp) which
was partly offset by a credit, in 2020, of
£40 million (related to the 2019 charge
associated with the excise dispute in Russia).
2020 also included an estimated
£145 million in additional supply chain costs
to maintain supply as a number of markets
experienced temporary disruption due to
COVID-19, with no material additional costs
incurred in 2021.
Expenditure on research and development
was £304 million in 2021 (2020: £307 million)
witha focus on products that could
potentially reduce the risk associated with
smoking conventional cigarettes.
Profit from operations
(£m)
£10,234m
+2.7%
2021
+2.7%
2020
+10.5%
£10,234m
£9,962m
Definition:
Profit for the year before the impact of net
finance costs/income, share of post-tax results of associates
and joint ventures and taxation on ordinary activities.
Change in adjusted profit from
operations at constant rates
(%)
+5.2%
2021 +5.2%
2020
+4.8%
Definition:
Change in profit from operations before the impact
of adjusting items, the impact of fluctuations inforeign exchange
rates and (in respect of 2021).
Analysis of profit from operations, net finance costs and results from associates and joint ventures
2021
2020
Reported
£m
Adjusting
items
£m
Adjusted
£m
Impact
of exchange
£m
Adjusted
at CC
£m
Reported
£m
Adjusting
items
£m
Adjusted
£m
Profit from operations
U.S.
5,566
321
4565,887
6,343
4,975
809
5,784
APME
1,287
430
1,717
116
1,833
1,472
381
1,853
AmSSA
1,496
94
1,590
1,68898
1,553
651,618
ENA
1,885
71
1,956
132
2,088
1,962
148
2,110
Total regions
10,234
916
80211,150
11,952
9,962
1,403
11,365
Net finance (costs)/income
(1,486)
55
(1,431)(89) (1,520)
(1,745)
153
(1,592)
Associates and joint ventures
415
12
427
29
456
455
(13)
442
Profit before tax
9,163
983
10,146742
10,888
8,672
1,543
10,215
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
77
IFRS-GAAP
Non-GAAP
KPI
•
•
•
IFRS-GAAP
Non-GAAP
KPI
•
•
•
Adjusted profit from operations
is the
Group’s profit from operations before
adjusting items referred to above.
Adjusted profit from operations fell 1.9%
to £11,150 million, driven by the foreign
exchange headwind. Onaconstant
currency basis this would have been
an increase of 5.2%. In 2020, adjusted
profit from operations grew 2.1% to
£11,365million, being an increase of
4.8%onaconstant currency basis.
Operating Margin
Operating margin in 2021 increased
by 120 bps to 39.8% largely driven by
lower charges in respect of items such
as trademark amortisation, goodwill
impairment, litigation and Quantum in 2021
compared to 2020, despite the impact of
Iran described earlier. In 2020, operating
margin was 38.6%, an increase of 380 bps
as 2019 was impacted by a number of items
(including Quebec and Russia) that did not
repeat. These are described in note 6 in the
Notes on the Accounts.
In 2021, adjusted operating margin
declined70 bps to 43.4%, compared to
a growth of 100 bps in 2020 (to 44.1%).
This was driven by the proportionate
growth in New Categories revenue (with
the Group continuing to invest in those
categories), higher revenue in lower margin
markets and a transactional foreign
exchange headwind of 1.7%.
Net Finance Costs
In 2021, net finance costs were
£1,486 million, a decrease of £259 million
on 2020 which, at £1,745 million, were
£143 million higher than 2019.
The movement in 2021 was partly due
to the impact of the charges incurred in
2020 (in relation to the redemptions and
tender offer to repurchase certain bonds
undertaken to de-risk the Group’s future
financing programme which did not repeat)
and a translational foreign exchange
tailwind due to the strength of sterling.
Also in 2021, the Group issued perpetual
hybrid bonds totalling €2 billion, recognised,
in line with IAS 32
Financial Instruments
,
as equity. Interest on such instruments
are recognised in reserves rather than as
a charge to the income statement in net
finance costs. In 2021, in line with IAS 33
Earnings Per Share
, £12 million has been
recognised as a deduction to EPS similar
to non-controlling interest. The increase
in 2020 was also driven by a change in
mix of borrowings towards the US dollar
during the year (as the Group issued bonds
totalling US$8.7 billion, €1.7 billion and
£0.5 billion).
Before adjusting items in respect of
interest on a settlement in Turkey in 2021
(£11 million), the Franked Investment
Income Group Litigation Order (FIIGLO),
as discussed on page 201 (£20 million;
2020: £21 million) and, in 2020, net costs
of £142 million in respect of the bond
redemption combined with a net credit of
£10 million (largely in respect of interest in
relation to the Russia excise dispute) and
the translation impactof foreign exchange
(in both years), adjusted net finance costs
were 4.5% lower in 2021 and 5.9% higher in
2020. The Group’s average cost of debt in
2021 was3.5%, compared to 3.6% in 2020.
Associates and Joint Ventures
Associates largely comprised the Group’s
shareholding in its Indian associate, ITC.
The Group’s share of post-tax results of
associates and joint ventures, included at
the pre-tax level under IFRS, decreased
from £455 million to £415 million in 2021.
This follows a decline in 2020 of 8.6% (from
£498 million in 2019), as ITC continued to
experience difficult trading conditions,
including business disruption due to the
impact of COVID-19.
Included in the results for 2021 and 2020
are adjusting items, which included a gain
of £6 million in 2021 (2020: £17 million),
arising on the deemed disposal of part of
the Group’s shareholding in ITC (due to
issuances of ordinary shares under the ITC
Employee Share Option Scheme).
In 2021, this was more than offset by
other charges, including an £18 million
charge in 2021 as the Group recognised an
impairment in Yemen.
In 2020, the Group recognised a £4 million
charge being the Group’s share of charges
recognised by ITC in respect of the cost of
leaf tobacco stocks destroyed in a third-
party warehouse fire.
Excluding such adjusting items and the
impact of translational foreign exchange,
the Group’s share of associates and
joint ventures on an adjusted, constant
currency basis increased 3.3% in 2021, to
£456 million. In 2020, this was a decrease
of1.2% on 2019.
Adjusted operating margin
(%)
43.4%
2021
43.4%
2020
44.1%
Definition:
Adjusted profit from operations asapercentage
ofadjusted revenue.
Operating margin
(%)
39.8%
2021 39.8%
2020
38.6%
Definition:
Profit from operations as a percentage
of revenue.
Analysis of profit from operations, net finance costs and results from associates and joint ventures
2020 2019
Reported
£m
Adjusting
items
£m
Adjusted
£m
Impact
of exchange
£m
Adjusted
at CC
£m
Reported
£m
Adjusting
items
£m
Adjusted
£m
Profit from operations
U.S.
4,975
809
5,784
32 5,816
4,410
626
5,036
APME
1,472
381
1,853
56
1,909
1,753
306
2,059
AmSSA
1,553
651,618
178
1,796
1,204
638
1,842
ENA
1,962
148
2,110
30
2,1401,649
2,193 544
Total regions
9,962
1,403
11,365
9,016296
11,6612,114 11,130
Net finance (costs)/income
(1,745)
153
(1,592) (1,602)
(20)
(1,612)80
(1,522)Associates and joint ventures
455
(13)
442
26
468
498
(25)
473
Profit before tax
8,672
1,543
10,215
302
10,517
7,912
2,169
10,081
BAT Annual Report and Form 20-F 2021
78
Financial Review
Financial Performance Summary
Continued
Tax
In 2021, the tax charge in the income
statement was £2,189 million, compared
to £2,108 million in 2020 and £2,063 million
in 2019.
The effective tax rates in the income
statement are therefore a charge of 23.9%
in 2021, 24.3% in 2020 and 26.1% in 2019.
These are also affected by the inclusion
of adjusting items described earlier and
the associates and joint ventures’ post-
tax profit in the Group’s pre-tax results.
Excluding these items, the underlying
tax rate for subsidiaries was 24.7% in
2021, 24.9% in 2020 and 26.0% in 2019.
The decrease in underlying tax rate in 2021
largely reflects the prior and current year
tax reclaims in Brazil together with mix
of profits.
See the section Non-GAAP measures on
page 309 for the computation of underlying
tax rates for the periods presented.
Tax strategy
The Group’s global tax strategy is reviewed
regularly by the Board. The operation of the
strategy is managed by the Finance and
Transformation Director and Group Head of
Tax with the Group’s tax position reported
to the Audit Committee on a regular basis.
The Board considers tax risks that may
arise as a result ofour business operations.
In summary, the strategy includes:
–
complying with all applicable laws
and regulations in countries in which
we operate;
–
being open and transparent with tax
authorities and operating to build mature
professional relationships;
–
supporting the business strategy of
the Group by undertaking efficient
management of our tax affairs in line with
the Group’s commercial activity;
–
transacting on an arm’s-length basis
for exchanges of goods and services
between companies within the Group;
and
–
engaging in pro-active discussions with
tax authorities on occasions of differing
legal interpretation.
Where resolution is not possible, tax
disputes may proceed to litigation.
The Group seeks to establish strong
technical tax positions.
Where legislative uncertainty exists,
resulting in differing interpretations, the
Group seeks to establish that its position
would be more likely than not to prevail.
Transactions between Group subsidiaries
are conducted on arm’s-length terms in
accordance with appropriate transfer
pricing rules and OECD principles.
The tax strategy outlined above is
applicable to all Group companies, including
the UK Group companies. Reference to tax
authorities includes HMRC.
The publication of this strategy is
considered to constitute compliance with
the duty under paragraph 16(2) Schedule 19
Part 2 of the UKFinance Act 2016.
The taxation on ordinary activities was a
charge of £2.2 billion in 2021, £2.1 billion in
2020 and £2.1 billion in 2019. Corporation Tax
paid (due to the timing of Corporation
Tax instalment payments which straddle
different financial years) was £2.3 billion
in 2021, £2.1 billion in 2020 and £2.2 billion
in 2019.
Our tax footprint extends beyond
Corporation Tax, including significant
payment of employment taxes and other
indirect taxes including customs and
import duties. The Group also collects
taxes on behalf ofgovernments (including
tobacco excise, employee taxes, VAT and
other sales taxes). The total tax paid in
2021 of £40.5 billion (2020: £41.1 billion,
2019: £41.4 billion) therefore consists of
bothtaxes borne and taxes collected as
shown in the table provided.
In addition to the major taxes, there are
ahost of other taxes the Group bears and
collects such as transport taxes, energy
and environmental taxes, and banking
andinsurance taxes.
The movements in deferred tax, taken
through other comprehensive income,
mainlyrelate to the change in the valuation
ofretirement benefits in the year, as
disclosed in note16 in the Notes on
the Accounts.
Major taxes paid
2021
£bn
2020
£bn
Tobacco excise
(collected)
31.6
32.2
Net VAT and other sales
taxes (collected)
5.6
5.8
Corporation Tax
(borne)
2.3
2.1
Customs and import
duties (borne)
0.3
0.3
Taxes paid by
employees (collected)
0.5
0.5
Employment taxes
(borne)
0.2
0.2
40.5
41.1
Major taxes paid 2021
(£bn)
£40.5bn
Deferred tax asset/(liability)
2021
£m
2020
£m
2019
£m
Opening balance
(15,780)
(16,626)
(17,432)
Difference on exchange
(148)
506
680
Changes in tax rates
158
133
47
Other credits/(charges) to the income statement
29
184
(55)
Other (charges)/credits to other comprehensive income
(110)
23
138
Other movements
– –
(4)
Closing balance
(15,851)
(15,780)
(16,626)
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
79
IFRS-GAAP
Non-GAAP
KPI
•
•
•
Earnings Per Share
Profit for the year was £6,974 million, a
6.2% increase compared to £6,564 million
in 2020 (itself an increase of 12.2% on
2019). While the Group was impacted
by foreign exchange headwinds, a good
operational performance in both years was
enhanced by efficiencies realised through
Quantum and from a lower effective tax
rate. Both 2021 and 2020 were impacted by
a number of charges as described earlier
with the improvement in profit for the year
in 2020 (compared to 2019) also due to
charges in relation to Quebec and Russia
in 2019.
Consequently, and after accounting for
the movement in non-controlling interests
in the year, basic earnings per share were
6.0% higher at 296.9p (2020: 280.0p;
2019: 249.7p). After accounting for the
dilutive effect ofemployee share schemes,
diluted earnings per share were 295.6p,
6.0% higher than 2020 (2020: 278.9p;
2019: 249.0p).
Earnings per share are impacted by
the adjusting items discussed earlier.
Adjusted diluted EPS, as calculated in note
11 in the Notes on the Accounts, was down
against the prior year by 0.8% at 329.0p,
with2020 ahead of 2019 by 2.4% at 331.7p.
Adjusted diluted EPS at constant rates
would have been 6.6% ahead of 2020 at
353.5p, with 2020 up 5.5% against 2019.
Dividends
The Group pays its dividends to
shareholders over four quarterly interim
dividends. Quarterly dividends provide
shareholders with a more regular flow of
dividend income and allow the Company to
spread its substantial dividend payments
more evenly over the year, aligning better
with the cash flow generation of the Group
and so enable the Company to fund the
payments more efficiently. The Board seeks
to reward shareholders with an increase in
dividend, by reference to 65% of adjusted
diluted EPS over the mid to long term.
The Board has declared an interim dividend
of 217.8p per ordinary share of 25p, payable
in four equal quarterly instalments of 54.45p
per ordinary share in May 2022, August
2022, November 2022 and February 2023.
This represents an increase of 1.0% on 2020
(2020: 215.6p per share, up 2.5%) and a payout
ratio, on 2021 adjusted diluted earnings per
share, of 66.2% (2020: 65.0%).
The quarterly dividends will be paid to
shareholders registered on either the UK
main register or the South Africa branch
register and to ADS holders, each on the
applicable record dates.
Under IFRS, the dividend is recognised in
the year that it is approved by shareholders
or, if declared as an interim dividend by
Directors, in the period that it is paid.
The cash flow, prepared in accordance
with IFRS, reflects the total cash paid in the
period. Further details of the total amounts
of dividends paid in 2021 and 2020 (with
2019 comparatives) are given in note 22 in
the Notes on the Accounts.
Dividends are declared and payable in
sterling except for those shareholders
on the branch register in South Africa,
where dividends are payable in rand.
The equivalent dividends receivable by
holders of ADSs in US dollars are calculated
based on the exchange rate on the
applicable payment date.
Further details of the quarterly
dividends and key dates are set out
under‘Shareholder information’ on
pages354 and 355.
IFRS-GAAP
Non-GAAP
KPI
•
•
•
Change in adjusted diluted EPS
at constant rates
(%)
+6.6%
2021
+6.6%
2020
+5.5%
Definition:
Change in diluted earnings per share before the
impact of adjusting items and the impact offluctuations in
foreign exchange rates.
IFRS-GAAP
Non-GAAP
KPI
•
•
•
Change in adjusted diluted EPS
(%)
-0.8%
2021 -0.8%
2020
+2.4%
Definition:
Change in diluted earnings per share beforethe
impact of adjusting items.
Diluted earnings per share (EPS)
(p)
295.6p
+6.0%
2021
+6.0%
2020
+12.0%
278.9p
Definition:
Profit attributable to owners of BAT p.l.c. over
weighted average number of shares outstanding, including the
effects of all dilutive potentialordinary shares.
The discussion of 2019 results that are not necessary to an understanding of the
Group’s financial condition, changes in financial condition and results of operations is
excluded from this Financial Review in accordance with applicable US Securities laws.
Discussion ofsuch 2019 metrics is contained in the Group’s Annual Report on Form
20-F 2020, which is available at bat.com/annualreport and has been filed with the SEC.
Information contained inpages 34 to 42, pages 65 to the first column on page 72 and
from the heading ‘Retirement benefit schemes’ on page 72 to page 73 of the Annual
Report on Form 20-F 2020 are accordingly incorporated byreference into this Annual
Report on Form 20-F 2021 only to the extent such information pertains to the Group’s
financial condition and results of operations for the fiscal year ended 31 December 2019.
295.6p
BAT Annual Report and Form 20-F 2021
80
Treasury and Cash Flow
Financial Review
Treasury, Liquidity and
Capital Structure
The Treasury Function is responsible
for raising finance for the Group and
managing the Group’s cash resources and
the financial risks arising from underlying
operations. Clear parameters have been
established, including levels of authority, on
the type and use of financial instruments
to manage the financial risks facing the
Group. Such instruments are only used
if they relate to an underlying exposure;
speculative transactions are expressly
forbidden under the Group’s treasury
policy. All these activities are carried out
under defined policies, procedures and
limits, reviewed and approved by the Board,
delegating oversight to the Finance and
Transformation Director and Treasury
Function. See note 26 inthe Notes on the
Accounts forfurther detail.
It is the policy of the Group to maximise
financial flexibility and minimise
refinancing risk by issuing debt with a
range of maturities, generally matching
the projected cash flows of the Group
and obtaining this financing from a wide
range of sources. The Group targets an
average centrally managed debt maturity
of at least five years of which no more
than 20% matures in a single rolling year.
As at 31 December 2021, the average
centrally managed debt maturity was 10.1
years (2020: 9.9 years) with the highest
proportion maturing in a single rolling
12-month period was 18.6% (2020: 16.4%).
In order to manage its interest rate risk,
the Group maintains both floating rate and
fixed rate debt. The Group sets targets
(within overall guidelines) for the desired
ratio of floating to fixed rate debt on a net
basis (at least 50% fixed on a net basis in
the short to medium term). At 31 December
2021, the relevant ratio of floating to fixed
rate borrowings was 10:90 (2020: 7:93).
As part of the management of liquidity,
funding and interest rate risk, the Group
regularly evaluates market conditions and
may enter into transactions, from time
to time, to repurchase outstanding debt,
pursuant to open market purchases, tender
offers or other means.
The Group continues to maintain
investment-grade credit ratings*, with
ratings from Moody’s/S&P at Baa2
(stable outlook)/BBB+ (stable outlook),
@
respectively, with a medium-term rating
target of Baa1/BBB+.
@
The strength
of the ratings has underpinned debt
issuance and the Group is confident of
its ability to successfully access the debt
capital markets.
* A credit rating is not a recommendation to buy, sell or hold
securities. A credit rating may be subject to withdrawal
or revision at any time. Each rating should be evaluated
separately of any other rating.
As at 31 December 2021, the Group’s
floating rate borrowings have no exposure
in relation to IBOR reform as its floating rate
bond of US$750 million is due to mature in
August 2022 before the USD LIBOR ceases.
Additionally, the Group has hedging
instruments that are indexed to sterling
LIBOR interest rates. The Group signed up
to the ISDA 2020 IBOR Fallback Protocol
as published by the International Swaps
and Derivative Association Inc., ensuring
that appropriate fallback rates will apply in
relation to derivatives that are impacted
by LIBOR cessation and therefore
certainty on the basis of the further cash
flows. The hedge relationship on these
derivatives will continue with the resulting
ineffectiveness likely to be immaterial.
Available facilities
The Group maintains a £25 billion Euro
Medium Term Note (EMTN) programme,
and US (US$4 billion) and European
(£3 billion) commercial paper programmes
to accommodate the liquidity needs of the
Group. At 31 December 2021, there was
£269 million commercial paper outstanding
(2020: nil outstanding). Cashflows relating
to commercial paper that have maturity
periods of three months or less are
presented on a net basis in the Group’s
cashflow statement.
The Group’s main bank facility is a
syndicated £5.85 billion committed revolving
credit facility. This facility was undrawn
at 31 December 2021 (31 December 2020:
undrawn). In 2021, the Group exercised
the first of the one-year extension options
on both tranches of the revolving credit
facility, with the second one-year extension
subsequently exercised in February
2022. Effective March 2022, therefore,
the £2.85 billion 364-day tranche will be
extended to March 2023 at the reduced
amount of £2.7 billion and £2.5 billion of the
five-year tranche will be extended from
March 2026 to March 2027 (with £3.0 billion
of this tranche remaining available until
March 2025 and £2.85 billion remaining
available from March 2025 to March 2026).
During 2021, the Group extended short-term
bilateral facilities totalling £2.5 billion until
March or April 2022, some with extension
options to extend for further periods.
As at 31 December 2021, £500 million
was drawn on a short-term basis.
Of such short-term bilateral facilities,
in December 2021, the Group amended
and extended a total of £500 million until
December 2022 and subsequent to year
end, the Group amended and extended
a further £500 million until January 2023
and effective April 2022, an additional
£350 million was agreed to be extended
until October 2022 and £500 million until
April 2023. Cashflows relating to bilateral
facilities that have maturity periods of three
months or less are presented on a net basis
in the Group’s cashflow statement.
In July 2019, the Group filed a shelf
registration statement on Form F-3 with
the SEC pursuant to which B.A.T Capital
Corporation and B.A.T. International Finance
p.l.c. may issue debt securities guaranteed
by certain members of the Group from
time to time. This forms part of the Group’s
strategy to ensure flexible and agile access
to capital markets and the registration
statement is initially valid for three years.
Use of facilities
These facilities ensure that the Group has
access to funding to supplement the cash
available or generated by the business
in the period to meet the operational
(including working capital) and general
corporate requirements including, but
not limited to, the timing of payments in
relation to:
–
dividends (2021: £4.9 billion;
2020: £4.8 billion);
–
capital expenditure (2021: £0.6 billion;
2020: £0.6 billion);
–
MSA in the U.S. (2021: £2.7 billion;
2020: £2.2 billion);
–
refinancing obligations;
–
share repurchase programme, as
announced for 2022 (£2 billion); and
–
other corporate activity such as litigation
or acquisitions as relevant.
Management believes that the Group
has sufficient working capital for present
requirements, taking into account the
amounts of undrawn borrowing facilities
andlevels of cash and cash equivalents,
andthe ongoing ability to generate cash.
Issuance, drawdowns and repayment
inthe period
In 2021, the Group repaid:
–
€650 million, £500 million, €1.1 billion,
CHF400 million and €500 million bonds
at maturity; and
–
the £1,929 million term loan that had
amaturity date in January 2022.
Also in 2021, the Group issued perpetual
hybrid bonds totalling €2 billion.
The issuance allowed the Group to raise
incremental euro-denominated securities,
which contributed to a more efficient
alignment of the Group’s earnings currency.
It also contributes to the diversification
of the Group’s sources of funding and
further strengthens its capital structure.
The issuance provided the additional
benefit of supporting the deleveraging
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
81
@
part of BAT's Annual Report on Form 20-F as filed with
the SEC.
journey with the addition of a small benefit
to the credit metrics.
During 2020, in light of the uncertainty and
volatility in the external markets, the Group
has de-risked future financing requirements
by accessing the debt capital markets,
raising a total of US$8.7 billion in the US
market, and €1.7 billion and £0.5 billion in the
European market (in aggregate £8.9 billion).
Also in 2020 as part of the de-risking
programme, the Group repurchased and
redeemed £3.1 billion of debt maturing in
2021 and 2022, reducing the ‘tower’ of debt
due for repayment in 2022.
Cash Flow
Net cash generated from
operatingactivities
Net cash generated from operating
activities decreased by 0.7% to
£9,717 million in 2021, compared to an
increase of £790 million to £9,786 million
in 2020. 2021 was negatively impacted by
a translational foreign exchange headwind
and the timing of MSA payments in the
U.S. and higher tax payments (mainly
in Canada and the U.S.). These were
largely offset by favourable movement in
inventories (as stock builds in Australia in
2020 did not repeat), and lower payments
in respect of litigation (2021: £248 million;
2020: £464 million). 2020 included the
payment of the settlement agreed in 2019
in respect of the excise dispute in Russia
(£205 million), US litigation (including
£169 million in respect of the Florida
judgment described earlier). 2020 was also
impacted by working capital movements
driven by COVID-19 of £131 million.
Net cash used in investing activities
In 2021, net cash used in investing
activities increased to £1,140 million
(2020: £783 million), largely due to a net
outflow of £228 million from short-term
investment products, including treasury bills
(2020: £159 million net outflow), the disposal
of the Group’s operations in Iran (£98 million)
and the purchase of the equity stake in
Organigram. Purchases of property, plant
andequipment were largely in line with 2020,
at £527 million (2020: £511 million).
In 2021, the Group invested £664 million, in
gross capital expenditure, an increase of
2.5% on the prior year (2020: £648 million).
This includes purchases of property, plant
and equipment and certain intangibles,
and the investment in the Group’s global
operational infrastructure (including, but
not limited to, the manufacturing network,
trade marketing software and IT systems
and the expansion of our New Categories
portfolio). The Group expects gross capital
expenditure in 2022 of £750 million.
Net cash used in financing activities
Net cash used in financing activities
was an outflow of £8,749 million in 2021
(2020: £7,897 million outflow), with the
outflow in each year largely driven by:
–
dividend payments (2021: £4,904 million,
up 3.4%; 2020: £4,745 million, up 3.2%,
with the growth in both years driven by
the higher dividend per share); and
–
the net repayment of borrowings
(2021: £3,865 million; 2020: £807 million)
partly offset by the issuance of the hybrid
bonds (£1,685 million in 2021).
In 2021, interest paid declined 14.9% to
£1,479 million (2020: £1,737 million), with
the movements largely driven by charges
in relation to the refinancing programme
in2020 that did not repeat.
In 2021, the Group repaid borrowings
of £4.8 billion and issued £1.0 billion of
new borrowings, while the Group issued
perpetual hybrid bonds totalling €2 billion
(£1.7 billion). The Group repaid borrowings of
£10.6 billion in 2020, including £3.1 billion as
part of the Group’s liquidity management
strategy to de-risk future financing, largely
offset by new borrowings of £9.8 billion.
Please refer to note 26 in the Notes
ontheAccounts for further details.
Free cash flow (before and after
dividends paid to shareholders)
@
Free cash flow (before dividends paid to
shareholders), as defined on page 311,
was £7,447 million, up 2.1% on the prior
year (2020: up 11.9% to £7,295 million;
2019: £6,519 million). The increase in 2021
was largely due to the lower outflows related
to adjusting items (2021: £501 million;
2020: £732 million), lower interest paid in the
year (down £258 million to £1,479 million,
due to the impact of the refinancing
programme undertaken in 2020), which
more than offset the movement in net
cash generated from operations described
above. Net capital expenditure was
marginally higher (2021: £632 million;
2020: £605 million). After payment of
dividends to shareholders, free cash flow
was £2,543 million (2020: £2,550 million;
2019: £1,921 million).
@
Cash flow conversion
The conversion of profit from operations
to net cash generated from operating
activities may indicate the Group’s ability
to generate cash from the profits earned.
Based upon net cash generated from
operating activities, the Group’s conversion
rate was 95% compared to 98% in 2020,
which was largely in line with 2019.
@
Operating cash flow conversion ratio
(based upon adjusted profit from
operations) was in line with 2020 at 104%
(2020: 103%), itself an increase on 2019
(97%). The performance in 2021 was
partly due to the positive impact of the
Australia stock build in 2020 not repeating.
See page 310 forfurther information on
this measure.
@
Restricted cash
Cash and cash equivalents include restricted
amounts of £1,024 million (2020: £878 million)
due to subsidiaries in CCAA protection
(as described in note 32 in the Notes on
the Accounts), as well as £305 million
(2020: £455 million) principally due to
exchange control restrictions, including
amounts of £92 million (2020: £141 million)
where the underlying restrictions are
expected to be short-term in nature.
Summary cash flow
2021
£m
2020
£m
2019
£m
Cash generated from operations
11,678
11,567
10,948
Dividends received from associates
353
351
252
Tax paid
(2,314)
(2,132)
(2,204)
Net cash generated from operating activities
9,717
9,786
8,996
Net cash used in investing activities
(1,140)
(783)
(639)
Net cash used in financing activities
(8,749)
(7,897)
(8,593)
Differences on exchange
(253)
(253)
(57)
(Decrease)/increase in net cash and cash equivalents
(425)
853
(293)
BAT Annual Report and Form 20-F 2021
82
Financial Review
Other
Borrowings and Net Debt
Total borrowings (which includes lease
liabilities) declined to £39,658 million in 2021
(2020: £43,968 million) largely due to the
refinancing undertaken in 2021 (with the
€2 billion perpetual hybrid bonds issued
in the year recognised as equity) and the
net repayment of borrowings in the year
(partly due to the cash flow generated
by the business in the period). The value
of borrowings is also impacted by the
relative movement of sterling against
other currencies, particularly the US dollar
and the euro. In 2021, this was a tailwind
of £409 million compared to a tailwind of
£219 million in 2020.
Total borrowings includes £754 million
(31 December 2020: £790 million) in respect
of the purchase price adjustments related
to the acquisition of Reynolds American Inc.
As discussed on page 80, the Group
remains confident about its ability
to access the debt capital markets
successfully and reviews its options
onacontinuing basis.
Net debt is a non-GAAP measure and is
defined as total borrowings (including
related derivatives and lease liabilities) less
cash and cash equivalents and current
investments held at fair value.
Net debt, at 31 December 2021, was
£36,302 million (2020: £40,241 million;
2019: £42,574 million), with the movement
in net debt largely due to the net
repayment of borrowings (partly enabled
by the issuance of perpetual hybrid
bonds) and a foreign exchange headwind
of £124 million, primarily due to the
movement of the US dollar against sterling
(2020: £69 million tailwind).
@
The movement in net debt also includes
the free cash flow before dividends
earned in the year (2021: £7,447 million;
2020: £7,295 million) as described on page
81. This is partly offset by dividends paid
to owners of the parent of £4,904 million
(2020: £4,745 million).
@
Adjusted Net Debt
toAdjustedEBITDA
@
The Group uses adjusted net debt to
adjusted EBITDA, as defined on page 312,
to assess its level of adjusted net debt in
comparison to the earnings generated by
the Group. This is deemed by management
to reflect the Group’s ability to service and
repay borrowings.
In 2021, the ratio of adjusted net debt
to adjusted EBITDA was 3.0 times,
representing an improvement from 3.3 times
at the end of 2020, itself an improvement
from 3.5 times at the end of 2019.
The Group’s adjusted net debt to adjusted
EBITDA ratio is subject to the fluctuations
in the foreign exchange market by virtue of
the Group’s foreign currency denominated
earnings and the exposure of the debt
portfolio to, predominantly, the US dollar.
In 2021, due to the relative movement in
sterling, the sterling value of adjusted
net debt increased by £477 million.
Excluding the impact of foreign exchange
on the Group’s reported results, adjusted
net debt to adjusted EBITDA declined 0.5
times in 2021 (2020: down 0.3 times).
Refer to page 312 for a full reconciliation
from borrowings to adjusted net debt,
profit for the year to adjusted EBITDA and
the ratio of adjusted net debt to adjusted
EBITDA, at both current and constant rates
of exchange.
@
Return on Capital Employed
(ROCE)
@
The Group’s ROCE, calculated in
accordance with our reported numbers,
was 8.4% (2020: 8.2%) with the movement
in 2021 largely due to the higher profit
from operations.
On an adjusted basis, as defined on page
313, including dividends from associates
and joint ventures (as a proxy to a return
in the period, given the inclusion of the
investment in associates and joint ventures in
the Group’s calculation of capital employed),
adjusted ROCE grew from 9.0% in 2019
to 9.6% in 2020, and declined to 9.4% in
2021. This was due to the movement in
adjustedprofit from operations in the
year and translational foreign exchange
described earlier.
@
Retirement Benefit Schemes
The Group’s subsidiary undertakings
operate defined benefit schemes,
including pension and post-retirement
healthcare schemes, and defined
contribution schemes. The most significant
arrangements are in the U.S., UK, Canada,
Germany, Switzerland and the Netherlands.
Together, schemes in these territories
account for over 90% of the total underlying
obligations of the Group’s defined benefit
arrangements and over 70% of the defined
benefit net costs charged to adjusted
profit from operations. Benefits provided
through defined contribution schemes
are charged as an expense as payments
fall due. The liabilities arising in respect of
defined benefit schemes are determined
in accordance with the advice of
independent, professionally qualified
actuaries, using the projected unit credit
method. It is Group policy that all schemes
are formally valued at least every three
years. 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.
The present total value of funded scheme
liabilities as at 31 December 2021 was
£10,084 million (2020: £12,223 million), while
unfunded scheme liabilities amounted
to £1,037 million (2020: £1,147 million).
The schemes’ assets decreased to
£10,816 million from £12,576 million in 2020,
itself an increase from £11,860 million in 2019.
The overall net liability for all pension and
healthcare schemes in Group subsidiaries
amounted to £321 million at the end of 2021,
compared to £810 million at the end of 2020.
In addition, during 2021, the risk profiles and
values of amounts relating to retirement
benefit arrangements were impacted by
a partial buy-out in the U.S. and through
buy-ins in the UK and Canada. Please refer
to note 15 in the Notes on the Accounts for
further details.
Litigation and Settlements
As discussed in note 31 in the Notes on
the Accounts, various legal proceedings
or claims are pending or maybeinstituted
against the Group.
Reconciliation of total borrowings to adjusted net debt
@
2021
£m
2020
£m
2019
£m
Total borrowings (including lease liabilities)
39,658
43,968
45,366
Derivatives in respect of net debt:
– assets
(273)
(518)
(527)
– liabilities
182
172
384
Cash and cash equivalents
(2,809)
(3,139)
(2,526)
Current investments held at fair value
(456)
(242)
(123)
Net debt
36,302
40,241
42,574
Purchase price adjustment (PPA) to Reynolds American Inc.
debt
(754)
(790)
(848)
Adjusted net debt
35,548
39,451
41,726
@
part of BAT's Annual Report on Form 20-F as filed with
the SEC.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
83
Government Activity
The marketing, sale, taxation and use of
tobacco products have been subject to
substantial regulation by government
and health officials for many years.
For information about the risks related
to regulation, seepage94 and pages
325to 334.
Off-balance Sheet Arrangements
and Contractual Obligations
Except for certain indemnities, the Group
has no significant off-balance sheet
arrangements other than in respect of
leaf purchase obligations. The Group has
contractual obligations to make future
payments on debt guarantees. In the
normal course of business, it enters into
contractual arrangements where the
Group commits to future purchases of
goods and services from unaffiliated
and related parties. See page 314 for a
summary of the contractual obligations
asat31 December 2021.
Accounting Policies
The application of the accounting
standards and the accounting policies
adopted by the Group are set out in the
Group Manual of Accounting Policies and
Procedures (GMAPP).
GMAPP includes the Group instructions
in respect of the accounting and reporting
of business activities, such as revenue
recognition, asset valuations and
impairment testing, adjusting items, the
accrual of obligations and the appraisal
of contingent liabilities, which include
taxes and litigation. Formal processes are
in place whereby central management
and end-market management confirm
adherence to the principles and the
procedures and to the completeness of
reporting. Central analyses and revision of
information are also performed to ensure
and confirm adherence.
In order to prepare the Group’s consolidated
financial information in accordance with
IFRS, management has used estimates
and assumptions that affect the reported
amounts of revenue, expenses and assets,
and the disclosure of contingent liabilities,
at the date of the financial statements.
The critical accounting estimates are
described in note 1 in the Notes on the
Accounts and include:
–
review of asset values, including
goodwilland impairment testing;
–
estimation and accounting for
retirementbenefit costs; and
–
estimation of provisions, including as
related to taxation and legal matters.
The critical accounting judgements are
described in note 1 in the Notes on the
Accounts and include:
–
identification and quantification of
adjusting items;
–
determination as to whether to recognise
provisions and the exposures to
contingent liabilities related to pending
litigation or other outstanding claims;
–
determination as to whether control
(subsidiaries), joint control (joint
arrangements), or significant influence
(associates) exist in relation to
investments held by the Group;
–
review of applicable exchange rates for
transactions with and translation of
entities in territories where there are
restrictions on the free access to foreign
currency ormultiple exchange rates; and
–
the determination as to whether
perpetual hybrid bonds should
be classified as equity instead
of borrowings.
Foreign Exchange Rates
The principal exchange rates used to convert
the results of the Group’s foreign operations
to sterling, for the purposes of inclusion and
consolidation within the Group’s financial
statements, are indicated in the table below.
Where the Group has provided results at
constant rates of exchange, this refers to the
translation of the results from the foreign
operations at rates of exchange prevailing
in the prior period – thereby eliminating
the potentially distorting impact of the
movement in foreign exchange on the
reported results.
Going Concern
A description of the Group’s business
activities, its financial position, cash flows,
liquidity position, facilities and borrowings
position, together with the factors
likely toaffect its future development,
performance and position, are set out
in this Annual Report and Form20-F.
The keyGroup risks include analyses of
financial risk and the Group’s approach
tofinancial risk management. Notes 23 and
26 in the Notes on the Accounts provide
further detail on the Group’s borrowings
andmanagement of financial risks.
The Group has, at the date of this report,
sufficient existing financing available for
its estimated requirements for at least the
next 12 months and beyond in respect of
general corporate purposes. This includes
the payments arising in respect of the
Master Settlement Agreement due
in the U.S. in 2022 and other known
liabilities or future payments (including
interim dividends), as they fall due.
Actions undertaken during 2021 and 2020
to de-risk future funding requirements,
as previously described, provide further
assurance with regards to the Group’s
financial viability.
During 2021 and 2020, COVID-19 has
demonstrated the Group’s ability to
navigate the uncertainties arising through
operational, economic and societal volatility.
Such challenges have been met through
the Group’s geographic diversity and ability
to flex operations. This, together with
the ability to generate cash from trading
activities, the performance of the Group’s
Strategic Portfolio and its leading market
positions in a number of countries, as well
as numerous contracts with established
customers and suppliers across different
geographical areas and industries, provides
the Directors with the confidence that the
Group is well placed to manage its business
risks successfully in the context of current
financial conditions and thegeneral outlook
in the global economy.
After reviewing the Group’s annual budget,
plans and financing arrangements, the
Directors consider that the Group has
adequate resources to continue operating
and that it is therefore appropriate to
continue to adopt the going concern
basis in preparing the Annual Report
andForm20-F.
Foreign exchange rates
Average
Closing
2021
2020 2019
20212020 2019
Australian dollar
1.832
1.862
1.836
1.863
1.771
1.885
Brazilian real
7.421
6.616
5.035
5.3297.544
7.100
Canadian dollar
1.724
1.720
1.694
1.711
1.741
1.718
Euro
1.164
1.125 1.140 1.180
1.191
1.117Indian rupee
101.702
95.097
89.898
100.684
99.880
94.558
Japanese yen
151.124
137.017
139.234 143.967
155.972
141.131Russian rouble
101.388
92.844
82.623
101.592
101.10682.282
South African rand
20.335
21.099
18.437
20.07921.617
18.525
US dollar
1.376
1.284
1.277
1.354
1.367
1.325
BAT Annual Report and Form 20-F 2021
84
Regional Review
U.S.
United States
Revenue and Profit
fromOperations
In 2021, reported revenue grew 1.9%to
£11,691 million, with 2020 up 10.6% to
£11,473 million. Excluding the impact of
translational foreign exchange, this was
an increase of 9.2% in 2021 (2020: up
11.2%). This was driven, in both years, by
pricing (supported by our Revenue Growth
Management (RGM) capabilities) in cigarettes,
Vapour and Traditional Oral and the continued
growth in vapour volume. 2021 also benefited
(by an estimated £200 million) from trade
inventory movements mainly linked to the
timing of price increases and uncertainty about
a potential excise increase. This was offset by a
decline in combustible volume (lapping a strong
comparator period). 2020 volume was positively
impacted by resilient consumer demand
resulting from the increase in fiscal stimulus,
lower gas prices and an extra selling day
combined with higher supply chain inventories.
Reported profit from operations increased
11.9% to £5,566 million in 2021 (2020: up 12.8%
to £4,975 million). This was driven by the higher
revenue (in both years), lower losses from Vuse
in 2021, initiatives including marketing spend
effectiveness and the benefit from trade
inventory movements. This was also driven by
lower adjusting items in 2021, related to the
ongoing efficiency programmes (Quantum),
credits related to the partial buy-out of the
pension fund (£35 million) and the finalisation
of the dissenting shareholders litigation
(£59 million). These were lower than in
2020, which included a £400 million charge
related to payment obligations under the
state settlement agreements with Florida,
Texas, Minnesota and Mississippi for brands
previously sold to a third party.
Excluding the adjusting items and the
impact of a translational foreign exchange
headwind, adjusted profit from operations
increased by 9.7% (2020: 15.5%) ona constant
currency basis.
New Categories
In 2021, Vuse performed well, gaining
significant vapour value share and
approaching value leadership, up 760 bps to
32.5% from 24.9% in 2020 and 16.6% in 2019.
Volume
2021
units
vs 2020
%
2020
units
vs 2019
%
2019
units
Cigarettes (bn sticks)
70
-5.0%
73
+0.5%
73Other (bn sticks eq)*
– – –
– –
Combustibles (bn sticks)
70
-5.0%
73
+0.5%
73New Categories:
Vapour (mn 10ml/pods)
291
+66.7%
174
+69.7%
103
THP (bn sticks)
– –
– – –
Modern Oral (mn pouches)
602
+272%
162
+45.0%
112
Traditional Oral (bn sticks eq)
7
-5.1%
8
-1.3%
8* Other includes MYO/RYO.
Revenue
2021
£m
vs 2020
%
vs 2020
(adj at cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Combustibles
10,015
+0.9%
+8.1%
+9.9%9,926
+9.3%
New Categories:
Vapour
561
+46.4%
+56.9%
383
+85.1% +86.1%
THP
1
-21.8%
-16.2%
1
+0.0%+0.5%
Modern Oral
2
-81.5%
-80.1%
10
+13.5% +14.1%
Total New Categories
564
+43.0%
+53.3%
394
+82.9%+81.9%
Traditional Oral
1,077
-4.3%
+2.6%
1,126
+7.0% +7.6%
Other
35
+26.9%
+36.0%
27
+4.6%
+5.1%
Revenue
11,691
+1.9%
+9.2%
+11.2%11,473
+10.6%
Profit from operations/Operating margin
2021
£m
vs 2020
%
vs 2020
(adj at cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Profit from operations
5,566
+11.9% +15.5%
+9.7%
+12.8%4,975
Operating margin (%)
47.6%
+420 bps
+20 bps
43.4%
+90 bps
+190bps
With Vuse approaching value
leadership and strong pricing, we are
delivering value across our portfolio
Guy Meldrum
President and CEO (Reynolds American Inc.)
Key Markets
Our products are available in all regions
ofthe U.S.
Revenue by category
+60 bps
7
Cigarette value
share change
Owned
manufacturing
(incR&D) sites
4,405
Number
of employees
Combustibles
New Categories
Traditional Oral
Other
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
85
Delivering on our
New Categories
The U.S. business continues its
accelerated journey towards A Better
Tomorrow™, delivering a year of
outstanding results in New Categories.
That success was mainly driven by Vuse,
whose market share (by value) was up
760 bps vs 2020, despite an increasingly
competitive environment, and is
approaching national market leadership.
This was balanced with continued
investment and quick learning with Velo in
the fast-growing Modern Oral category.
Vuse’s exceptional performance is
underpinned by a relentless focus on
consumer acquisition and a unique
device customisation platform, ‘Vuse
by U’, a leading innovation for adult
consumers seeking personal expression.
Vuse’s adult consumer-centred platform is
focused on driving conversion and retention
with an expansive portfolio spanning
three flavours, across three nicotine levels
and three pod pack formats with the
introduction of Single &Quad Pods.
Vapour consumable volume increased 67%
(2020: up 70%), with revenue increasing
46.4% to £561 million (2020: up 85.1% to
£383 million). This was a growth of 56.9%
(2020: 86.1% increase), at constant rates of
exchange, with pricing on consumables in
the second half of 2021 offsetting the roll-
over impact of the negative mix from the
successful launch of the quad-pack in 2020.
The Alto variant now represents over 90%
of Vuse revenues in the U.S., up from 83% in
2020 and 50% in 2019.
Industry vapour volumes were up 21.2% in
2021, following a decline of 13.1% in 2020 as
the industry recovered from the effects of the
EVALI crisis (in 2019) and implementation of
the flavour regulations in early 2020.
In October 2021, Vuse Solo received the first
marketing authorisation from the U.S. FDA as
discussed below. We remain confident in the
quality of the applications submitted for the
rest of our New Category products, which
are supported by scientific evidence that the
continued marketing of our Vuse and Velo
products is appropriate for the protection of
public health.
In Modern Oral, volume increased by over
270% (2020: 45% higher) with volume share
up 410 bps in 2021. Revenue declined 81.5%
(2020: up 13.5%). The performance in 2021
was driven by promotional pricing and
the national roll-out of the Velo-branded
nicotine pouch products (available in over
110,000 stores), that were acquired in
October 2020 from Dryft Sciences, LLC
(Dryft). While growing year-on-year, driven
by distribution expansion, the Modern Oral
segment remains small, representing only
1.6% of total nicotine value share.
Combustibles
Combustibles revenue was 0.9% higher
in 2021 at £10,015 million (2020: up 9.3%
to £9,926 million). However, excluding a
translational foreign exchange headwind
in both years, this was an increase of 8.1%
(2020: 9.9% higher) at constant rates of
exchange. The growth was driven by strong
pricing (with four price increases announced
in both 2021 and 2020, supported by our RGM
capabilities) which more than offset a decline
in volume of 5.0% to 70 billion sticks in 2021
(2020: 73 billion sticks; 0.5% increase). In 2021,
the Group benefited from trade inventory
movements (mainly linked to the timing of price
increases and uncertainty about a potential
excise increase) which are expected to unwind
in 2022. Excluding this, volume would have
been down 7.0%. Industry volume was down
6.5%, driven by rising gas prices and the partial
unwinding of last year’s additional supply chain
inventories and stronger consumption trends.
Value share of cigarettes increased 60 bps
(2020: up 45 bps), driven by our strategic
brands (up 80 bps) including Newport and
Natural American Spirit. Total volume share
declined 40 bps (2020: 10 bps increase)
as we focused on value generation from
combustibles in 2021.
The strategic portfolio performed well, partly
due to Lucky Strike which was reintroduced
in the final quarter of 2020 and reached
1% national volume share in the first year
post launch.
On 29 April 2021, the FDA announced it is
setting into motion the process of advancing
two tobacco product standards regarding
menthol in cigarettes and all flavoured cigars.
The Group’s U.S. business will evaluate any
proposed regulation and will participate in
any consultation and rulemaking processes
by submitting robust comments grounded
in science-based evidence. The published
science does not support regulating menthol
cigarettes differently from non-menthol.
The scientific evidence neither shows a
difference in health risks between menthol
and non-menthol cigarettes, nor indicates that
menthol cigarettes adversely affect initiation,
dependence, or cessation.
Traditional Oral
Traditional Oral revenue fell 4.3% (2020:
up 7.0%), a growth of 2.6% (2020: 7.6%) at
constant rates of exchange, driven by strong
pricing in both years, which more than offset
lower volume (down 5.1% in 2021, and 1.3%
in 2020). Through the utilisation of RGM
techniques, value share of moist oral grew 10
bps, having declined 25 bps in 2020, largely
driven by Grizzly, which performed well in
2021, having been impacted by strong pricing
in the final quarter of 2019 and early 2020.
Our Strategy in Action
Innovation drives performance
Vuse growth in the U.S. has been fuelled by an
evolving marketing plan focused on local brand
building plans tailored to the consumer needs in key
cities. Vuse is now the value share market leader in
27 states.
Through collaboration with local artists and
leveraging the McLaren partnership and through
the Vuse device customisation platform, we have
generated significant consumer and media interest.
This has all been underpinned by investments in
improving data, marketing technology and digital
engagement, while the expanding of the vapour
pod format options during the year gave consumers
more choice.
We have also made progress in improving the
brand’s profitability in the U.S.. We have focused on
value generation, through RGM, while also unlocking
cost savings (including in product costs and
efficient marketing and trade spend), with the brand
achieving profitability in the final quarter of 2021.
Availability of
New Categories
in the Region
+43%
Revenue growth in
NewCategories
* Based on the weight of evidence and assuming a complete switch from cigarette smoking. These products are not risk free
and are addictive.
† Our products as sold in the U.S., including Vuse, Velo, Grizzly, Kodiak, and Camel Snus, are subject to FDA regulation and no
reduced-risk claims will be made as to these products without agency clearance.
BAT Annual Report and Form 20-F 2021
86
Regional Review
AmSSA
Americas and Sub-Saharan Africa
Revenue and Profit
fromOperations
In 2021, reported revenue increased 0.8%
to £3,801 million (2020: 11.5% decrease
to £3,772 million). The reported results
were negatively impacted by translational
foreign exchange headwinds due to the
relative strength of sterling against a
number of currencies, particularly the
Brazilian real, Argentinian peso, Nigerian
naira and Kenyan shilling. Excluding the
translational headwind, on a constant
currency basis, revenue grew by 7.8% in
2021 (2020: increase of 1.4%), driven by
combustibles pricing and growth in New
Categories in both years. The lower growth
rate in 2020 was due to the negative impact
of COVID-19 in that year, as a number
of markets implemented temporary
restrictions in response to the pandemic,
with South Africa in particular restricting
the production and sale of tobacco
products for a period of five months.
Reported profit from operations fell 3.7% to
£1,496 million partly due to the recognition
of a £54 million charge related to goodwill
in Peru and by the impact of translational
foreign exchange on our reported results.
In 2020, this was an increase of 29.0% to
£1,553 million, with the growth largely from
the absence of the £436 million charge in
2019 in relation to the Quebec Class Action.
Excluding the adjusting items (largely
related to Quantum and Peru) and the
impact of foreign exchange in both periods,
adjusted profit from operations increased
4.3% (2020: decrease of 2.5%) on a constant
currency basis, largely driven by the growth
in adjusted revenue. However, in 2021,
this was partially offset by transactional
foreign exchange headwinds and increased
investment in New Categories. In 2020, the
higher revenue was more than offset by
the impact of COVID-19 which led to supply
restrictions in South Africa noted above and
additional supply chain costs elsewhere
(estimated to be £57 million) to manage the
operational volatility.
While not yet back to pre-COVID-19 levels,
South Africa has recovered during 2021 and
as such the risk of impairment of goodwill
has reduced. Please refer to page 209.
Leadership of vapour in
Canada demonstrates our
resilience in a challenging
environment
Luciano Comin
Regional Director
Key markets
Argentina, Brazil, Canada, Chile, Colombia,
Mexico, Nigeria, South Africa
Revenue by category
-70 bps
27
Cigarette value
share change
Owned
manufacturing
(incR&D) sites
15,565
Number
of employees
Volume
2021
units
vs 2020
%
2020
units
vs 2019
%
2019
units
Cigarettes (bn sticks)
147
+0.1%
147
-3.9%
152
Other (bn sticks eq)*
1
-7.7%
2
-1.7%
2Combustibles (bn sticks)
148
0.0%
149
-3.8%
154
New Categories:
Vapour (mn 10ml/pods)
62
+102%
31
+118%
14
THP (bn sticks)
– – – – –
Modern Oral (mn pouches)
–
-100%
819
+142%
Traditional Oral (bn sticks eq)
– – – – –
* Other includes MYO/RYO.
Revenue
2021
£m
vs 2020
%
vs 2020
(adjat cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Combustibles
3,435
-2.8%
+4.1%
3,535
-11.4%
+1.3%
New Categories:
Vapour
141
+115% +115%
65
+52.8%
+58.6%
THP
– – – – – –
Modern Oral
–
-100% -100%
1-49.8%
-47. 3%
Total New Categories
141
+114% +114%
66
+51.3%
+57.1%
Traditional Oral
– – – – – –
Other
225
+32.3%
+44.7%
171
-24.3%
-7.2%
Revenue
3,801
+0.8%
+7.8%
3,772-11.5%
+1.4%
Profit from operations/Operating margin
2021
£m
vs 2020
%
vs 2020
(adj at cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Profit from operations
1,496
-3.7%
+4.3%
1,553
+29.0%
-2.5%
Operating margin (%)
39.3%
-190 bps -140 bps
41.2%
+1,290bps
-160 bps
Combustibles
New Categories
Traditional Oral
Other
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
87
Delivering on our
New Categories
Our Canadian subsidiary cemented its
leadership of closed system category
by delivering consumer relevant offers
starting with ePod 2.0 upgrade and a
series of flavours through the year amidst
COVID-19 restrictions. With the onset
of new Canadian federal regulations
capping the nicotine ceiling to 20mg, the
Vuse portfolio was rotated and expanded
with new mint and tobacco flavours to
accommodate for provincial flavour bans.
Our focus on digital transformation has
delivered data driven insights – propelling
e-commerce in key markets. Analytics and
enhanced user experiences have enabled
us to optimise the subscription model in
South Africa and Canada.
Tobacco Harm Reduction is high on the
vapour agenda, with a focus on category
perceptions on Quality and Trust.
Our Canadian subsidiary deployed an
integrated campaign centred on safety
of pods and devices to demonstrate
Vuse is the brand with the highest
safety standards.
Our Strategy in Action
Migration to Vuse in South Africa
The migration of Twisp to Vuse demonstrates
agile transformation at scale. 84 own retail outlets
nationwide were fully redesigned to the global Vuse
Inspiration store configuration, supporting the new
ePod 2.0 device, recognised as more premium with
better sensorial experience.
The migration retained 99% of the former Twisp
franchise with Vuse acquiring new consumers.
The full potential of Vuse is being realised with
expansion into organised retail and key accounts
nationwide with monthly pod sales crossing the
1 million pods mark.
The franchise is now 3 times bigger post migration
to Vuse.
As part of its ESG agenda, Vuse has deployed the
Drop the Pod scheme, with South Africa recording
the highest returns (27% of own retail sales) among
Vuse markets globally.
New Categories
In 2021, New Categories revenue more than
doubled, up 114% to £141 million (2021: up
51.3% to £66 million) driven by the growth of
vapour in both years.
Having gained value leadership of the
total vapour category in Canada in 2020,
Vuse consolidated its leadership position
with total value share up 34.3 ppts in 2021,
having grown 22.2 ppts in 2020. This was
driven by the growth of the ePod variant,
including the upgraded 2.0 variant.
In South Africa, vapour revenue recovered
following the suspension, alongside those
of cigarettes, between March and August
2020 as part of the country’s COVID-19
response. While this was a headwind in
2020, volume recovered and almost tripled
in 2021, supported by the completion of the
migration of Twisp to Vuse.
In Kenya, we continue to engage with the
relevant authorities on the regulatory and
fiscal framework to support a commercially
sustainable re-entry into the Modern
Oral category.
We continue to believe that Modern Oral
represents an exciting opportunity to offer
affordable New Category alternatives to
adult nicotine consumers in emerging
markets, given the absence of an
electronic device and a pre-existing ritual
of oral product consumption in a number
of markets.
Combustibles
Combustibles revenue declined 2.8% to
£3,435 million (2020: 11.4% decrease to
£3,535 million). A translational foreign
exchange headwind impacted both years
with revenue, on a constant currency basis,
up 4.1% in 2021 and 1.3% in 2020.
Combustibles pricing in both years,
supported by our RGM capabilities, was,
in 2021, partially offset by negative mix
as volume recovered from the impact of
COVID-19 in a number of markets including
in South Africa (impacted by the sales
suspension in 2020, with the market still
recovering from the growth in illicit trade
in 2020) and Colombia. In Brazil, COVID-19
related lockdowns (in 2020 and 2021) and
increased border security led to growth in
the duty paid industry, with some growth
in consumption at the lower end of the
market. Having declined by 3.8% in 2020,
combustible volume in AmSSA was flat
in 2021.
Value share declined 70 bps driven by
Canada, South Africa, Mexico, and Brazil.
This compared to an increase in 2020 of
30 bps.
Availability of
New Categories
in the Region
+114%
Revenue growth in
NewCategories
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
BAT Annual Report and Form 20-F 2021
88
Regional Review
ENA
Europe and North Africa
I am delighted that our multi-
category approach is delivering
excellent results
Johan Vandermeulen
Regional Director
Key markets
Algeria, Belgium, Bulgaria, Czech Republic,
Denmark, Egypt, France, Germany, Italy,
Kazakhstan, Morocco, Netherlands,
Poland, Romania, Russia, Spain, Sweden,
Switzerland, Turkey, Ukraine, UK
Revenue and Profit
fromOperations
Reported revenue in 2021 was marginally
higher than 2020 (2020: down 1.6%) as good
pricing in Combustibles and growth in New
Categories revenue (2021: up 80%, 2020:
up 50%) in both years was largely offset by
lower combustible volume (down 3.1% in
2021 and 4.1% in 2020) and a translational
foreign exchange headwind of 7.2%
(2020: 3.7% headwind).
Excluding the impact of adjusting items (that
affected revenue in 2019) and the impact of
currency, revenue grew 7.3% on an adjusted
constant rates basis (2020: up 2.1%).
Reported profit from operations
declined by 3.9% to £1,885 million as the
strong New Category revenue growth,
in combination with tight control of
overheads and Quantum cost savings,
were more than offset by incremental
investment in New Categories and foreign
exchange headwinds.
In 2020, reported profit from operations
increased 19% to £1,962 million, largely due
to the absence of the £202 million charge in
respect of the Russian excise dispute that
impacted the prior year (2019: down 13%).
Excluding the impact of currency and
adjusting items (in respect of Quantum and
the factory rationalisation programme),
adjusted profit from operations at constant
rates was down 1.0% in 2021 (2020: down
2.4%) as the region continued to invest in
New Categories.
New Categories
In 2021, revenue from Vapour was up
40.2%reflecting strong volume growth
(up 30%), driven by an increase in industry
volume, and higher consumables pricing.
In 2020, revenue from Vapour was
marginally higher than 2019 as the impact
of COVID-19 on our vape stores and an
increase in marketing investment to drive
consumer activation (recognised as a
deduction to revenue in line with IFRS 15),
largely offset higher volume (up 23%).
Revenue by category
-20 bps
20
Cigarette value
share change
Owned
manufacturing
(incR&D) sites
22,333
Number
of employees
Volume
2021
units
vs 2020
%
2020
units
vs 2019
%
2019
units
Cigarettes (bn sticks)
214
-2.7%
220
-4.2% 230
Other (bn sticks eq)*
15
-8.7%
16
-2.5%
17
Combustibles (bn sticks)
229
-3.1%
236
-4.1%247
New Categories:
Vapour (mn 10ml/pods)
173
+29.8%
133
+23.0% 108
THP (bn sticks)
9.8
+195%
3.3
+203%
1.1
Modern Oral (mn pouches)
2,440
+46.4%
1,667
+55.6%
1,071
Traditional Oral (bn sticks eq)
1
+6.1%
1
+2.8%
1* Other combustibles includes MYO/RYO.
Revenue
2021
£m
vs 2020
%
vs 2020
(adj at cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Combustibles
5,024
-6.2%
+1.1%
5,356
-3.4%
+0.5%
New Categories:
Vapour
207
+40.2%
+43.8%
+0.2%148
+0.4%
THP
341
+150% +167% +159%
136
+143%Modern Oral
266
+43.9%
+45.6%
+59.3%185
+58.5%
Total New Categories
814
+73.6%
+80.3%
469
+46.7%
+49.6%
Traditional Oral
41
+18.2% +18.1%
34
+16.2%
+14.2%
Other
122
-8.9%
-4.9%
135 -31.6% -31.7%
Revenue
6,001
+0.1%
+7.3%
5,994
-1.6%
+2.1%
Profit from operations/Operating margin
2021
£m
vs 2020
%
vs 2020
(adj at cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Profit from operations
1,885
-3.9%
-1.0%
1,962
+19.0%
-2.4%
Operating margin (%)
31.4%
-130 bps
-270 bps
-160 bps32.7%
+560 bps
Combustibles
New Categories
Traditional Oral
Other
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
89
Vype was migrated to Vuse, with Vuse
growing across the region, extending its
value leadership position in all key markets.
In the UK and France, trade margin
optimisation, together with growth ahead
of incremental marketing investment
led to a reduced drag on regional profit
from operations.
In 2021, THP volume grew by 195% (2020:
up 203%), with revenue 150% higher at
£341 million (2020: up 143% to £136 million).
This was driven by the roll out of glo Hyper,
which has now been launched in 18 markets
in the region. glo continued to increase
volume share of the THP category in key
markets for 2021, including in:
–
Russia, reaching 19.3% up 1,070 bps
on 2020);
–
Italy, increasing by 870 bps to 12.8%;
–
Ukraine, being 20.9%, an increase of
990bps; and
–
Romania, 530 bps higher than 2020 at22.1%.
Hyper also continued to make good
progress in Kazakhstan, Poland, Egypt, the
Czech Republic and across other smaller
ENA launch markets.
In 2021, Modern Oral revenue grew 44%
(2020: up 59%), led by 46% volume growth
(2020: 56% increase). In both years, the
Group continued to grow its volume
share of the total oral category in more
established markets such as Sweden and
Norway, while also building the overall
category, and our volume share of Modern
Oral itself, in Denmark and Switzerland.
In Germany, sales of Modern Oral were
suspended during the year, pending
engagement with authorities regarding
the classification of tobacco-free
nicotine pouches.
In January 2021, we pilot-launched our
first CBD vaping product, Vuse CBD Zone.
This allowed us, for the first time, to offer
adult consumers a range of high-quality
CBD vaping products from our trusted,
global brand, Vuse, gaining valuable insights
into the product and consumer behaviour.
Combustibles
In 2021, revenue was 6.2% lower, compared
to a decline of 3.4% in 2020. Good price/
mix in both years (up 4% in 2021 and 5% in
2020) was more than offset by the impact
of lower combustible volume, down 3.1%
in 2021 and 4.1% in 2020, and the foreign
exchange headwind described earlier.
At constant rates of exchange, revenue
increased 1.1% (2020: 0.5%).
The decrease in combustible volume in
2021 was driven by lower volume in Ukraine,
Russia and Kazakhstan, in part due to
industry contraction in those markets.
In 2020, the decline in combustible volume
was despite higher volume in Turkey
(drivenby Kent and the local portfolio)
as this was more than offset by industry
volume contraction in a number of markets,
partly due to COVID-19.
Cigarette value share was down 20 bps
in 2021, while 2020 was in line with 2019.
Cigarette volume share declined 30 bps
(2020: up 30 bps) as growth in Turkey,
Germany and the Czech Republic was
more than offset by reductions in Russia,
Poland, France, Italy, Spain, Romania, the
UK, Ukraine and Denmark. The growth
in 2020 was largely driven by Russia and
Turkey, partly offset by lower volume share
in France, Spain, the Netherlands, Denmark,
Switzerland and the UK.
In 2020, menthol bans were introduced in
Turkey, the UK and the EU. The Group has
a long-standing track record of managing
regulatory shifts. In 2021, the Group did
not experience a material impact from the
introduction of the new regulations.
Delivering on our
New Categories
Following the successful launch of
the Hyper platform in 2020, glo has
delivered strong traction in ENA.
Hyper was developed using consumer
understanding and insights, coupled
with breakthrough technology which
allowed us to unlock record heating
times, delivered by our signature
boost feature.
During 2021, glo was the first THP to
be launched in Egypt and becoming
the fastest growing THP brand in
both Poland and Greece. glo is now
in 18 countries in ENA, with a winning
combination of innovation in product
(including an upgraded device design,
limited edition products and double
capsules), combined with relevant
consumer activation.
In alignment with corporate ESG
targets, device take back schemes
were implemented in all end markets
during 2021.
Our Strategy in Action
New innovation hub in Italy
In September 2021, we announced the launch of a new
A Better Tomorrow™ Innovation Hub in Trieste, Italy.
The hub will host a new manufacturing site for
BAT’s New Category products, and a digital
boutique encompassing an innovation lab and
centre of excellence for digital transformation and
digital marketing.
Multiple production lines are anticipated to be
developed for European and global export of BAT’s
reduced-risk* products – demonstrating our
commitment to harm reduction.
The building will be constructed to minimise its
environmental impact, aiming for carbon neutrality,
with a particular focus on energy efficiency and the use
of renewable sources.
The works for the construction of the structure began
in mid-November 2021 with the first module scheduled
to be completed and activated in May 2022.
Availability of
New Categories
in the Region
+74%
Revenue growth in
NewCategories
Algeria, Egypt, Libya, Morocco, Sudan and Tunisia) will be
reported under APME. From that date, ENA will be known
as Europe.
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
BAT Annual Report and Form 20-F 2021
90
Regional Review
APME
Asia-Pacific and Middle East
Revenue and Profit
fromOperations
Reported revenue declined 7.6% to £4,191 million
(2020: declined 11.9% to £4,537 million).
The performance in 2021 was impacted by
the structural excise changes in Australia
and New Zealand, and competitive pricing
dynamics in Australia (in combination, an
estimated headwind of £260 million), and
negative geographic mix due to volume
share growth and recovery from COVID-19
in emerging markets, leading to a growth
in combustible volume of 4.4% (largely due
to Bangladesh, Vietnam and Pakistan).
Revenue in 2021 was also negatively impacted
by the sale of the Group’s operations in Iran,
part way through the year.
In 2020, the decline in revenue was largely
driven by lower cigarette volume (which fell
7.3%). This was partly due to the negative
impact of COVID-19 on GTR and other
markets in the region and the impact of
excise increases and minimum pricing
in Indonesia. Revenue in 2020 was also
impacted by the excise harmonisation of
THP in Japan and a £50 million charge in
respect of the withdrawal of glo Sens.
Excluding the impact of translational
foreign exchange, in 2021 revenue was in
line with 2020 (2020: declined 9.9%) on
anadjustedconstant rate basis.
Reported profit from operations declined
12.6% to £1,287 million, driven by the lower
revenue and due to the £358 million charge
(mainly in respect of foreign exchange
previously charged to other comprehensive
income) recognised in respect of the sale of the
Group’s operations in Iran, and costs associated
with the withdrawal from Myanmar.
In 2020, reported profit from operations
was a decrease of 16.0% to £1,472 million,
as the impact of COVID-19 in a number of
markets including GTR, the recognition
of costs related to the ongoing factory
rationalisation programme (principally
in Southeast Asia), an impairment
in goodwill in respect of the Group’s
performance in Malaysia (£197 million) and
unfavourable foreign exchange movements
more than offset the efficiencies realised
through Quantum.
Our New Categories continue
to grow despite difficult trading
conditions in key markets.
Michael (Mihovil) Dijanosic
Regional Director
Key markets
Australia, Bangladesh, Indonesia, Japan,
Malaysia, Middle East (inc KSA), New Zealand,
Pakistan, South Korea, Taiwan, Vietnam
Revenue by category
-20 bps
21
Cigarette value
share change
Owned
manufacturing
(incR&D) sites
9,747
Number
of employees
Volume
2021
units
vs 2020
%
2020
units
vs 2019
%
2019
units
Cigarettes (bn sticks)
206
+4.6%
198
-7.3%
213
Other (bn sticks eq)*
2
-14.1%
2
+3.3%
2Combustibles (bn sticks)
208
+4.4%
200
-7.2%
215
New Categories:
Vapour (mn 10ml/pods)
9
+65.6%
6
+385%
1THP (bn sticks)
9
+26.5%
7
-6.5%
8Modern Oral (mn pouches)
254
+197%
86
n/m
3
Traditional Oral (bn sticks eq)
– – – – –
* Other combustibles includes MYO/RYO.
Revenue
2021
£m
vs 2020
%
vs 2020
(adj at cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Combustibles
3,555
-9.6%
-2.3%
3,935-10.3%
-7.7%
New Categories:
Vapour
18
+26.0% +260%
+27.5%
+255%15
THP
511
+2.8%
+13.0%
497
-26.0%
-27.1%
Modern Oral
6
+179% +199%
2
n/m n/m
Total New Categories
535
+4.2%
+14.2%
514
-24.0% -25.0%
Traditional Oral
– – – – – –
Other
101
+13.0%
+20.1%
88
-1.3%
-0.4%
Revenue
4,191
-7.6%
0.0%
4,537
-11.9%
-9.9%
Profit from operations/Operating margin
2021
£m
vs 2020
%
vs 2020
(adj at cc)
%
2020
£m
vs 2019
%
vs 2019
(adj at cc)
%
Profit from operations
1,287
-12.6% -1.1%
1,472
-16.0%
-7.3%
Operating margin (%)
30.7%
-170 bps
-40 bps
-160 bps32.4%
+110 bps
Combustibles
New Categories
Traditional Oral
Other
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
91
Excluding adjusting items in 2021, (largely
related to Iran, Myanmar and Quantum)
and the impact of translational foreign
exchange, adjusted profit from operations
at constant rates of exchange declined
1.1% in 2021 (2020: fell 7.3%), driven by
the reduction in revenue and continued
investment in New Categories.
New Categories
Total revenue from New Categories
increased 4.2% to £535 million (2020:
declined 24.0% to £514 million).
In 2021, this was driven by a 26.5%
increase in THP consumable volume to
9.3 billion sticks, compared to a decline
of 6.5% to 7.4 billion sticks in 2020.
2021 was underpinned by the success of
glo Hyper (the first-to-world THP that uses
induction heating technology to provide
a step change in taste delivery leading
to an increase in consumer satisfaction,
driven by 30% more tobacco, faster
heating and aboost function), launched
in 2020. 2020 was impacted by excise
harmonisation affecting the industry and
a strong comparator period (2019) that
included the launch of glo Pro, glo Nano
andglo Sens.
Delivering on our
New Categories
In 2021, APME reached 3.8 million active
consumers of our non-combustible
products driven by strong performance
across our New Category platforms
across the region.
In Japan, the largest THP market in the
world, glo performed very well, being the
fastest growing THP brand (in the THP
category) by volume and value share and
was the number 1 choice for cigarette
smokers who chose to migrate to New
Categories. This was driven by improving
penetration and conversion rates with
consumer relevant product innovation and
improved experience across the consumer
journey. This was complemented by
good performance in South Korea, where
glo volume share grew 310 bps with
revenue up 2.7 times during the year.
On the Vapour front, our regional Vuse
volume increased by 66% in 2021, while
successfully completing the migration
from Vype to Vuse. Our accelerated
learning journey in Modern Oral continued
in 2021, specifically in Pakistan where we
nearly doubled our Velo consumer base.
Our Strategy in Action
glo in Japan
In 2021, glo attracted more than 700,000 new
consumers during the year, to become a brand
family with more than 3 million consumers in Japan.
glo’s growth was driven by a robust understanding
of consumer opportunities, a well-balanced
consumable portfolio and integrated online-offline
activations, while also successfully increasing
device penetration and conversion. Device launches
were combined with a more targeted, multi-brand
consumables portfolio that delivered credibility and
satisfaction to an increasing number of consumers.
Improvements in glo’s retail presence provided the
foundation for growth, complemented by a digital
first consumer engagement approach enabling
direct and tailored consumer interactions.
THP revenue increased 2.8% (2020:
decrease of 26%), or 13.0% (2020: down
27%) excluding the impact of currencies.
The growth in 2021 was driven by increased
Hyper volume, more than offsetting the
continued impact of excise harmonisation,
which negatively impacted revenue in
2020 (compared to 2019). The movement
between the years was also due to a
£50 million charge to revenue in respect
ofthe withdrawal of glo Sens (in 2020, that
did not repeat in 2021) as the product did
not perform to expectations.
In Japan, the largest THP market in the
world, glo is the fastest growing THP brand
(by volume), with volume share increasing
to 6.8% in 2021, up 140 bps, maintaining the
momentum of 2020 which was up 50 bps
on 2019.
Our Modern Oral pilot launches in
emergingmarkets including in Pakistan
and Indonesia continue to deliver valuable
insights, as we roll-out in key urban
markets. We believe that Modern Oral is
an exciting longer-term opportunity to
commercialise reduced risk products
*
by offering affordable New Category
alternatives to adult nicotine consumers.
Combustibles
Revenue from combustibles declined 9.6%
to £3,555 million (2020: down 10.3% to
£3,935 million), or by 2.3% (2020: down 7.7%)
at constant rates of exchange.
In 2021, this was despite an increase in
combustible volume (up 4.4%) as emerging
markets recovered from COVID-19. However,
this led to a negative geographic mix which,
combined with structural excise changes in
Australia and New Zealand and competitive
pricing dynamics in Australia (totalling
approximately £260 million) and the negative
impact of the sale of operations in Iran part
way through the year, drove revenue down.
In 2021, value share decreased 20 bps (2020: up
10 bps), with volume share up 20 bps (2020: 55
bps higher), as volume share gains (including in
Bangladesh, Japan, Pakistan and Taiwan) more
than offset losses in Indonesia (as the Group
drove for value growth with pricing ahead of
the industry) and Saudi Arabia.
In 2020, pricing in Australia and Pakistan
was more than offset by a 7.2% decline
in combustible volume. Higher volume
in Bangladesh was more than offset by
the impact of COVID-19 in a number of
markets, notably within GTR, an increase
in local taxes and the minimum retail price
compliance in Indonesia, and the continued
increase in illicit trade in Pakistan (following
an excise-led price increase in 2019).
Availability of
New Categories
in the Region
+4%
Revenue growth in
NewCategories
* Based on the weight of evidence and assuming a complete
switch from cigarette smoking. These products are not risk
free and are addictive.
BAT Annual Report and Form 20-F 2021
92
Group Principal Risks
Group Principal Risks
Overview
The principal risks that may affect the Group
are set out on the following pages.
Each risk is considered in the context of the
Group’s strategy and business model, as set
out in this Strategic Report on pages 16 to
19, and 26 to 28. On the following pages is a
summary of each principal risk, its potential
impact
@
and management by the Group
@
.
Clear accountability is attached to each
risk through the risk owner. BAT define the
principal risks as those assessed with a high
impact and probable likelihood. Additionally,
the risks “Inability to commercialise and
deliver New Categories”, “Litigation”,
“Solvency and liquidity” are also recognised
as principal risks; even though they are not
assessed as having high impact and probable
likelihood, they are material to the Group and
the delivery of its strategic objectives.
@
The Group has identified risks and is
actively monitoring and mitigating these
risks.
@
This section focuses on those risks
that the Directors believe to be the principal
risks to the Group. Not all of these risks are
within the control of the Group and other risks
besides those listed may affect the Group’s
performance. Some risks may be unknown at
present. Other risks, currently regarded as less
material, could become material in the future.
The risks listed in this section
@
and the
activities being undertaken to manage them
@
should be considered in the context of the
Group’s internal control framework. This is
described in the section on risk management
and internal control in the corporate
governance statement on pages 125 to 126.
This section should also be read in the context
ofthe cautionary statement on page 352.
A summary of all the risk factors (including
the principal risks) which are monitored by the
Board through the Group’s risk register is set
out in the Additional Disclosures section on
pages 317 to 339.
Assessment of Group Risks
@
During the year, the Directors carried out
a robust assessment of the principal risks,
uncertainties and emerging risks facing the
Group, including those that could impact
delivery of its strategic objectives, business
model, future performance, solvency or liquidity.
The Board assessed that in line with the Group’s
strategy to deliver long-term sustainable
growth with a range of innovation and less
harmful products that stimulate senses of
new adult generations, it was appropriate to
no longer consider “Market size reduction and
consumer down trading” as a principal risk to
the Group.
Otherwise, the Group’s current principal risks
remain broadly unaltered compared to 2020.
The viability statement below provides a
broader assessment of long-term solvency
and liquidity. The Directors considered a
number of factors that may affect the resilience
of the Group. Except for the risk “Injury, illness
or death in the workplace” the Directors also
assessed the potential impact of the principal
risks that may impact the Group’s viability.
Time frame
Short-term
Medium-term
Long-term
Strategic impact
Simplification
New Categories
Combustibles
Key Stakeholders
Consumers
Society
Employees
Shareholders
Considered in viability statement
@
Yes
No
@
Denotes phrase, paragraph or similar that does not form
part ofBAT’s Annual Report on Form 20-F as filed with
the SEC.
Viability statement@
The Board has assessed the viability of the Group taking into account the current position and principal risks, in accordance with provision 31 of the
UK Corporate Governance Code 2018. Whilst the Board believes the Group will be viable over a longer period, owing to the inherent uncertainty
arising due to ongoing litigation and regulation, the period over which the Board considers it possible to form a reasonable expectation as to the
Group’s longer-term viability (that it will continue in operation and meet its liabilities as they fall due) is three years.
In making this assessment, the Board considered the Group’s:
–
strong cash generation from operating activities;
–
access to, and ability to raise, external sources of financing including the removal of any financial covenants in its credit facilities; and
–
continued ability to manage the impact of COVID-19 and recognised the Group’s ability to utilise its geographic footprint and integrated
operating model to minimise the impact to the Group’s performance.
This assessment included a robust review of the Group’s operational and financial processes, (which cover both short-term financial forecasts
and capacity plans) and the principal risks (as indicated on pages 93 to 97) that may impact the Group’s viability. These are considered, with the
mitigating actions, at least once a year. The assessment included a reverse stress test of the principal risks and did not identify any individual
risk, based upon a prudent annual forecast, that would, if arising in isolation and without mitigation, impact the Group’s viability within the 3 year
confirmation period. Furthermore, the Board recognised that even if all the principal risks arose simultaneously, given the underlying strong free
cashflow generation before the payment of dividends (2021: £7.4 billion), the Group would be able to undertake mitigating actions to meet the
liabilities as they fall due. The assessment also reviewed the potential impact of climate-related risks and concluded that these, including the
potential cost implications and noting the mitigating actions, would not impact the Group’s viability (see pages 58 to 67 with respect to TCFD).
The Board noted that the Group has access to a £5.85 billion credit facility (2021: undrawn and which will reduce to £5.7 billion in March 2022), US
(US$4 billion) and Euro (£3 billion) commercial paper programmes (2021: £269 million drawn) and £2.5 billion of bilateral agreements which may be
utilised. However, the Group is subject to inherent uncertainties with regards to regulatory change and litigation, the outcome of which may have
a bearing on the Group’s viability. The Group maintains, as referred to in note 31 in the Notes on the Accounts ‘Contingent Liabilities and Financial
Commitments,’ that, whilst it is impossible to be certain of the outcome of any particular case, the defences of the Group’s companies to all the
various claims are meritorious on both law and the facts. If an adverse judgment is entered against any of the Group’s companies in any case, an
appeal may be made, the duration of which can be reasonably expected to last for a number of years.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
93
Risks
Competition from illicittrade
Increased competition from illicit trade and illegal products – either local duty evaded, smuggled, counterfeits, or non-regulatory
compliant, including products diverted from one country to another.
Time frame
Short/Medium/Long-term
Strategic impact
NewCategories
Combustibles
Key Stakeholders
Society
Considered in viability statement
@
Yes
Impact
Erosion of goodwill, with lower volumes and/or increased
operational costs (e.g. track and trace costs) and reduced profits.
Reduced ability to take price increases.
Investment in trade marketing and distribution is undermined
andthe product is commoditised.
Counterfeit products (especially in New Categories) and other
illicit products could harm consumers, damaging goodwill, and/or
the category (with lower volumes and reduced profits), potentially
leading to misplaced claims against BAT, further regulation and a
failure to deliver the corporate harm reduction objective.
Breach of legislation, criminal offences, contract breaches
under the EU Cooperation Agreement, allegations of facilitating
smuggling and reputational damage, including negative
perceptions of our governance and ourESG credentials.
Mitigation activities across all categories
@
Dedicated Anti-Illicit Trade (AIT) teams operating at regional
and country levels; internal cross-functional levels; compliance
procedures, toolkit and best practice shared.
Active engagement with key external stakeholders.
Cross-industry and multi-sector cooperation on a range of AIT issues.
Regional AIT strategy supported by a research programme to further
the understanding of the size and scope of the problem.
AIT Engagement Teams (including a dedicated analytical laboratory
and a forensic and compliance team) work with enforcement
agencies in pursuit ofpriority targets.
Geopolitical tensions
Geopolitical tensions, civil unrest, economic policy changes, global health crises, terrorism and organised crime have the potential
todisruptthe Group’s business inmultiple markets.
Time frame
Short/Medium-term
Strategic impact
Simplification
NewCategories
Combustibles
Key Stakeholders
Society, Employees
Considered in
viability statement
@
Yes
Impact
Potential injury or loss of life, loss of assets and disruption to supply
chains and normal business processes.
Increased costs due to more complex supply chain and
security arrangements and/or the cost of building new facilities
ormaintaining inefficient facilities.
Lower volumes as a result of not being able to trade in a country.
Higher taxes or other costs of doing business as a foreign company
or the loss of assets as a result of nationalisation.
Reputational damage, including negative perceptions of our
governance and protection of our people and our ESG credentials.
Mitigation activities
@
Physical and procedural security controls are in place, and constantly
reviewed in accordance with our Security Risk Management process,
for all field force and supply chain operations, with an emphasis on the
protection ofGroup employees.
Globally integrated sourcing strategy and contingency sourcing arrangements.
Security risk modelling, including external risk assessments and the
monitoring of geopolitical and economic policy developments worldwide.
Insurance cover and business continuity planning, including scenario
planning and testing, and risk awareness training.
The Business Continuity Management organisation plans for and responds
to geopolitical risks, including readiness ofCrisisManagement Teams at
all levels.
BAT Annual Report and Form 20-F 2021
94
Group Principal Risks
Continued
Group Principal Risks
Tobacco, New Categories and other regulation interrupts growth strategy
The enactment of, proposals for, or rumours of, regulation that significantly impairs the Group’s ability to communicate, differentiate,
market or launch its products, and/or the lack of appropriate regulation for New Categories.
Time frame
Short/Medium/Long-term
Strategic impact
NewCategories
Combustibles
Key Stakeholders
Society
Considered in viability statement
@
Yes
Impact
A lack of acceptance or rejection of tobacco harm reduction as
a tobacco control policy could prevent a balanced regulatory
framework for New Categories.
Restricted ability to sell and communicate New Categories
could lead to failure of the harm reduction objective and loss of
confidence in the Group’s ESG performance.
Inappropriate regulations for New Categories (e.g. pharma or
food) or total bans of tobacco and/or New Categories products in
certain markets.
Reduced ability to make scientific claims and compete in future
product categories and make new market entries.
Erosion of brand value through commoditisation and the inability
to launch innovations may negatively affect our ability to generate
value growth.
Regulation with respect to bans or severe restrictions on menthol
flavours, product design & features and nicotine levels may
adversely impact individual brand portfolios.
Reduced consumer acceptability of new product specifications,
leading to consumers seeking alternatives in illegal markets or
irresponsible operators exploiting regulatory loopholes.
Shocks to share price on rumours, the announcement
or enactment of restrictive regulation (e.g. sales ban to
future generations).
Increased scope and severity of compliance regimes in new
regulation (e.g. Extended Producer Responsibility (EPR)
schemes) leading to higher costs, greater complexity and
potential reputational damage or fines for breach, including
inadvertent breach.
Mitigation activities
@
Engagement and litigation strategy coordinated and aligned
across the Group to drive a balanced global policy framework for
combustibles and New Categories.
Stakeholder mapping and prioritisation, developing robust compelling
advocacy materials (with supporting evidence and data) and
regulatory engagement programmes.
Regulatory risk assessment of marketing plans to ensure
decisions are informed by an understanding of the potential
regulatory environments.
Advocating the application of integrated regulatory proposals to
governments and public health regulators and practitioners based on
the harm reduction potential of New Categories.
Development of an integrated regulatory strategy thatspans
conventional combustibles and New Categories.
Training and capability programmes for End Markets to upskill Legal
and External Affairs managers on combustible and New Categories
regulatory engagement, including product knowledge.
Direct access to online portal providing latest position and advocacy
material for End Market engagement on combustibles and
New Categories.
Working to define a sustainable EPR model and markets negotiating
to implement effective EPR schemes.
Please refer to pages 325 to 327 for details of tobacco and nicotine regulatory
regimes under which the Group’s businesses operate.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
95
Litigation
Product liability, regulatory or other significant cases (including investigations) may be lost or settled resulting in a material loss or
other consequence.
Time frame
Short/Medium/Long-term
Strategic impact
NewCategories
Combustibles
Key Stakeholders
Shareholders
Considered in viability statement
@
Yes
Impact
Damages and fines, negative impact on reputation (including ESG
credentials), disruption andloss of focus on the business.
Consolidated results of operations, cash flows and financial
position could be materially affected by an unfavourable outcome
or settlement of pending or future litigation, criminal prosecution
or other contentious action.
Inability to sell products as a result of patent infringement action
may restrict growth plans and competitiveness.
Potential share price impact.
Mitigation activities
@
Consistent litigation and patent management strategy across
the Group.
Expertise and legal talent maintained both within the Group and
external partners.
Ongoing monitoring of key legislative and case law developments
related to our business.
Delivery with Integrity compliance programme.
Please refer to note 31 in the Notes on the Accounts for details ofcontingent liabilities
applicable to the Group.
Significant increases or structural changes in tobacco, nicotine and New Categories related taxes
The Group is exposed to unexpected and/or significant increases or structural changes in tobacco, nicotine and New Categories
relatedtaxesin key markets.
Time frame
Short/Medium/Long-term
Strategic impact
NewCategories
Combustibles
Key Stakeholders
Consumers, Society
Considered in viability statement
@
Yes
Impact
Consumers reject the Group’s legitimate tax-paid products
forproducts from illicit sources orcheaper alternatives.
Reduced legal industry volumes.
Reduced sales volume and/or portfolio erosion.
Partial absorption of excise increases leading to lower profitability.
Mitigation activities
@
Formal pricing and excise strategies, including Revenue Growth
Management using a data science-led approach, with annual risk
assessments and contingency plans across all products.
Pricing, excise and trade margin committees in markets, with
global support.
Engagement with relevant local and international authorities where
appropriate, in particular in relation to the increased risk to excise
revenues from higher illicit trade.
Portfolio reviews to ensure appropriate balance and coverage
acrossprice segments.
Monitoring of economic indicators, government revenues
and the political situation.
BAT Annual Report and Form 20-F 2021
96
Group Principal Risks
Continued
Group Principal Risks
Inability to develop, commercialise and deliver the New Categories strategy
Risk of not capitalising on the opportunities in developing and commercialising successful, safe and consumer-appealing innovations.
Time frame
Short/Medium/Long-term
Strategic impact
Simplification
NewCategories
Combustibles
Key Stakeholders
Shareholders
Considered in viability statement
@
Yes
Impact
Failure to deliver Group strategic imperative, 2025 growth
ambition and 2030 consumer targets.
Potentially missed opportunities, unrecoverable costs and/or
erosionof brand, with lower volumes and reduced profits.
Reputational damage and recall costs may arise in the event
ofdefective product design or manufacture.
Loss of market share due to non-compliance of product
portfolio withregulatory requirements.
Loss of investor confidence in ESG performance.
Failure to deliver our corporate purpose of harm reduction.
Mitigation activities
@
Focus on product stewardship to ensure high-quality standards
across the portfolio.
Brand Expression, which sets out how our brand expresses
itself (including through its logo, name, product, packaging, etc.)
deployed to lead End Markets via activation workshops and best
practices shared.
Generating sufficient IP to develop competitive and
sustainable products.
Accelerating digital and consumer analytics along with data
management platforms for enhanced methodologies, insight
generation and line of sight across the Group.
R&D is accredited to ISO9001 standard and laboratories are
accredited to ISO17025 for key methods.
Injury, illness or death in the workplace
The risk of injury, death or ill health to employees and those who work with the business is a fundamental concern of the Group
andcanhaveasignificant effect on its operations.
Time frame
Short-term
Strategic impact
Simplification
NewCategories
Combustibles
Key Stakeholders
Employees
Considered in viability statement
@
No
Impact
Serious injuries, ill health, disability or loss of life suffered by
employees and the people who work with the Group.
Exposure to civil and criminal liability and the risk of prosecution
from enforcement bodies and the cost ofassociated legal costs,
fines and/or penalties.
Interruption of Group operations if issues are not
addressed immediately.
High staff turnover or difficulty recruiting employees ifperceived
tohave a poor Environment, Health and Safety (EHS) record.
Reputational damage to the Group.
Mitigation activities
@
Risk control systems in place to ensure equipment andinfrastructure
are provided and maintained.
EHS strategy aims to ensure that employees at all levels receive
appropriate EHS training and information.
Behavioural-based safety programme to drive operations’ safety
performance, culture and closer to zero accidents.
Analysis of incidents undertaken regionally and globally by a
dedicated team to identify increasing incident trends or high potential
risks that require coordinated action.
Global monthly Health & Safety (H&S) Committee established,
formed by senior members from the H&S and Operations
Sustainability leadership team.
Disputed taxes, interest and penalties
The Group may face significant financial penalties, including the payment of interest, in the event of an unfavourable ruling
byataxauthorityin a disputedarea.
Time frame
Short/Medium-term
Strategic impact
Simplification
NewCategories
Combustibles
Key Stakeholders
Shareholders
Considered in viability statement
@
Yes
Impact
Significant fines and potential legal penalties.
Disruption and loss of focus on the business due todiversion
ofmanagement time.
Impact on profit and dividend.
Mitigation activities
@
End market tax committees.
Internal tax function provides dedicated advice and guidance,
andexternal advice sought where needed.
Engagement with tax authorities at Group, regional and
individual market level.
Please refer to note 31 in the Notes on the Accounts for details
ofcontingent liabilities applicable to the Group.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
97
The Strategic Report was approved by the Board of Directors on 10 February 2022 and signed on its behalf by Paul McCrory, Company Secretary.
Solvency and liquidity
Liquidity (access to cash and sources of finance) is essential to maintaining the Group as a going concern in the short term (liquidity)
andmedium term (solvency).
Time frame
Short/Medium-term
Strategic impact
NewCategories
Combustibles
Key Stakeholders
Shareholders
Considered in viability statement
@
Yes
Impact
Inability to fund the business under the current capital structure
resulting in missed strategic opportunities or inability to respond
to threats.
Decline in our creditworthiness and increased funding costs for
the Group.
Requirement to issue equity or seek new sources of capital.
Reputational risk of failure to manage the financial risk profile
ofthebusiness, resulting in an erosion of shareholder value
reflectedinan underperforming share price.
Mitigation activities
@
Group policies include a set of financing principles and key
performance indicators including the monitoring of credit ratings,
interest cover, solvency and liquidity with regular reporting to the
Corporate Finance Committee and the Board.
The Group targets an average centrally managed debt maturity of
atleast five years with no more than 20% of centrally managed debt
maturing in a single rolling year.
The Group holds a two-tranche revolving credit facility of £5.85bn
syndicated across a wide banking group, consisting of a 364-day
tranche (with a one-year extension option and a one-year term-out
option remaining) and a five-year tranche (with a one-year extension
option remaining).
Liquidity pooling structures are in place to ensure that there
ismaximum mobilisation of cash liquidity within the Group.
Going concern and viability support papers are presented
totheBoard on a regular basis.
Foreign exchange rate exposures
The Group faces translational and transactional foreign exchange (FX) rate exposure for earnings/cash flows from its global businesses.
Time frame
Short/Medium-term
Strategic impact
NewCategories
Combustibles
Key Stakeholders
Shareholders
Considered in viability statement
@
Yes
Impact
Fluctuations in FX rates of key currencies against sterling
introduce volatility in reported earnings per share (EPS), cash flow
and the balance sheet driven bytranslation into sterling of our
financial resultsand these exposures are not normally hedged.
The dividend may be impacted if the payout ratio is not adjusted.
Differences in translation between earnings and net debt may
affect key ratios used by credit rating agencies.
Volatility and/or increased costs in our business, due to
transactional FX, may adversely impact financial performance.
Mitigation activities
@
While translational FX exposure is not hedged, its impact
isidentifiedin results presentations and financial disclosures;
earningsare restated at constant rates for comparability.
Debt and interest are matched to assets and cash flows to mitigate
volatility where possible and economic to do so.
Hedging strategy for transactional FX and framework is defined
in thetreasury policy, a global policy approved by the Board.
Illiquid currencies of many markets where hedging iseither not
possible or uneconomic are reviewed on aregular basis.
BAT Annual Report and Form 20-F 2021
98
Chairman’s Introduction
onGovernance
Governance
Dear Shareholder
As your incoming Chairman, I’ve spent
2021 immersing myself fully in the work
and culture of the Board and wider
organisation, building on my prior
experience as one of your Non-Executive
Directors. My sentiments are unchanged:
this is an outstanding organisation that is
fully committed to realising its corporate
purpose of building A Better Tomorrow
TM
.
I’m grateful to my predecessor, Richard
Burrows, the Board and the management
team, who have recognised that achieving
this purpose is predicated on a consumer-
centric strategy and empowering ethos.
Our ambitious sustainability agenda, strong
corporate governance, and robust control
environment underpin the delivery of our
corporate purpose more so than ever.
Strategic focus
We are clear on, and delivering against,
our three commercial priorities of
combustible value growth; step-change
in New Categories; and simplifying
the organisation. This year, the Board
has also strongly supported executive
management’s drive to deliver our Quest
programme, setting out our five critical
enablers for corporate transformation
(discussed on page 104). I’m pleased to
report that we’re confident this programme
is progressing well and will accelerate
our transformation to a multi-category
business, in nicotine and beyond.
The Board’s consideration of the Group’s
capital allocation for 2022 carefully
balanced New Categories investment
and our ongoing objective to de-leverage
the balance sheet within an appropriate
range, as well as laying foundations for
ouractivities beyond nicotine.
With regard to our new longer-term active
capital allocation framework, we are
growing the dividend and have announced
a £2 billion share repurchase programme
for 2022.
Action on climate change is a vital pillar of
our sustainability agenda, and momentum
in this area must be maintained. The Board
has reviewed progress against the
glidepath towards achieving the Group’s
commitment to net zero value chain
emissions by 2050. This is also the first year
we report to you in full alignment with the
TCFD framework.
Given the importance of the sustainability
agenda to our strategy, we extended the
scope of external assurance of our reported
ESG metrics this year (discussed on page
126) and our Audit Committee’s terms of
reference were revised to formalise its
oversight role in this area (see page 121).
This enhanced assurance is something
our stakeholders and society are rightly
coming to expect as part of good
corporate governance.
Culture and values
The Board recognises its role in shaping
and overseeing Group culture and values.
Acting with integrity is an important part
of our ethos, and the Board ensures that
embedding integrity across our business
practices remains a priority.
In January 2022, we launched our revised
Standards of Business Conduct (SoBC) and
Supplier Code of Conduct (discussed on
page 110). Regular evolution of these long-
standing policies keeps them in step with
our strategy, ethos, external requirements
and stakeholder expectations.
These policies mandate responsible
business practices without compromise,
and the Company takes seriously any non-
compliance with our standards or our legal
obligations. As we accelerate our multi-
category platform initiatives, I firmly believe
these standards foster sustainable growth.
You can read about our SoBC and Delivery
with Integrity programme on page 56.
Stakeholder engagement
We had an active shareholder and investor
engagement programme in 2021.
I met with a number of shareholders in the
year, and the Remuneration Committee
Chair has engaged extensively on our new
Directors’ Remuneration Policy. My fellow
Board members and I look forward to
further dialogue with you ahead of the
2022 AGM, which we plan to hold in person
subject to prevailing guidance at the time.
We also listen to the perspectives of our
wider stakeholders and we review how we
engage with them across the Group, which
you can read about on pages 106 to 109.
Our people
The continuing resilience and commitment
of our people to overcome the challenges
of COVID-19 has been inspirational to the
Board. Their safety and well-being remains
our top priority, and we devote time to
satisfy ourselves that the right support is
available and is responsive to change.
The Board maintains effective engagement
with our people worldwide through a range
of channels (discussed at page 108).
Board efficacy
While much of the Board’s interaction
remained virtual in 2021, we have operated
effectively and engaged consistently with
management and staff throughout the year.
This year, I led an internal evaluation of the
Board, its Committees and each individual
Director, set out on page 114. The Board
considers that it continues to function
effectively and its working relationships
with its Committees continue to be sound.
I’m confident that the corporate
governance framework that I now oversee
as your Chairman enables the Group’s
strategic objectives. On behalf of the
Board, I confirm that we believe that this
combined Annual Report and Form 20-F is fair,
balanced and understandable, and presents
the information necessary to assess
the Company’s position, performance,
businessmodel and strategy.
Luc Jobin
Chairman
Our ambitious sustainability
agenda, strong corporate
governance, and robust
control environment underpin
the delivery of our corporate
purpose more so than ever.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
99
Throughout the year ended
31December 2021, we applied the
Principles of the UKCorporate
Governance Code 2018.
TheCompany was compliant with all
provisions oftheCode during the year.
The Board considers that this
AnnualReport and Form 20-F, and
notably this Governance section,
provides the information shareholders
needtoevaluate how we have complied
with our obligations under the Code.
Pages noted opposite refer to particular
discussion on the application of Principles of
theCode in this Annual Report and Form 20-F.
For reference, we prepare a separate voluntary
annual compliance report by reference to each
Principle and Provision of the Code, available at
bat.com/governance
Board Leadership and
CompanyPurpose
P
rinciple
A. Long-Term Sustainable Success
pages 2 to 91, 98 to 115
B. Purpose, Values and Culture
pages 2 to 27, 68 to 73, 98, 103 to 105, 114 to 115
C. Resources and Control Framework
pages 4 to 18, 92 to 97, 103, 120 to 126
D. Shareholder and Stakeholder Engagement
pages 20, 21, 72, 106 to 110, 128
E. Workforce Engagement, Policies, Practices
pages 57, 70 to 73, 103, 108,
163 to 165
Division of
Responsibilities
Principle
F. Leadership of the Board
pages 98 to 115
G. Board Composition and Division of Responsibilities
pages 100, 101, 112, 113
H. Role and Commitment of Non-Executive Directors
pages 112 to 113
I. Board Support
pages 98, 112 to 114
Composition,
Succession, Evaluation
Principle
J. Board Appointments, Succession and Diversity
pages 98, 105, 116 to 119
K. Board Skills and Experience
pages 100 to 101, 116 to 119
L. Board Evaluation
pages 114 to 115
Audit, Risk,
Internal Control
Principle
M. Internal and External Audit Functions
pages 123 to 126
N. Fair, Balanced and Understandable Assessment
pages 126 and 166
O. Risk Management and Internal Controls
pages 92 to 97, 105, 120 to 126
Remuneration
Principle
P. Remuneration Policies and Practices
pages 128 to 165
Q. Development of Policy on Remuneration
pages 128 to 165
R. Judgement and Discretion
pages 128 to 165
Disclosure guidance and transparency rules
We comply with the Disclosure Guidance and Transparency Rules
requirements for corporate governance statements by virtue of the
information included in this section, together with the information
contained in the Other Information section.
The UK Corporate Governance Code 2018 is available at frc.org.uk.
US corporate governance
As a result of the listing of the Company’s American Depositary
Shares (ADSs) on the NYSE, the Company is required to
meet certain NYSE requirements relating to corporate
governance matters.
Certain exceptions to these requirements apply to the Company
as a foreign private issuer. For details of the significant differences
between the NYSE requirements and the Company’s practices,
please see page 349.
Governance
BAT Annual Report and Form 20-F 2021
100
Board of Directors
As at 10 February 2022
Governance
Nationality:
Brazilian
Appointed:
August 2019
Experience:
Tadeu joined the Group
in Brazil in 1992 and joined the
Management Board as Director,
Business Development in 2014, later
becoming Regional Director, Western
Europe in 2016, then Regional Director,
Europe and North Africa in January
2018. He was appointed Director,
Group Transformation in January 2019
and, in addition to this role, he was
appointed Deputy Finance Director
in March 2019, before joining the
Board as Finance Director in August
2019. As Finance and Transformation
Director, Tadeu’s role includes
leadership of the design and delivery
of the Group’s Quest transformation
programme to accelerate delivery of
Group strategy.
Relevant skills and contribution
to the Board:
Tadeu brings broad
experience gained in various national,
regional and global finance and
general leadership roles, through
his previous roles across the Group.
These experiences make Tadeu
particularly well-placed to contribute
to the Group’s transformation and
broader strategic agenda.
External appointments:
No
external appointments.
Nationality:
French
Appointed:
Chief Executive since
April 2019; Executive Director since
January 2019.
Experience:
Jack joined the Group in
2004 and was appointed as Chairman
of British American Tobacco France
in 2005, before becoming Managing
Director of British American Tobacco
Malaysia in 2007. He joined the
Management Board as Regional
Director for Western Europe in
2009, becoming Regional Director
for the Americas in 2011, then
Regional Director for Asia-Pacific in
2013. He became Chief Operating
Officer in 2017 and Chief Executive
Designate in November 2018, before
being appointed to the Board in
January 2019.
Relevant skills and contribution to
the Board:
Jack brings significant
management, innovation, and
strategic leadership to the Board,
developed through his previous
roles across many of the Group’s key
geographies and areas of business.
This enables him to effectively lead
the Group and deliver our ambition to
build A Better Tomorrow
TM
.
External appointments:
No
external appointments.
Nationality:
German
Appointed:
August 2016
Experience:
Marion’s extensive
career includes Chief Financial Officer
positions at Celesio, Q-Cells and
ThyssenKrupp Elevator Technology
and, more recently, she has
served as a member of a variety of
supervisory boards.
Relevant skills and contribution to
the Board:
Marion brings significant
financial expertise and operational
experience gained at an international
level, having spent her working life
managing businesses across Europe,
the Americas and Asia. Her experience
as a member of various supervisory
boards enables Marion to bring a range
of insights to the Board’s discussions.
External appointments:
Vice
Chairwoman of the Supervisory Board
and Co-Chairwoman of the Presiding
and Nomination Committee of
ProSiebenSat.1 Media SE; Supervisory
Board member and Chairman of the
Audit Committee of Heineken N.V.
and Supervisory Board member,
Chairman of the Audit Committee
of Siemens Healthineers AG and
independent director of LONZA Group
Ltd. (from 5 May 2022).
Nationality:
Canadian
Appointed:
Chairman since April 2021;
Non-Executive Director since July 2017.
Experience:
Luc was President and
Chief Executive Officer of Canadian
National Railway Company from
July 2016 until March 2018, having
served as Executive Vice President
and Chief Financial Officer since
2009. Previously, he was Executive
Vice President of Power Corporation
of Canada (an international financial
services company) from 2005 to 2009.
Luc was Chief Executive Officer of
Imperial Tobacco Canada from 2003
to 2005 and Executive Vice President
and Chief Financial Officer from 1998
to 2003. Luc previously served as an
independent Non-Executive Director
of Reynolds American Inc. from 2008
until its acquisition by the Group.
Relevant skills and contribution
to the Board:
Luc brings significant
financial, regulatory and consumer
business experience to the Board,
together with extensive North
American knowledge and experience
of enterprise transformation.
External appointments:
Gildan
Activewear Inc.
Nationality:
British
Appointed:
September 2020
Experience:
Karen has held a variety
of executive roles, including President
and Director General of Colgate
Palmolive France, and Chairman
and Managing Director of Colgate
Palmolive UK Limited. She was
formerly a Non-Executive Director
of Electrocomponents p.l.c., Davide
Campari-Milano S.p.A, Paysafe PLC,
Inchcape PLC, Samlerhuset BV and
Swedish Match AB.
Relevant skills and contribution
to the Board:
Karen brings valuable
international experience, particularly
in marketing, sales and consumer
goods insight to the Board.
External appointments:
Non-
Executive Director of Amcor p.l.c.
Dr Marion
Helmes
Non-Executive
Director (56)
Luc Jobin
Chairman (62)
Jack Bowles
Chief Executive
(58)
Tadeu Marroco
Finance and
Transformation
Director (55)
Karen Guerra
Non-Executive
Director (65)
Nationality:
British
Appointed:
February 2015
Experience:
Sue’s extensive career
includes Director, Strategic and
Business Development of Chime
Group and a number of senior
marketing and communications
positions, including: Director of
Marketing BBC, Corporate Affairs
Director of Thames Television and
Director of Communications of
Vauxhall Motors. Sue is a former
Chairwoman of both the Marketing
Society and the Marketing Group of
Great Britain.
Relevant skills and contribution
to the Board:
Sue contributes
considerable expertise in relation to
marketing, branding and consumer
issues, which are key areas of focus for
the Board.
External appointments:
Non-
Executive Director and Chair of the
Remuneration Committee of Accsys
Technologies PLC; Non-Executive
Director of Helical plc; and Non-
Executive Director of Unlimited
Group Ltd.
Sue Farr
Non-Executive
Director (65)
Nationality:
British
Appointed:
January 2014
Experience:
During his extensive
career Savio has worked broadly in
technology for General Electric, BTR
plc and Alibaba Group, China’s largest
internet business, where he was both
Chief Operating Officer and, later, a
Non-Executive Director.
Relevant skills and contribution to
the Board:
Savio brings significant
business leadership experience to
the Board, together with a deep
knowledge of Greater China and Asia,
an important region for the Group.
External appointments:
Co-Founder
and CEO of A&K Consulting Co Ltd;
Non-Executive Director of the Alibaba
Hong Kong Entrepreneur Fund and
Crossborder Innovative Ventures
International Limited; Non-Executive
Director and Advisory Board member
of Homaer Financial; Independent
Non-Executive Director of GOGOX
and Southern England Wines Ltd.
Savio Kwan
Non-Executive
Director (73)
Nationality:
American
Appointed:
July 2017
Experience:
Up until April 2018,
Holly was a Senior Advisor to Corsair
Capital LLC, where she had previously
served as Managing Partner and
Co-Head of Infrastructure from 2015
until her retirement in 2017. From 2010
to 2015, she served as Co-Head of
Citi Infrastructure Investors and
prior to 2010 she held financial and
executive management roles with
American Electric Power Company,
Inc. and Consolidated Natural Gas
Company. Holly previously served
as an independent Non-Executive
Director of Reynolds American Inc.
from 2008 until its acquisition by
the Group.
Relevant skills and contribution
to the Board:
Holly’s extensive
international operational and financial
management experience in a range of
industry sectors enables her to make
important contributions to the Board.
External appointments:
Non-
Executive Director of Flutter
Entertainment plc; Director and Chair
of the Governance Committee of AES
Corporation; and Director of Arch
Coal Inc.
Holly Keller
Koeppel
Non-Executive
Director (63)
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
101
Attendance at Board meetings in 2021
1
Attended/Eligible to attend
Name
Director since
Scheduled
4
Ad hoc
Luc Jobin
2017
6/6
2/2
Jack Bowles
2019
6/6
2/2
Tadeu Marroco
2019
6/6
2/2
Sue Farr
2015
6/6
2/2
Karen Guerra
2020
6/6
2/2
Dr Marion Helmes
2016
6/6
2/2
Holly Keller Koeppel
2017
6/6
2/2
Savio Kwan
2014
6/6
2/2
Dimitri Panayotopoulos
2
2015
6/6
1/2
Darrell Thomas
2020
6/6
2/2
Richard Burrows
3(a)
2009-2021
2/2 2/2
Jerry Fowden
3(b)
2019-2021
1/1
2/2
Notes:
1. Number of meetings in 2021: The Board held eight meetings in 2021, two of which were ad hoc and convened at short notice, to review Board
Committee and Management Board appointments.
2. Dimitri Panayotopoulos did not attend the ad hoc meeting in March due to prior commitments. Directors that are unable to attend Board or
Committee meetings have the opportunity to provide their comments to the Chairman in advance of the meeting.
3. Composition: The Board of Directors is shown as at the date of this Annual Report and Form 20-F; (a) Richard Burrows retired as Chairman
at the conclusion of the Company’s Annual General Meeting on 28 April 2021; and (b) Jerry Fowden stepped down from the Board with effect
from 1 April 2021.
4. Number of meetings in 2022: Six Board meetings are scheduled for 2022.
Nationality:
Greek/British
Appointed:
Senior Independent
Director since April 2020;
Non-Executive Director
sinceFebruary 2015.
Experience:
Dimitri was Vice
Chairman and Adviser to the
Chairman and CEO of Procter &
Gamble (P&G), where he started his
career in 1977. During his time at P&G,
Dimitri led on significant breakthrough
innovations and continued to focus
on this, speed-to-market and scale
across all of P&G’s businesses while
Vice Chairman of all the Global
Business Units.
Relevant skills and contribution
to the Board:
Dimitri has extensive
general management and
international sales and brand
building expertise, which enables
him to make valuable contributions
to Board discussions on these
important topics.
External appointments:
Senior
Adviser at The Boston Consulting
Group; Advisory Board member of
JBS USA; Board Member of IRI; Board
Member of North Atlantic Acquisition
Corporation; and Director of Airway
Therapeutics Inc.
Dimitri
Panayotopoulos
Senior
Independent
Director (70)
Committee Chairman
Executive Director
Non-Executive Director
Audit Committee
Nominations Committee
Remuneration Committee
Nationality:
American
Appointed:
December 2020
Experience:
Darrell is currently Vice
President and Treasurer for Harley-
Davidson, Inc., having previously
held several senior finance positions
including Interim Chief Financial
Officer for Harley-Davidson, Inc.,
Chief Financial Officer for Harley-
Davidson Financial Services, Inc.
and Vice President and Assistant
Treasurer, PepsiCo, Inc. Prior to joining
PepsiCo, Inc. Darrell had a 19-year
career in banking with Commerzbank
Securities, Swiss Re New Markets,
ABN Amro Bank and Citicorp/Citibank
where he held various capital markets
and corporate finance roles.
Relevant skills and contribution
tothe Board:
Darrell brings extensive
US, financial and regulatory
experience to the Board.
External appointments:
Vice
President and Treasurer for Harley-
Davidson, Inc. (Darrell will retire from
Harley-Davidson, Inc. on 1 March
2022); Board member of Sojourner
Family Peace Center, Inc.; Independent
Director of Dorman Products Inc.;
and Non-Executive Director of Scotia
Holdings (US) Inc.
Darrell Thomas
Non-Executive
Director (61)
BAT Annual Report and Form 20-F 2021
102
Management Board
As at 10 February 2022
Governance
Nationality:
British
Kingsley was appointed Chief
Marketing Officer in January 2019.
He joined the Group in 1996 and held
various senior marketing positions
prior to being General Manager in
Russia. He was appointed to the
Management Board as Corporate and
Regulatory Affairs Director in 2012.
In January 2015, he was appointed
Managing Director, Next Generation
Products and then as Regional
Director, Americas and Sub-Saharan
Africa in January 2018.
Nationality:
Belgian
Johan was appointed Regional
Director, Europe and North Africa in
January 2019. From 1 January 2022,
his role title is Regional Director,
Europe. Johan joined the Management
Board in 2014 as Regional Director
for Eastern Europe, Middle East
and Africa, then became Regional
Director, Asia-Pacific and Middle East
in January 2018. He has been with the
Group for more than 25 years and
his previous roles include General
Manager in Russia, General Manager
in Turkey and Global Brand Director for
the Kent brand.
Nationality:
Australian
Michael was appointed Regional
Director for Asia-Pacific and Middle
East in September 2020 and joined the
Management Board at the same time.
Previously, he was Area Director for
Asia-Pacific and Global Travel Retail.
Michael joined BAT in 1999 and has
held several senior roles in the Group
including General Manager (Papua
New Guinea and Cambodia) and
Regional Manager, Asia-Pacific.
Nationality:
British
David was appointed Director,
Research and Science in January
2019, having joined the Management
Board as Group Scientific Director
in2012, leading R&D’s focus on
potentially reduced-risk products.
He has been with the Group for more
than 20 years and was previously
Head of International Public Health
and Scientific Affairs, responsible for
engagement with scientific, medical
and public health communities.
Nationality:
New Zealander
Guy was appointed President and
CEO of Reynolds American Inc.
in September 2020, having joined
the Management Board asRegional
Director, Asia-Pacific and Middle
East in January 2019. Previously he
was Area Director, Australasia Area.
Guy joined the Group in 1993 and has
held several senior roles in the Group
including Area Director, North Asia
Area and Marketing Director, Russia.
Nationality:
Dutch
Paul joined the Management Board
asDirector, New Categories in
January 2019. He has been with the
Group for 14 years in various senior
roles, including Regional Marketing
Manager, Asia-Pacific and Middle
East, Area Director, East Asia and
Global Head of Marketing Futures.
Nationality:
Korean
Hae In joined the Management
Board as Director, Talent and Culture
Designate in January 2019 and
became Director, Talent and Culture
in April 2019. Her role title changed
to Director, Talent, Culture and
Inclusion in November 2020. She was
previously Group Head of Talent
and Organisational Effectiveness
and has held several other senior
HR roles in the Group, including
Regional HR Director, Asia-Pacific,
and HR Director, Japan and North
Asia. Prior to joining the Group in
2008, she gained experience at
Samsung, IBM Consulting Services
and PricewaterhouseCoopers.
Nationality:
Italian/Argentinian
Luciano joined the Management
Board as Regional Director, Americas
and Sub-Saharan Africa in January
2019. He joined the Group in 1992
and has held a wide range of roles,
including Marketing Director in
Venezuela, Marketing Director in
Mexico and General Manager of BAT
Mexico. Luciano was also Regional
Marketing Manager for Western
Europe and then Regional Head of
Marketing, Americas and Sub-Saharan
Africa before his appointment to the
Management Board.
Nationality:
Italian/Brazilian
Marina joined the Management Board
as Director, Digital and Information in
January 2019. She joined the Group as
Chief Information Officer (CIO) in 2018,
having previously served as Global
CIO and Global Business Services
SVP at Anheuser-Busch InBev, where
she was responsible for information
technology transformation, including
consumer digital marketing.
Nationality:
American
Jerry was appointed Director, Legal
& External Affairs and General
Counsel in May 2015, having joined
the Management Board as Group
Corporate & Regulatory Affairs
Director in January 2015. Jerry was
Regional General Counsel, Asia-
Pacific from 2010 to 2014, before
becoming Assistant General Counsel
– Corporate & Commercial. He was
a member of the Board of Reynolds
American Inc. from February 2016
untilJuly 2017.
Jerome Abelman
Director, Legal &
External Affairs
and General
Counsel (58)
Hae In Kim
Director, Talent,
Culture &
Inclusion (47)
Michael
Dijanosic
Regional Director,
Asia Pacific and
Middle East (50)
Marina Bellini
Director,
Digitaland
Information (48)
Paul Lageweg
Director, New
Categories (52)
Johan
Vandermeulen
Regional Director,
Europe (54)
Luciano Comin
Regional Director,
Americas and
Sub-Saharan
Africa (52)
Guy Meldrum
President and
CEO, Reynolds
American Inc.
(50)
Kingsley
Wheaton
Chief Marketing
Officer (48)
Nationality:
Pakistani
Zafar was appointed Director,
Operations in February 2021
and became a member of the
Management Board at the same
time. Previously, he was Group Head
of New Categories Operations where
he was responsible for successfully
embedding an end-to-end supply
chain for our New Category products
to support their accelerated growth
across the world. Zafar joined BAT
in 1996 and has held several senior
roles in the Group including Regional
Head of Operations Asia Pacific &
Middle East, Group Head of Plan,
Service & Logistics, Regional Head of
Plan and Service for Western Europe
andHeadof Operations, Bangladesh.
Zafar Khan
Director,
Operations (49)
Dr David O’Reilly
Director,
Research and
Science (55)
Jack Bowles
Chief Executive
(58)
See page 100
for
full biography
Tadeu Marroco
Finance and
Transformation
Director (55)
See page 100 for full
biography
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
103
Board Leadership
The Board is collectively responsible to our shareholders for the
long-term sustainable success of the Company and for the Group’s
strategic direction, purpose, values and governance. The Board
provides the leadership necessary for the Group to meet its
business objectives within a robust framework of internal controls.
The Board’s primary responsibilities are summarised on page 111.
The Board has a comprehensive annual programme of meetings
to review the Group’s strategy and monitor performance across
all elements of the Group’s business model. The Board’s strategic
priorities for 2021 are identified within the keyperformance
indicators set out on page 9. The Chairman sets structured
meeting agendas in consultation with the Chief Executive and the
Company Secretary.
Key activities of the Board in 2021 are set out on pages 104 to 105.
The Board considers stakeholder interests in its decision-making
on an ongoing basis. Examples of principal decisions made by
the Board during the year, and how it considered the long-term
consequences of decisions, stakeholder interests, the impact of
operations on the environment and corporate reputation in those
contexts, are discussed on page 110.
Oversight of the impact of COVID-19 and the Group’s response
remained an important focus for the Board throughout 2021.
How our governance framework supports our strategy
An overview of our governance framework, including the structure
of the Board and its principal Committees, is set out on page 111.
As part of our internal controls framework, the Board has delegated
certain authorities to executive management through our Group
Statement of Delegated Authorities (SoDA) to enable effective
delivery of Group strategy.
Our SoDA is designed to empower management at the right level
of our organisation and promote high levels of accountability and
ownership. Overseeing the implementation of Group strategy
through our SoDA is one of the ways that the Board promotes
robust corporate governance, risk management and internal
controls across our Group. Our SoDA supports our Board members
in managing their responsibility for promoting the success of the
Company, in line with their directors’ duties.
Our Purpose and Ethos
Our purpose, to build A Better Tomorrow
TM
for all our stakeholders,
isunderpinned by our ethos.
We launched the BAT ethos in 2020, developed with significant
employee input. It guides our culture and behaviours across our
Group, enabling an organisation that is future fit for sustainable
growth. We believe our ethos empowers our people and fosters
avibrant, rewarding and responsible workplace. Its focus on
diversity and inclusion enables better understanding, connectivity
and insights across our business.
The Board is committed to supporting the Management Board in
continuing to promote the BAT ethos in every area of our business.
Read more about our purpose on page 27 and our ethos on page 69
Shaping and Overseeing Culture
The Board considers the Group’s culture and activities promoting
our ethos in a range of contexts throughout the year, including
through workforce engagement. Key examples of the Board’s
oversight of culture are highlighted on page 105.
During 2021, Board oversight and monitoring of culture was
supported by the Board’s annual review of the Group culture
dashboard. This dashboard presents a series of insights measured
over time across the organisation, including diversity at different
levels, employee engagement (measured through our Your Voice
global employee survey), leadership stability, employee retention,
health and safety, and business conduct, including Speak
Up allegations.
Following review, the Board is satisfied that our culture is aligned
with the Group’s purpose, strategy and ethos, and reflected
consistently in our workplace policies and practices.
Outside of the boardroom, the Directors typically participate in
regular market and site visits to give them direct experience of our
organisational culture in context. The Directors’ market and site
visit programme continued to be impacted by travel restrictions in
place due to COVID-19. Direct workforce engagement was instead
enabled primarily through virtual forums in 2021 (discussed on
page 108).
Delivery with integrity
How we execute our strategy is as important as its successful
delivery. The Board remains focused on ensuring that we deliver
with integrity in every aspect of our business. It is essential to
our Group’s long-term, sustainable success that all our people
act with consistently high standards of behaviour. We articulate
this through our Group Standards of Business Conduct (SoBC).
Compliance with our SoBC, in letter and spirit, is mandatory for all
our people worldwide.
Our SoBC holds everyone responsible for compliance, and every
line manager across our business must act as a role model for
high standards of behaviour. The SoBC includes our Speak Up
policy, reflecting the range of Speak Up channels for raising any
concerns in confidence (anonymously if preferred) and without fear
of reprisal. The SoBC also includes our Lobbying and Engagement
policy, reinforcing the requirement for all our engagement activities
with governments, regulators and other external stakeholders to be
conducted with transparency, openness and integrity.
Our SoBC is regularly reviewed and updated. A revised version of
our SoBC was introduced in January 2022 (discussed on page 110).
The Audit Committee is kept updated on SoBC allegations, and
reports to the Board to enable Board oversight of behaviour falling
short of our standards and the corrective action taken.
Read more about our commitment to delivery with integrity and our Group
Standards of Business Conduct on pages 56 to 57
Leadership Overview
Board Leadership and Purpose
We are
Empowered
We are
Diverse
We are
Bold
We are
Responsible
We are
Fast
BAT Annual Report and Form 20-F 2021
104
Board Activities
in 2021
Driving value from combustibles is a core
priority for the Board, to deliver today and
build ABetter Tomorrow
TM
.
Continued investment and development of
New Categories to accelerate growth is a
strategic focus of the Board’s agenda.
1
Step Change in
NewCategories
Performance
Drive Value
From Combustibles
The Board understands our business is enabled
by simplifying our structures, embracing digital
transformation, and rigorous cost management.
Simplify the
Business
Board Leadership and Purpose
Activities in 2021
–
reviewing Group performance
against strategy to accelerate New
Categories growth and KPIs, including
New Categories revenue growth and
market share;
–
reviewing industry and Group
performance outlook in total nicotine and
by product portfolio;
–
reviewing consumer adoption, trading
environment and competitor landscape
across New Categories portfolios;
–
reviewing our New Categories
investment glidepath and innovation
pipeline across all product portfolios;
–
reviewing the Group’s New Categories
supply chain, its resilience, sourcing
footprint and risk mitigation strategies
(including in response to COVID-19);
–
reviewing regulatory landscapes in New
Categories across key markets, with
particular focus on the US and EU;
–
overseeing the development of strategic
opportunities beyond nicotine, including
Better Tomorrow Ventures’ portfolio
investments and the Group’s acquisition
of a 19.9% investment in Organigram
Holdings Inc.; and
–
assessing principles for laying
foundations in wellbeing and stimulation.
Activities in 2021
–
reviewing Group performance against
strategy to drive value from combustibles
and KPIs, including value share growth;
–
reviewing industry outlook, trading
environment and competitor landscape;
–
understanding the impact of
growth in illicit trade, particularly in
developing markets;
–
assessing the continuing impact of
COVID-19 in highly impacted markets
(such as South Africa and Brazil);
–
reviewing the impact of evolving tax
regimes, with focus on excise tax
developments in the US and Asia-Pacific;
–
assessing principles applied to prioritise
development and investment in our
brand portfolio to generate sustainable
value to fund New Categories
development; and
–
reviewing combustible product
portfolios, product development
pipelines and developments in blending
and product differentiation across
the Group’s drive brand portfolio,
emphasising innovation that is
consumer relevant whilst reducing
environmental impact.
Activities in 2021
–
reviewing Quantum implementation
(part of Quest), including: effectiveness
of Phase 1 organisational design and
business unit simplification; impact of
Phase 2 end market operating model
and route-to-market optimisation; and
progress in implementing Phase 3 UK
head office restructuring;
–
oversight of progress against target
savings to be realised through
efficiencies implemented under
Quantum to release funds for investment;
–
oversight of initiatives to drive a
step-change in portfolio complexity
reduction, including drive brand portfolio
consolidation and stock-keeping unit
rationalisation, as part of the Group’s
focus on stronger, global brands;
–
reviewing revenue growth management
capabilities and use of data and
analytics to power insights and enhance
forecasting and decision-making; and
–
reviewing key aspects of digital
transformation to deliver enhanced
user experience for consumers
and customers, leverage Digital
Business Solutions technology hubs
to increase efficiencies, and cyber
security developments.
The Enterprise of the Future
The Board supports management’s drive
to implement our Quest programme, as
it recognises that, for the Group to reach
its long-term sustainability ambitions and
to deliver its corporate purpose, it cannot
rely on incremental delivery alone.
In 2021, the Board reviewed progress
on Quest’s five capability accelerators
(discussed to the right), via updates
from the Executive Directors and other
Management Board members.
The Finance and Transformation Director
is the programme director for Quest and
responsible for Quest implementation.
Quantum
Quantum’s objective is to simplify
the organisation and generate funds
through cost savings to reinvest in New
Categories. Board oversight of Quantum
is discussed above.
Unleash innovation
Increasing focus and investment in
transformational R&D, product innovation
and partnering to create a powerful
innovation eco-system.
Empowered organisation
Building an engaged, agile and high
performing organisation that can deliver
the Enterprise of the Future, with winning
capabilities, accountable and empowered
leaders, a fit for purpose organisational
design with an ambitious diversity and
inclusion agenda.
Shaping sustainability
Accelerating our path to becoming a truly
sustainable enterprise and fulfilling our
A Better Tomorrow
TM
purpose, through
transparent engagement with scientists,
regulators and policy-makers so that our
strategy takes account of our views, and
developing our New Categories science
programmes whilst advocating for
appropriate standards and regulations.
Technology and Digital
Driving digital transformation to unlock
commercial value across our entire
value chain, using data and analytics and
developing enhanced digital capabilities.
Read more about our Quest programme and
capability accelerators on pages 30 to 31.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
105
The Board emphasises that our strategy, business,
and product portfolio be sustainable for the long
term and meet our evolving societal responsibilities.
The Board shapes and oversees the Group’s culture
and ethos. Setting the ‘tone from the top’ is an
important part of the Board’srole.
The Board pays close attention to Group
performance and financial matters, internal control,
and integrity of reporting and risk management.
Environmental, Social,
Governance
Ethos, Culture, People
Financial and Risk
Activities in 2021
–
approval of Group budget, consideration
of capital allocation priorities, and
oversight of resource allocation activities,
to support strategy execution;
–
reviewing Group financial performance
against key performance metrics, current
outlook, challenges and opportunities for
growth in each region, and FX impacts;
–
reviewing Group half-year results, trading
updates, year-end results and the Annual
Report and Form 20-F;
–
reviewing share price performance and
investor and broker perspectives;
–
review of interim dividend proposals and
assessment of distributable reserves of
the Company prior to dividend payments;
–
determining Group viability, taking
into account current position and
principal risks;
–
reviewing compliance with Group
financing principles, including liquidity,
capital allocation and net debt/EBITDA;
–
reviewing the Group’s revolving
credit facilities, refinancings, the
Euro hybrid bond issuance, and debt
issuance programmes;
–
reviewing Group cash flow performance
and opportunities to optimise the
balance sheet to enable investment,
while reducing the carrying value of debt;
–
reviewing the appropriate level of
authority to allot shares to maintain
future flexibility for the Company;
–
reviewing the Group risk register, and
risk appetite in the context of strategic
objectives and emerging risks;
–
reviewing evolving global product
regulation, including US FDA regulation
of menthol and flavours and evolving EU
product and excise regulation;
–
reviewing status of litigation involving
Group companies, including updates
on the Canadian Companies’ Creditors
Arrangement Act (CCAA) process in
relation to Imperial Tobacco Canada;
–
reviewing Group insurance coverage; and
–
reviewing financial performance of
associates of the Group periodically.
Activities in 2021
–
oversight of climate-related issues and
opportunities for the Group and the
approach to embedding the elements of
the TCFD framework across the Group;
–
reviewing environmental performance
for the preceding year and progress
against glidepaths towards achieving the
Group’s environmental targets, including
in relation to climate, renewable energy,
water stewardship and recycling;
–
reviewing the Group’s ESG agenda,
factors contributing to its increasing
importance to key stakeholders,
performance against ESG metrics and
associated governance and controls;
–
approving revised terms of reference
for the Audit Committee to include
responsibilities for engagement and
monitoring of external providers
conducting assurance over ESG metrics;
–
reviewing the perspectives of the
Group’s key stakeholders, the Group’s
response to stakeholder perspectives,
and the effectiveness of engagement
mechanisms used;
–
assessing the impact of COVID-19 on
Group operations, and Group business
continuity structures and plans to
manage the Group’s response;
–
approving revisions to the Group’s
Standards of Business Conduct and
Supplier Code of Conduct, to take effect
from 1 January 2022;
–
approving the annual Modern Slavery Act
statement and annual Conflict Minerals
Report; and
–
reviewing updates on compliance
matters, including allegations of
misconduct, reports from Speak Up
channels and investigations, and
the Group’s ‘Delivery with Integrity’
programme initiatives.
Activities in 2021
–
determining the independence of Non-
Executive Directors prior to proposing
them for re-appointment at the
Company’s AGM;
–
revising the composition of the Audit
and Remuneration Committees,
on the recommendation of the
Nominations Committee;
–
approving changes to
Management Board composition,
on the recommendation of the
Nominations Committee;
–
reviewing proposed changes to
the Directors’ Remuneration Policy,
shareholder perspectives on new policy
proposals, responses to shareholder
engagement, and adopting the new
Directors’ Remuneration Policy for
shareholder approval at the 2022 AGM;
–
approving revisions to Non-Executive
Director fees;
–
reviewing the outcomes of the annual
board evaluation in 2021;
–
monitoring corporate culture and its
alignment with the Group’s purpose,
ethos and strategy;
–
reviewing the Group’s talent strategy,
employer brand, diversity and inclusion
agenda, and progress against objectives;
–
reviewing approach to talent capability
development, with a focus on capabilities
needed for Group transformation;
–
considering feedback from the Group’s
workforce engagement mechanisms;
–
reviewing the effectiveness of Speak Up
channels; understanding the evolving
impact of COVID-19 on the Group’s
workforce and reviewing strategies for
securing safe on-site environments,
effective connectivity for remote
working, and safeguarding welfare;
–
reviewing health and safety performance
for the preceding year, targets for the
coming year and action plans; and
–
reviewing the funding positions
relating to the Group’s retirement
benefit schemes.
BAT Annual Report and Form 20-F 2021
106
FY
Results
HY
Pre-close
HY
Results
FY
Pre-
close
Chairman
and/or Chair
ofRem Co
Chairman
and/or Chair of
Rem Co
Strategy &
performance
Strategy &
performance
Strategy &
performance
ESG
ESG
Executive
Management
& IR
Executive
Management
& IR
Science /ESG
Management
Executive
Management
& IR
Investor relations
calendar 2021
Board Engagement
withStakeholders
Board Leadership and Purpose
Annual investor relations programme
A global engagement programme is conducted annually with
shareholders, investors, potential investors and analysts. This is
led by the Chairman and Executive Directors, supported by the
Investor Relations team. The Executive Directors presented our Full
and Half-Year results and pre-close statements with investor Q&A
calls. Presentations and transcripts are published on bat.com.
In total we hosted 678 investor meetings in 2021 facilitated by
virtual ways of working, covering 71% of our shareholder base with
broad geographic coverage across the US, the UK, South Africa,
Europe and other markets.
Investor interaction encompassed a broad range of event formats,
including our virtual attendance at 11 investor conferences, 14
investor roadshows and 4 salesforce briefings. We launched our
new IR website in February 2021 (see Spotlight on shareholder
communication on page 107) enabling us to further leverage our
digital interaction with investors.
We significantly increased our engagement on ESG topics
(see Spotlight on ESG below), interacting with ESG-focused
teams within our investment community through conference
presentations and an ESG roadshow. This engagement also
enabled investors to interact with members of our executive
management team.
In February 2021, Jack Bowles and Tadeu Marroco presented for
the first time at the Consumer Analyst Group of New York (CAGNY)
conference via a live webcast and Q&A to over 150 investors.
These presentations focused on our strengths and capabilities
across brand building, digital, ESG, science and R&D and articulated
our commitment to deliver value for our stakeholders, driven by our
A Better Tomorrow
TM
purpose.
ResultsResults
Governance
Road shows
Governance
Road shows
Investor
Road shows
Investor
Road shows
ConferencesConferences
Our Directors value engagement with our
shareholdersand wider stakeholders to understand
their views and inform the Board’s decision-making,
strategy development and risk assessment.
Shareholder and Investor Engagement
The Board is committed to open and transparent dialogue with
shareholders and investors to ensure their views are understood
and considered. The Chairman and Executive Directors’ annual
engagement programme is discussed below.
The Senior Independent Director and other Non-Executive
Directors are also available to meet with major shareholders
on request.
F
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SPOTLIGHT
ESG Engagement
We continue to build on our strong ESG foundations, with
2021 marking the 20th anniversary of our first Social Report
in 2001. We increased our ESG engagement with investors
through our investor relations programme and we also
hosted
more than 40 ESG-specific meetings with over
100different investment institutions over the year.
We participated in two dedicated ESG investor conferences
where Dr David O’Reilly, Director, Scientific Research, hosted
meetings with investors, supported by the IR team.
At the Deutsche Bank Consumer Conference in June 2021,
Kingsley Wheaton, Chief Marketing Officer, joined Dr
O’Reilly to communicate our purpose of building A Better
Tomorrow
TM
and reducing the health impact of our business.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
107
We launched our refreshed investor website in February 2021
alongside our results for FY 2020, taking into account investor
feedback. As part of the refresh, site design was fully updated,
improving user experience and making content easier to navigate.
We also added new content areas, including:
–
Our investment case and our approach to ESG; and
–
Shareholder FAQ and regular consensus sharing.
A new Investor News hub pulls our press releases, news and
features together in one place for investors. An automated news
alerts service is available to keep investors up to date. We are
increasing our investor reach with live broadcasts of events,
including results and conferences on our website, with playback
slides and transcript available online. During 2021, the refreshed
site has seen an 18% increase in traffic with over 417,000 visits.
2021
2021
2020
UK 40
United States 29
South Africa 9
Europe (ex. UK) 16
Rest of world 6
2021 %
Strategic focus
76
91
ESG focus
17
7
Governance focus
7
2
Investor meetings: discussion focus Investor meetings: geographic scope
Update on 2021 AGM voting results
All resolutions were passed at the Company’s AGM held on 28 April
2021 with the requisite majority of votes. However, we acknowledge
the vote against received in relation to the 2020 Directors’
Remuneration Report and the resolution to renew the Directors’
authority to allot shares, which we address below.
Directors’ Remuneration Report
Following the 2021 AGM and continuing into 2022, we have
engaged with a broad cross-section of our shareholders and
advisory bodies, including a number of shareholders that voted
against this resolution at the 2021 AGM, to understand their
perspectives on management of executive pay. Details of this
engagement and how the Remuneration Committee has taken
shareholder feedback into account in shaping the proposed new
Directors’ Remuneration Policy are set out on pages 128 to 132.
Renewal of Directors’ Authority to Allot Shares
In 2021, the Board reviewed the appropriate level of authority to
allot shares to maintain future flexibility for the Company, and took
into account the perspectives of shareholders unable to support an
authority to allot shares of up to two-thirds of issued share capital
as sought at our 2021 AGM.
In light of that review, the Board intends to propose shareholder
approval of an authority to allot shares at a reduced level of up to
one-third of issued share capital at our 2022 AGM, within the UK
Investment Association’s share capital management guidelines.
Full details of this resolution will be set out in the Company’s Notice
of Meeting for our 2022 AGM.
How the Board considers shareholder and investor views
The Chairman, the Executive Directors and Remuneration
Committee Chair regularly update the Board on their dialogue with
shareholders and investors. The Board also receives updates from
the Head of Investor Relations and our brokers on key issues raised
by shareholders and on stock performance.
Shareholder and investor perspectives considered by the Board
in 2021 included transformation, New Categories strategy and
performance, ESG targets, deleveraging, capital allocation and key
regulatory developments. The Board takes shareholder feedback
into account in decision-making and developing Group strategy
(discussed further on this page and on pages 110 and 128 to 132).
Annual General Meeting (AGM)
Our AGM is an opportunity for further shareholder engagement, for the
Chairman to set out progress, and for the Board to answer questions.
Our 2021 AGM was held whilst the UK Government’s COVID-19 ‘Stay at
Home’ measures were in force, prohibiting public gatherings of more than
two people. Given those restrictions, our 2021 AGM was convened with a
minimum quorum of two shareholders in accordance with the Company’s
Articles of Association. Shareholders were given the opportunity to submit
questions about AGM business in advance of the meeting and responses
to the queries received were published at bat.com/agm.
Looking ahead, we plan to hold our 2022 AGM in person, subject to UK
Government guidelines applicable at that time. Details of our 2022 AGM
are set out on page 377.
For disclosures required by paragraph 7.2.6 of the Disclosure Guidance and
Transparency Rulesand the Companies Act2006, see the Other Information section
678
meetings in 2021
463
meetings in 2020
678
meetings in 2021
SPOTLIGHT
Shareholder communication
BAT Annual Report and Form 20-F 2021
108
Board Engagement withStakeholders
Continued
Wider Stakeholder Engagement
A broad range of stakeholders are important to the Group at local,
regional and functional levels. Key stakeholders are essential to our
ability to generate long-term, sustainable value and we identify them
by applying an established stakeholder engagement framework,
which takes into account strategic objectives and risks to the Group.
Our key stakeholders are referenced in our business model on page
18, with an overview of their importance, what matters to them,
and how we engage and respond to them set out on pages 20 to 21.
Transparency of engagement is woven into our Group policies, such
as our Standards of Business Conduct and specific frameworks
for stakeholder engagement. Matters reserved for the Board
include responsibility for understanding the views of the Group’s
wider stakeholders (including our workforce) and review of the
effectiveness of engagement mechanisms.
The Board conducted a review of key stakeholders in 2021. This included
how engagement is conducted across the Group, stakeholders’
perspectives, and how the Board is kept informed of those perspectives
where engagement is not at Board level. Following its review, the Board
remains satisfied there is well-established and effective engagement
with the Group’s key stakeholders, which enables the Board to
understand their perspectives. The Board will continue to monitor the
ongoing effectiveness of stakeholder engagement.
Where the Board does not engage directly with our stakeholders,
it is kept updated so Directors maintain an effective understanding
of what matters to them and can draw on these perspectives,
including in Board decision-making and strategy development.
An overview of how the Board engaged with wider stakeholders
and maintained its understanding of their interests during the year
follows below, with further information on page 72 and on page 165
in relation to workforce engagement on remuneration matters.
Board Leadership and Purpose
UK Companies Act: Employee engagement
This section summarises the Directors’ approach to engaging with the
Group’s workforce, including employees of UK Group companies, and
how the Directors have regard to their interests. Further information is
provided on pages 20 to 21, 70 to 73, and pages 163 to 165 in relation to
remuneration matters. Further details regarding the effect of that regard
are provided on page 110.
The Board keeps up to date with the current views of our
workforce through a combination of engagement methods
across multiple channels at different levels of our organisation.
These include town halls, works councils, webcasts, our ‘Your
Voice‘ global employee survey, and direct engagement through
Directors’ market and site visits (discussed on page 72). Given the
spread, scale and diversity of the Group’s workforce, the Board
considers it effective to use this blend of established channels,
augmented by structured reporting.
These engagement channels, combined with Group-wide
reporting structures to capture workforce feedback, cover
all Group company employees and individuals contracted on
a fixed-term basis to undertake permanent roles. Focus and
action areas reviewed by the Board are then cascaded to
our workforce.
Engagement across our organisation remained a top priority in
2021, as COVID-19 continued to affect our organisation and ways of
working. The Board reviewed our workforce engagement channels
across the Group in 2021 and consolidated feedback from them.
The overarching themes were transformation, innovation, and
staying connected (particularly in the pandemic context),
highlighted
below.
Our Board’s usual programme of market and site visits
allows Directors to engage directly with people across our
organisation, but continued to be curtailed in 2021 due to
COVID-19 restrictions.
However, our Executive Directors led a series of virtual market
visits and other forums to connect regularly with regional,
local and functional teams (highlighted to left), and featured
on our internal global news channel ‘BATV’. The Chairman
delivered a personal video greeting to staff worldwide on his
appointment and featured in our internal eZine.
Our Executive Directors also presented global, functional
andmarket webcasts including discussions on our purpose,
ethos, strategy, performance and business outlook, in real-time
with Q&A.
The Board was briefed on London HQ return to site plans,
staff perspectives on the positives and negatives, and how
safeguarding measures would ensure a COVID-19 secure return
for staff working on site.
The Board noted that staff felt well-supported during the
pandemic, and the need to balance the advantages of more
flexible working practices going forward, with recognition of
on-site working as a powerful catalyst for collaborative and
cohesive teamwork.
Our People
SPOTLIGHT
6
Events with
Directors
8
Events with
Directors
7
Events with
Directors
6
Events with
Directors
8
Events with
Directors
* Total virtual or face-to-face market visits or other forums by location /region/
central function that one or more Directors attended in 2021.
APME
AmSSA
US
Centre
ENA
2021: Directors’ engagement forums*
Key priorities from workforce feedback
Transformation
Simpler,
faster, stronger
organisation
Innovation
Step change in
New Categories
Staying
Connected
– Focus areas are implementation of business simplification
andchange management.
– Initiatives in response to feedback include: Functional briefings
on our Quest programme; live global webcast of the 2021 Half
Year results with Q&A; the ‘Technology Inspiring a Modern
Enterprise’ global virtual summit; launch of a series of global
webinars to develop digital capabilities.
– Focus areas are New Categories strategy, footprint expansion
and deepening product knowledge.
– Initiatives in response to feedback include: Regular updates
on New Categories product launches and success stories
from across the Group, virtual BAT R&D lab tour experience;
bulletins spotlighting our Science & Innovation Report and
NewCategories portfolios.
– Focus areas are maintaining active staff engagement and
staffwelfare during the pandemic.
– Initiatives in response to feedback include: regular
guidancetostaff worldwide on measures to safeguard
welfareduring the pandemic; interactive global and regional
briefings on ESG and sustainability topics; and interactive
eventstohighlight International Women’s Day.
Read more about our approach
toworkforce engagement
Pages72 and 165
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
109
Our consumers are at the core of everything we do. Consumer-
led innovation and product science are central to achieving our
purpose of building A Better Tomorrow
TM
. We believe that our
multi-category approach is the most effective way to appeal to
thediverse preferences of adult consumers worldwide.
The Board is regularly briefed by the Executive Directors and
senior management on product performance across all portfolio
categories and how product offerings continue to evolve to satisfy
adult consumer preferences. In 2021, the Board was updated on
how we are responding to consumer views on safety and quality
of New Categories products, and our contribution to developing
voluntary industry standards in various markets.
The Board was also briefed on how we understand our consumers’
shift to digital and e-commerce channels, and our development
ofmobile e-commerce and subscription tools.
Through its strategy sessions in 2021, the Board reviewed how
we are actioning our wealth of consumer insights to support
delivery of relevant product pipelines for a step-change in
NewCategories performance.
Whilst retailer, wholesaler and distributor relationships are managed at
local market and business unit levels, the Board is briefed regularly on
the Group’s route-to-market strategies and developments in the global
retail environment.
In 2021, focus areas for Board updates included our response to retail
customer feedback on the accelerating shift to e-commerce, including
new tools for digital engagement roll-out across 40 markets, and how
markets were adapting to maintain their engagement with customers,
as COVID-19 impacts continue and beyond.
The Audit Committee also reviews the Group’s Youth Access Prevention
action plans annually, including for New Categories digital channels.
Our relationships with suppliers and contracted farmers are managed
day-to-day by the Group’s Operations function and at local market level.
The Board periodically reviews the Group’s supply chain strategies,
supplier footprint and progress of sustainable agriculture and farmer
livelihoods programmes.
In 2021, the Board was regularly updated on the impact of COVID-19 on
our operations and supply chain, mitigation plans to avoid supply chain
disruption, and initiatives to support suppliers.
The Board reviewed the Group’s New Categories supplier network and
geographic sourcing footprint, supply chain resilience and business
continuity. The review focussed on sources of uncertainty and managing
external impacts, through increased automation and efficiency
improvements in collaboration with our suppliers.
The Board reviewed the annual Modern Slavery Statement, including
commitments to ensure that operations are free from exploitation of labour
and modern slavery, and the due diligence and monitoring programmes
underpinning those commitments.
The Board approved the revised Supplier Code of Conduct (discussed on
page 110). The Board also approved the Company’s annual Conflict Minerals
Report which details due diligence undertaken to determine the origin of
minerals at risk of being sourced in conditions of conflict.
Read more about our approach
toengaging with consumers
Pages 34 to 44
Read more about engagement with
suppliers and farmers
Pages 3, 48, 53 to 55
Read more about customers and
responsible marketing
Pages 57
Customers
Suppliers
Consumers
We believe tobacco harm reduction can only be solved
collaboratively, and that only through collaborative effort
can effective regulation be developed to deliver public health
objectives and also enable real consumer choice.
The Board is briefed on scientific engagement with regulators,
public health bodies, and scientific communities. In 2021,
this included updates covering engagement with the US
FDA on vapour products, and the progress of US subsidiary
Kentucky BioProcessing towards developing proprietary
vaccine technology.
At every regular Board meeting, the Board reviews a report
from our Legal & External Affairs Director covering evolving
product regulation, regulatory engagement, developments in
excise tax, anti-illicit trade initiatives, litigation and compliance.
For example, in 2021, these reports included briefings on
developments in the US FDA’s approach to regulating menthol
and flavours. The Board was also kept up to date on evolving
product regulation and excise tax regimes, with focus on
developments in the US and the EU, at its strategy sessions
and through regular briefings from the Chief Executive.
The Board was briefed on investor and wider stakeholder
expectations on sustainability policies, programmes
and performance, including on alignment with the TCFD
reporting framework and progress towards net zero carbon
emissions. It also considered the Group’s range of responses
to stakeholder feedback on the environmental impact of
our products. Examples included our work to enable Vuse’s
certification as the first carbon neutral global vapour brand,
our reduction of single use plastics in our New Categories
products, and take-back schemes for New Categories.
The Audit Committee regularly reviews the Group’s ESG
performance against key metrics, and is briefed annually on our
investment in community and charitable initiatives.
In 2021, the Audit Committee was briefed on enhanced due diligence
and governance guidance for end markets and central functions
when making charitable contributions and providing in-kind support
under the revised Group Community Investment Framework.
The Audit Committee is also updated on engagement with tax
authorities on material Group tax matters.
The Non-Executive Directors regularly attend the Corporate
Audit Committee and Regional Audit & CSR Committees, where
societal and community perspectives at regional and local levels
are discussed. The Audit Committee also reviews feedback from
these Committees.
UK Companies Act: Business relationships
This section summarises how the Directors have regard to the
need to foster business relationships with customers, suppliers
and other external stakeholders. Further information is provided
on pages 20 to 21, Information regarding the effect of that regard is
provided onpage 110.
Read more about our engagement
withgovernments and wider society
Pages 36 and 45 to 67
Society
BAT Annual Report and Form 20-F 2021
110
Capital Allocation to Build A Better Tomorrow
TM
In approving the 2022 budget, the Board weighed a variety of
imperatives for a multi-year, balanced capital allocation plan.
The budget emphasises New Categories investment and builds on
the Group’s investment in Organigram Holdings Inc. and portfolio
investments by BTommorow Ventures to develop an ecosystem of
capabilities, technologies and insights. This investment enables our
strategy for long-term sustainability in nicotine and beyond.
The budget is also designed to secure mid-term, high single digit
EPS growth, achieve our shareholders’ deleverage expectations
to maintain financial flexibility, and prioritise dividend distribution,
whilst enabling commercial delivery across all categories in line
with our guidance.
Our capital allocation anticipates developing our portfolios in
nicotine and beyond to meet evolving consumer preferences,
underpinned by robust product stewardship, scientific research
and collaborative innovation to meet those needs, and considers
the environmental impact of our operations and the complexity of
navigating external fiscal and regulatory environments.
Amongst other factors, the 2022 budget also takes into account
workforce remuneration and commercial arrangements with
suppliers and customers.
Key stakeholder perspectives taken into account
Shareholders
and investors
Customers
Our people
Consumers
Suppliers
Governments and
wider society
Revised Standards of Business Conduct
and Supplier Code of Conduct
The Board approved revised Standards of Business Conduct
(SoBC) and a revised Supplier Code of Conduct, applicable from
1 January 2022. These revised policies are aligned with our strategy
and ethos and take account of evolving external requirements and
expectations of all our stakeholders for high standards of integrity in
our business conduct.
Our revised SoBC emphasises that a key driver to delivering
our corporate purpose is our ethos, which guides our culture
and behaviours across the Group and enables an organisation
future-fit for sustainable growth (discussed further on page 56).
Our revised Supplier Code is aligned to our multi-category portfolio,
sets expectations for suppliers to support our work to reduce the
environmental impact of our products and operations, and reflects
changes to our SoBC.
Updates to these policies were informed by feedback from our staff
and business partners, international standards such as the ILO
Declaration on Fundamental Principles and Rights at Work and OECD
Guidelines for Multinational Enterprises, and external benchmarking.
Continuous development of these policies demonstrates our
commitment – within our organisation and in collaboration with our
suppliers – to deliver results with high standards of integrity across
our value chain.
Key stakeholder perspectives taken into account
Shareholders
and investors
Customers
Our people
Consumers
Suppliers
Governments and
wider society
Principal Decisions
Madeby the Board
Board Leadership and Purpose
Shaping the 2022 Directors’ Remuneration Policy
The Remuneration Committee conducted a comprehensive review
of the current Directors’ Remuneration Policy during 2021, continuing
into 2022.
This review included detailed consideration of the alignment of
executive remuneration with our strategy, long-term interests of
shareholders, and how best to reflect our ESG ambitions in short and
long-term incentives, specifically our commitment to reducing the
health impact of our business. The review also took account of the
pay policies and practices applicable to our wider workforce, and the
importance of promoting performance-based pay. Policy-related
considerations are discussed in further detail on pages
[.]
to
[.]
.
The review was informed by external market practices, corporate
governance regulations, shareholder and governance advisory body
guidelines, and advice from the Committee’s UK and US remuneration
consultants, supported by the Director, Talent, Culture & Inclusion.
The Committee discussed initial policy proposals with the Board,
and took into account perspectives from the Chairman and other
Directors on those initial proposals, drawing on their ongoing dialogue
with shareholders.
The Committee Chair then led several rounds of engagement with
institutional shareholders and governance advisory bodies, and the
Committee evaluated feedback and had active regard to addressing
it when finalising the policy proposals. The Board accepted the
recommendation of the Committee to put forward the proposed 2022
Directors’ Remuneration Policy to shareholders for approval at the
forthcoming AGM.
Key stakeholder perspectives taken into account
Shareholders
and investors
Our people
Governments and
wider society
Progress Towards Net Zero Emissions
The Board reviewed progress against the glidepath towards achieving
the Group’s commitment to net zero value chain carbon emissions by
2050. This encompasses science-based targets across all emission
scopes and is discussed on pages 47 and 61.
In setting environmental targets, regard was had to the emphasis
placed across our key stakeholders – our shareholders and investors,
our people, our consumers, our customers and suppliers, and
wider society – on the importance of responding to climate change
and maintaining high standards of environmental management,
as well as to our broader, long-term sustainable success and
corporate reputation.
Costs associated with progressing towards these targets were
taken into account, balanced against the clear imperative to continue
taking action to address worldwide implications of climate change,
demonstrating our commitment to act as a responsible organisation
and business partner.
Key stakeholder perspectives taken into account
Shareholders
and investors
Customers
Our people
Consumers
Suppliers
Governments and
wider society
We define principal decisions as those decisions and discussions by the
Board that are strategic or material to the Group and those of significance
toany of our key stakeholders.
Outlined below are some of the principal decisions made by the Board over the year,
highlighting how the Board considered relevant factors including key stakeholder
perspectives, the environment, corporate reputation, and the long-term impact of decisions.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
111
Governance Framework
Division of Responsibilities
An overview of our governance framework is set out below. There is a clear and effective division
ofresponsibility established between our Board, itsCommittees and operational management.
Our Board
Primary Board responsibilities include:
–
Group strategy and ensuring resources
are in place to meet objectives
–
Setting Group performance objectives
and monitoring performance
–
Group budget
–
Risk management and internal control
–
Periodic financial reporting
–
Annual Report & Accounts and Form
20-F approval
–
Dividend policy
–
Significant investments, disposals and
corporate activities
–
Board, Management Board and
Company Secretary appointments
and succession planning
–
Corporate governance
–
Group policies
–
Effective engagement with
shareholders, our workforce and
wider stakeholders
–
Assessing and monitoring culture and
its alignment with Group purpose,
values and strategy
–
Ensuring workplace policies and
practices align with values andsupport
sustainable success
–
Review of Speak Up channels and
reports arising
Audit Committee Remuneration CommitteeNominations Committee
See page 120 for
role
and activities
See page 116 for role
and activities
See page 128 for
role
and activities
Monitors the integrity of financial
reporting, independence and
effectiveness of the external auditors,
assurance of ESG metrics, internal
controlsand risk management
Recommends Board and Management
Board appointments; oversees
development of executive talent pipeline
Established the Directors’
Remuneration Policy; determines
remuneration for the Chairman
andexecutive management
Board Committees
The Board has three principal Board Committees to which it has delegated
certain responsibilities. The roles, memberships and activities of these
Committees are described in their individual reportsin this section.
Each Committee has its own terms of reference, available atbat.com/
governance. These are regularlyreviewed and updated where necessary,
most recently in 2021 in respect of the Audit Committee.
Following each Committee meeting, the Chair of each Committee
provides a full briefing to the Board, including on decisions made and key
matters discussed.
Copies of the minutes of all Committees arecirculated to all Board members
to theextent appropriate.
The statement of matters reserved for the Board
isavailable at bat.com/governance
Board oversight of M&A transactions
See page
[298]
Delegation of Authorities:
As part of our internal controls framework,
the Board delegates certain authoritiestoexecutive management
through theGroup Statement of DelegatedAuthorities to enable
effective delivery ofGroup strategy (see page 103).
Management Board
Management Board structure
The Management Board is chaired by the Chief Executive
and comprises the Executive Directors and 11 senior Group
executives whose names and roles are described on page 102.
Zafar Khan was appointed as Director, Operations with effect
from 1 February 2021. Alan Davy stepped down from the
Management Board with effect from 31 January 2021.
The Management Board is responsible for overseeing the
implementation of Group strategy and policies set by the
Board,and creating the framework for Group subsidiaries’
day-to-day operations.
Management Board responsibilities
Primary responsibilities of the Management Board include:
–
Developing Group strategy for the Group’s product
portfoliofor approval by the Board.
–
Monitoring Group operating performance.
–
Ensuring Group, regional and functional strategies and
resources areeffective and aligned.
–
Managing the central functions.
–
Overseeing the management and development of Group talent.
BAT Annual Report and Form 20-F 2021
112
Our Approach to Division
of Responsibilities
Division of Responsibilities
The Board comprises the Non-Executive Chairman, two Executive Directors
andsevenindependent Non-Executive Directors.
This section sets out the roles and division of responsibilities between
theChairman, Executive Directors and Non-Executive Directors.
Chairman
Chief Executive
Finance and
Transformation
Director
Senior Independent
Director
Non-Executive
Directors
–
Leadership of the Board and
its overall effectiveness
–
Promotes constructive debate
and effective decision-making
–
Sets the Board agenda
–
Facilitates Directors’
contributions
–
Interfaces with shareholders
–
Ensures effective
shareholder engagement
–
Representational duties on
behalf ofthe Company
–
Overall responsibility for
Group performance
–
Leadership of the Group
–
Enables planning and
execution of Group objectives
and strategies
–
Stewardship of Group assets
–
Drives the cultural tone of
theorganisation
–
Leadership of the Group in
respect offinancial matters
–
Enables planning and execution
of Group financial objectives
and strategies
–
Leadership of the design
anddelivery of the Group’s
QUEST transformation
programme to accelerate
delivery of Group strategy
–
Leads review of the
Chairman’s performance
–
Presides at Board meetings in
theChairman’s absence
–
Chairs the Nominations
Committee when Chairman
succession considered
–
Sounding board for
the Chairman
–
Intermediary for
other Directors
–
Available to meet
with shareholders
–
Oversee Group strategy and
resource allocation
–
Monitor Group performance
and delivery of Group strategy
–
Oversee systems of control
and risk management
–
Review management
proposals and provide
strategic guidance
–
Scrutinise and hold to
account performance
against objectives
–
Bring external judgement,
perspective and effective
challengeto management
Board Efficacy
Board meetings during the year continued to be convened virtually
due to continuing COVID-19 travel restrictions, with in-person
meetings resuming in December 2021. Feedback from the annual
Board evaluation confirmed that Board meetings continued to
operate well and are considered to be chaired effectively.
The Chairman facilitates constructive Board relations, supporting
effective contribution from Non-Executive Directors and promoting
a culture of openness and debate. The Chairman seeks a consensus
at Board meetings but, if necessary, decisions are taken by majority
decision. If any Director has concerns on any issues that cannot be
resolved, such concerns are noted in the Board minutes. No such
concerns arose in 2021.
Non-Executive Director meetings
–
The Non-Executive Directors, led by the Chairman, meet
following Board meetings on a regular basis. Additional meetings
led by the Chairman, and without the Executive Directors
present, are scheduled in theBoard calendar.
–
The Executive and the Non-Executive Directors also meet
annually, led by the Senior Independent Director and without
theChairman present, to discuss the Chairman’s performance.
Role
Responsibilities
The responsibilities of the Chairman,
Executive Directors and Senior
Independent Director are available
at bat.com
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
113
Independence
The Board considers all Non-Executive Directors to be independent,
as they are free from any business or other relationships that
couldinterfere materially with, or appear to affect, their judgement.
Luc Jobin was determined by the Board to be independent on his
appointment as Chairman, as reported in the Company’s Annual
Report and Form 20-F for 2020.
The Board has determined Holly Keller Koeppel to be independent,
having taken into account her service on the board ofReynolds
American as an independent, non-executive director.
Luc and Holly were originally appointed to the Board in 2017
following the acquisition of Reynolds American Inc. (Reynolds
American) and pursuant to the Agreement and Plan of Merger with
Reynolds American.
The Board has also considered the independence requirements
outlined in the NYSE’s listing standards and has determined
thatthesearemet by the Chairman and all the Non-Executive
Directors. The Board considers that it includes an appropriate
combination ofExecutive and Non-Executive Directors.
Commitment
Before appointing prospective Directors, the Board takes
into account their other commitments and significant time
commitments are disclosed prior to appointment. The letters of
appointment for the Chairman and Non-Executive Directors set out
their expected time commitment to the Company (see page 116).
Any additional external appointments following appointment
to the Board require prior approval by the Board in accordance
with the UK Corporate Governance Code. The Board assesses
the significance of any additional external appointment notified
byaDirector, supported by the Company Secretary.
During 2021, the Board gave approval to Holly Keller Koeppel’s
appointment as a non-executive director of Flutter Entertainment
plc from 13 May 2021. This additional appointment was considered by
the Board to be significant, but not to impair her ability to serve as a
Director of the Company in view of the anticipated time commitment
and given that she had stepped down as non-executive director of
Vesuvius plc on 12 May 2021. Including the Company, Holly is currently
a non-executive director of three listed companies.
In 2021, the Board considered and gave approval to Darrell Thomas’
appointment as an independent director of Dorman Products
Inc. from 30 October 2021. The Board considered this additional
appointment to be significant, but did not consider it to impair
Darrell’s ability to serve as a Director of the Company as he would
hold a total of two listed company mandates (within the voting
guidelines of leading corporate governance advisory bodies).
Following this appointment, Darrell is currently a non-executive
director of twolisted companies, including the Company.
Conflicts of Interests
The Board has formal procedures for managing conflicts of
interest. Directors are required to give advance notice of any
conflict issues to the Company Secretary. These are considered
either at the next Board meeting or, if the timing requires it, at a
meeting of the Board’s Conflicts Committee.
Each year, the Board also considers afresh all previously authorised
situational conflicts. Directors are excluded from the quorum and
votein respect of any matters in which they have an interest.
In relation to Darrell’s appointment as a non-executive director
of Scotia Holdings (US) Inc. from 4 February 2022, a potential
situational conflict was reviewed and authorised by the Board as
another company in the Bank of Nova Scotia group is a supplier to
the Group in Colombia (although those supply arrangements are
not material and Darrell has no involvement in the operations of
that supplier or BAT subsidiary operations in Colombia). The Board
determined that these arrangements did not impact Mr Thomas’
independence as a Non-Executive Director of the Company.
Directors Information and Advice
Directors receive effective support to assist them in meeting their
responsibilities under the UK Corporate Governance Code and
discharging their directors’ duties, both individually and collectively.
–
Directors receive papers for review in good time ahead of each
Board and Committee meeting.
–
Papers and presentations to the Board and its Committees
include discussion of specific stakeholder considerations
as applicable.
–
The Company Secretary ensures effective information flow
within and between the Board and its Committees, and between
the Non-Executive Directors and senior management.
–
The Company Secretary, in conjunction with external advisers
where appropriate, advises the Board on all governance matters.
–
All Directors have access to the advice and services of the
Company Secretary. The appointment and replacement of the
Company Secretary is a matter for the Board.
–
A procedure is in place for all Directors to take independent
professional advice at the Company’s expense if required.
–
Each Board Committee may obtain independent legal or other
professional advice, at the Company’s expense, and secure
attendance at meetings of external participants if needed.
Chairman induction
Luc completed his Chairman induction programme in
Q12021 following his appointment as Chairman Designate.
Luc’s induction was conducted primarily through virtual
meetings due to COVID-19 restrictions then in place.
The programme included meetings with outgoing
Chairman Richard Burrows and each of the Directors.
Luc participated in a comprehensive series of briefings
with senior management, enabling in-depth discussion of
strategic planning, business regions, product portfolios,
digital transformation, our ethos, culture and sustainability
agenda, shareholder and wider stakeholder engagement
programmes, evolving regulation, corporate governance, and
treasury, risk, and legal matters.
Luc met with representatives of key shareholders prior to
the AGM in April 2021, and also attended sessions with the
external audit partner and the Remuneration Committee’s
UK and US consultants and introductory meetings with
representatives of key external business partners.
SPOTLIGHT
BAT Annual Report and Form 20-F 2021
114
Board Effectiveness
Composition, succession, evaluation
Board Induction
All Directors receive a thorough and personalised induction on
joining the Board, taking into account their skills, experience and
scope of appointment.
Luc Jobin completed his induction as Chairman in 2021, discussed
below. Darrell Thomas completed his Non-Executive Director’s
induction in early 2021, as set out in the Annual Report and Form
20-F for 2020.
Professional Development
Non-Executive Directors receive a full programme of briefings
during the year across all areas of the Group’s activities from the
Executive Directors, members of the Management Board, the
Company Secretary, other senior executives and outside advisors.
During 2021, key briefings for the Board included cyber security,
patent portfolios, evolving product regulation, and other regulations
impacting the Group’s business and governance arrangements, for
example, the UK Financial Conduct Authority’s consultation on the
proposed introduction of new regulations to enhance disclosure of
the diversity of boards and executive management.
In the context of reviewing the Group’s climate strategy and
enhanced sustainability targets, the Board was briefed on
the objectives and requirements of the TCFD framework and
stakeholder expectations on progress towards net zero carbon
emissions across operational supply chains. The Board also
recapped on directors’ duties under Section 172 of the UK
Companies Act 2006 as part of its annual review of Group
stakeholder engagement.
Committees of the Board are kept updated on developments
within their respective remits. In 2021, the Audit Committee was
updated on regulator and stakeholder expectations in respect
of addressing climate risks in annual reporting, UK Government
proposals to reform audit and corporate governance regulation,
and in relation to revisions to applicable UK auditing standards and
their impact. The Remuneration Committee was regularly updated
by its external consultants on UK and US corporate governance
developments impacting executive remuneration.
Non-Executive Directors regularly attend meetings of the
Group’s Regional Audit and Corporate and Social Responsibility
Committees and Corporate Audit Committee to gain a better
understanding of the Group’s regions and central functions and the
risks faced by the business at market, regional and functional levels.
The Chairman meets with each Non-Executive Director individually
towards the end of each year, to discuss their individual training
and development plans.
Board Review Process
The performance and effectiveness of the Board, its Committees,
the Executive and Non-Executive Directors and the Chairman were
evaluated internally in 2021, facilitated by the Company Secretary.
An external evaluation of the Board, its Committees andthe Directors
was conducted in 2019, facilitated by Independent Audit Limited.
The Chairman is responsible for the overall evaluation process
and each Committee Chair is responsible for the evaluation
of the performance and effectiveness of their Committee.
The evaluations were conducted through a series of detailed
questionnaires and all participants were requested to provide
commentary to support their assessments.
All Directors participated in the evaluation process, assessing the
Board, the Committees of which they were a member or regularly
attended in2021, and each of the Directors individually. In addition,
several members of the Management Board and other senior
management participated in elements of the evaluation.
Anonymised reports specifying the findings of the evaluations
were prepared by the Company Secretary for the Board and
each Committee. The Board and Committees then reviewed and
discussed their respective reports and identified action areas for
2022 taking into account the evaluation findings.
The Chairman received reports from the Company Secretary
on the performance and effectiveness of all Executive and Non-
Executive Directors (other than himself) in 2021 and he provided
individual feedback to each Director.
The Senior Independent Director received a report from the Company
Secretary on the Chairman’s performance and effectiveness, and led
a discussion reviewing the Chairman’s effectiveness with the other
Directors (without the Chairman present). The Senior Independent
Director then provided feedbackto the Chairman.
1. Evaluate
–
Directors evaluate performance and
effectiveness of the Board, its
Committees (as applicable) and each of
the other Directors.
2. Report
–
The Company Secretary
collatesanonymised feedback and
prepares reports for the Board, its
Committees and each of the Directors.
3. Review and Action
–
Board Committees review evaluation
outcomes, identify any actions and
provide feedback to the Board.
–
The Board reviews the evaluation
outcomes and identifies action areas.
–
The Chairman provides feedback
to the other Directors. The Senior
Independent Director provides feedback
to the Chairman.
2021: Internal Board Review Process
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
115
2021 Evaluation: Outcomes and Actions
The Board considers that it, its Committees and its Directors continue to
function effectively and that the working relationships between the Board
anditsCommittees continue to be sound.
Leadership and culture
The Board put their collective skillsets to good use in providing
support to the Executive Directors’ drive to simplify the
organisation and embed the BAT ethos. The Board continued to
be adaptable in the face of COVID-19, and praised management’s
consistent approach to prioritising staff welfare in 2021.
The Chairman and two new Non-Executive Directors were
welcomed to the Board, refreshing the skillsets and perspectives
of an already diverse and experienced team.
Non-Executive Directors were seen to be supportive in the
development of strategy and offering appropriate challenge.
The candid nature of their discussions with the executive team
was highlighted as a good example of the open culture at Board
and senior management level.
The organisation’s resilience was clear to the Board in 2021,
notwithstanding constraints on spending time in the wider
business. The Non-Executive Directors look forward to resuming
their usual programme of market and site visits in 2022.
Key Action for 2022
–
Plan for Non-Executive Director market and site visits.
Strategy
The Board considered its strategy discussions to be effective,
leading to strong strategic objective setting, and notably
in driving the ESG and people agendas forward in the
year. The Remuneration Committee has been focused on
ensuring that strategic objectives are reflected in the Group’s
remuneration strategy.
Following up on actions arising from the 2020 Board evaluation to
allow additional time for deep dives on strategic objectives and
review of major initiatives, during the year the Board’s agenda
included a series of in-depth reviews: for example on talent
strategy, ESG agenda and the New Categories supply chain.
The Board is keen to build on this into 2022 with further emphasis
on the competitor landscape, scenario planning, and emerging
issues and trends.
Key Action for 2022
–
More detail for the Board on the competitive landscape and
consumer trends, with more time in the Board agenda for
in-depth scenario analysis and planning.
Composition and succession
The Board regards its composition to be well balanced in
terms of skills, experience, geography and gender, with recent
appointments demonstrating its effectiveness at bringing the
right people around the table.
Following up on actions arising from the 2020 Board evaluation,
the Nominations Committee completed its skills profile for
future non-executive directors to support succession planning.
The Nominations Committee is keen to see more of the executive
management pipeline in 2022.
Key Action for 2022
–
Additional time to be allowed on the Board agenda for executive
management succession planning.
Risk management
The continued focus on business controls and compliance is
highly regarded by the Board, and the Board’s monitoring of key
risks and oversight of compliance is considered to be effective.
The Audit Committee’s oversight of the fundamental reporting
environment was considered to be sound, with the Committee
staying on top of key projects and activities.
In the context of the Group’s transformational agenda, Directors
noted the benefit of understanding the risks and stresses of
extensive business change and the pressure points from a
people perspective.
Actions arising from the 2020 Board evaluation, to further
enhance the Board’s understanding of strategic opportunities
and risks presented by evolving technologies, were followed up
during the year. For example, the Board reviewed developments
in cyber security and the Audit Committee assessed
digital transformation risks and the approach to managing
risks identified.
Key Action for 2022
–
Further emphasis in the Board agenda on change management
in the context of the Group’s transformational agenda, including
from a people perspective.
Dynamics and information
Board and Committee meetings are considered to be chaired
effectively, and well-supported by the Company Secretariat.
The Chairman was recognised for his inclusive style and fostering
open discussion. Agendas are seen as well-balanced between
business critical items and governance matters.
During the year the Board conducted several in-depth reviews of
market analysis and the competitor environment in response to
actions identified from the 2020 Board evaluation to emphasise
time for these areas in the Board agenda.
Key Action for 2022
–
Additional pre-read material to be provided for key
presentations to enable greater time for discussion in
Board meetings.
BAT Annual Report and Form 20-F 2021
116
Nominations Committee
Role
As set out in the Terms of Reference, the Nominations
Committee is responsible for:
–
reviewing the structure, size and composition of the Board and
Management Board on a regular basis to ensure both have an
appropriate balance ofskills, expertise, knowledge and, in relation
to the Board, independence;
–
reviewing the succession plans for appointments to the
Board, the Management Board and Company Secretary to
maintain an appropriate balance of skills and experience and
to ensure progressive refreshing of both the Board and the
Management Board;
–
making recommendations to the Board on suitable candidates
forappointments to the Board, the Management Board and
Company Secretary, ensuring that the procedure for those
appointments is rigorous, transparent, objective and merit-based
and has regard for diversity;
–
assessing the time needed to fulfil the roles of Chairman, Senior
Independent Director and Non-Executive Director, and ensuring
Non-Executive Directors have sufficient time to fulfil their duties;
–
overseeing the development of a pipeline of diverse, high-
performing potential Executive Directors, Management Board
members and other senior managers; and
–
implementing the Board Diversity Policy and monitoring
progress towards the achievement of its objectives, summarised
on page 119.
Key Activities in 2021
–
Making recommendations to the Board in respect of Board
Committee appointments, including appointment of Karen
Guerra to the Audit Committee from 1 April 2021, as set out on
page 120.
–
Making recommendations to the Board to appoint a new
Director, Operations with effect from 1 February 2021, as set out
at page 111.
–
Analysis of the profile, skills and experience required of future
Non-Executive Directors in the context of the Group’s purpose
and strategy, to support Board succession planning activities.
–
Making recommendations to the Board in relation to Directors’
annual appointment and re-election at the AGM, discussed
further on page 117.
–
Reviewing the Executive Directors’ and Management Board
members’ annual performance assessments and assessing the
development of candidates for Management Board roles.
–
Overseeing the Group’s diversity and inclusion agenda, its role in
promoting an inclusive and high performing culture as part of the
Group’s talent strategy, and progress in building diverse talent
pipelines and creating enablers across the organisation.
–
Reviewing the Committee’s effectiveness in 2021, following the
Committee evaluation process, discussed on pages 114 to 115.
Terms of Appointment to the Board
Details of the Directors’ terms of appointment to the Board and the
Company’s policy on payments for loss of office are contained in the
current Directors’ Remuneration Policy, which is set out in full in the
Remuneration Report 2018, in the Company’s Annual Report and Form
20-F for 2018 available on bat.com.
The Executive Directors have rolling one-year contracts. Non-Executive
Directors do not have service contracts with the Company but instead
have letters of appointment for one year, with an expected time
commitment of 25 to 30 days per year.
Nominations Committee current members
Luc Jobin (Chair)
Holly Keller Koeppel
Sue Farr
Savio Kwan
Karen Guerra
Dimitri Panayotopoulos
Dr Marion Helmes
Darrell Thomas
Attendance at meetings in 2021
1(a), 2(a)
Attended/Eligible to attend
Name
Member since
Scheduled
Ad hoc
Luc Jobin
2017
2/2
4/4
Sue Farr
2015
2/2
4/4
Karen Guerra
2020
2/2
4/4
Dr Marion Helmes
2016
2/2
4/4
Holly Keller Koeppel
2017
2/2
4/4
Savio Kwan
2014
2/2
4/4
Dimitri Panayotopoulos
1(b)
2015
2/2
3/4
Darrell Thomas
2020
2/2
4/4
Richard Burrows
2(b)
2009 – 2021
1/1
2/2
Jerry Fowden
2(c)
2019 – 2021
1/1
2/2
Notes:
1. Number of meetings in 2021: (a) the Committee held six meetings, four of which were ad
hoc; and (b) Dimitri Panayotopoulos did not attend the ad hoc meeting in March, which was
convened at short notice, due to prior commitments.
2. Membership: (a) all members of the Committee are independent Non-Executive Directors
in accordance with UK Corporate Governance Code 2018 Provisions 10 and 17, applicable
US federal securities laws and NYSE listing standards;
(b) Richard Burrows ceased to
be a member of the Committee on stepping down from the Board at the conclusion of
the Company’s AGM on 28 April 2021; and (c) Jerry Fowden ceased to be member of the
Committee on stepping down from the Board with effect from 1 April 2021.
3. Other attendees: the Chief Executive, the Director, Talent, Culture & Inclusion, and Group
Head of Talent & Organisation Effectiveness regularly attend meetings by invitation but are
not members.
Luc Jobin
Chair of
theNominations
Committee
Nominations Committee terms of reference
The Committee’s terms of reference align with the requirements
of the Code. No changes were made to the Committee’s terms
of reference in 2021.
For the Committee’s terms of reference
seebat.com/governance
Composition, Succession, Evaluation
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
117
Balance and Diversity
The Board appreciates the benefits of diversity in all of its
forms, withinits own membership and at all levels across our
organisation. Our Non-Executive Directors come from a broad
range of industry and professional backgrounds, with varied
experience and expertise alignedto the Group’s strategy.
Biographies of the Directors, including a summary of their skills,
experience and contribution brought to the Board,are set out on
pages 100 to 101. The diversity of our Board is set out on this page
and our Board Diversity Policy is discussed on page 119.
Board Succession Planning
The Board considers the length of service of the Board members as
a whole and the need for it to refresh its membership progressively
over time. The Nominations Committee is responsible for regularly
reviewing the composition of the Board and Management Board
to ensure both have an appropriate balance of skills, expertise
and knowledge. The Committee is also responsible for identifying
candidates for Board positions and ensuring that all appointments
are made on merit, against objective criteria, and with due regard for
our Board Diversity Policy (see page 119). This process includes a full
evaluation of candidates’ attributes and how these would augment
the Board’s mix of skills, expertise and knowledge and involves
interviews with a range of candidates.
In 2021, the Committee assessed the profiles, skills and experience
required of future Non-Executive Directors, taking into account
the Group’s purpose and strategy. Following this assessment, the
Committee developed candidate profile requirements to support
Non-Executive Director succession planning. Heidrick & Struggles
1
was appointed to support the Committee with future Non-Executive
Director search activities in 2021. The Committee will report on the
process leading to the appointment of
Krishnan ‘Kandy’ Anand
as a Non-Executive Director from 14 February 2022 in the Annual
Report and Form 20-F for 2022.
Annual General Meeting 2022
With the exception of Marion Helmes
,
the Company will submit all
eligible Directors for re-election and, in the case of Kandy Anand,
election for the first time. Prior to making recommendations
to the Board in respect of Directors’ submissions for re-election,
theCommittee carried out an assessment of each Director, including
their performance, contribution to the long-term sustainable success
of the Company and, in respect of each oftheNon-Executive Directors,
theircontinued independence.
In relation to the proposed reappointment of Savio Kwan, who
will have served as a Non-Executive Director for just over eight
years at the time of the 2022 AGM, the Committee conducted
a particularly rigorous review, taking into account relevant
considerations including his performance and his attendance record.
The Committee concluded that Savio continues to make effective
use of his experience, challenges management constructively and
maintains independence of thought and approach, and considered it
appropriate to recommend to the Board that Savio be submitted for
re-election at the 2022 AGM.
The Chairman’s letter accompanying the 2022 AGM Notice confirms
that all Non-Executive Directors being proposed for re-election are
effective and that they continue to demonstrate commitment to
their roles.
Board Retirements
Richard Burrows stepped down as Chairman and from the Board with
effect from the conclusion of the Company’s AGM on 28 April 2021.
Jerry Fowden stepped down from the Board with effect from 1 April
2021. Marion Helmes will step down from the Board with effect from
the conclusion of the Company’s AGM on 28 April 2022.
Board Balance at 31 December 2021
Nationality of Directors
American 2
Brazilian 1
French 1
British 3
Canadian 1
German 1
Greek/British 1
Length of tenure of Non-ExecutiveDirectors
0–3 years 2
4–6 years 3
7+ years 3
Directors: Gender balance
Male 6
Female 4
Directors: Ethnicity balance
White 8
Ethnic minorities
2
2
Notes:
1. Heidrick & Struggles International, Inc. is an independent executive search firm, compliant
with the Standard and Enhanced Code of Conduct for Executive Search Firms. Heidrick &
Struggles has no connections with the Company or its Directors other than in respect of
provision of executive search services.
2. Applying UK Office for National Statistics ethnicity categories of: Asian; Black; Mixed/
multiple ethnic groups; Other non-white ethnic group, inalignment with the Parker Review.
Balance of Non-Executive Directors
and Executive Directors
Chairman 1
Executive Directors 2
Independent Non-
Executive Directors 7
BAT Annual Report and Form 20-F 2021
118
Nominations Committee
Continued
Composition, Succession, Evaluation
Notes:
1. Applying UK Office for National Statistics ethnicity categories of: Asian; Black;
Mixed/multiple ethnic groups; Other non-white ethnic group, inalignment with the
Parker Review.
2. Senior Management comprises the Management Board and Company Secretary in
accordance with the UK Corporate Governance Code.
Executive Succession planning
As part of the Committee’s responsibility to oversee the development
of a pipeline of diverse, high-performing senior management, it
reviews succession plans and talent pools at short, mid and long-term
time horizons for the Executive Directors, other Management Board
members, and certain other members of senior management.
Talent Pipeline Development
The Board regularly reviews Group talent development more broadly,
including progress on our talent and culture strategic priorities to:
–
attract the best talent
, including development of a strong
employer brand and engagement with strategic talent pools;
–
develop future winning capabilities
through accelerating
leadership and functional capability development and
digital transformation;
–
enable an agile and empowered organisation
through
proactive organisational design effectiveness, leaders who are
accountable and empowered, and a strong learning culture; and
–
promote an inclusive and high-performing culture
through a bold diversity and inclusion agenda, and strong
leadership teams.
Our talent and culture strategic priorities are underpinned by our
Group diversity and inclusion agenda, discussed on pages 69 to 73.
Progress in 2021 against our objective to develop a pipeline of diverse,
high-performing senior managers is set out on page 119.
Diversity and Inclusion Agenda
Our diversity and inclusion agenda focuses on the core areas
of driving ownership and accountability, building diverse talent
pipelines and creating enablers.
In the context of our talent and culture strategic priorities, the
Board oversees and monitors progress of our Group diversity and
inclusion agenda. In 2021, this included:
–
reviewing progress against the Group’s diversity and inclusion
ambitions through to 2025, including to have women in 40% of
senior leadership team roles and 45% of management roles,
and a 50% spread of distinct nationalities in key leadership
team roles;
–
the Group’s progress in gaining industry-leading employer
certifications in diversity and inclusion and the Group’s ambitions to
gain further recognition;
–
the roll-out of diversity and inclusion, LGBT+, and race and
ethnicity allyship guides, including as part of leadership
programmes; and
–
implementation of our IGNITE returners programme in
multiple markets, which focuses on supporting experienced
professionals return to the workplace after a career break.
Our Strategic Report discusses our diversity and inclusion agenda
and initiatives further, and provides details on the representation
of women and distinct nationalities in our workforce, and in our
senior management population, on pages 69 to 73.
Executive Management balance at 31 December 2021
Senior Management
2
and their
directreports: gender balance
Male 80
Female 28
Management Board: Gender balance
Male 11
Female 2
Management Board: Ethnicity balance
White 11
Ethnic minorities
2
Management Board: Nationality
French 1
Pakistani 1
Brazilian 1
Korean 1
American 1
Dutch 1
Italian/Argentinian 1
New Zealand 1
Italian/Brazilian 1
British 2
Australian 1
Belgian 1
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
119
Board Diversity Policy
We believe that talent is our competitive advantage and
diversity is a critical component of our success, providing better
understanding, connectivity and insight to our consumers and our
employees. ‘We are diverse‘ is one of the five key principles of our
ethos, set out on page 69.
Our commitment to promoting diversity across our organisation is
reflected in our Group Standards of Business Conduct, discussed
further on pages 56 to 57. We respect and celebrate each other’s
differences and value what makes each of us unique.
Diversity is taken into consideration in determining the composition
of our Board and Management Board, through the application of
our Board Diversity Policy.
Our Board Diversity Policy is aligned with our ethos. Our policy
expresses how we think of diversity in its widest sense, as those
attributes that make each of us unique. These include our race,
ethnicity, cultural and social background, geographical origin,
gender, age, any disability, sexual orientation, religion, skills,
experience, education and professional background, perspectives
and thinking styles.
Objectives and Progress Update
The objectives of our Board Diversity Policy (as applied in 2021) and
progress against these objectives in the year are set out below.
The Board complies with the recommendations on ethnic diversity
made by the Parker Review.
As at 31 December 2021, the representation of women on the
Board was 40%, compliant with the recommendations on gender
diversity made by the Hampton-Alexander Review.
Our Commitment to Furthering Diversity
When Marion Helmes steps down from the Board at conclusion
of the 2022 AGM, and following Kandy Anand’s appointment as a
Non-Executive Director, the representation of women on the Board
will be 30% at conclusion of the 2022 AGM (40% at conclusion of
the 2021 AGM).
The Board is fully committed to enhancing its gender balance
so that women represent at least 33% of the Board prior to the
Company’s following AGM in 2023. The Nominations Committee
will be actively progressing its Non-Executive Director succession
planning to meet this objective, supported by the Board
Diversity Policy.
In view of the UK Financial Conduct Authority (FCA) consultation
on enhanced disclosure of the diversity of boards and executive
management, the Board also anticipates that a revised Board
Diversity Policy will be introduced during 2022, aligned to any new
UK Listing Rules requirements implemented by the FCA.
Objective in 2021 Progress in 2021
Considering all aspects of diversity when reviewing
the composition of, and succession planning for, the
Board and Management Board.
–
The Nominations Committee has regard to diversity in its widest
sense, including attributes such as gender, race, ethnicity, cultural and
social backgrounds, and other personal attributes, when undertaking
these activities.
Considering a wide pool of candidates
acrossgenders for appointment to the Board.
–
Executive search firms are engaged to support Board and Management
Board succession planning where applicable and are required to provide
gender-balanced shortlists of candidates. Succession planning for Executive
Directors and Management Board members takes into account potential
internal candidates from across the Group and potential external candidates.
Maintaining at least 30% female Board
representation, with the ambition of progressing
towards further gender balance.
–
The representation of women on the Board was 40% as at 31 December 2021
(2020: 33.3%). Please refer to the note above in relation to representation of
women on the Board in 2022.
–
Non-Executive Director succession planning takes into account the Board’s
ambition to further improve gender diversity.
Giving preference, where appropriate, to
engagement of executive search firms accredited
under the Standard and Enhanced Codes of Conduct
for Executive Search Firms.
–
Where executive search firms are engaged to provide executive search
services to support Board succession planning, preference is given to those
that are accredited under the Standard and Enhanced Codes ofConduct for
Executive Search Firms.
Oversight of the development of a pipeline
ofdiverse, high-performing potential
ExecutiveDirectors, Management Board
membersand other senior managers.
–
The representation of women on the Management Board was 15.4%
as at 31December 2021 (2020: 15.4%) and remains so currently.
Management Board succession planning takes into account the ambition to
progress towards improved gender diversity.
–
Emphasis is placed on building diverse talent pools at all levels of the
organisation through recruiting, developing and retaining diverse and high-
performing talent.
–
In 2021, 47% of the Group’s external management recruits were women
(2020: 43%) and women comprised 51% of our new graduate intake in 2021.
–
Please refer to pages 69 to 73 for further information about the Group’s
diversity and inclusion agenda.
BAT Annual Report and Form 20-F 2021
120
Audit Committee
Introduction
On behalf of the Audit Committee, I am pleased to introduce our
report for 2021. The report sets out the Committee’s role and
responsibilities, and discusses our activities during the year.
Karen Guerra joined the Committee on 1 April 2021 and, later
that month, Luc Jobin stepped down from the Committee on his
appointment as Chairman. We welcome Karen and extend our
thanks to Luc for his service to the Committee since 2019.
We have addressed a series of important topics this year.
We assessed climate-related risks and their impact on the Group
to ensure robust processes are in place to identify, assess and
manage climate risks in alignment with the TCFD framework.
We also reviewed the approach to managing cyber security
and digital transformation risks across the Group and our role in
monitoring cyber security controls is now expressly recognised in
the Committee’s revised terms of reference.
We have given detailed consideration to a range of accounting
matters during the year, including rigorous assessment of
adjusting items. We also introduced a new Group accounting policy
on biological assets in view of the Group’s acquisition of a non-
controlling interest in Organigram Holdings Inc.
Alongside these activities, we maintained our focus on
safeguarding a sound control environment, taking account of the
continued impact of COVID-19 on ways of working. We monitored
progress on the internal audit plan during the year and are satisfied
the blended approach to remote and onsite audits continues to be
effective. The internal audit plan approved for 2022 builds on these
principles and is designed to be responsive to the evolving nature of
Group risks.
We appreciate the expectations of our shareholders and wider
stakeholders for transparent, high quality reporting on our ESG
metrics and progress on our sustainability agenda. Our Group
sustainability reporting is well established, including procedures
for reporting ESG metrics and related information. To enhance this,
we have extended the scope of external assurance of reported
ESG metrics, overseen by the Committee under our revised terms
of reference.
Holly Keller Koeppel
Audit Committee Chair
Audit Committee current members
Holly Keller Koeppel (Chair)
Karen Guerra
Darrell Thomas
Attendance at meetings in 2021
Attended/Eligible to attend
Name
Member since
Scheduled
1(a)
Ad hoc
Holly Keller Koeppel
2(a),(b)
2017
5/5
0/0
Karen Guerra
2(a),(c)
2021
4/4
0/0
Darrell Thomas
2(a),(b)
2020 5/5
0/0
Luc Jobin
2(d)
2019 – 2021
2/2
0/0
Jerry Fowden
2(e)
2019 – 2021
1/1
0/0
Notes:
1. Meetings: (a) the Committee held five meetings in 2021; (b) five meetings of the Committee
are scheduled for 2022.
2. Membership: (a) all members of the Committee are independent Non-Executive Directors
in accordance with the UK Corporate Governance Code 2018 Provisions 10 and 24 and
applicable US federal securities laws and NYSE listing standards. The Board has determined
each Committee member to meet the financial literacy requirements applicable under
NYSE listing standards. Each member of the Committee has recent and relevant financial
experience in accordance with the UK Corporate Governance Code 2018. The Committee
members as a whole have competence relevant to the sectors the Group operates in;
(b) Holly Keller Koeppel and Darrell Thomas are each designated as an audit committee
financial expert in accordance with applicable US federal securities laws and NYSE listing
standards; (c) Karen Guerra became a Committee member on 1 April 2021; (d) Luc Jobin
ceased to be a Committee member on his appointment as Chairman from conclusion of the
Company’s AGM on 28 April 2021; and (e) Jerry Fowden ceased to be a Committee member
on stepping down from the Board with effect from 1 April 2021.
3. The Finance and Transformation Director attends all Committee meetings but is not a
member. Other Directors may attend by invitation. The Director, Legal & External Affairs
and General Counsel, the Group Head of Internal Audit and the external auditors attend
all meetings.
4. The Committee meets alone with the external auditors, and, separately with the Group
Head ofInternal Audit, at the end of every Committee meeting. The Committee also meets
periodically with management.
Holly Keller Koeppel
Chair of the
AuditCommittee
Audit, Risk, Internal Control
Audit Committee terms of reference
Revised terms of reference for the Committee were approved
by the Board in September 2021.
For the Committee’s terms of reference
seewww.bat.com/governance
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
121
Role
As set out in its terms of reference, the Audit Committee
monitors and reviews the:
–
integrity of the Group’s financial statements and any formal
announcements relating to the Company’s performance,
considering any significant financial reporting issues, significant
judgements and estimates reflected in them, before their
submission to the Board;
–
consistency of the Group’s accounting policies;
–
effectiveness of, and makes recommendations to the
Board on, the Group’s accounting, internal accounting and
other financial controls, auditing matters and business risk
management systems;
–
effectiveness of the Group’s internal audit function; and
–
independence, performance, effectiveness and objectivity of the
Company’s external auditors, making recommendations to the
Board as to their re-appointment (or for a tender of audit services
where appropriate), and approving their terms of engagement
and the level of audit, audit-related and non-audit fees.
Revisions to the Audit Committee terms of reference in 2021
Revised Audit Committee terms of reference were adopted by the
Board in September 2021 to:
–
extend the remit of the Committee to include responsibilities for
the engagement of external providers to conduct assurance over
defined ESG metrics and related information in annual reporting,
monitoring that assurance work, and reviewing its effectiveness,
taking into account applicable regulatory and professional
requirements; and
–
make express reference to the Committee’s role in monitoring
cyber security controls as part of the Committee’s oversight of
the Group’s internal controls and business risk systems.
Key Activities in 2021
Regular work programme – reviewing:
–
the Group’s annual results, half-year results, the application of
accounting standards, and the external auditors’ reports where
results are audited;
–
the Group’s external auditors’ year-end audit, including the key
audit matters, critical audit matters, materiality assessments
and the Group’s control environment, and confirming the
independence of the Group’s external auditors;
–
the basis of preparation and accounting judgements;
–
the steps taken to validate the Group’s ‘going concern’
assessment at half-year and year-end and agreeing the process
and steps taken to determine the Group’s viability statement at
year-end;
–
adjusting items, applicable accounting treatments and the use
of alternative performance measures;
–
the annual assessment of goodwill and intangibles impairment;
–
the accounting applicable to retirement benefits liabilities
and assets;
–
the Group’s liquidity position, including current facilities and
financing needs;
–
the internal processes followed for the preparation of the Annual
Report and Form 20-F and confirming that the processes
appropriately facilitated the preparation of an Annual Report and
Form 20-F that is ‘fair, balanced and understandable’;
–
the Group’s risk register, including prioritisation and
categorisation of Group risks, and relevant mitigating factors;
–
oversight of management’s activities to ensure ongoing
compliance with the US Sarbanes-Oxley Act of 2002 (SOx)
(discussed on page 127);
–
the Company’s status as a Foreign Private Issuer for the
purposes of US securities laws;
–
regular reports from the Group Head of Internal Audit on the
internal audits of markets, business units, processes and
operations, management responses to internal audit findings
and action plans put in place to address any issues raised;
–
the 2022 internal audit plan and progress against the 2021 plan;
–
annual and interim reports on the Group’s ‘Delivery with
Integrity’ compliance programme (discussed on pages 56 to
57), and monitoring compliance with the Standards of Business
Conduct (SoBC), and monitoring SoBC incident reporting and the
effectiveness of ‘SpeakUp’ channels prior to review by the Board;
–
the Group’s sustainability performance on an annual basis,
including performance against the Group’s ESG targets, the
Group’s responsible marketing and youth access prevention
activities, and the Group’s community investment activities in
countries and communities in which the Group operates under
the Group Strategic Framework for Community Investment,
(discussed on page 54);
–
the outcomes of assessments of countries in which Group
companies operate identified to have a higher degree of
exposure to human rights risks in 2021, including local
compliance with Group policies, standards and controls and local
measures in place to enhance human rights risk management;
–
periodic reports from the Group’s Corporate Audit
Committee and Regional Audit and Corporate Social
Responsibility Committees;
–
the annual report from the Group Head of Security on security
risks, losses and fraud arising during the preceding year;
–
half-year and year-end reports on political contributions,
(discussed on page 127); and
–
the Committee’s effectiveness, following the annual evaluation
oftheCommittee (discussed on pages 114 to 115).
Further specific matters considered by the Committee
inrelation to the financial statements:
–
segmental reporting:
the Committee reviewed the application
of segmental reporting in accordance with IFRS 8 (
Operating
Segments
) and assessed that the Group’s financial reporting
segmentation would remain by geography for the 2021 financial
statements, with revenue disclosures also provided by product
category (see note 2 in the Notes on the Accounts).
–
revisions to Group accounting policies:
the Committee
endorsed the introduction of a new Group accounting policy
on biological assets in accordance with IAS 41 (
Agriculture
) to
take effect from the acquisition by the Group of a 19.9% equity
investment in Organigram Holdings Inc.
–
UK-adopted IFRS:
following the incorporation of IFRS standards
into UK regulations at the end of the transition of the UK’s exit
from the EU, the Group’s financial reporting is prepared under
UK-adopted international accounting standards from 1 January
2021 onwards.
–
Euro Hybrid Bond issuance:
the Committee reviewed the
accounting treatment applicable to the €2 billion hybrid bond
issuance and assessed its classification as equity in accordance
with IAS 32 (
Financial Instruments
) and its impact on the
earnings per share calculation (see note 11 in the Notes on
the Accounts).
BAT Annual Report and Form 20-F 2021
122
–
goodwill and intangibles impairment review:
the Committee
reviewed management’s assessments of the carrying value of
intangibles including goodwill (see note 12 in the Notes on the
Accounts), with particular focus on:
US Business:
the Committee considered potential regulatory
changes in the US in relation to menthol in cigarettes and
assessed that no impairment was required for US business
goodwill or intangible assets and that retaining indefinite-life
designation for the Newport and Camel brand intangibles
was appropriate;
GTR:
despite a delay in returning to normal operations after
COVID-19, the Committee concurred with management’s
assessment that there was no indication of impairment.
Peru:
the Committee reviewed the Group’s business in Peru and
concluded that an impairment to goodwill or other intangibles of
£54 million was required;
Imperial Tobacco Canada (ITCAN):
the Committee assessed
that, notwithstanding ongoing proceedings (including the
CCAAprocess) in respect of Group subsidiary ITCAN, there
wasno indication of impairment to goodwill;
–
changes in the Group:
the Committee considered the
accounting treatment in relation to the Group’s disposal of
operations in Iran (concurring with the accounting for the
disposal including treatment of costs and foreign exchange) and
acquisition of an initial 19.9% equity investment in Organigram
Holdings Inc. and concurred with management’s assessment
to account for this as an associate
(
see note 14 in the Notes on the Accounts);
–
hybrid bonds:
the Committee assessed the issuance of
perpetual hybrid bonds, concurring with management’s
assessment for such to be classified as equity instead of
borrowings; and
–
adjusting items:
the Committee conducted a rigorous
assessment of all adjusting items, including the appropriate
application of adjusting items treatment to
Quantum
programme implementation costs (see note 7 in the Notes on
the Accounts) and costs arising from the disposal of the Group’s
operations in Iran (see note 6(f) in the Notes on the Accounts).
Risk topics considered by the Committee included:
–
risks relating to the continued impact of COVID-19 and the
approach to incorporating those risks into existing risks to the
Group managed under the Group’s risk register;
–
climate change risks and their impact on the Group, to ensure
robust processes are in place to manage both physical and
transitional climate change risks, and annual reporting on the
identification, assessment and management of those risks, in
alignment with the TCFD framework;
–
risks related to ESG and the approach to incorporating ESG
risks into existing risks managed under the Group’s risk register,
to ensure appropriate internal standards, strategic plans,
governance, monitoring and reporting mechanisms are in place
to align with recognised international standards, meet external
expectations and identify emerging issues;
–
current and emerging risks in the context of the Group’s digital
strategy, technology architecture and data management,
with particular focus on digital transformation, cyber security,
protection of the Group’s information systems and data, and the
approach to managing those risks;
Significant accounting judgements and estimates
considered by the Committee in relation to the 2021 financial
statements:
The significant accounting judgements and estimates considered
in relation to the financial statements for the year ended
31 December 2021 are summarised below.
–
the Group’s significant tax exposures:
reviewing updates on
corporate tax matters and reports from the Group Head of Tax
on the status of the Franked Investment Income Group Litigation
Order (FII GLO) and issues in various markets, including tax
disputes in theNetherlands. The Committee concurred with
management’s assessments and disclosures in respect ofthese
(see note 31 in the Notes on the Accounts);
–
contingent liabilities, provisions and deposits in connection
with ongoing litigation:
Imperial Tobacco Canada (ITCAN): monitoring the status of
the ongoing Canadian Companies’ Creditors Arrangement
Act (CCAA) proceedings under which Group subsidiary ITCAN
filed for protection in March 2019 following the judgment of the
Quebec Court of Appeal in the Quebec Class Action lawsuits.
The Committee also reassessed the accounting treatment in
respect of all other ongoing tobacco-related litigation to which
ITCAN is a defendant and confirmed that it continued to be
appropriate to make no provision in respect of that litigation,
as it is not possible to reasonably estimate the amount of any
potential settlement (see note 31 in the Notes on the Accounts)
and that, whilst ITCAN is subject to the CCAA proceedings, it
continued to be appropriate to consolidate ITCAN’s financial
results in the Group financial statements;
Fox and Kalamazoo rivers: the Committee reassessed the provision
in respect of the Fox River clean-up costs and related legal expenses
and confirmed that the provision would continue to be retained
at the prior year level (see note 24 in the Notes on the Accounts),
although inherent uncertainties remain (see note 31 in the Notes on
the Accounts). The Committee reviewed the position in respect of
the Kalamazoo River claim and assessed that no provision should
be recognised on the basis set out at note 31 in the Notes on
the Accounts;
Reynolds American Companies: the Committee considered and
endorsed management’s approach to accounting for the Master
Settlement Agreement and the Engle class-action and progeny
cases consistent with the prior year (see note 31 in the Notes on
the Accounts); and
VAT on social contributions in Brazil: the Committee assessed
the accounting treatment applicable to claims made by a Group
subsidiary in Brazil for refunds of VAT on social contributions
made in Brazil (see note 31 in the Notes on the Accounts) and in
relation to the disposal of part of the associated contingent asset
(see note 5 in the Notes on the Accounts);
–
foreign exchange and hyperinflation:
as the Group has
operations in certain jurisdictions with severe currency
restrictions where foreign currency is not readily available,
including in hyperinflationary territories such as Venezuela, the
Committee assessed management’s approach to applicable
accounting treatment and confirmed that methodologies used
to determine relevant exchange rates for accounting purposes
were appropriate;
Audit, Risk, Internal Control
Audit Committee
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
123
–
revisions to the Group’s risk appetite framework as it relates to
the Group’s strategic objectives, and regular review of emerging
risks to the Group prior to Board assessment;
–
the report on the effectiveness of the Company’s risk
management system;
–
risks associated with continued exposure to interest rate
changes on net finance costs, arising from existing and future
refinanced debt;
–
re-assessment of risks consequent to the UK’s EU exit(Brexit) in
the context of the Group risk register (including costs of capital,
FX exposures, supply chain continuity, taxation, customs duty
and talent management), resulting in the removal of Brexit-
related risk from the Group risk register in view of impacts
assessed as below threshold; and
–
Group anti-bribery and anti-corruption, sanctions and supply
chain controls and compliance programme.
For further information please refer to the Group Principal Risks on
pages 92 to 97 and the Group risk factors on pages 315 to 337
External Auditors
KPMG LLP (KPMG) were appointed as the Company’s auditors
with effect from 23 March 2015, following a competitive tender
process carried out in 2015. The Committee continually reviews
its relationship with the auditors, including consideration as to
when it next intends to complete a competitive tender process
for the Company’s external audit. The Committee also reviews the
quality of the audit and discusses opportunities for improvement
with KPMG and management. These are taken into consideration
in determining when the Committee next intends to complete a
competitive tender process for the external audit.
The Committee considers the relationship with the auditors to
be working well and remains satisfied with their effectiveness.
The Committee’s review of external auditor effectiveness is
discussed on page 124. In view of this, and having considered
the continued independence and objectivity of the auditors,
the Committee considers it to be in the best interests of the
Company’s shareholders for KPMG to remain as auditors for the
following financial year.
The Committee will continue to monitor this, taking into account
the effectiveness and independence of the auditors and the best
interests of shareholders, and will ensure that an audit tender is
conducted no later than in respect of the 2025 financial year in
accordance with applicable law and regulations.
UK Competition and Markets Authority Audit Order
The Company has complied with the Statutory Audit Services
Order issued by the UK Competition and Markets Authority for
the financial year ended 31 December 2021.
Group Auditor Independence Policy (AIP)
The Group has an established AIP, reflecting the requirements of
applicable laws, to safeguard the independence and objectivity
of theGroup’s external auditors and to specify the approval
processes for the engagement of the Group’s external auditors
to provide audit, audit-related and other non-audit services.
The key principle of the AIP is that the Group’s external auditors
may only beengaged to provide services in cases where the
provision of those services does not impair auditor independence
and objectivity.
The Committee recognises that using the external auditors to
provide services can be beneficial given their detailed knowledge
of our business. However, the AIP does not permit the Committee
to delegate its responsibilities to the external auditors and the
external auditors are only permitted to provide audit, audit-related
and non-audit services inaccordance with the AIP.
The AIP does not permit the external auditors to maintain a
financial, employment or business relationship with any Group
company, orprovide services to any Group company, which:
–
creates a mutual or conflicting interest with any Group company;
–
places the external auditors in the position of auditing their
own work;
–
results in the external auditors acting as a manager or employee
ofany Group company; or
–
places the external auditor in the position of advocate for any
Group company.
Audit services are approved in advance by the Committee on
the basis of an annual engagement letter and the scope of audit
services isagreed by the Committee with the external auditors.
Subject to the restrictions specified in the AIP, the external auditors
may also provide certain non-audit services with the prior approval
ofthe Committee. The requirement for the Committee’s pre-
approval of non-audit services may be waived only if the aggregate
amount of all non-audit services provided is less than 5% of the
total amount paid to the external auditors during the reporting
year, where those services were not recognised to be non-audit
services at the time of engagement, and provided those services
are promptly brought to the attention of the Committee and their
provision is approved prior tocompletion of the audit in the relevant
reporting year.
The provision of permitted non-audit services must be put to
tender if expected spend exceeds limits specified in the AIP, unless
a waiver of this requirement, in accordance with the terms of the
AIP, is agreed by the Finance and Transformation Director and
notified to the Committee.
The AIP:
–
requires Committee pre-approval for all audit, audit-related and
other non-audit services, except in respect of non-audit services
falling within the exceptions described above;
–
prohibits the provision of certain types of services by the external
auditors, including those with contingent fee arrangements,
expert services unrelated to audit and other services prohibited
by US securities laws and the Public Company Accounting
Oversight Board;
–
prohibits the Chief Executive, Finance and Transformation
Director, Group Financial Controller and Group Chief Accountant
from having been employed by the external auditors in any
capacity in connection with the Group audit for two years
beforeinitiation of an audit;
–
specifies requirements in respect of audit partner rotation,
including for both the lead and the concurring external audit
partners to rotate off the Group audit engagement at least
everyfive years, and not to recommence provision of audit or
audit-related services to the Group for a further five years; and
–
provides authority for the Committee to oversee any allegations
of improper influence, coercion, manipulation or purposeful
misleading inconnection with any external audit, and to review
any issues arising inthe course of engagement with the
external auditors.
BAT Annual Report and Form 20-F 2021
124
External audit fees
The Committee reviews a schedule identifying the total fees for all
audit and audit-related services, tax services and other non-audit
services expected to be undertaken by the external auditors in the
following year. Tax services and other non-audit services in excess
of the tender thresholds referred to above must be itemised.
Updated schedules are also submitted to the Committee at mid-
year and year-end, so that it has full visibility of the Group spend on
services provided by the Group’s external auditors.
A breakdown of audit, audit-related, tax and other non-audit fees
paid to KPMG firms and associates in 2021 is provided in note 6(i) in
the Notes on the Accounts and is summarised as follows:
Services provided by KPMG firms and associates 2021
2021
£m
2020
£m
Audit services
18.2
18.6
Audit of defined benefit schemes
0.4
0.5
Audit-related assurance services
8.0
8.5
Total audit and audit-related services
26.6
27.6
Other assurance services
0.3
0.5
Tax advisory services
– –
Tax compliance
– –
Other non-audit services
– –
Total non-audit services
0.3
0.5
Note:
In 2021, non-audit fees paid to KPMG amounted to 1.1% of the audit and audit-related
assurance fees paid to them (2020: 1.8%). All audit and non-audit services provided
bytheexternal auditors in 2021 were pre-approved by theCommittee.
External auditor effectiveness
The Committee, on behalf of the Board, is responsible for the relationship
with the external auditors. The Committee carries out an annual
assessment of the Group’s external auditors, covering qualification,
expertise and resources, objectivity and independence, and the
effectiveness of the audit process. This assessment takes into account
the Committee’s interactions with, and observations of, the external
auditors and considers a range of factors, including:
–
experience and expertise of the external auditors in their direct
communication with, and support to, the Committee;
–
their mindset and professional scepticism;
–
their effectiveness in completing the agreed external audit plan;
–
their approach to handling significant audit and accounting judgements;
–
content, quality and robustness of the external auditors’ reports; and
–
their provision of non-audit services, as noted above, and other
matters that may impact independence.
The Committee’s assessment is also informed by an external
audit satisfaction survey completed by members of the Group’s
senior management. No material issues were identified during the
external auditor assessment in 2021. The Committee is satisfied
with the qualification, expertise and resources of its external
auditors, and that the objectivity and independence of its external
auditors are not in any way impaired by the non-audit services
which they provide. The Committee has recommended to the
Board the proposed re-appointment of KPMG at the 2022 AGM.
The Committee Chair, Finance and Transformation Director,
Director, Legal & External Affairs and General Counsel, Group
Headof Internal Audit and the Company Secretary all meet with
the external auditors regularly throughout the year to discuss
relevant issues as well as the progress of the external audit.
Any significant issues are included on the Committee’s agenda.
Audit Partner Rotation
In accordance with the requirements of the UK Financial Reporting
Council (FRC) Ethical Standard and the US SEC independence rules
on partner rotation, the previous audit partner’s term concluded at
the end of the 2020 year-end audit and the current audit partner’s
tenure commenced from the start of the 2021 year-end audit.
FRC review of Half Year report to 30 June 2021
The FRC carried out a review of the Company’s Half Year report
to 30 June 2021. The FRC correspondence with the Company
regarding the outcomes of that review confirmed there were no
questions or queries that required substantive correspondence
between the Company and the FRC.
The outcomes of the FRC review of the Company’s Half Year report
were reviewed by the Committee and have been taken into account
in the preparation of the Annual Report and Accounts for the year
ended 31 December 2021.
The review conducted by the FRC was based solely on the
Company’s published Half Year report to 30 June 2021. The FRC’s
review does not provide any assurance that the Half Year Report
is correct in all material respects; the FRC’s role is to consider
compliance with reporting requirements, not to verify the
information provided.
Risk Management and Internal Control
Overview
The Company maintains its system of risk management and
internal control with a view to safeguarding shareholders’
investment and the Company’s assets. It is designed to identify,
evaluate and manage risks that may impede the Company’s
objectives. It cannot, and is not designed to, eliminate them
entirely. The system therefore provides a reasonable, not absolute,
assurance against material misstatement or loss. A description of
the principal risks that may affect the Group’s business is provided
in our Strategic Report on pages 92 to 97.
The main features of the risk management processes and system
of internal control operated within the Group are described below.
These have been in place throughout the year under review and
remain in place to date. These do not cover associates of the Group.
Board oversight
During the year, the Board considered the nature and extent of
the principal risks that the Group is willing to take to achieve its
strategic objectives (its ‘risk appetite’) and its framework for
maintaining sound risk management and internal control systems.
Risk appetite is reviewed annually by the Board to ensure that it
is appropriate. Alongside a robust assessment of the principal
risks and uncertainties facing the Group (including those that
would threaten its business model, future performance, solvency,
liquidityand viability), the Board also considers emerging risks
which may challenge the Group’s ability to achieve its strategic
objectives in the future. Each emerging risk is assessed by
the Board on its potential impact and likelihood and, where
applicable,incorporated into the Group’s risk register with
appropriate mitigating activities. Emerging risks are kept under
regular review by the Committee, prior to Board assessment.
With the support of the Committee, the Board also conducts
an annual review of the effectiveness of the Group’s risk
management and internal control systems. This review
covers allmaterial controls including financial, operational
andcompliancecontrolsand risk management systems, with
the Committee continuing to have a strong focus on IT systems
and controls.
Audit, Risk, Internal Control
Audit Committee
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
125
Audit and Corporate Social Responsibility (CSR)
Committee framework
The Group’s Regional Audit and CSR Committee framework
underpins the Audit Committee. It provides a flexible channel
for the structured flow of information through the Group, with
committees for each of the three Group regions, for the US
business, and for locally-listed Group entities and specific
marketswhere considered appropriate.
The Regional Audit and CSR Committees are supported by Risk
andControl Committees established at business unit level, and
within certain Group functions where applicable.
This framework ensures that significant financial, social,
environmental, governance and reputational risks faced by
the Group are appropriately managed and that any failings
or weaknesses are identified sothat remedial action may be
taken. The Group’s Regional Audit and CSR Committees are
all chaired by an Executive Director, comprise members of the
Management Board and regularly attended by one or more Non-
Executive Directors.
In addition, the Corporate Audit Committee focuses on the
Group’s risks and control environment that fall outside the
regional committees’ remit, such as central functions, and global
programmes, processes and projects. It comprises members
of the Management Board and is chaired by a Regional Director.
One or more ofthe Non-Executive Directors also regularly attend
meetings of the Corporate Audit Committee.
External and internal auditors attend meetings of these
committees and regularly have private audiences with
members ofthe committees after meetings. Additionally,
central, regional and individual market management, along with
Internal Audit, support the Board in its role ofensuring a sound
control environment.
Risk management
Risk registers, based on a standardised methodology, are used at
Group, functional, directly-reporting business unit (DRBU), and
individual market levels to identify, assess and monitor the risks
(both financial and non-financial) faced by the business at each
level. Risks are assessed and prioritised at three levels by reference
to their impact (high/medium/low) and likelihood (probable/
possible/unlikely).
Mitigation plans are required to be in place to manage the risks
identified, and progress against those plans is monitored. The risk
registers are reviewed on a regular basis. Functional and regional
risk registers are reviewed regularly by the relevant Regional
Audit and CSR Committee or the Corporate Audit Committee, as
appropriate. DRBU and market risk registers are reviewed as part
oflocal Risk and Controls meetings.
At the Group level, specific responsibility for managing each
identified risk is allocated to a member of the Management Board.
The Group risk register is reviewed regularly by a committee of
senior managers, chaired by the Finance and Transformation
Director. In addition, it is reviewed annually by the Board and twice
yearly by the Committee. The Board and the Committee review
changes in the status of identified risks and assess the changes
in impact and likelihood. The Committee also conducts detailed
reviews on selected risks, meeting senior managers responsible
formanaging and mitigating them, so that it can consider those
risks at a more granular level.
As reported in the Company’s half-year report to 30 June 2021, the
Group no longer maintains ‘market size reduction and consumer
downtrading’ as a principal risk, due to the Group’s strategy to
deliver long-term sustainable growth with a range of innovation
and less harmful products. The Group’s current principal risks
otherwise remain broadly unaltered from those maintained as at
31 December 2020.
The Board also considered the Group Viability Statement
see page 92 of the Strategic Report
@
For more information on risks see the Group Principal Risks
on pages 92 to 97 and the Group risk factors on pages 315 to 337
Internal control
Group operating companies and other business units are annually
required to complete a controls self-assessment, called Control
Navigator, of the key controls that they are expected to have in
place. Its purpose is to enable them to self-assess their internal
control environment, assist them in identifying any controls that
may need strengthening and support them in implementing
and monitoring action plans to address control weaknesses.
The Control Navigator assessment is reviewed annually to ensure
that it remains relevant to the business and covers all applicable
key controls. In addition, at each year-end, Group operating
companies and other business units are required to:
–
review their system of internal control, confirm whether it
remains effective, and report on any specific control deficiencies
and the action being taken to address them; and
–
review and confirm that policies and procedures to promote
compliance with the SoBC are fully embedded and identify any
material instances of non-compliance.
The results of these reviews are reported to the relevant Regional
Audit and CSR Committees or to the Corporate Audit Committee,
and to the Audit Committee, to ensure that appropriate remedial
action has been, or will be, taken where necessary. They are also
considered by the SOx Steering Committee and the Disclosure
Committee in determining management’s opinion on the internal
controls over financial reporting (ICFR).
Annual review
The Financial Reporting Council’s ‘Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting’
provides guidance in relation to issues of risk and internal control
management and related reporting.
The processes described above, and the reports that they give rise
to, enable the Board and the Committee to monitor risk and internal
control management on a continuing basis throughout the year
and to review its effectiveness at the year-end. The Board, with
advice from the Committee, has completed its annual review of the
effectiveness of that system for 2021.
The Board is satisfied that the system of risk and internal control
management accords with the UK Corporate Governance Code
2018 and satisfies the requirements for internal controls over
financial reporting.
BAT Annual Report and Form 20-F 2021
126
Internal Audit function
The Group’s Internal Audit function is responsible for carrying out
risk-based audits of Group companies, business units, and global
processes. A separate Business Controls Team provides advice and
guidance on controls to the Group’s businesses.
The Group’s Internal Audit function works to a rolling 18-month
audit plan, prioritising principal risk areas aligned to the Group’s risk
register. During 2021, the Internal Audit plan was kept under regular
review with the Committee, enabling flexibility to augment the plan
to cover additional audit assignments in response to emerging
risks where appropriate and ongoing monitoring of the continuing
effectiveness of remote audit work.
In 2021, internal audits covered various markets, manufacturing
facilities in various locations and a range of other business
activities, including business continuity planning, cyber and data
security and access controls, IT infrastructure, supply chain
compliance, leaf sourcing, business transformation programmes,
business to consumer (B2C) e-commerce channels and New
Categories youth access prevention procedures. The Committee
considered internal audit findings and action plans established to
address any issues identified.
The scope of each internal audit is assessed for SOx impact
and audit of applicable SOx controls is included where relevant.
Reviews of SOx controls and their effectiveness are primarily
conducted by the Group’s Business Controls Team and assurance
is also undertaken by the Group’s external auditors, see page 127.
The Committee has approved the Internal Audit plan for 2022 and
assessed its alignment with the Group’s risk register and coverage
of Group risks. The design of the Internal Audit plan for 2022 builds
on progress made in 2021, with enhanced use of data analytics, and
takes account of the evolving nature of Group risks.
The strategic priorities for Internal Audit underpin the design of
the Internal Audit plan for 2022, with continued emphasis on New
Categories and innovation in ways of working, whilst maintaining
thorough coverage of core business activities, lines of defence
and IT controls. The Internal Audit plan for 2022 anticipates the
continuation of COVID-19 travel restrictions into 2022, balancing
remote fieldwork and use of data analytics with focused site visits.
The Committee reviews the effectiveness of the Group’s internal
audit function annually. The Committee considers the Internal
Audit function to be effective and to have the necessary resources
to enable it to fulfil its mandate.
Financial reporting controls
The Group has in place a series of policies, practices and controls in
relation to the financial reporting and consolidation process, which
are designed to address key financial reporting risks, including risks
arising from changes in the business or accounting standards, and
to provide assurance of the completeness and accuracy of the
Annual Report and Form 20-F.
A key area of focus is to assess whether the Annual Report
and Form 20-F and financial statements are ‘fair, balanced and
understandable’ in accordance with the UK Corporate Governance
Code, with particular regard to:
Fair:
Consistency of reporting between the financial statements
and narrative reporting of Group performance and coverage of an
overall picture of the Group’s performance;
Balanced:
Consistency of narrative reporting of significant
accounting judgements and key matters considered by the
Committee with disclosures of material judgements and
uncertainties noted in the financial statements; appropriate use,
prominence and explanation of primary and adjusted performance
measures; and
Understandable:
Clarity and structure of the Annual Report and
Form 20-F and financial statements, appropriate emphasis of key
messages, and use of succinct and focused narrative with strong
linkage throughout the report, to provide shareholders with the
information needed to assess the Group’s business, performance,
strategy and financial position.
The Group Manual of Accounting Policies and Procedures sets out
the Group accounting policies, its treatment of transactions and its
internal reporting requirements.
The internal reporting of financial information to prepare the
Group’s annual and half-year financial statements is signed off
by the heads of finance responsible for the Group’s markets and
business units. The heads of finance responsible for the Group’s
markets and all senior managers must also confirm annually that
all information relevant to the Group audit has been provided to
the Directors and that reasonable steps have been taken toensure
full disclosure in response to requests for information from the
external auditors.
The Committee Chair participated in the 2021 Annual Report
and Form 20-F drafting and review processes, and engaged with
the Finance and Transformation Director and the Group Head of
Internal Audit during thedrafting process.
External assurance of ESG metrics and related information
To further strengthen robust procedures in place for reporting
ESG metrics and related information for the Group in the Annual
Report and Form 20-F, the scope of external assurance over
annual reporting of ESG metrics and related information has
been extended, with the work of the external assurance provider
overseen by the Committee under its revised terms of reference
discussed on page 121.
Following a competitive tender process, KPMG LLP were appointed
as the external assurance provider in relation to defined ESG
metrics and related information. The Committee approved KPMG’s
provision of these services in accordance with the requirements of
the Group Auditor Independence Policy. ESG metrics and related
information subject to external assurance are identified in the
assurance statement set out in our 2021 ESG Report.
Audit, Risk, Internal Control
Audit Committee
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
127
SOx compliance oversight
The Company is subject to certain rules and regulations of US
securities laws, including the US Securities Exchange Act 1934
and SOx. SOx places specific responsibility on our Chief Executive
and the Finance and Transformation Director to certify or disclose
information applicable to the financial statements, disclosure
controls and procedures (DCP) and ICFR. This includes our
Chief Executive and Finance and Transformation Director giving
attestations in respect of ICFR effectiveness under §404 of SOx.
The Committee has oversight of processes established to ensure
full and ongoing compliance with applicable US securities laws,
including SOx. Two committees provided assurance during 2021
with regard to applicable SOx certifications. The Disclosure
Committee reviews the Company’s financial statements for
appropriate disclosure, designs and maintains DCPs, and reports
to, and is subject to the oversight of, the Chief Executive and the
Finance and Transformation Director.
A sub-committee of the Disclosure Committee, the SOx Steering
Committee, provides assurance that ICFR have been designed,
and are being operated, implemented, evaluated and disclosed
appropriately, in accordance with applicable requirements and
subject to the oversight of the Chief Executive and Finance and
Transformation Director. The activities of this sub-committee are
directly reported to the Disclosure Committee.
The outputs from the Disclosure Committee and SOx Steering
Committee were presented toand reviewed by the Committee.
No material weaknesses were identified and the Committee
is satisfied that, where areas for improvement were identified,
processes are in place to ensure that remedial action is taken and
progress is monitored.
In 2021, the Committee also reviewed the scope of the external
auditors’ SOx procedures, and received reports on their progress
with their independent assessment of ICFR across the Group.
Code of Ethics for the Chief Executive
and Senior Financial Officers
The Company has adopted a Code of Ethics applicable to the Chief
Executive, the Finance and Transformation Director, and other
senior financial officers, as required by US securities laws and NYSE
listing standards. No waivers or exceptions to the Code of Ethics
were granted in 2021.
Group Standards of Business Conduct (SoBC)
The Committee is responsible for monitoring compliance with
the SoBC, and reports on this to the Board. The SoBC requires
all staff to act with a high degree of business integrity, comply
with applicable laws and regulations, and ensure that standards
are never compromised for the sake of results. Every Group
company and all staff worldwide, including senior management
and the Board, are expected to adhere to the SoBC. The SoBC and
the Group’s Delivery with Integrity compliance programme are
discussed on pages 56 to 57.
All Group companies have adopted the SoBC or local equivalent.
Information on compliance with the SoBC is gathered at a regional
and global level and reports of SoBC allegations, including details of
the channels through which allegations are reported, are provided
on a regular basis to the Regional Audit and CSR Committees,
Corporate Audit Committee, and to the Committee. A breakdown
of SoBC contacts and SoBC allegations reported across the Group
in 2021 is set out on page 57.
The SoBC and information on the total number of SoBC contacts
and SoBC allegations reported in 2021 (including established
breaches) is available at bat.com/sobc.
Speak Up
The Group maintains Speak Up channels which enable concerns
regarding SoBC compliance matters, including concerns about
possible improprieties in financial reporting, to be raised in
confidence (and anonymously should an individual wish) without
fear of reprisal.
The SoBC includes the Group’s Speak Up policy, which is
supplemented by local procedures throughout the Group that
provide staff with further guidance on reporting matters and
raising concerns, and the channels through which they can do so.
The Board periodically reviews the Group’s Speak Up policy and
reports arising from Speak Up channels. The Speak Up policy was
revised with effect from 1 January 2022 (as part of the revised
SoBC). The Board is satisfied that the Group’s Speak Up policy and
procedures enable proportionate and independent investigation
of matters raised, and ensure that appropriate follow-up action
is taken.
Read more about Speak Up channels
and Speak Up reports on page 57
Political contributions
The Group does not make contributions to UK or European Union
(EU) political organisations or incur UK or EU political expenditure.
The total amount of political contributions made to non-UK and
non-EU political parties in 2021 was £4,339,371 (2020: £4,851,616)
as follows:
Reynolds American Companies reported political contributions
totalling £4,339,371 (US$5,970,975) for the full year 2021 to US
political organisations and to non-federal-level political party and
candidate committees in accordance with their contributions
programme. No corporate contributions were made to federal
candidates or party committees and all contributions were made in
accordance with applicable laws.
All political contributions made by Reynolds American Companies
are assessed and approved in accordance with Reynolds
American’s policies and procedures to ensure appropriate
oversight and compliance with applicable laws.
In accordance with the US Federal Election Campaign Act,
Reynolds American Companies continue to support an employee-
operated Political Action Committee (PAC), a non-partisan
committee registered with the US Federal Election Commission
that facilitates voluntary political donations by eligible employees
of Reynolds American Companies. According to US federal finance
laws, the PAC is a separate segregated fund and is controlled
by a governing board of individual employee-members of the
PAC. In 2021, Reynolds American Companies incurred expenses,
as authorised by US law, in providing administrative support to
the PAC.
No other political contributions were reported.
BAT Annual Report and Form 20-F 2021
128
Annual Statement onRemuneration
Remuneration Report
Introduction
I am pleased to present to you the Directors’ Remuneration Report
for the year ended 31 December 2021 which sets out our role and
the new Remuneration Policy. This report contains:
–
The Annual Remuneration Report, explaining how the current
Remuneration Policy has been implemented during 2021; and
–
The new Directors’ Remuneration Policy, which will be put
forward for a binding vote at the 2022 AGM.
2021 has been a year of further volatility as we have continued
to manage the disruption arising from the COVID-19 pandemic
across our business. We are incredibly proud of the collective
effort made by the Group’s employees and management teams
as they have remained focussed on delivering growth, serving the
needs of our customers and consumers, while managing through
continued disruption.
Our response to the pandemic has continued to be guided by our
Ethos and our primary focus has been on looking after our people
and protecting their health, safety, and well-being. Throughout the
disruption caused by COVID-19 the Group has continued to
focus on providing practical support to employees to navigate
through this unprecedented period and has not entered furlough
arrangements or made redundancies as a result of the pandemic.
Our Focus in 2021
We have completed the review of the Directors’ Remuneration
Policy during 2021, which has focussed on opportunities to
strengthen alignment with 1) the Group’s strategy and ESG agenda,
2) shareholder and advisory body feedback arising from the AGM in
2021 and 3) an assessment of our position in the marketplace.
Dimitri
Panayotopoulos
Chairman of the
Remuneration
Committee
Index to our Remuneration Report
Policy Report
1. Summary of our current Directors’ Remuneration Policy
[133]
2. Overview of what our Executive Directors earned in 2021 and why
[135]
3. Executive Directors’ Remuneration for the Year Ended
31 December 2021
[136]
4. Executive Directors’ Remuneration for the Upcoming Year
[143]
5. Chairman and Non-Executive Directors’ Remuneration
for the Year Ended 31December 2021
[144]
6. Directors’ Share Interests
[145]
7. Other Disclosures
[148]
8. The Remuneration Committee and Shareholder Engagement
[149]
9. Directors' Remuneration Policy for 2022 onwards
[152]
The following Annual Report on Remuneration has been prepared in accordance with
the relevant provisions of the Companies Act 2006 and as prescribed in The Large and
Medium-sized Companies and Group (Accounts and Reports) (Amendment) Regulations
2013 (the UK Directors’ Remuneration Report Regulations).
@
Where required and for the
purpose of the audit conducted in accordance with International Standards on Auditing
(ISA) data has been audited by KPMG and this is indicated appropriately.
@
Our priority has been to ensure that the Remuneration Policy:
–
Creates close, long-term links between the Group’s senior
management and our shareholders;
–
Enables the Group to attract and retain top quality talent in the
global marketplace;
–
Directly supports Group strategy delivery and our A Better
Tomorrow
TM
agenda, by rewarding high levels of sustainable
long-term performance in both an appropriate and competitive
manner; and
–
Continues to incorporate best practice policy features.
In summary we are proposing no changes to the headline operation
or quantum of our Remuneration Policy. Our overarching objective
has been to ensure that the new Remuneration Policy reflects our
corporate purpose and our primary ESG ambition, to reduce the
health impact of our business. Specifically, we have sought through
the new Remuneration Policy to:
–
Strengthen focus on revenue growth in New Categories;
–
Ensure focus on improving profitability in New Categories; and
–
Incentivise the continued financial performance of the Group.
The Committee acknowledges that a significant minority of
shareholders have been unable to support recent decisions
regarding fixed pay increases for Executive Directors and have
sought fuller disclosures as to the Committee’s decision-making
process, which has been reflected through voting on the Directors’
Remuneration Reports in 2020 and 2019. This has been a key
consideration throughout the Committee's review process and our
report this year is structured differently to provide greater detail
on the perspectives of shareholders and how the Committee has
responded, which are set out in the following pages.
Shareholder Engagement
and New Remuneration Policy
The latter part of 2021 was dedicated to a programme of
engagement with shareholders on the proposals which are
contained in the new Remuneration Policy. We have engaged
with shareholders representing 60% of our issued share capital,
together with the Investment Association, Institutional Shareholder
Services and Glass Lewis.
Our objective has been to undertake a focussed review of the
Remuneration Policy, building on the work undertaken in 2018
which introduced a variety of changes to our policy, including
alignment of Executive Directors' pensions arrangements with
those of the wider workforce and post-employment shareholding
requirements. Our current Remuneration Policy was approved at
the 2019 AGM with significant support from our shareholders.
Our programme of shareholder engagement has helped to refine
proposals and ensure that proposed changes to the Remuneration
Policy are targeted and focussed. Initial feedback indicated:
–
That the proposals to strengthen the focus on New Categories
performance within the short-term incentive plan (STI) and long-term
incentive plan (LTI) are timely and appropriate for the Group, and
–
There were opportunities to reconsider some aspects of the proposed
metrics for both the STI and LTI, such as the balance and weighting
between metrics and some specific performance conditions.
The tables on pages
[129]
and [130]
summarise the proposals
put forward by the Committee during shareholder engagement,
together with the key points of feedback received from
shareholders and the adjustments made by the Committee taking
into account the feedback received.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
129
Incentive plans – Short-Term Incentive Plan (IEIS)
: The Group made changes to the IEIS for 2021 following engagement with shareholders and
introduced New Categories revenue performance into the plan. Recent discussions with shareholders have focussed on opportunities to further
strengthen prioritisation of New Categories performance, together with the incentivisation of the continued financial performance of the Group.
The Committee considers that the proposed changes outlined below will strengthen alignment with the Group’s long-term strategy
delivery and the interests of shareholders.
Summary of Changes
2021 measures
Original proposal Final proposal
Short-term incentive
Volume Share
15%
Volume Share 10%
Volume Share 10%
New Categories Revenue
20%
New Categories Revenue 15%
New Categories Revenue 15%
Adj Profit from Operations
30%
Adj Profit from Operations 25%
Adj Profit from Operations 25%
Deleverage (ex FX)
35%
Adj Cash Generated From Operations
30%
Adj Cash Generated From Operations 30%
New Categories Contribution
20%
New Categories Contribution 20%
Proposed change and rationale (I)
The introduction of a new measure ‘New Categories contribution’ with a 20% weighting. This measure will incentivise year-on-year
improvement in New Categories profit contribution in line with the Group’s pathway to profitability by 2025. Further details are provided
on page
[143]
.
Shareholder feedback
Shareholders have welcomed the introduction of ‘New Categories contribution’ to the IEIS as both timely and relevant.
Some shareholders indicated that they need to understand how they may assess performance in this area, as at present the Group does
not disclose details for New Categories contribution.
Committee response
The introduction of this new measure will be accompanied by a change in Group reporting from 2022 where we will provide revenue and
category contribution as separate disclosures. Performance targets for this measure will be disclosed in the normal manner, following the
close of the performance period.
Proposed change and rationale (II)
The introduction of ‘adjusted cash generated from operations’ with a 30% weighting. This measure will ensure continued focus on cash
generation to fund further leverage reductions and returns to our shareholders. Further details are provided on page
[143]
.
This measure will replace the ‘deleveraging excluding foreign exchange’ measure – the Committee is pleased with the progress made to
de-lever the balance sheet over the last two years towards our medium-term corridor of 2-3x, to the point that it is felt more appropriate
to re-focus on cash performance within the IEIS.
Shareholder feedback
Shareholders have in general been supportive of the proposed change.
However, adjusting items within this measure have generated mixed views among some shareholders, with some expressing discomfort
with adjusting for restructuring costs and litigation settlements, while other shareholders have been comfortable to adjust for litigation
settlements on the basis that these are unpredictable and outside of management control.
Committee response
The Committee has considered the feedback carefully and understands shareholder views regarding adjusting for restructuring costs,
which may be considered as an ongoing cost of doing business for purposes of the performance measure.
Consequently, adjusting for restructuring costs has been removed from the performance measure. Litigation settlements are considered
unpredictable and outside of management control, accordingly, adjusting for these have been retained as part of this measure.
Proposed change and rationale (III)
Minor adjustments were proposed to the weightings for the ‘Group share of key markets’ measure (from 15% to 10%), the ‘New Categories
revenue’ measure (from 20% to 15%) and the ‘adjusted profit from operations’ measure (from 30% to 25%).
Shareholder feedback
The majority of shareholders have been supportive of the proposed re-weightings, with some specific questions raised to understand the
balance of weighting between performance measures.
Committee response
Weightings were maintained as originally proposed during shareholder engagement. The Committee considered it appropriate to retain
a slightly higher weighting for the ‘adjusted cash generated from operations’ measure given the Group’s continued need to focus on cash
generation to support returns to shareholders and provide flexibility with capital allocation.
The introduction of the ‘New Categories contribution’ measure also further strengthens the focus within the IEIS on financial
performance, whereby financial metrics represent 75% of the weighting within the plan.
BAT Annual Report and Form 20-F 2021
130
Annual Statement onRemuneration
Continued
Remuneration Report
Incentive plans – Long-Term Incentive Plan:
Changes are made with the aim of reflecting our corporate purpose more directly, in
particular our commitment to reduce the health impact of our business as part of our A Better Tomorrow
TM
agenda. These changes take
into account shareholder feedback and focus on harm reduction as an imperative to delivering long-term sustainable growth, as follows:
Summary of Changes
2021 measures
Original proposal Final proposal
Long-term incentive
Adjusted revenue growth
20%
Adjusted revenue growth 20%
Adjusted revenue growth15%
EPS (current / constant)
40%
EPS (current / constant) 20%
EPS (current / constant)30%
Cash Conversion
20%
Cash Conversion 20%
Cash Conversion20%
Relative TSR
20%
Relative TSR (streamlined
comparator group)
20%
Relative TSR (streamlined
comparator group)
20%
New Categories revenue growth
20%
New Categories revenue growth 15%
Proposed change and rationale (I)
The introduction of a new measure ‘New Categories revenue growth’, with a 15% weighting. Our strategic objective is to provide long-term
sustainable growth for our shareholders and this performance measure is directly aligned with our transformation ambitions and stated
targets and will measure future growth in New Categories. Further details are provided on page
[144]
.
Shareholder feedback
The majority of shareholders have been supportive of the introduction of this new measure.
Some shareholders have wanted to understand the basis of measurement and the relationship with the ‘New Categories revenue’ metric in the IEIS.
When we presented our original proposals, some shareholders requested that the Committee reconsider the relative weight between
revenue measures and EPS, such that there is a greater balance between profit delivery and revenue growth.
Committee response
The inclusion of New Categories revenue growth in both the IEIS and LTIP is an important step given New Categories growth is a critical
part of our long-term strategy and ESG agenda. The IEIS measure will continue to provide focus on in year delivery, while the LTIP measure
will focus on cumulative and sustained performance over a 3-year period.
The Committee understands the views expressed by shareholders and as a result has adjusted the original proposals such that the
weighting for the ‘New Categories revenue growth’ and ‘adjusted revenue growth’ measures have been reduced from 20% to 15% and the
weighting for the ‘adjusted diluted earnings per share’ measure has been increased from 20% to 30% to increase the overall proportion
based on profitability versus the original proposals.
Proposed change and rationale (II)
The ‘relative total shareholder return’ (TSR) measure is retained with the current weighting of 20%. The comparator group of companies
has undergone a review as the constituents have been in place since 2013, other than the addition of the Altria Group in 2019. A review
of comparator companies was believed to be timely and relevant considering changes in the Group’s business over the last 8 years, our
strategic focus and ambition to become to multi-category, new-category led business.
The review exercise has aimed to deliver a more focussed and relevant comparator group comprised of businesses which are adjacent
to the Group’s, well correlated and broadly comparable in terms of their size and scale. The final constituents represent the tobacco, soft
drinks, alcohol and fast moving consumer goods sectors. Back testing of the comparator group changes for past awards confirmed that
these changes would not have impacted vesting under the TSR measure. Further details are provided on page
[144]
.
Shareholder feedback
The majority of shareholders have expressed comfort with the proposed comparator group changes and the intent to ensure the TSR
comparator group is well calibrated and relevant for the future.
A small number of shareholders had requested that additional specific companies were considered for inclusion in the
comparator group.
More broadly, the Committee is aware that relative TSR can attract strong and often conflicting opinions, with a small number of
shareholders expressing a preference for the removal of the measure from the LTIP.
Committee response
The Committee is pleased that the comparator group changes have been met with support and has taken into consideration feedback
as to the composition of the group. Consequently, Swedish Match, which was not part of the original proposal, will be included in the
new TSR comparator group from 2022.
The Committee remains of the view that the relative TSR measure is an important component of the LTIP and helps to maintain
alignment with shareholder interests, a view which is shared by the majority of our shareholders.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
131
These changes to performance measures will apply to the IEIS
from 2022 and to new awards made under the LTIP from 2022
for the Executive Directors and the Group’s wider management
population. Importantly they will ensure that the Group’s
transformation ambitions and core financial delivery are
appropriately reflected in both the IEIS and LTIP.
Wider Themes from Shareholder Engagement
ESG measures:
A small number of shareholders have enquired
whether the Committee considered the introduction of broader
ESG measures to either the IEIS or the LTIP. The Committee gave
consideration to broader ESG measures as part of the policy review
process. In view of our primary ESG commitment, to reduce the
health impact of our business, and accordingly, the importance of
sustainable New Categories growth, the Committee concluded that
the proposed changes to IEIS and LTIP would focus on incentivising
delivery of our corporate purpose and stated ambitions of delivering
£5 billion in revenues in New Categories by 2025, reaching profitability
in New Categories over the same time period and the continued
transformation of our portfolio. Discussions with shareholders have
confirmed there is consensus that this is the right approach for
the Group at this time, being both directly linked to Group strategy
delivery and quantifiable. The Remuneration Committee will continue
to monitor ESG measures and we will continue to drive performance
across our comprehensive suite of objectives across all areas of ESG,
which are discussed in the Strategic Report.
Returns measures
: A discrete group of shareholders have expressed
a preference for a Returns-type measure within the LTIP. While the
Committee concurs that this is an important metric for the business
to continue to track, it believes there are other important metrics
to focus remuneration on at this time. We expect the Group’s
return on capital performance will over the near to medium term be
driven by organic profit growth which is a key performance metric
already represented in the IEIS and LTIP. Further, at this stage of our
transformation journey the Committee believes the IEIS and LTIP
should be focussed on measures more closely linked to the Group’s
transformation agenda (such as New Categories revenue growth and
category contribution) and key financial performance measures (such
as adjusted profit from operations, EPS and cash). The Committee will
continue to keep metric formulation and the orientation of our incentive
plans under review as our transformation journey progresses.
Executive Director remuneration
: A significant minority of
shareholders have been unable to support recent decisions regarding
fixed pay increases for the Executive Directors and have requested
fuller disclosures as to the Committee’s decision-making process
in the future. During our engagement, shareholders have provided
their feedback on decisions made in 2020 and 2021; while the
rationale followed by the Remuneration Committee at the time has
been understood, shareholders have explained their expectation of
restraint with regard to fixed pay increases in future, with the majority
wishing to see an employee average-led approach. The Remuneration
Committee has considered the matters raised by shareholders in
detail and the approach to be taken in 2022 is set out on page
[132]
.
I would like to thank our shareholders, and wider stakeholders who
have worked with us, for their feedback and help to maintain an
ongoing and transparent dialogue regarding executive remuneration.
Group Performance
The performance measures included in our incentive plans are
closely aligned with the Group’s strategy and the metrics as set out
in the Strategic Report.
The Group has delivered a strong performance in 2021, accelerating
growth in New Categories, delivering on its leverage commitment
and advancing the ESG agenda while managing the ongoing
impacts arising from the COVID-19 pandemic. The performance
targets set by the Committee early in the year have remained
unchanged throughout the 2021 performance period.
Target setting for 2021 assumed a rate of recovery from lockdown
impacts in emerging markets and Global Travel Retail, while
expecting ongoing disruption from further lockdowns elsewhere in
the Group, together with prolonged travel restrictions and excise
shocks. A key focus area of target setting was growth in the New
Categories business, founded on geographic expansion, growth
in the consumer base and achieving leadership of the Vapour
category in the US. Target setting also assumed a continuing
strong profit performance in developed markets driven by an
increase in pricing. The impact of price increases and consequent
flow through to revenue and profit growth was expected to
be constrained by less favourable geographical mix due to the
weighting of the post-pandemic volume recovery towards
emerging markets. In order to meet profit objectives ambitious
cost savings were also embedded in the targets, anticipated to
be delivered from product costs and the continued simplification
of the organisation. The Group’s continued emphasis on
deleveraging was reflected in a stretch target which was calibrated
in anticipation of further strong delivery in operating cash flow
conversion as well as the Group delivering against its profit targets.
2021 Short-term Incentive
The Group has delivered combustibles and THP volume share
gains of 6 bps over performance in 2020 together with a robust
performance with growth in New Categories revenue at constant
rates of 50.9% and growth in adjusted profit from operations
at constant rates of 5.2%. In addition, there has been continued
progress with the deleveraging ambition (excluding foreign
exchange) with a full year performance of -0.50x.
These results are reflected in the outcomes for the IEIS, for which
the corporate result across the four measures (Group’s share of key
markets, New Categories revenue, adjusted profit from operations
and deleveraging excluding foreign exchange) was 85.7%.
2019 Long-term Incentive
The Group has delivered a compound annual growth rate in Group
revenue of 5.3% at constant rates through the three year 2019 to
2021 period, a compound annual growth rate in adjusted, diluted EPS
of 6.8% at constant rates and a corresponding operating cash flow
conversion ratio of 101.0% at current rates over the same period.
These results are reflected in the outcomes for the 2019 LTIP award,
for which the corporate result across relative total shareholder return
(TSR), adjusted diluted EPS, adjusted revenue growth at constant
rates and the operating cash flow conversion ratio, results in a vesting
in March 2022 of 49.1%.
The vesting result reflects, through the relative TSR measure,
movements in the Group’s share price during the performance period.
The Committee applied a downward adjustment at grant to the 2019
LTIP award, whereby the number of shares awardedwere calculated
on the basis of the Group’s closing share price on25 February 2019,
increased by 15%. This adjustment was made in recognition of the
decline in Group share price over the preceding twelve months.
Given the share price is below that used to determine the grant, the
Committee are comfortable that there has been no windfall gain.
BAT Annual Report and Form 20-F 2021
132
Annual Statement onRemuneration
Continued
Remuneration Report
Following evaluation of the formulaic outcomes for both the 2021
IEIS and 2019 LTIP, the Committee considered the results against
the underlying performance of the Group and the experience of
our shareholders. The Committee concluded that the outcomes
were a fair reflection of performance delivered in what continues to
be challenging and volatile market conditions and no adjustments
were required. In addition, share price fluctuations are reflected
throughout the Executive Directors’ remuneration, in the vesting
and holding periods as well as their individual shareholdings.
The performance against the key measures that delivered the IEIS
and LTIP remuneration outcomes are summarised on pages
[137]
and
[138]
.
Executive Director Remuneration
The Remuneration Committee has considered in detail the views of
shareholders and wider stakeholders with respect to annual salary
reviews and the management of executive pay. This topic was
discussed at length with shareholders during our engagement on
the Remuneration Policy.
The Committee has also given due consideration to the total
remuneration positioning of the Executive Directors in relation to
the wider market, their individual performance, and the level of
pay increases for UK employees generally. Pay increases for UK
employees are expected to range between 0% and 7.2%, based
on performance in the prior year, with the average of employee
increases falling within the 2.6% to 3.8% range.
The Remuneration Committee has decided that the salaries of the
Chief Executive and the Finance and Transformation Director will
be maintained at their current levels, with no further increases to
apply in April 2022.
Pay and Transparency
The Remuneration Committee recognises the importance of
considering executive compensation in the broader context of the
Group’s workforce and the role that large organisations may play
in encouraging greater transparency in this respect. Consequently,
from 2022 the Group has broadened the scope of its pay equality
reporting as follows.
Gender Pay: UK
In March 2022, we will be publishing data relating to UK Gender Pay
in line with the statutory requirements. As a result of our continued
focus we have seen an improvement in both our mean and median
pay gaps by 3 percentage points when compared to 2020 and an
improvement in the median bonus gap by 7 percentage points
compared to 2020.
These improvements are attributable to increased time at level
among senior female employees reflecting our commitment to
continue to nurture and retain our female talent in more senior
roles. The Group is committed to driving further progress in this
area and has a comprehensive set of diversity initiatives in place
which are explained further on pages
[3]
to
in our Diversity and [5]
Inclusion Report.
Gender Pay: International Business
We will also be publishing in March 2022 voluntary disclosures
on gender pay for our international business. We felt it important
to complement the statutory reporting for the UK with a broader
view of the Group. Our international business gender pay data
includes gender pay information from a cross section of key
markets, representing each of the Group’s regions and functions.
Further details are included on pages
[7]
to
[10]
in our Diversity and
Inclusion Report.
Ethnicity Pay: UK
During 2021 we completed a data gathering exercise with the help
of UK employees. I am delighted to say that 77% of employees in
the UK supported this effort and this has allowed the Group to
complete a review of UK ethnicity pay data. Further details are
included on page
[11]
in our Diversity and Inclusion Report. We will continue to review our approach to ensure the Group
provides as much transparency as is practicable in this
important area.
Looking Ahead to 2022
The annual report on remuneration details remuneration in 2021
and the decisions made by the Remuneration Committee during
this period. The new Remuneration Policy will be put forward for a
binding vote at the 2022 AGM.
The Group has delivered a strong performance in 2021 and I believe
that our proposed new Remuneration Policy supports Group
strategy, drives pay for performance and meets the needs of our
stakeholders in a considered way.
I would once again like to thank our shareholders and wider
stakeholders for the direct engagement and feedback during this
past year on both our remuneration policy and practices. I look
forward to continuing this dialogue in 2022.
Dimitri Panayotopoulos
Chairman, Remuneration Committee
[10]
February 2022
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
133
1 Summary of Our Current Directors’ Remuneration Policy
This section provides a summary of the Remuneration Policy for the Executive Directors and the Non-Executive Directors that was
approved by shareholders at the AGM on25 April 2019 and was in place during the year ended 31 December 2021.
The full Directors’ Remuneration Policy is set out in the Remuneration Report 2018 contained in the Annual Report for the year ended
31 December 2018, which is available at bat.com.
As referenced in the Annual Statement on Remuneration on pages
[128]
to
[132]
, we will be putting forward to a vote the updated
Directors' Remuneration Policy at the AGM on 28 April 2022 and the full detail of the updated policy can be found on pages
[152]
to
[162]
.
Strategic Purpose Key Features
Salary
To attract and retain high-calibre individuals
todeliverthe Group’s long-term strategy
andto offer market-competitive levels of
guaranteed cash to reflectan individual’s
skills,experience and role withinthe Group.
–
Normally paid in 12 equal monthly instalments during the year;
–
Reviewed annually in February (changes effective from April) or subject to ad-hoc review
onsignificant change of responsibilities;
–
Reviewed taking into consideration several factors including individual performance and
appropriate market data based on a Pay Comparator Group;
–
Annual increases will generally be in the range of the increases in the base pay of other
UK-based employees in the Group and will not exceed 10% per annum; and
–
Recently appointed Executive Directors’ base salaries may exceed the top of the range
of the salary increases for UK-based employees where the Remuneration Committee
considers it appropriate to reflect the accrual of experience.
Benefits
To provide market-competitive benefits
consistent withthe role which:
–
attract and retain high calibre individuals
todeliver the Group’s long-term strategic
plans; and
–
recognise that such talent is global in
source and thatthe availability of certain
benefits (e.g. relocation,repatriation,
taxation compliance advice) will from
time to time be necessary to avoid such
factors beingan inhibitor to accepting
the role.
The Company offers the following contractual benefits to Executive Directors:
–
A car or car allowance;
–
Use of a car and driver for personal and business use;
–
Employment tax advice;
–
Tax equalisation payments (where appropriate);
–
Private medical insurance, including general practitioner ‘walk in’ medical services;
–
Personal life and accident insurance;
–
Housing, education allowances or similar arrangements as appropriate to family
circumstances; and
–
Other benefits may include Executive Directors and their partners’ attendance at
hospitality or similar functions, and the provision of benefits which may be treated as
benefits for tax purposes, such as the provision of home security and reimbursement of
expenses incurred in connection with their duties.
Pension
To provide competitive post-retirement
benefit arrangements which recognise
theexternal environment in the context
ofattracting and retainingsenior high
calibreindividuals to deliver theGroup’s
long-term strategy.
–
Only base salary is pensionable.
–
Defined Contribution (“DC”) benefits – Executive Directors are eligible to receive a pension
benefit equivalent to a maximum of 15% of base salary as a contribution into the British
American Tobacco UK Pension Plan or, as alternative provision, they can opt for either
a cash allowance or accrual in a DC unfunded arrangement. The Company contribution
rate is aligned with the benefit available to our wider UK population where the default
contribution rate is 15%, comprising of a core 10% contribution rate and an additional 5%
contribution on a matching basis to an employee’s pension contribution.
BAT Annual Report and Form 20-F 2021
134
Short-term incentives (STI)
–
To incentivise the attainment of
corporate targets aligned to the Group’s
strategic objectives on an annual basis,
with a deferred element to ensure
alignment with shareholders’ interests.
–
To ensure, overall, a market-competitive
remuneration to attract and retain high
calibre individuals to delivertheGroup’s
long-term strategy.
Opportunity
–
Chief Executive – Maximum 250%; on-target 125%.
–
Finance and Transformation Director – Maximum 190%; on-target 95%.
Operation
–
50% of the incentive delivered as cash; 50% as deferred shares (DSBS) which vest after
three years. Deferred shares attract a dividend equivalent which is delivered in additional
quarterly interim dividend equivalent shares;
–
The Remuneration Committee sets the performance targets each year at the beginning of
the performance period and is able to vary the exact measures and the weighting of them
from year to year;
–
Performance measures for 2021 can be found on page
;[137]
and for 2022 on page [143]
–
The Remuneration Committee has discretion to adjust outcomes in circumstances where
it considers it is appropriate to do so to reflect the overall performance of the Company;
–
In cases of identified poor individual performance, the corporate result may be reduced by
upto 50%; and
–
Clawback and malus provisions are in place.
Long-term incentives (LTIP)
–
To put in place a combination of
measures with appropriately stretching
targets around the long-term strategy
delivery that provides a balance relevant
to the Company’s business and market
conditions as well as alignment between
Executive Directors’ and shareholders’
interests.
–
To facilitate the appointment of senior
high calibre individuals required to deliver
the Group’s long-term strategy, and
to promote the long-term success of
the Company.
Opportunity
–
Maximum annual award of shares of 500% of salary for all Executive Directors.
–
Normal annual grants of 500% of salary for the Chief Executive and 400% of salary for the
Finance and Transformation Director.
Operation
–
LTIP awards vest only to the extent that:
–
the performance conditions are satisfied at the end of the three-year performance period; and
–
an additional vesting period of two years from the third anniversary of the date of grant has
been completed;
–
Dividend equivalent shares are awarded at the end of the extended vesting period to the
extent that the awards vest;
–
The Remuneration Committee sets the performance targets for the applicable performance
period each year;
–
Vesting levels are based on the achievement of appropriately stretching targets against
performance measures aligned to the Group’s long-term strategy;
–
Performance measures for the 2019-2021 performance period are detailed on page
[138]
andfor the awards to be granted in 2022 are detailed on page
[144]
;
–
The Remuneration Committee has discretion to adjust the level of vesting in circumstances where
it considers it is appropriate to do so to reflect the overall performance of the Company; and
–
Clawback and malus provisions are in place.
Shareholding requirements
–
To strengthen the alignment between
the interests of the Executive Directors
and those of shareholders by requiring
Executive Directors to build up a
high level of personal shareholding in
the Company.
–
To ensure long-term alignment between
the interests of the Executive Directors
andthose of shareholders through
the operation of post-employment
shareholding requirements.
Executive Directors are required to hold shares in the Company:
–
during service as a Director, equal to the value of the same multiple of salary at which LTIP
awards are made to that Director (currently, 500% for the Chief Executive and 400% for
the Finance and Transformation Director); and
–
after ceasing service as a Director, equal to the value of 100% of the shareholding
requirement that applied while a Director for a period until the second anniversary of
cessation of employment with the Group.
All-employee share plans
Executive Directors are eligible to participate
in the Company’s all-employee share
schemes which are designed to incentivise
employees by giving them an opportunity to
build shareholdings in the Company.
–
All-employee share schemes are the Partnership Share Scheme, the Sharesave Scheme
and the Share Incentive Plan (SIP); and
–
Executive Directors are subject to the same limits on participation as other employees, as
defined by the applicable statutory provisions.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
135
2 Overview of What Our Executive Directors Earned in 2021 and Why
What our Executive Directors earned in 2021 –
@
audited
@
Single figure for Executive Directors
Jack Bowles
Tadeu Marroco
2021
£’000
2020
£’000
2021
£’000
2020
£’000
Fixed Pay
Salary
1,316
1,259
803
775
Taxable benefits
320
508
100
152
Pension
197
189
121
116
Total Fixed Pay
1,833
1,956
1,024
1,043
Variable Pay
Short-term incentives
2,820
2,238
1,308
1,046
Long-term incentives
1,2
2,815
757
584
489
Other emoluments
3
3
318
Total Variable Pay
5,638
2,998
1,895
1,553
Total Remuneration
7,471
4,954
2,919
2,596
Notes:
1.
The 2019 LTIP award is due to vest on 28 March 2022 for Jack Bowles (first award made as an Executive Director) and Tadeu Marroco based on completion of the three-year performance
period on 31 December 2021. The value shown is based on the average share price for the three-month period ended 31 December 2021 of 2,616p. Given the share price performance since the
date of grant of awards, none of the value shown in the table above is attributable to share price appreciation.
2. Long-term incentives shown for 2020
:
in accordance with the UK Directors’ Remuneration Report Regulations, estimates for the values of the vesting 2018 LTIP awards were given in the Annual Report onRemuneration for the year ended 31 December 2020; these amounts have been re-presented to show the actual market value on the date of vesting in 2021.
Further information in respect of this remuneration can be found in Section 3 on page
[136]
.
How this aligns to performance
Short-term incentives for the performance period ended in 2021
Performance summary:
Chief Executive: corporate performance – 214.3% of salary
Finance and Transformation Director: corporate performance – 162.8% of salary
Group share of Key Markets
+6 bps growth over 2020
Adjusted profit from operations (APFO)
at constant rates of exchange +5.2% growth
New Categories revenue
+50.9% growth
Deleveraging (excluding foreign exchange)
-0.50x at constant rates of exchange
Long-term incentives for the three-year performance period ended in 2021
Vesting at 49.1%
Total shareholder return (TSR)
17 out of 24 in FMCG comparator group 2019–2021
0% achievement
(0% of award vesting out of possible 20%)
Adjusted diluted earnings per share (EPS) growth
3.5% CAGR at current rates of exchange
0% achievement
(0% of award vesting out of possible 20%)
Adjusted diluted earnings per share (EPS) growth
6.8% CAGR at constant rates of exchange
45.5% achievement
(9.1% of award vesting out of possible 20%)
Adjusted revenue growth
5.3% CAGR at constant rates of exchange
100% achievement
(20% of award vesting out of possible 20%)
Adjusted operating cash flow conversion ratio
101.0% ratio over the performance period
100% achievement
(20% of award vesting out of possible 20%)
Non-GAAP measures
Adjusted profit from operations (APFO), deleveraging (excluding foreign exchange), New Categories revenue, adjusted diluted EPS,
adjusted revenue and adjusted operating cash flow conversion ratio are non-GAAP measures used by the Remuneration Committee to
assess performance. Please refer to pages
[302 to 311]
for definitions of these measures @
and a reconciliation of these measures to the
most directly comparable IFRS measure where applicable.
@
@
Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2021
136
3 Executive Directors’ Remuneration for the Year Ended 31 December 2021
Total remuneration for the year ended 31 December 2021 –
@
audited
@
Jack Bowles
Tadeu Marroco
2021
£’000
2020
£’000
2021
£’000
2020
£’000
Salary
1,316
1,259
803
775
Taxable benefits
1
–
car allowance
20
20
20
20 –
health insurance
–
life insurance
15
18
15
19
13
8
13
8
–
tax advice
49
65
21
30
–
use of Company driver
65
85
27
55
–
home and personal security
80
155
4
14
– –
tax & social security
62
136
– –
other expenses related to individual and/or accompanied attendance at Company
functions/events
11
13
7
12
Total taxable benefits
320
508
100
152
Short-term incentives
STI vesting percentage (% of maximum)
85.7%
71.1%
85.7%
71.1%STI: cash – Group performance cash element
1,410
1,119
654
523
STI: DSBS – Group performance deferredelement
1,410
1,119
654
523
Total short-term incentives (
[page 137]
)
2,820
2,238
1,308
1,046
Long-term incentives
4,5
LTIP vesting percentage (% of maximum)
49.1%
54.2%
49.8%
54.2%LTIP value to vest
2,267
612
470
395
Dividend equivalent
548
145
114
94
Total long-term incentives (
[page 138]
)
2,815
757
584
489
Total pension-related benefits (
[page 139]
)
197
189
121
116
Other emoluments
Share Reward Scheme (value of ordinary shares awarded)
3
3
33
Sharesave Scheme (face value of discount onoptions granted)
– – –
15
Total other emoluments
3
3
318
Total remuneration
7,471
4,954
2,919
2,596
Notes:
1. Taxable benefits: the figures shown are gross amounts as, in line with the UK market, it is the normal practice for the Company to pay the tax which may be due on any benefits, with the
exception of the car or car allowance. The numbers presented above for tax advice are inclusive of applicable VAT and income tax.
2. Figure for home and personal security for Jack Bowles for 2020 related to necessary one-off security improvements to his residence and annual maintenance/monitoring. The figure reported
for 2021 relates only to annual maintenance/monitoring. As noted in point 1 above, these amounts have been grossed up for UK tax purposes.
3. The amount reported for Jack Bowles for 2020 in the Annual Report on Remuneration for the year ended 31 December 2020 was £220,000. This amount has been restated above to
account for credits received in the UK in respect of overseas tax payments made by the Company. The figure reported for 2021 relates to overseas taxes paid by the Company in respect of
employment income in order to protect Jack Bowles to his UK tax position in line with the Company policy for the wider workforce.
4. The 2019 LTIP award is due to vest on 28 March 2022 based on completion of the three-year performance period on 31 December 2021. The value shown is based on the average share price
for the three-month period ended 31 December 2021 of 2,616p. The LTIP vesting figure above for Jack Bowles reflects the first award made as an Executive Director. The LTIP vesting figure
above for Tadeu Marroco reflects award made prior to being appointed asan Executive Director.
5. LTIP award shown for 2020: the values disclosed in the Annual Report on Remuneration for the year ended 31 December 2020 were estimated values as the award had not vested by the date
of that report; these amounts have been re-presented based on the actual market value on the date of vesting of 27 March 2021 of 2,578p.
6. LTIP dividend equivalent payments: the dividend equivalent payment that will attach to the LTIP award that is included in the Single Figure Table is reported. The values for the year ended
31 December 2020 have been restated on this basis. The amount reported for Jack Bowles will be delivered in shares following the end of the two year additional holding period.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
137
Short-Term Incentives for the Year Ended 31 December 2021
STI performance measures, weightings and results for year ended 31 December 2021 –
@
audited
@
STI: performance measure and target 2021 Description of measure 2021
Actual performance 2021
Payout
(maximum)
Group’s share of Key Markets
(growth over prior year)
Weighting: 15%
Threshold:
0 bps growth over 2020
Maximum:
10bps growth over 2020
The Group’s volume share in its Key Markets
accounts for around 80% of cigarettes
volume and 90% of THP volume of the
Group’s subsidiaries. The Group’s share
is calculated from data as independently
measured by retail audit agencies and
scanner sales to consumers, or from
estimated shipment share.
Global volume share in key markets
grew by 6 bps.
Strategic Report: Delivering our
strategy –A Better Tomorrow
TM
for Consumers
9.0% (15%)
New Categories revenue
(growth over prior year)
Weighting: 20%
Threshold:
15% growth over 2020
Maximum:
30% growth over 2020
New Categories Revenue is the revenue
derived from the Vapour, THP and Modern
Oral product categories. This measure is
assessed at constant rates of exchange.
New Categories revenue grew by
50.9%.
Strategic Report: Delivering our
strategy –A Better Tomorrow
TM
for Shareholders
20% (20%)
Adjusted profit from operations
(APFO)
(growth over prior year)
Weighting: 30%
Threshold:
3.0% growth over 2020
Maximum:
6.0% growth over 2020
APFO is the adjusted profit from operations
at constant rates of exchange for the year
ended 31 December 2021. Please refer to
page
[306]
for the detailed description
of APFO.
APFO growth over the prior year of
5.2%.
Strategic Report: Delivering our
strategy –A Better Tomorrow
TM
for Shareholders
21.7% (30%)
Deleveraging (excluding
foreign exchange)
Weighting: 35%
Threshold:
0.10x reduction
versus 2020
Maximum:
0.30x reduction
versus 2020
Deleveraging (excluding foreign exchange)
refers to the reduction in Adjusted Net Debt
to Adjusted EDITDA during the year ended
31 December 2021, assessed at constant
rates of exchange.
Deleveraging (excluding foreign
exchange) was 0.50x.
Strategic Report: Delivering our
strategy –A Better Tomorrow
TM
for Shareholders
35% (35%)
85.7% (100%)
STI outcome for year ended 31 December 2021
Available STI award as
% of base salary
STI award achieved
as % of maximum
opportunity
STI award achieved
% of base salary
STI award achieved
£’000
(Value shown in
Single Figure Table)
1,2
Jack Bowles
250%
85.7%
214.3%
2,820
Tadeu Marroco
190%
85.7%
162.8%
1,308Notes:
1. Malus and clawback provisions apply.
2. 50% of the STI award will be paid in cash and 50% as an award under the DSBS. Awards made under the DSBS are in the form of free ordinary shares in the Company that normally vest after
three years and no further performance conditions apply in that period. In certain circumstances, such as resigning before the end of the three-year period, participants may forfeit all of
the shares.
3. The Remuneration Committee did not consider that any discretion to adjust the formulaic outcome need be applied.
@
Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2021
138
Long-Term Incentives (LTIP) for the Year Ended 31 December 2021
LTIP performance measures, weightings and results for the year ended 31 December 2021 –
@
audited
@
LTIP: performance measure
Description of measure and target for 2019 LTIP
Performance period 1 January 2019 – 31 December 2021
Result achieved
Vesting percentage
Relative TSR
1
Relative to a peer group of international
FMCG companies
Weighting: 20%
Ranked 17
outof24
0%
(out of maximum
of 20%)
2019–2021 LTIP target
Threshold
At median, 3% vests
Maximum
At upper quartile, 20% vests
EPS growth at current rates
of exchange
Compound annual growth inadjusted
diluted EPS measured atcurrent rates
of exchange
Weighting: 20%
3.5% CAGR
0%
(out of maximum
of 20%)
2019–2021 LTIP target
Threshold
At CAGR of 5%, 3% vests
Maximum
At CAGR of 10%, 20% vests
EPS growth at constant rates
of exchange
Compound annual growth inadjusted
diluted EPS measured atconstant rates
of exchange
Weighting: 20%
6.8% CAGR
9.1%
(out of maximum
of 20%)
2019–2021 LTIP target
Threshold
At CAGR of 5%, 3% vests
Maximum
At CAGR of 10%, 20% vests
Adjusted revenue
2
Compound annual growth measured
atconstant rates of exchange
Weighting: 20%
5.3% CAGR
20%
(out of maximum
of 20%)
2019–2021 LTIP target
Threshold
At CAGR of 3%, 3% vests
Maximum
At CAGR of 5%, 20% vests
Adjusted Operating cash flow
conversion ratio
Ratio over the performance period
atcurrent rates of exchange
Weighting: 20%
101.0% ratio
20%
(out of maximum
of 20%)
2019–2021 LTIP target
Threshold
Ratio of 85%, 3% vests
Maximum
Ratio of 95%, 20% vests
Total vesting level as a percentage of
maximum opportunity
49.1%
Notes:
1.
Relative TSR:
the constituents of the FMCG peer group for the 2019-2021 LTIP were: Altria Group, Anheuser-Busch InBev, Campbell Soup, Carlsberg, Coca-Cola, Colgate-Palmolive, Danone,
Diageo, Heineken, Imperial Brands, Japan Tobacco, Johnson & Johnson, Kellogg, Kimberly-Clark, LVMH, Mondelez International, Nestle, PepsiCo, Pernod Ricard, Philip Morris International,
Procter & Gamble, Reckitt Benckiser and Unilever.
2.
The underpin for adjusted revenue growth measure:
the adjusted revenue growth measure can only vest provided the corresponding three-year CAGR of APFO exceeds the CAGR of
the threshold performance level for APFO as approved annually in the STI and approved by theBoard. The underpin was exceeded with reference to the APFO STI outcomes for 2019, 2020
and 2021.
3. The Remuneration Committee did not consider that any discretion to adjust the formulaic outcome need be applied.
@
Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
139
LTIP outcome for year ended 31 December 2021
Number of ordinary
shares subject
to award
Vesting % achieved
(based on 2019–2021
performance period)
Number of
ordinary shares
to vest
Value of ordinary
shares to vest
1
£’000
Dividend equivalent
payment on
vesting
2
£’000
Total value tovest
£’000
(Value shown in
Single Figure Table)
Jack Bowles
176,532
49.1%
86,677
2,267
548
2,815
Tadeu Marroco
3
36,057
49.8%
17,956
470
114
584
The 2019 LTIP award was granted to Tadeu Marroco prior to his appointment as Executive Director, therefore the vesting date is 28 March
2022 and the shares will become exercisable on that same date.
Notes:
1. The value of ordinary shares to vest shown above is based on the average share price for the three-month period ended 31 December 2021 of 2,616p.
2. The dividend equivalent amount shown above that will be delivered on vesting is the value of the dividend equivalents accrued on the proportion of the award that is due to vest.
Dividend equivalent will be delivered as shares following the end of the two-year post-vesting holding period for Jack Bowles. Dividend equivalent will be delivered as cash on vesting date for
Tadeu Marroco due to LTIP award being made prior to appointment as Executive Director.
3. The number of shares subject to award made to Tadeu Marroco reflect the award opportunities available at the time of the award, prior to being appointed asExecutive Director.
4. The vesting percentage for Tadeu Marroco reflects the vesting percentage applicable to awards made prior to being appointed as Executive Director.
Executive Directors’ pension entitlements and accruals for the year ended 31 December 2021 –
@
audited
@
Total Defined Contribution (DC) fund value as
at year-end 31 December 2021 £’000
Pension values
Defined Contribution (DC)
Unapproved Unfunded
Retirement Benefit Scheme
(UURBS)
1
British American Tobacco UK
Pension Plan
Jack Bowles
1,118
359
Tadeu Marroco
781
211
Total
1,899
570
Note:
1. The DC UURBS credit accrued over the year is increased in line with the Company’s Weighted Average Cost of Debt (WACD) over the year. For the year ended 31 December 2021, a WACD of
3.6% has been used.
Jack Bowles
The total Company contribution to the DC arrangements over the period 1 January to 31 December 2021 was £197,526. Of this, £3,033 was
paid to the British American Tobacco UK Pension Plan and £194,493 was credited to the DC UURBS. These total amounts are based on a
Company contribution rate of 15% of salary per annum.
Tadeu Marroco
The total Company contribution paid to the DC arrangements over the period 1 January to 31 December 2021 was £120,643. Of this, £3,033
was paid to the funded British American Tobacco UK Pension Plan and £117,610 was credited to the DC UURBS. These total amounts are
based on a Company contribution rate of 15% of salary per annum.
No excess retirement benefits have been paid to or are receivable by an Executive or former Executive Director.
@
Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2021
140
Other Information Relating to Chief Executives’ Remuneration for the year Ended 31 December 2021
Chief Executives’ pay – comparative figures 2012 to 2021
Year
2012 2013 2014 2015 2016 2019 2020
2017
20182021
Chief Executives’
‘singlefigure’ of total
remuneration (£’000)
Nicandro Durante
1
(to1 April 2019)
6,340
6,674
3,617
4,543
8,313
10,244
8,651
3,054
n/a
n/a
Jack Bowles
(from 1 April 2019)
n/a n/a n/a n/a n/a n/a n/a
3,512
4,954
7,471
Annual bonus (STI)
paidagainst maximum
opportunity (%)
Nicandro Durante
1
(to1 April 2019)
85.0 100 50.0
81.3 73.2
10097.2
100n/a
n/a
Jack Bowles
(from 1 April 2019)
n/a n/a n/a n/a n/a n/a n/a
96
71.1
85.7
Long-term
incentive (LTIP) paid
againstmaximum
opportunity(%)
Nicandro Durante
1
(to1 April 2019)
87.1
49.2
0.0
69.38.7
46.0
96.1
70.5
n/a
n/a
Jack Bowles
(from 1 April 2019)
n/a n/a n/a n/a n/a n/a n/a
69.9
54.2
49.1
Notes:
1. Nicandro Durante retired as Chief Executive on 1 April 2019. Historical data are taken from the Directors’ Remuneration Reports for the relevant years and are recast (as appropriate) on the
basis of the ‘single figure’ calculation as prescribed in the UK Directors’ Remuneration Report Regulations. His ‘single figure’ remuneration for the year ended 31 December 2019 has been
time-apportioned to reflect the period he was Chief Executive.
Total shareholder return (TSR) performance:
1
1 January 2012 to 31 December 2021
Value of hypothetical £100 holding
250
50
0
100
150
200
Dec 21Dec 20Dec 19Dec 18Dec 17Dec 16Dec 15Dec 14Dec 13Dec 12Dec 11
Note:
1.
Performance and pay chart:
this shows the performance of a hypothetical investment of £100 in ordinary shares (as measured by the TSR for the Company) against a broad
equity market index (the FTSE 100 Index) over a period of 10 financial years starting from 1 January 2012 through to 31 December 2021 based on 30-trading-day average values. The FTSE 100
has been selected by the Committee as an appropriate comparator group due to BAT's position within the FTSE. A local currency basis is used for the purposes of the TSR calculation making
it consistent with the approach to TSR measurement for the LTIP.
British American Tobacco
FTSE 100
Annual Statement onRemuneration
Continued
Remuneration Report
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Governance Report
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Other Information
BAT Annual Report and Form 20-F 2021
141
Annual change in remuneration of Directors’ and employees
The following table shows the percentage change in the Directors’ remuneration measured against a comparator group comprising the UK
employee population across all UK entities. This comparator group is considered tobe the most appropriate group due to the limited number
of employees employed under BAT p.l.c. contracts outside of the Director group. In addition, using a more widely-drawn group encompassing
the worldwide nature of the Group’s business would also present practical difficulties in collation and a less relevant comparator, given the
significant variations in employee pay across the Group, the differing economic conditions and wide variations in gross domestic product
per capita.
% change in salary/fees % change in taxable benefits
1
% change in STI
2020 to
2021
2019 to
2020
2020 to
2021
2019 to
2020
2020 to
2021
2019 to
2020
Executive Directors
Jack Bowles
5%
7%
(37%)
84%
(21%)26%
Tadeu Marroco
2
4%
5%
(24%)(33%)
25%22%
Chairman
Richard Burrows
3
2%
3%
8%
(44%)
– –
Luc Jobin
4
334%
2%
24%(79%)
– –
Non-Executive Directors
Sue Farr
1%
2%
0%
(100%)
– –
Dr Marion Helmes
1%
2%
(72%) (77%)
– –
Jerry Fowden
5
2% 2%
(98%)
14%
– –
Holly Koeppel
1%
3%
(99%) (82%)
– –
Savio Kwan
1%
2%
(97%)
(84%)
– –
Dimitri Panayotopoulos
6
9%
21%
(78%) (88%)
– –
Karen Guerra
7
0%
n/a
0%n/a
– –
Darrell Thomas
8
n/a n/a n/a n/a
– –
Average UK-based employee
9
6%
3%
(1%)
1%
(5%)20%
Notes:
1. Changes in taxable benefit values for 2019 to 2020 and for 2020 to 2021 for Non-Executive Directors were primarily a result of a reduction in travel and subsistence costs associated with
business functions due to COVID related travel restrictions throughout 2020 and 2021. Further details of the taxable benefits figures can be found in the table on page
[144]
.
2. Tadeu Marroco was appointed as an Executive Director from 5 August 2019. For the period 5 August 2019 to 31 December 2019, annualised figures have been used to calculate the year-on-
year change.
3. Richard Burrows departed the Company 28 April 2021. For the period 1 January to 28 April 2021, annualised figures have been used to calculate the year-on-year change.
4. Luc Jobin was appointed Chairman from 28 April 2021. The change in fees from 2020 to 2021 is due to the increase in fees received following the appointment.
5. Jerry Fowden was appointed to the board on 1 September 2019 and departed the Company on 31 March 2021. For the periods 1 September to 31 December 2019 and 1 January to 31 March
2021, annualised figures have been used to calculate the year-on-year change.
6. Dimitri Panayotopoulos started receiving the Senior Independent Director fee with effect from 1 May 2020.
7. Karen Guerra was appointed to the board on 14 September 2020. For the period 14 September 2020 to 31 December 2020, annualised figures have been used to calculate the year-on-
year change.
8. Darrell Thomas was appointed to the board on 7 December 2020, receiving no fees or taxable benefits in 2020. Accordingly, no year-on-year change figures have been included.
9. The data for the UK-based employees comparator group are made up as follows as at 1 November 2021: (1) the weighted average base salaries; (2) the average taxable benefits per grade; and
(3) the weighted average bonus result based on that population as at that date.
BAT Annual Report and Form 20-F 2021
142
Chief Executive Pay Ratio Disclosure
The below table reflects the Chief Executive pay ratio when compared to employees at the 25th percentile, median and 75th percentile
of the Group’s UK workforce for years 2019, 2020 and 2021. The table also includes the salary and total remuneration figures for the
employees at each percentile for 2021.
Year
Method
25th percentile pay ratio Median pay ratio 75th percentile pay ratio
2019
Option A
144:1 86:1 36:1
2020
Option A
103:1 66:1 29:1
2021
Option A
138:1 90:1
37:1
Employees remuneration for 2021
25th percentile
Median
75th percentileSalary
£36,010 £55,849
£98,777
Total Remuneration
£53,980
£83,438
£202,314
Notes:
1. Option A uses the total full-time equivalent remuneration for all UK employees for the financial year ended 31 December 2021 and has been used to calculate the ratio as this is viewed to be
the most robust and comprehensive means of assessment and is also reflective of shareholder preferences.
2. Total pay and benefits are based on the workforce as at 1 November 2021 and include the annualised income for the earnings period 1 January 2021 to 31 December 2021.
3. Total pay and benefits for the Chief Executive are based on the single figure calculation on page
[135]
.
4. Total pay and benefits for the workforce is calculated as far as possible on the same basis as the Chief Executive single figure calculation. This includes salary, taxable benefits, short-term
incentive, long-term incentive, dividends, pension benefits and any other remuneration receivable. For the purposes of this analysis, the following has been assumed:
–
For all employees that are eligible for a car benefit, the applicable car allowance amounts have been used;
–
For all employees that participate in the global International Executive Incentive Scheme or equivalent corporate incentive scheme, incentive pay-outs are calculated based on the same
metrics; and
–
For all employees that participate in the UK DC scheme, Company contributions of 15% of salary have been used.
5. For the calculation of the total pay and benefits for employees, employees on international assignment into and out of the UK have been included; however, assignment benefits, such as
housing support, education support, home leave allowance or relocation costs, have not been included as these are not consistent with the benefits included in the Chief Executive single
figure calculation.
6. For hourly paid employees who are not full time, total pay and benefits have been pro-rated based on full-time employee hours.
The figures above show that following the decrease from 2019 to 2020, there has been an increase in the Chief Executive pay ratio across
all quartiles from 2020 to 2021.
The increase in pay ratio from 2020 to 2021 is due to the 2019 LTIP award being the first award made to Jack Bowles at Chief Executive
award levels.
Fixed remuneration remained aligned with that of the wider UK based workforce, with salary increasing in line with the wider
workforce increase range, pension contribution percentage remaining aligned with the wider workforce at 15% and taxable benefits
reducing significantly.
The CEO pay ratio is likely to continue to vary over time, with variances being attributable to the CEO variable pay opportunity which
accounts for 80% to 90% of the total remuneration.
The Company believes the median pay ratio for 2021 reflects the diversity of our business footprint and employee population across the
UK. The Group’s remuneration policies and practices are founded on a high degree of alignment and consistency, with total remuneration
at all levels providing competitive compensation that enables the attraction and retention of talent while also providing equitable
differentiated remuneration based on grade, performance and experience. Further details on all-employee rewards at BAT can be found
on pages
[163]
and [164]
.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
143
4 Executive Directors’ Remuneration for the Upcoming Year
Base salary for 2022
The Remuneration Committee has determined the following salaries for the Executive Directors.
Executive Directors – salaries
Base
salary from
1 Apr 2022
£
Percentage
change
%
Base
salary from
1 Apr 2021
£
Jack Bowles
1,325,610
n/a
1,325,610
Tadeu Marroco
803,400
n/a
803,400
Benefits and pension
No changes have been made to the provision of benefits or pension for 2022.
Short-term incentives for 2022
STI opportunity levels for Executive Directors will be in line with those set out in our Directors’ Remuneration Policy. STI metrics and
weightings are as follows:
2022 STI metrics & weightings
Volume share growth (Incl THP)
1
10%
New Categories revenue
2
15%
Adjusted profit from operations
25%
New Categories contribution
3
20%
Adjusted cash generated from operations
4
30%
Total
100%
Notes:
1. Group share of key markets will include THP performance for all major markets (markets included are Japan, South Korea, Italy, the Czech Republic, Ukraine, Russia, Poland, Greece & Hungary).
2. New Categories Revenue is the revenue derived from the Vapour, THP and Modern Oral product categories. This measure is assessed at constant rates of exchange. Further details of the
metric can be found on page
[303]
.
3. New Categories Contribution is the contribution to APFO from Vapour, THP and Modern Oral products. It is stated after deduction of directly attributable costs and allocated cross-category
shared costs, before the deduction of administrative overheads and excluding the impact of adjusting items. The measure is assessed at constant rates of exchange.
4. Net cash generated from operating activities, less net finance costs, net capital expenditure, dividends from associates and dividends paid to non-controlling interests and before cash paid/
received in respect of litigation. Adjusted CGFO is measured at constant rates of exchange.
Due to the commercial sensitivity of the targets, details for the year ending 31 December 2022 will be disclosed retrospectively in the
Annual Report on remuneration for the year ending 31 December 2022.
BAT Annual Report and Form 20-F 2021
144
Long-term incentives for 2022
The Chief Executive and Finance and Transformation Director will be granted an LTIP award equal to a maximum of 500% of salary and
400% of salary, respectively. The measures and targets for 2022 LTIP awards are set out below.
LTIP measures and performance ranges
% of award
vesting
at maximum
% of award
vesting
at threshold
Relative TSR
Median performance vs. FMCG peer group to upper quartile.
The current constituents of the FMCG peer group as part of the new remuneration policy will be:
20
3
Altria Group Pernod Ricard
Coca-Cola
Imperial BrandsReckitt Benckiser
Anheuser-Busch InBev
Diageo
Japan Tobacco
Philip Morris International Swedish Match
Carlsberg Heineken
PepsiCo
Procter & Gamble
Unilever
EPS growth (15% current and 15% constant rates of exchange)
5%–10% compound annual growth in adjusted diluted EPS over the performance period
30
4.5
Adjusted revenue growth
3%–5% compound annual growth over the performance period
15
2.25
Growth in New Categories revenue
20%–30% compound annual growth over the performance period
15
2.25
Adjusted operating cash flow conversion ratio
Ratio of 85%–95% over the performance period at current rates of exchange
20
3
Total
100
15
5 Chairman and Non-Executive Directors’ Remuneration for the Year Ended 31 December 2021 –
@
Audited
@
The following table shows a single figure of remuneration for the Chairman and Non-Executive Directors in respect of qualifying services
for the year ended 31 December 2021 together with comparative figures for 2020.
Base fee
1
£’000
Chair/Committee
membership fees
1
£’000
Taxable benefits
2
£’000
Total remuneration
£’000
2021
2020
20212020
20212020
20212020
Chairman
Luc Jobin
3
(from 28 April 2021)
523
96
9
26
20
16
552
138
Richard Burrows (up to 28 April 2021)
234
714
–
–
36
77
270
791
Non-Executive Directors
Sue Farr
97
96
27
26
–
–
124
122
Karen Guerra
97
29
27
8
–
–124
37
Dr Marion Helmes
97
96
27
26
1
3
125
125
Holly Keller Koeppel
4
97
96
54
53
–
23
152
172
Savio Kwan
97
96
27
26
–
10
124
132
Dimitri Panayotopoulos
138
124
54
53
1
3
193
180
Darrell Thomas
104
–29
––
–133
–Jerry Fowden (up to 31 March 2021)
25
96
7
26
–3
32
139
Total
1,509
1,443
261244
58
135
1,829
1,836
Notes:
1.
Committee memberships:
are shown, together with changes during the year, in the reports of the respective committees in the Governance sections of the Directors’ Report.
2.
Benefits:
the Chairman’s benefits in respect of Richard Burrows in 2021 comprised: health insurance and ‘walk-in’ medical services £15,000 (2020: £16,000); the use of a Company driver
£11,000 (2020: £48,000); home and personal security in the UK and Ireland £10,000 (2020: £11,000); and commuting flights to London (2020: £2,000). The Chairman’s benefits in respect of
Luc Jobin in 2021 comprised: health insurance and ‘walk-in’ medical services £8,000; the use of a Company driver £1,000; and commuting flights to London £3,000. The benefits for the other
Non-Executive Directors principally comprised travel-related expenses incurred in connection with individual and/or accompanied attendance at certain business functions and/or events
and ‘walk-in’ medical services. The figures shown are grossed-up amounts (as appropriate) as, in line with the UK market, it is the normal practice for the Company to pay the tax that may be
due on any benefits.
3.
Pension:
Luc Jobin receives a pension in respect of prior service to Imasco Limited (acquired in 2000 by the Group) and Imperial Tobacco Canada Limited, a subsidiary of BAT. In 2021 this
amount was CAD$150,228.00 (£87,139.21) (2020: CAD$151,395.00 (£86,112.85)).
4.
Deferred Compensation Plan for Directors of Reynolds American Inc. (DCP):
as a former outside director of Reynolds American Inc. Holly Keller Koeppel participated in the DCP under which she
elected to defer payment of a portion of her Reynolds American retainers and meeting attendance fees to a Reynolds American stock account. Following the acquisition of Reynolds American by BAT, amounts
deferred to a stock account (Deferred Stock Units or DSUs) mirror the performance of, and receive dividend equivalents based on, BAT American Depository Shares (ADSs). The DSUs of Holly Keller Koeppel are
disclosed as a note to ‘Summary of Directors’ share interests’ below. DSUs deferred under the DCP will be paid in accordance with the terms of the DCP, section 409A of the US Internal Revenue Code of 1986,
as amended, and the Director’s existing deferral elections.
5. Darrell Thomas was appointed to the Board on 7 December 2020, with the first fee being paid to him in January 2021.
6. The Non-Executive Directors’ fees structure 2021 is set out in the table overleaf.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
145
Fees from 1 May 2021
£
Fees to 30 April 2021
£
Base fee
96,850
96,850
Senior Independent Director – supplement
41,500
41,500
Audit Committee: Chairman
42,000
40,950
Audit Committee: Member
14,400
14,100
Nominations Committee: Chairman
–
–
Nominations Committee: Member
12,800
12,500
Remuneration Committee: Chairman
42,000
40,950
Remuneration Committee: Member
14,400
14,100
Chairman and Non-Executive Directors’ fees and remuneration for the upcoming year
As described in the Annual Report on Remuneration for the year ended 31 December 2020, the Chairman’s fee was £670,000 from
28 April 2021.
The Chairman's fee and the fees for Non-Executive Directors will be maintained at their current levels, with no increases to apply in
May 2022.
6 Directors’ Share Interests
Summary of Directors’ share interests –
@
audited
@
Ordinary shares
held at
31 Dec 2021
Outstanding scheme interests 31 Dec 2021
Total of all interests
in ordinary shares at
31Dec 2021
Unvested awards
subject to performance
measures and
continued employment
(LTIP)
Unvested awards
subjectto
continued
employment only
(DSBS)
Unvested
interests
(Sharesave)
Total ordinary
sharessubject
tooutstanding
schemeinterests
Executive Directors
Jack Bowles
1,2
239,214
629,975 119,862
–
749,837
989,051
Tadeu Marroco
2,3
78,126
265,012
322,25056,348
890
400,376
Chairman
Richard Burrows (up to 28 April 2021)
19,000 19,000
Luc Jobin
4
90,236 90,236
Non-Executive Directors
Sue Farr
– –
Jerry Fowden (up to 31 March 2021)
4
10,000 10,000
Karen Guerra
5,000 5,000
Dr Marion Helmes
4,500 4,500
Holly Keller Koeppel
5
– –
Savio Kwan
8,238 8,238
Dimitri Panayotopoulos
3,300 3,300
Darrell Thomas
4
2,600 2,600
Notes:
1.
Jack Bowles:
ordinary shares held include 822 held by the trustees of the BAT Share Incentive Plan (SIP).
2.
Changes from 31 December 2021:
Tadeu Marroco: purchases of five ordinary shares on 5 January 2022 and five ordinary shares on 2 February 2022 under the SIP. There were no changes in
the interests of the Chairman and the other Non-Executive Directors.
3.
Tadeu Marroco:
ordinary shares held include 1,347 held by the trustees of the SIP.
4.
American Depositary Shares (ADSs):
each of the interests in ordinary shares held by Luc Jobin, Jerry Fowden and Darrell Thomas consists of an equivalent number of BAT ADSs each of
which represents one ordinary share in the Company.
5.
Deferred Stock Units (DSUs):
at the date of this report Holly Keller Koeppel, being a former director of Reynolds American Inc. and a participant in the Deferred Compensation Plan for
Directors of Reynolds American (DCP), holds DSUs which were granted prior to becoming a Director of BAT. Each DSU entitles the holder to receive a cash payment upon ceasing to be
a Director equal to the value of one BAT ADS. The number of DSUs increases on each dividend date by reference to the value of dividends declared on the ADSs underlying the DSUs.
Ms Koeppel currently holds 26,660.09 DSUs (31 December 2020: 25,125.91 DSUs).
BAT Annual Report and Form 20-F 2021
146
Executive Directors’ shareholding guidelines
Executive Directors are encouraged to build up a high level of personal shareholding to ensure a continuing alignment of interests with
shareholders. The shareholding guidelines require Executive Directors to hold ordinary shares equal to the value of a percentage of salary
assetout in the table below.
No. of eligible
ordinary shares
held at
31 Dec 2021
Value of eligible
ordinary shares
held at
31 Dec 2021
1
£m
Actual
percentage (%)
of base salary at
31 Dec 2021
Shareholding
requirements
(% of base salary
31 Dec 2021)
Compliant
with shareholding
requirement
Jack Bowles
301,919
8,255
623%
500%
Yes
Tadeu Marroco
106,653
2,916
363%
400%
See note 2
Executive Directors are required to hold shares equivalent to 100% of current shareholding requirements for two full years following
the date of their departure with a sale restriction mechanism in place for this period. More detail on Executive Director shareholding
requirements can be found in the Directors Remuneration policy on page
[157]
Ben Stevens was compliant with the post-employment shareholding requirement up to the end of the two year post employment
shareholding period which ended on 4 August 2021.
Eligibility of shares: (a) unvested ordinary shares under the DSBS, which represent deferral of earned bonus, are eligible and count
towards the requirement on a net-of-tax basis; (b) unvested ordinary shares under the LTIP are not eligible and do not count towards
therequirement during the performance period, but the estimated notional net number of ordinary shares held during the LTIP Extended
Vesting Period are eligible and will count towards the requirement; and (c) ordinary shares held in trust under the all-employee share
ownership plan (SIP) are not eligible and do not count towards the shareholding requirement.
Non-Executive Directors are not subject to any formal shareholding requirements although they are encouraged to build a small interest
inordinary shares during, the term of their appointment. As noted in the Directors' Remuneration policy on page
[162]
, future fees for Non-Executive Directors may be paid in cash or a combination of cash and shares, with the proportion to be paid in shares in a year to be
disclosed in the relevant Directors' Remunerations Report.
Notes:
1.
Value of ordinary shares shown above:
this is based on the closing mid-market share price on 31 December 2021 of 2,734p.
2. Tadeu Marroco was appointed as an Executive Director on 5 August 2019, prior to which the shareholding requirement for Mr Marroco was set at a lower percentage of salary with Mr
3.
Meeting the guidelines:
if an Executive Director does not at any time, meet the requirements of the shareholding guidelines, the individual may, generally, only sell a maximum of up to 50%
of any ordinary shares vesting (after tax) under the Company share plans until the threshold required under the shareholding guidelines has been met.
4.
Waiver of compliance with guidelines:
this is permitted with the approval of the Remuneration Committee in circumstances where a restriction on a requested share sale could cause
undue hardship. No such applications were received from the Executive Directors during 2021.
@
Denotes phrase, paragraph or similar that does not form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
147
Executive Directors’ outstanding scheme interests –
@
audited
@
Plan
At 1 Jan 2021
Awarded
in 2021
Lapsed
in 2021
Exercised/
released
in 2021
At
31 Dec 2021
Exercise
price
(p)
End of
performance
period
Date from which
exercisable or
shares released
Jack Bowles
LTIP
1
43,785
–
20,054
–23,731
2,802
31 Dec 20 26 Mar 21
LTIP
2
176,532
– – –
176,532–
31 Dec 21 28 Mar 24
LTIP
3
223,129
– – –
223,129–
31 Dec 22 30 Mar 25
LTIP
3
– –
230,314
–230,314
–31 Dec 23 29 Mar 26
DSBS
12,064
– –
12,064– –
31 Dec 20 26 Mar 21
DSBS
26,192
– – –
26,192–
31 Dec 21 28 Mar 22
DSBS
53,618
– – –
53,618–
31 Dec 22 30 Mar 23
DSBS
– –
40,052
–40,052
–31 Dec 23 29 Mar 24
Sharesave
– – – – – – – –
Sharesave
– – – – – – – –
Tadeu Marroco
LTIP
1
28,248
–
12,93815,310
–
2,787
31 Dec 20 26 Mar 21
LTIP
2
36,057
– – –
36,057–
31 Dec 21 28 Mar 22
LTIP
3
113,938
– – –
113,938–
31 Dec 22 30 Mar 25
LTIP
3
– –
115,017
–115,017
–31 Dec 23 29 Mar 26
DSBS
7,783
– –
7,783– –
31 Dec 20 26 Mar 21
DSBS
13,233
– – –
13,233–
31 Dec 21 28 Mar 22
DSBS
24,388
– – –
24,388–
31 Dec 22 30 Mar 23
DSBS
– –
18,727
–18,727
–31 Dec 23 29 Mar 24
Sharesave
266
–
266– – –
1 May 21 1 May 21
Sharesave
– –
433
–433
–1 May 24 1 May 24
Sharesave
624
– – –
624–
1 May 25 1 May 25
Notes:
1. Details of the performance condition for the LTIP awards granted in 2018 (which vested during 2021), and of achievement against that condition in the period to 31 December 2020,
weresetoutintheAnnual Report on Remuneration for the year ended 31 December 2020.
2. Details of the performance condition attached to 2019 LTIP awards, and of achievement against that condition in the period to 31 December 2021, are set out on page
[127]
.
3. Details of the performance condition attached to 2020 and 2021 LTIP awards are set out on page
[148]
.
Further details in relation to scheme interests granted during the year ended 31 December 2021
Plan
Ordinary
shares awarded
Price per
ordinary share
at award
1
Face value
ofaward
£’000
Proportion of award vesting
for threshold performance
(%)
Performance
period
Date from which
exercisable or
shares released
Jack Bowles
LTIP
2
230,314
2,794p
6,435
15
2021–2023
29 Mar 26
DSBS
40,052
n/a n/a
29 Mar 24
Tadeu Marroco
LTIP
2
115,017 2,794p
3,214
15
2021-2023
29 Mar 26
DSBS
18,727
n/a n/a
29 Mar 24
Notes:
1. The price per ordinary share is the price used to determine the number of ordinary shares subject to the awards, which is calculated as the average of the closing mid-market price of an
ordinary share over the three dealing days preceding the date of grant.
2. Details of the performance condition attached to these LTIP awards are set out on page
[148]
.
BAT Annual Report and Form 20-F 2021
148
Further details in relation to performance conditions attaching to outstanding scheme interests
LTIP awards granted in 2020
LTIP awards granted in 2021
1 January 2020–31 December 2022
1 January 2021–31 December 2023
Weighting
Threshold
Maximum
Weighting
Threshold
Maximum
Relative TSR
Ranking against a peer group of international
FMCG companies
20%
At median,
3% of
award vests
At upper
quartile, 20% of
award vests
20%
At median,
3% of
award vests
At upper
quartile,
20% of
award vests
EPS growth at current rates of exchange
Compound annual growth in adjusted diluted
EPS measured at current rates of exchange
20%
At 5%
CAGR, 3% of
award vests
At 10%
CAGR, 20% of
award vests
20%
At 5%
CAGR, 3% of
award vests
At 10% CAGR,
20% of
award vests
EPS growth at constant rates of exchange
Compound annual growth in adjusted diluted
EPS measured at constant rates of exchange
20%
At 5%
CAGR, 3% of
award vests
At 10%
CAGR, 20% of
award vests
20%
At 5%
CAGR, 3% of
award vests
At 10% CAGR,
20% of
award vests
Adjusted revenue growth
Compound annual growth measured at
constant rates of exchange
20%
At 3%
CAGR, 3% of
award vests
At 5%
CAGR, 20% of
award vests
20%
At 3%
CAGR, 3% of
award vests
At 5% CAGR,
20% of
award vests
Adjusted operating cash flow
conversion ratio
Measured at current rates of exchange,
as a percentage of APFO
20%
At 85%,
3% of
award vests
At 9 5%,
20% of
award vests
20%
At 85%,
3% of
award vests
At 95%,
20% of
award vests
7 Other Disclosures
Payments to past directors or for loss of office
There were no payments to past Directors or for loss of office.
Relative importance of spend on pay
To illustrate the relative importance of the remuneration of the Directors in the context of the Group’s finances overall, the Remuneration
Committee makes the following disclosure:
Item
2021
£m
2020
£m
% change
Remuneration of Group employees
1
2,717
2,744
(1%)
Remuneration of Executive Directors
10
8
25%
Remuneration of Chairman and Non-Executive Directors
2
2
-Total dividends
2
4,904
4,745
3%
Notes:
1.
Total remuneration of Group employees:
this represents the total employee remuneration costs for the Group, set out on page
[191]
within note 3(a) in the Notes on the Accounts.2.
Total dividends:
this represents the total dividends paid in 2021. For further details please refer to pages
[79]
,
and [352]
[353]
.
Shareholder dilution – options and awards outstanding
Satisfaction of Company share plan awards in accordance with the Investment
Association’s Principles of Remuneration
New ordinary shares issued by the Company during the year ended
31December2021
–
by the issue of new ordinary shares;
–
ordinary shares issued from treasury only up to a maximum
of 10% ofthe Company’s issued share capital in a rolling 10-
year period;
–
within this 10% limit, the Company can only issue (as newly
issued ordinary shares or from treasury) 5% of its issued share
capital to satisfy awards under discretionary or executive plans;
and
–
the rules of the Company’s Deferred Share Bonus Scheme do
not allow for the satisfaction of awards by the issue of new
ordinary shares.
–
26,191 ordinary shares issued by the Company in relation to the
Sharesave Scheme;
–
a total of 956,857 Sharesave Scheme options over ordinary
shares in the Company were outstanding at 31 December 2021,
representing 0.04% of the Company’s issued share capital
(excluding shares held in treasury); and
–
options outstanding under the Sharesave Scheme are exercisable
until1 March 2027 at option prices ranging from 2,076p to4,056p.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
149
8 The Remuneration Committee and Shareholder Engagement
Remuneration Committee current members
Dimitri Panayotopoulos (Chairman)
Sue Farr
Dr Marion Helmes
Savio Kwan
Role
As set out in the Terms of Reference, the Remuneration Committee is responsible for:
–
determining and proposing the Directors’ Remuneration Policy (covering salary, benefits, performance-based variable rewards and
retirement benefits) forshareholder approval;
–
determining, within the terms of the approved Directors’ Remuneration Policy, the specific remuneration packages for the Chairman
and the Executive Directors, on appointment, on review and, if appropriate, any compensation payment due on termination
of appointment;
–
the setting of targets applicable for the Company’s performance-based variable reward schemes and determining achievement
against those targets, exercising discretion where appropriate and as provided by the applicable scheme rules and the Directors’
Remuneration Policy;
–
reviewing Group workforce remuneration and related policies, and the alignment of incentives and rewards with Group culture, taking
these into account when setting the policy for Executive Director remuneration. Providing feedback to the Board on workforce reward,
incentives and conditions applicable across the Group and supporting the Board’s monitoring of the Group’s culture and its alignment
with the Group’s purpose, values and strategy;
–
setting remuneration for members of the Management Board and the Company Secretary; and
–
monitoring and advising the Board on any major changes to the policy on employee benefit structures for the Group.
Remuneration Committee terms of reference
The Committee’s terms of reference align with the requirements of the UK Corporate Governance Code 2018.
No changes were made to the Remuneration Committee’s terms of reference in 2021.
For the Remuneration Committee’s terms of reference see:
www.bat.com/governance
Attendance at meetings in 2021
1
Name
Member
since
Attendance/
Eligible to attend
Scheduled
Attendance/
Eligible to attend
Ad Hoc
Dimitri Panayotopoulos
1(b)
2015
4/4
2/3
Sue Farr
2016
4/4
3/3
Karen Guerra
2(b)
2020 – 2021
1/1
2/2
Marion Helmes
2019
4/4
3/3
Savio Kwan
2016
4/4
3/3
Notes:
1.
Number of meetings in 2021:
(a) the Committee held seven meetings in 2021, three of which were ad hoc: (b) Dimitri Panayotopoulos did not attend the ad hoc meeting in February 2021 due
to a scheduled medical appointment. That ad hoc meeting was chaired by a member of the Remuneration Committee in accordance with the Committee's Terms of Reference.
2.
Membership:
(a) all members of the Committee are independent Non-Executive Directors in accordance with the UK Corporate Governance Code 2018 Provisions 10 and 32 and applicable
NYSE listing standards; and (b) Karen Guerra stepped down from the Committee with effect from 1 April 2021.
3.
Other attendees:
the Chairman, the Chief Executive, the Director, Talent, Culture and Inclusion, the Group Head of Reward and other senior management, including the Company Secretary,
may be consulted and provide advice, guidance and assistance to the Remuneration Committee. They may also attend Committee meetings (or parts thereof) by invitation. Neither the
Chairman, any Executive Director nor member of senior management plays any part in determining their own respective remuneration.
4.
PwC LLP:
Appointed in January 2020 as one of the Remuneration Committee’s remuneration consultants, representatives of PwC LLP attended meetings of the Remuneration Committee in
2021. PwC LLP agrees to the Remuneration Consultants Group (RCG) Code of Conduct which seeks to clarify the scope and conduct of the role of executive remuneration consultants when
advising UK listed companies and is one of the founding members of the RCG. The Committee is satisfied that the advice received is independent and objective.
5.
Meridian Compensation Partners:
Appointed in January 2020 as one of the Remuneration Committee’s remuneration consultants, a representative of Meridian Compensation Partners
attended meetings of the Remuneration Committee in 2021.
BAT Annual Report and Form 20-F 2021
150
Remuneration Committee advisers during 2021
Independent
externaladvisers
Services provided to the Remuneration Committee
Fees
Other services provided
totheCompany
PwC LLP
1,2
General advice on remuneration matters including: market trends
and comparator group analysis; policy review and shareholder
engagement perspectives; and independent measurement of the
relative TSR performance conditions.
2021: £165,946
2020: £126,013
Tax, corporate finance and
consulting services to Group
companies worldwide
excluding the US.
Meridian
2
General advice on remuneration matters including market
trends, shareholder engagement perspectives and comparator
group analysis.
2021: $72,974
2020: $49,537
Consulting services to Group
companies in the US.
Herbert Smith
Freehills LLP
Advice in respect of share plan regulations is provided to the
Company and is available to the Remuneration Committee.
Fees relate to advice
givento the Company.
General corporate legal andtax
advice principally inthe UK.
KPMG LLP
Specified procedures to assist in the assessment of the
calculations of the STI bonus and LTI outcomes and future targets.
2021: £29,000
2020: £28,000
Audit and tax services and
other non-audit services.
Notes:
1. PwC LLP also provides other international services and international tax advice such as tax return services including for certain globally mobile directors. The Remuneration Committee
advisory team is not involved in any other services PwC provides to the Group.
2. The fees payable to PwC and Meridian are based on annual fixed fees for specified services with anything outside this scope being charged on a time and material basis.
Regular work programme 2021
The Remuneration Committee:
–
reviewed salaries for the Executive Directors to take effect from 1 April 2021, taking into account market positioning and the level of
salary increases awarded to UK employees. A programme of shareholder engagement on executive remuneration was conducted, led
by the Committee Chairman, and the Committee considered feedback from shareholders (discussed at page
[131]
;
–
reviewed salaries for members of the Management Board and the Company Secretary from 1 April 2021, taking into account market
positioning and the level of salary increases awarded to UK employees;
–
assessed the achievement against the targets for the 2020 STI award and set the STI targets for 2021;
–
reviewed updates on performance against the 2021 STI target measures and for outstanding LTIP awards;
–
assessed the achievement against the performance conditions for the vesting of the 2018 LTIP award, determined the contingent level
of LTIP awards for March 2021 and reviewed the associated performance conditions;
–
assessed the achievement against the targets for the 2020 Share Reward Scheme and set the targets for the 2021 award;
–
reviewed and assessed the target ranges across STI and LTI plans to ensure there is an appropriate level of stretch within the target
range to drive performance for the benefit of shareholders;
–
reviewed the Annual Statement and the Annual Report on Remuneration for the year ended 31 December 2020 prior to its approval by
the Board and subsequent proposal to shareholders at the Company’s AGM on 28 April 2021;
–
reviewed the 2021 AGM voting results relating to remuneration resolutions, market trends in the context of that annual general meeting
season and corporate governance developments in the UK and the US;
–
monitored the continued application of the Company’s shareholding guidelines for the Executive Directors and members of the
Management Board; and
–
reviewed the Remuneration Committee’s effectiveness following the Board and Committee evaluation process, discussed further
onpages
[114]
to
[115]
.
Directors' Remuneration Policy
The Committee conducted an in-depth assessment of proposed changes to the current Directors' Remuneration Policy and an associated
programme of shareholder engagement led by the Committee Chairman.
In determining the revised Directors' Remuneration Policy to be proposed to shareholders at the Company's AGM on 28 April 2022,
the Committee has taken into account shareholder feedback, remuneration and related policies applicable to the wider workforce,
the alignment of incentives and rewards with the Group's culture, the application of the UK Corporate Governance Code and
applicable regulations.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
151
Other activities in 2021
The Remuneration Committee
–
reviewed the terms of appointment and associated remuneration, and terms of termination of employment, in connection with
Management Board changes during the year;
–
reviewed elements of the Group’s workforce remuneration strategy and their alignment with Executive Directors’ remuneration and
their alignment with the Group’s culture, with specific focus on the reward architecture for management grade employees across
the Group;
–
approved changes to the methodology for calculating the share of market read for the STI volume share metric in a limited number of
markets, based on the local market environment and reporting capabilities; and
–
reviewed the UK gender pay report for 2020 for applicable UK Group companies, prior to publication in March 2021.
Voting on Remuneration and Engagement with Shareholders
At the AGM on 28 April 2021, shareholders considered and voted on the 2020 Directors’ Remuneration Report as set out on the table
below. No other resolutions in respect of Directors’ remuneration or incentives were considered at the 2021 AGM. Further information
regarding shareholder engagement in relation to remuneration matters is set out in the Annual Statement on Remuneration on page
[128]
and in the discussion of Board engagement with shareholders on pages
[106]
to
[107]
.
Approval of Directors’ Remuneration Report¹
2021 AGM
Percentage for
61.71
Votes for (including discretionary)
1,091,216,857
Percentage against
38.29
Votes against
676,947,189
Total votes cast excluding votes withheld
1,768,164,046
Votes withheld
³
16,119,810
Total votes cast including votes withheld
1,784,283,856
The Directors’ Remuneration Policy was approved by shareholders at the 2019 AGM. A summary of this Policy is on pages
[133]
to
[134]
.
Approval of Directors’ Remuneration Policy²
2019 AGM
Percentage for
92.63
Votes for (including discretionary)
1,641,331,721
Percentage against
7.37
Votes against
130,661,885
Total votes cast excluding votes withheld
1,771,993,606
Votes withheld
³
1,820,757
Total votes cast including votes withheld
1,773,814,363
Notes:
1.
Directors’ Remuneration Report:
does not include the part of the Remuneration Report containing the Remuneration Policy (see note 2 below).
2.
Directors’ Remuneration Policy:
was approved by shareholders at the 2019 AGM held on 25 April 2019 and is set out in full in the 2018 Annual Report on Remuneration.
3.
Votes withheld:
these are not included in the final proxy figures as they are not recognised as a vote in law.
The Directors’ Remuneration Report has been approved by the Board on 10 February 2022 and signed on its behalf by:
Dimitri Panayotopoulos
Chairman, Remuneration Committee
10 February 2022
BAT Annual Report and Form 20-F 2021
152
Introduction
This policy section of the Remuneration Report (the Policy Report) sets out a proposed new Remuneration Policy for the Executive
Directors and the Non-Executive Directors.
This new Remuneration Policy, which is intended to replace the current remuneration policy approved by shareholders at the 2019 AGM, is
subject to a binding vote by shareholders at the AGM on 28 April 2022 and, if approved, will come into effect from 29 April 2022. The new
Remuneration Policy is set out in full on the following pages with changes from the current remuneration policy identified for reference.
Principles of remuneration
The Committee’s remuneration principles are to:
–
reward, as an overriding objective, the delivery of the Group’s long-term strategy in a manner which is simple, straightforward and
understandable and which is aligned with shareholders’ interests;
–
structure a remuneration package that is appropriately positioned relative to the market and comprises core fixed elements and
performance-based variable elements;
–
design the fixed elements of pay (comprising base salary, pension and other benefits) to recognise the skills and experience of our
Executive Directors and to ensure current and future market competitiveness in attracting talent;
–
design the variable elements of pay (provided via two performance-based incentive schemes: a short-term incentive scheme delivered through
a combination of a cash element and a deferral element, and a long-term incentive scheme), to be both transparent and stretching and to
support, motivate and reward the successful delivery of the Group’s long-term strategy and growth for shareholders on a sustainable basis;
–
ensure that reputational, behavioural and other risks that can arise from target-based incentive plans are identified and mitigated;
–
maintain an appropriate balance between fixed pay and the opportunity to earn performance-related remuneration with immediate and
deferred elements, such that the majority of the Executive Directors' total remuneration package is delivered in BAT shares;
–
ensure that the performance-based elements form, at maximum opportunity, between 80% and 90% of the Executive Directors’ total
remuneration packages;
–
ensure, through its annual review, that the Remuneration Policy is both rigorously applied and remains aligned with the Company’s
purpose, values and strategy and the need to promote the long-term success of the Company; and
–
ensure that remuneration arrangements are transparent and promote effective engagement with shareholders and the workforce.
Our remuneration principles and the key elements of the Directors’ Remuneration Policy align with the UK Corporate Governance Code
2018 requirements, as follows:
Clarity and simplicity
Our policy provides an overall remuneration package that is transparent for our Executive Directors and shareholders alike; its simple structure has
a clear and straightforward link to the delivery of the Group’s long-term strategy. Principles driving fixed remuneration (salary, benefits, pension)
are closely aligned with the wider workforce and variable remuneration (STI and LTI) rewards delivery of financial and strategic objectives both in
the short and long-term.
Risk
The combination of performance target setting for the STI and LTI, the inclusion of provisions for discretionary adjustments and malus
and clawback provisions ensure that we remunerate our Executive Directors in accordance with high standards of governance while
mitigating, as far as possible, reputational and other risks arising from remuneration that are not proportionate to outcomes.
Predictability and proportionality
There is a clear link between the operation of our short and long-term incentive plan awards and the delivery of our strategy and long-term
performance. Variable remuneration at the Company accounts for between 80%-90% of an Executive Directors’ total remuneration, ensuring
that poor performance is not rewarded. Further detail on short and long-term incentive plan awards are detailed on pages
[155 and 156]
Alignment to culture
The Remuneration Committee has worked extensively to develop a policy that closely aligns the Executive Directors to the wider workforce and
rewards long-term sustainable performance. The Remuneration Committee continually reviews the Policy, taking into account any feedback
received from engagement with the wider workforce and shareholders, to ensure it is aligned to the Company’s purpose and values, and
promotes the long-term success of the Company.
Summary of key changes
The background and explanation of the proposed key changes from the current remuneration policy are given in the Annual Statement
from the Chairman of the Remuneration Committee starting on page
[128]
of this Remuneration Report. Those key changes have been further explained in relevant sections of the Policy Report as summarised below:
Policy Element
Change in Policy
Page Number
Short-Term Incentive (STI),
performance measures
Underlying policy is unchanged, however alternative measures and weightings have been
selected for awards to be made in 2022.
[155]
Long-Term Incentive
Plan (LTIP),
performance measures
Underlying policy is unchanged, however alternative measures and weightings have been
selected for awards to be made in 2022.
[156]
Malus and clawback
Updated and expanded to reflect market best practice
[157]
Annual Statement onRemuneration
Continued
Policy Report
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
153
Future Policy Table – Executive Directors
Base salary
How the element supports the
Company’s strategic objectives
To attract and retain high calibre individuals to deliver the Company’s strategic plans and to offer
market-competitive levels of guaranteed cash to reflect an individual’s skills, experience and role
within the Company.
Operation of the element
2022 Policy:
no change in policy
Base salary
is normally paid in 12 equal monthly instalments during the year. Salaries are normally
reviewed annually in February (with salary changes effective from April) or subject to an ad hoc
review on a significant change of responsibilities.
Salaries are reviewed taking into account factors including individual performance as well as
appropriate market data including general UK pay trends and a company size and complexity
model based on a Pay Comparator Group*.
The Committee will review and potentially amend the constituents of the Pay Comparator Group
from time to time.
* Current constituents of the pay comparator group are: Accenture, Altria Group, Anheuser-Busch Inbev, AstraZeneca, Bayer, Coca-Cola
Company, Colgate-Palmolive, Danone, Diageo, GlaxoSmithKline, Heineken, Imperial Brands, Johnson & Johnson, Kraft Heinz, L'Oreal,
LVMH, Microsoft, Mondelez International, Nestle, Nike, Novartis, PepsiCo, Philip Morris International, Procter & Gamble, Reckitt
Benckiser, salesforce, Siemens, Unilever, Vodafone.
Maximum potential value
2022 Policy:
no change in policy
Annual increases for Executive Directors’ base salaries in the normal course will generally be in
the range of the increases in the base pay of other UK-based employees in the Group and will not
exceed 10% per annum.
The salary of a recently appointed Executive Director as he or she progresses in a role may exceed
the top of the range of the salary increases for UK-based employees where the Committee
considers it appropriate to reflect the accrual of experience. A significant change in responsibilities
or material change in role may be reflected in an above average increase (which may exceed 10%)
in salary.
Benefits
How the element supports the
Company’s strategic objectives
To provide market-competitive benefits consistent with the role which:
–
attract and retain high calibre individuals to deliver the Company’s strategic plans; and
–
recognise that such talent is global in source and that the availability of certain benefits (e.g.
relocation, repatriation, taxation compliance advice) will from time to time be necessary to avoid
such factors being an inhibitor to accepting the role.
Operation of the element
2022 Policy:
no change in policy
The Company currently offers the following contractual benefits to Executive Directors:
a car
or car allowance
; the
use of a car and driver for personal and business use; employment tax advice
(including in instances where multi-jurisdictional tax authorities are involved);
tax
equalisation payments
(where appropriate);
private medical insurance
, including
general
practitioner ‘walk-in’ medical services
;
personal life and accident insurance; and
housing
and
education
allowances or similar arrangements as appropriate to family circumstances
(anticipated to be provided for Executive Directors who relocate internationally).
Other benefits may include the Executive Directors' and their partners’ attendance at hospitality or
similar functions, and the provision of services and benefits which may be treated as benefits for
tax purposes, such as the provision of home security and the reimbursement of expenses incurred
in connection with their duties.
Other benefits not identified above may be offered if, in the Committee’s view, these are necessary
in order to remain aligned with market practice.
With the exception of the car or car allowance, in line with the UK market and the practice followed
for all the Group’s other UK employees, it is also practice to pay the tax that may be due on benefits.
The Company provides Directors and Officers liability insurance (D&O) and an indemnity to
Directors to cover costs and liabilities incurred in the execution of their duties.
BAT Annual Report and Form 20-F 2021
154
Maximum potential value
2022 Policy:
no change in policy
The maximum potential values are based on market practice for individuals of this level of seniority,
with any tax on benefits paid by the Company in addition.
The maximum annual value (subject to periodic inflation-related increases where applicable) that
can be offered for the following benefits is:
–
car allowance
: £20,000;
–
use of a car and company driver for personal and business use
: cost is dependent on the
miles driven in any year;
–
the cost of
private medical insurance
is dependent on an individual’s circumstances and is
provided on a family basis;
–
GP ‘walk-in’ medical services located close to the Group’s headquarters in London
: £5,000
per annum;
–
personal life and accident insurance
designed to pay out at a multiple of four and five times
base salary, respectively;
–
employment tax advice
as required, but not exceeding £30,000 and
tax equalisation
payments
as agreed by the Committee from time to time; and
–
housing and education allowances
or other similar arrangements, as appropriate to the
individual’s family circumstances.
Pensions
How the element supports the
Company’s strategic objectives
To provide competitive post-retirement benefit arrangements which are aligned to the wider
workforce whilst also recognising the external environment in the context of attracting and
retaining senior high calibre individuals to deliver the Group’s long-term strategy.
Operation of the element
2022 Policy:
no change in policy
Defined contribution benefits
Executive Directors are eligible to receive a pension benefit equivalent to 15% of base salary, which
the Committee may determine to provide as a contribution into the British American Tobacco UK
Pension Plan (the "Plan") (or a similar defined contribution arrangement from time to time) or as a
gross cash sum paid in lieu thereof.
The level of contribution in the Plan is restricted to take into account the annual allowance, and the
individual may elect to accumulate any balance in the Defined Contribution Unfunded Unapproved
Retirement Benefits Scheme ("DC UURBS") or receive the balance as a gross cash sum. The DC
UURBS closed to new entrants on 31 March 2021.
Operation
The pension arrangements operate in accordance with the rules of the applicable scheme,
including in respect of any benefits payable in the event of death or on early retirement.
Details of the Executive Directors’ accrued pension benefits are provided in the Annual Report on
Remuneration on page
[139]
.
Maximum potential value
The maximum annual contribution in the defined contribution section of the Pension Fund is 15%
of base salary in alignment with the wider workforce. Excess benefits (whether accrued in the DC
UURBS or paid as a cash sum) are subject to this same limit.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
155
Short-term incentives: International Executive Incentive Scheme (IEIS)
How the element supports the
Company’s strategic objectives
To incentivise the attainment of corporate targets aligned to the Group’s strategic objectives on an
annual basis, with a deferred element to ensure alignment with shareholders' interests.
To ensure, overall, a market-competitive package to attract and retain high calibre individuals to
deliver the Group’s long-term strategy.
Operation of the element
2022 Policy:
no change in policy
The IEIS is awarded
50% in cash
and
50% in shares
through the Deferred Share Bonus Scheme
(DSBS)
.
The deferred shares normally
vest after three years
and attract
additional dividend
equivalent shares.
IEIS cash payments are subject to clawback provisions, and the deferred shares element of the IEIS
is subject to updated malus and clawback provisions, as described on page
[157]
.
Performance assessment
2022 Policy:
underlying policy is
unchanged, however alternative
measures / weightings have been
selected for awards to be made
in 2022
The IEIS is assessed against a range of performance measures.
The Committee determines performance measures, weightings and targets annually each year.
The Remuneration Committee will review the formulaic outcome of the incentive measures to
ensure it reflects the underlying performance of the business and the experience of shareholders
over the performance period. The Committee retains the ability to adjust any formulaic outcomes
if considered appropriate. Any such adjustments will be fully disclosed in the relevant Directors'
Remuneration Report.
In cases of identified poor individual performance, the corporate result may be reduced by up
to 50%.
Performance measures for 2021 can be found on page
[137]
and for 2022 on page [143]
.
Maximum potential value and
payment and threshold
2022 Policy:
no change in policy
Chief Executive – Maximum 250% of salary; on-target 125% of salary.
Other Executive Directors – Maximum 190% of salary; on-target 95% of salary.
The payout at threshold is 0% for each performance measure.
BAT Annual Report and Form 20-F 2021
156
Long-term incentives: Long-Term Incentive Plan (LTIP)
How the element supports the
Company’s strategic objectives
To incentivise individuals to deliver the Group’s long-term strategy and promote the long-term
success of the Company, and facilitate the appointment and retention of senior high-calibre talent.
To put in place a combination of measures with appropriately stretching targets around the long-
term plan that provides a balance relevant to the Company’s business and market conditions as well
as providing alignment between Executive Directors’ and shareholders’ interests.
Operation of the element
2022 Policy:
no change in policy
LTIP awards are annual awards over shares that vest only to the extent that:
1. the performance condition is satisfied at the end of the
three-year performance period
; and
2.
an additional vesting period of two years
from the date of the third anniversary of the date of
grant has been completed –
the LTIP Extended Vesting Period
.
Participants may receive a dividend equivalent which is delivered in additional shares on vesting at
the end of the LTIP Extended Vesting Period to the extent to which awards vest.
LTIP awards may be delivered in any form provided under the LTIP rules as approved by
shareholders. Awards are subject to updated malus and clawback provisions, as described on page
[157]
.
Performance assessment,
measures and weighting
2022 Policy:
underlying policy is
unchanged, however alternative
measures / weightings have been
selected and the TSR comparator
group has been updated for awards
to be made in 2022
The Committee sets performance measures and targets for each LTIP grant. Measures, weightings
and performance conditions will be selected based on the strategic priorities for BAT at that time.
The performance measures and weightings for the LTIP grant in 2022 will be:
1.
Relative total shareholder return (TSR) (20%)
.
2.
Growth in New Categories revenue (15%)
.
3.
Adjusted diluted earnings per share (ESP) growth (30%)
.
at current rates (15%)
at constant rates (15%)
4.
Adjusted revenue growth (15%)
.
5.
Adjusted operating cash flow conversion ratio (20%)
.
The Remuneration Committee will engage with shareholders in advance if it proposes significant
changes to the LTIP performance measures.
The Remuneration Committee will review the formulaic outcome of the incentive measures to
ensure it reflects the underlying performance of the business and the experience of shareholders
over the performance period. The Committee retains the ability to adjust any formulaic outcomes
if considered appropriate. Any such adjustments will be fully disclosed in the relevant Directors'
Remuneration report.
Maximum potential value and
payment at threshold
Maximum award of shares
permitted is 500% of salary for Executive Directors.
The payout for
threshold performance
is 15% of maximum for each measure.Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
157
All-employee share schemes
How the element supports the
Company’s strategic objectives
Executive Directors are eligible to participate in the Company’s all-employee share schemes, in the
same way as the wider workforce, which are designed to incentivise employees by giving them an
opportunity to build shareholdings in the Company.
Operation of the element
2022 Policy:
no change in policy
The Company currently operates two all-employee share schemes: the
Sharesave Scheme
, an HM Revenue & Customs (HMRC) tax-advantaged savings-related share option scheme, and the
Share Incentive Plan (SIP)
– an HMRC tax-advantaged plan operated by the Company to allow
eligible employees to purchase shares in the Company (the
Partnership Plan
) and to make an annual award of free shares of a level based on performance in the previous financial year (the
Share Reward Scheme
).
Maximum potential value
2022 Policy:
no change in policy
Executive Directors are subject to the same limits on participation as other employees, as defined
by the applicable statutory provisions. Currently, these limits are monthly savings under the
Sharesave Scheme of £500 per month, and annual share purchases under the Partnership Plan of
£1,800 and annual share awards under the Share Reward Scheme of £3,600.
Shareholding requirements
How the element supports the
Company’s strategic objectives
To strengthen the alignment between the interests of the Executive Directors and those of the
shareholders by requiring Executive Directors to build up a high level of personal shareholding in
the Company.
To ensure long-term alignment through the operation of post-employment
shareholding requirements.
Operation of the element and
performance metrics used 2022
Policy:
no change in policy
Executive Directors are required to hold shares in the Company:
–
during service as a Director, equal to the value of the same multiple of salary at which LTIP
awards are made to that Director; and
–
after ceasing service as a Director during the period until the second anniversary of cessation
of employment with the Group, of a value equal to 100% of the shareholding requirement that
applied whilst a Director. In order to monitor and enforce the above provisions, former Executive
Directors are required to hold their shares in a nominee account in respect of which a sale
restriction applies to shares held to comply with the requirements.
Those Executive Directors who do not meet the shareholding requirements may generally sell a
maximum of up to 50% of any shares vesting (after tax) until the threshold for the shareholding
requirements has been met. The estimated notional net-of-tax number of shares held subject to
unvested awards under the DSBS element, and LTIP Awards during the LTIP Extended Vesting Period,
will count towards the respective shareholding requirements.
A waiver of compliance with the shareholding requirements is permitted at the discretion of the
Committee in circumstances which the Committee considers to be exceptional.
Additional notes to the Future Policy Table:
1. The Committee reserves the right to make any remuneration payments where the terms were agreed prior to an individual being appointed an Executive Director of the Company or prior
to the approval and implementation of the Remuneration Policy (including, for the avoidance of doubt, pursuant to the current Remuneration Policy). This includes the achievement of the
applicable performance conditions for Executive Directors who are eligible to receive payment from any award made prior to the approval and implementation of the Remuneration Policy.
2. The Company recognises the opportunities and benefits that accrue to the Company and its Executive Directors who undertake non-executive roles. Consequently, an Executive Director
may, with the permission of the Board, undertake a single external appointment and the Executive Director may retain the fees from such appointment.
3.
Malus and clawback
: Bonus amounts paid under the IEIS are subject to clawback provisions, and awards made under the DSBS and the LTIP are subject to malus and clawback provisions.
duration of 5 years from the date of award if: (1) there has been a material misrepresentation in relation to the performance of any Group company, relevant business unit and/or the
participant; (2) an erroneous calculation was made in assessing the extent to which an award vested or bonus was paid, which in either case resulted in the value of the award or payment
being more than it should have been; or (3) there is an insolvency event or corporate failure.
determined that the participant: (1) committed misconduct; (2) caused a material loss for any Group company as a result of (a) reckless, negligent or wilful actions or (b) inappropriate
behaviour or behaviour that is not aligned with corporate values; (3) contributed to serious reputational damage of any Group company or one of its business units, in each case prior to the
vesting of the relevant award or payment of the bonus.
be effected by the number of shares subject to the award being reduced and/or by a reduction in other cash or share-based awards held by the participant.
4. The operation of the remuneration policy for employees below Board level is discussed on pages
[163 and 164]
.
BAT Annual Report and Form 20-F 2021
158
Illustrations of the Application of the Remuneration Policy
The levels of remuneration to be received by Jack Bowles and Tadeu Marroco as Executive Directors for the first complete year in which
the Remuneration Policy will apply are shown as the hypothetical values of their remuneration packages under different performance
scenarios in the charts below.
Remuneration outcomes for varying levels of performance
0 5000 10000 15000 20000
Chief Executive
50%
60%
100%
41% 37%
22%
53%
16% 28%
56%
12% 22% 44% 22%
£11,786,527
£15,100,552
£1,844,452
£4,495,672
Fixed Remuneration
IEIS LTIP
Share price growth
Finance & Transformation Director
1000
Maximum plus 50%
share price growth
Maximum
On-target
Minimum
Maximum plus 50%
share price growth
Maximum
On-target
Minimum
100%
45% 34%
21%
52%
18%
26% 56%
14% 21% 44%
£1,023,910
£2,269,180
£5,763,970
£7,370,770
22%
The following assumptions have been applied in the chart above.
Chief Executive
Finance and Transformation Director
Fixed remuneration
Salary: £1, 325,610 (effective 1 Jan 2022)
Pension: 15% of salary
Benefits: £320,000 (illustrative based
on 2021 figure)
Sa l ary : £803, 4 0 0 (eff e c ti ve 1 Ja n 2022)
Pension: 15% of salary
Benefits: £100,000 (illustrative based on
2021 figure)
STI (IEIS)
250%
190%
LTI (LTIP)
500% 400%
Minimum
Fixed remuneration only:
No IEIS payout; no vesting under LTIP
On-target
Fixed remuneration, plus:
50% IEIS payout; threshold vesting under the LTIP
Maximum
Fixed remuneration, plus:
100% IEIS payout; 100% vesting under the LTIP
Maximum plus 50% share
price growth
Fixed remuneration, plus:
All elements are the same as the maximum but assuming 50% share price
appreciation during relevant performance period of LTIP
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
159
Other Policy Provisions in Relation to Directors’ Pay
Flexibility, judgement and discretion
As the Remuneration Policy needs to be capable of operating over a three-year period, the Committee has built in a degree of flexibility
to enable the practical implementation of the Remuneration Policy over that prospective lifetime, including as set out in the Future Policy
Table above. The key discretions and areas of flexibility and judgement under the STI (cash and deferred shares) and LTI are summarised
as follows:
–
to determine performance measures, weightings and targets annually for the STI and to set performance measures and targets for
each LTIP grant based on the strategic priorities of BAT at that time.
–
to alter performance conditions if events happen which cause the Committee to determine that the performance conditions are no
longer a fair measure of the Company's performance, or to take account of legal changes or to obtain or retain favourable tax, regulatory
or exchange control treatment or in the event that it considers it fair and reasonable to do so, provided that the revised target is, in the
opinion of the Committee, not materially less challenging than was intended in setting the original condition.
–
to exercise available discretions in connection with any termination of employment or change of control or similar event.
–
to determine whether awards under the LTIP are delivered as options or under any other form permitted under the LTIP rules as
approved by shareholders, and in respect of operational matters not otherwise covered by this Policy, to operate the IEIS, DSBS and LTIP
in accordance with their terms.
–
to operate the malus and clawback provisions.
Approach to Remuneration of Directors on Recruitment
Principles
In making an Executive Director
appointment (whether an internal
promotion or external appointee)
the Committee will follow
these principles.
2022 Policy:
no change in policy
–
British American Tobacco seeks to appoint senior, high calibre managers. Many of its
competitors for talent are based outside the UK.
–
To offer a package (both fixed salary, pension and performance-related remuneration) which is
sufficiently competitive (but not excessively so) so that senior, high calibre candidates can be
appointed, and which is designed to promote the long-term success of the Company.
–
The Committee will consider the market, including the Pay Comparator Group, and by reference
to other companies of equivalent size and complexity to ensure that it does not overpay.
–
Consideration will be given to relevant factors, such as the candidate’s skills, knowledge
and experience and his or her current package and current location in determining the
overall package.
–
Internal pay relativities and the terms and conditions of employment of the new and existing
Executive Directors will be considered to ensure fairness between Executive Directors.
External appointment to
role of Executive Director –
additional considerations
2022 Policy:
no change in policy
–
Maximum incentive opportunities will be set in line with the Policy set out in the policy table.
–
The Committee will consider matching up to the maximum of the expected value of lost short or
long-term incentive awards in order to facilitate the recruitment of that individual.
–
A replacement award would generally take the form of either a one-off award with a vesting
period similar to the award given up (and, in the case of a replacement of a performance-based
award, appropriate performance conditions) or a cash replacement payment in respect of an
award that is within three months of vesting, although in either case the Committee may make
other arrangements as it deems to be necessary.
–
Where appropriate, a replacement award will also be made subject to malus and
clawback provisions.
Relocation
British American Tobacco
may provide appropriate
relocation support.
2022 Policy:
no change in policy
Relocation support of up to £200,000 may be provided in connection with recruitment. Examples of
this support may include: shipment of goods; temporary accommodation; assistance to find
accommodation; tax support services; and spouse or partner career counselling.
Inbound relocation and shipment expenses are subject to clawback provisions.
BAT Annual Report and Form 20-F 2021
160
Service Contracts – Executive Directors
The following table describes the provisions of the service contracts of Jack Bowles and Tadeu Marroco. It is currently anticipated that
service contracts for newly-appointed Executive Directors will not contain terms differing materially from these provisions (provided
that other arrangements may be entered into in connection with the recruitment of Executive Directors, as described in the ‘Approach to
remuneration of Directors on recruitment’ section on page
[159]
).
Notice period –
no change in policy
Employed on a permanent contract,
terminable by either party on one-
year’s notice.
A period of notice to be given by either the Executive Director or the Company of 12 months.
The Company may require the Executive Director to be on garden leave during all or any part of the
period of notice (whether given by the Executive Director or the Company).
Contractual terms –
no change
in policy
The contract includes obligations
which could give rise to, or impact
upon, remuneration and/or
payments for loss of office.
The provisions of the Company’s
incentive arrangements applicable
on a termination of employment are
set out separately below.
The primary obligations under the contract which may give rise to remuneration or payments for
loss of office are as follows:
–
to terminate the contract only on the expiry of 12 months’ written notice or to make a payment
in lieu of notice in respect of all, or the unexpired part, of the 12 months’ notice calculated based
on: (1) salary at then current base pay; and (2) the cost to the Company of providing private
medical expenses insurance and personal accident insurance (or the Company may, at its option,
continue those benefits for the unexpired period of the notice). In determining the value of a
payment in lieu of notice the Company shall not be required to reward failure on the part of the
Executive Director and shall have regard to corporate governance standards at the termination
date. The Company may, at its reasonable discretion, make the payment in lieu of notice in
phased monthly or quarterly instalments and may determine that it should be reduced in
accordance with the duty on the part of the Executive Director to mitigate their loss; and
–
to continue to pay the Executive Director’s salary and contractual benefits during any garden
leave period.
In addition to the contractual rights to a payment on loss of office, the Executive Director may
have statutory and/or common law rights to certain additional payments depending on the
circumstances of the termination.
Inspection of service contracts
Copies may be inspected at the
Company’s registered office; these
contracts are amended annually
following the salary review.
The dates of the latest service contracts are shown below:
Executive Director
Execution date of current service contract
Jack Bowles
11 December 2018 (appointment as an Executive Director commenced
1 January 2019)
Tadeu Marroco
5 August 2019
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
161
Policy on Payment for Loss of Office
Treatment of awards under the
share incentive schemes:
no
change in policy
International Executive Incentive
Scheme (IEIS)/Deferred Share
Bonus Scheme (DSBS)
Long-Term Incentive Plan (LTIP)
All-employee scheme
The release of awards is dependent
on ‘leaver’ status and is at the
discretion of the Committee.
Plan
‘Good leaver’ ‘Other’ leaver scenarios
IEIS and DSBS
2022 Policy:
no change
in policy
‘Good leavers’ are eligible
for a bonus pro-rated for the
period of employment during
the year.
Payments made during
a notice period or after
cessation may, at the
discretion of the Committee,
be made in cash only.
Bonuses are assessed
based on actual full-year
performance and paid at the
normal time.
Deferred awards under
the DSBS will vest upon
termination of employment.
No entitlement to a bonus
but the Committee has the
discretion to treat ‘other’
leavers in the same manner as
‘good leavers’; this discretion is
not exercisable in the case of
summary dismissal.
Deferred awards under the
DSBS will lapse unless the
Committee, in its absolute
discretion, decides otherwise.
LTIP
2022 Policy:
no change
in policy.
Vesting occurs at the
end of theLTIP Extended
Vesting Period, subject to
performanceover the normal
performance period and,
whereapplicable, pro-rated for
the period of employment
during the performance period.
Unvested awards, including any
awards which are still subject
to the LTIP Extended Vesting
Period, will lapse unless the
Committee, in its absolute
discretion, decides otherwise.
All-employee share schemes
Directors are treated in accordance with the scheme rules, in
the same manner as applies to all employees.
The Committee retains discretion in
deciding ‘good leaver’ status other
than in cases of automatic ‘good
leavers’ as set out in the applicable
provisions of the DSBS and LTIP
rules. The discretionary powers
are intended to provide flexibility
as Executive Directors may leave
employment for a broad variety of
reasons which may not necessarily
fall within the prescribed category
of ‘good leaver’. The Committee
exercises its discretion by
reference to guidelines which set
out its agreed relevant factors to
assist in the determination of a
leaver’s status.
Guidelines
Factors which may indicate that discretion
may be exercised to treat as a ‘good leaver’
Factors which may indicate that discretion
may not be exercised
Resignation intending to cease
work altogether.
Resignation from the Company to work for a
competitor or to undertake a role otherwise
acting in conflict with the interests of
the Company.
Resignation intending to take up a different
occupation, such as a portfolio career.
Resignation from the Company notwithstanding
the Company’s plans and role demands.
Delayed resignation from the Company to
accommodate the Company’s plans or the
demands of his or her current workload.
Termination or resignation in any circumstance
involving factors such as misconduct or
poor performance.
Departure at the request of and/or with the
agreement of the Company.
In exercising its discretion, the Committee will also take into account the individual’s overall
performance as well as their contribution to the Company during their total period of employment.
Other –
no change in policy
–
Payment of legal fees incurred by an individual in connection with reviewing a settlement
agreement on termination of employment.
–
Reimbursement of reasonable relocation costs of up to £200,000 where an Executive Director
(and, where relevant, his or her family) had originally relocated to take up the appointment; this
may include the shipment of personal goods and winding-up his or her affairs in the UK and the
incidental costs incurred in doing so.
In certain circumstances, the Committee may approve new contractual arrangements with
departing Executive Directors, potentially including (but not limited to) settlement, confidentiality,
restrictive covenants and/or consultancy arrangements. These arrangements would only be
entered into where the Committee believes that it is in the best interests of the Company and its
shareholders to do so.
BAT Annual Report and Form 20-F 2021
162
Terms of Appointment for the Chairman and other Non-Executive Directors
Non-Executive Directors, including the Chairman, are appointed as officeholders, not employees. In any given year, the period of
appointment runs from the close of the Company’s last AGM to the close of the Company’s next AGM.
The Chairman may terminate his or her appointment on one month’s written notice, and the Company may give a compensation payment
in lieu of all or part of such notice. The Chairman may be removed by the Company prior to the expiry of his or her term of appointment by
three months’ written notice or a compensation payment in lieu of all or part of such notice.
A Non-Executive Director may terminate his or her appointment at any time in accordance with the Company’s Articles of Association.
Alternatively, a Non-Executive Director’s appointment will terminate if: (1) the Board requests that he or she not offer himself or herself for
re-election at the next AGM; (2) the Non-Executive Director is not re-elected at the next AGM; (3) the Non-Executive Director is required to
vacate office for any reason pursuant to any of the provisions of the Company’s Articles of Association; or (4) the Non-Executive Director is
removed as Director or otherwise required to vacate office under any applicable law.
Chairman and Non-Executive Directors
Fees
2022 Policy:
policy has been updated
so fees may be delivered in cash or a
combination of cash and shares
The Chairman receives a single all-inclusive fee. Other Non-Executive Directors receive a base fee
and may also receive additional fees in respect of committee membership and/or chairmanship.
The Committee considers annually the fee payable to the Chairman and to the other Non-Executive
Directors. This process may take into account factors including the breadth and demands of the
relevant role as well as comparison with fees paid by the same comparator group of companies
used for setting the base salary of Executive Directors. The annual review does not necessarily
result in a change to the fees.
Fees may be paid in cash or a combination of cash and shares, with the proportion to be paid in
shares in a year to be disclosed in the relevant Directors' Remuneration Report.
It is anticipated that any future aggregate increase in fees for the Chairman and other Non-
Executive Directors will generally be in the range of the increases in the base pay of UK-based
employees in the Group and will not exceed 10% per annum during the policy period.
1
The Chairman and other Non-Executive Directors do not participate in any discussion on their own
respective remuneration.
Benefits, travel and
related expenses
2022 Policy:
no change in policy
Non-Executive Directors may be reimbursed for the cost of travel, accommodation and related
expenses incurred in connection with their duties and are eligible to use general practitioner
‘walk-in’ services. The Non-Executive Directors and their partners may attend hospitality or
similar functions.
Benefits for the Chairman may also include: the use of a Company driver; private medical insurance
and personal accident insurance benefits; the provision of home and personal security; and
assistance in relation to personal tax matters.
If necessary, the Company will pay for independent professional advice in connection with the
performance of duties as Non-Executive Directors.
The Company provides D&O insurance and an indemnity to the Non-Executive Directors to cover
costs and liabilities incurred in the execution of their duties.
In instances where any benefits, reimbursements or expenses are classified by HMRC as a benefit
to the Non-Executive Directors, it is also the practice of the Company to pay any tax due on any
such benefits.
Other
2022 Policy:
no change in policy
There are no formal requirements or guidelines to hold shares in the Company. No Non-Executive
Director is eligible to participate in the British American Tobacco share schemes, bonus schemes
or incentive plans and no Non-Executive Director may be a member of any Group pension plan.
Note:
1. Aggregate fees limit: the total annual fees of the Chairman and other Non-Executive Directors are limited to the overall aggregate annual limit authorised by shareholders with reference to
the Company’s Articles of Association (currently £2,500,000).
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
163
Principles of Remuneration for Our Wider Workforce
The Group’s remuneration policies and practices are founded on a high degree of alignment and consistency across the organisation.
Accordingly, remuneration for senior management is determined considering the remuneration principles that apply to the Executive
Directors, and similar principles also form the basis of the remuneration arrangements for the wider workforce.
The reward strategy for all employees is built around the following four strategic pillars and comprises fixed and variable
remuneration elements:
Competitive yet sustainable Equitably differentiated
–
Competitive remuneration, able to attract and retain talent.
–
Agility to meet changing generational needs.
–
Responsible cost structure to support profit delivery.
–
Differentiated on clear and objective criteria – level, performance
and experience.
–
Supported by unbiased processes and tools.
Transparent
Aligned to shareholder interests
–
Clear and inclusive policies, openly communicated.
–
Individual total reward package statements form part of regular
annual cycle.
–
Competitive employment cost base and incentives that align the
interests of employees with those of shareholders.
A globally consistent pay comparator group, derived from the peer group used by the Remuneration Committee for executive pay
benchmarking, is utilised across all levels of the organisation for pay benchmarking purposes, with an appropriate level of flexibility
provided to the other employing entities.
The approach to annual salary reviews is consistent across the Group, with consideration given to the scope of the role, level of individual
experience, responsibility, individual performance and pay levels in the selected peer group.
All middle-to-senior managers are eligible to participate in a short-term incentive plan with the same metrics as Executive Directors.
Other employees in corporate functions are eligible to participate in annual bonus plans, which mirror the Executive Directors’
performance objectives. Functional incentive schemes are offered to the Group’s employees in non-corporate positions such as sales
force or manufacturing roles. Opportunities and metrics which apply to those schemes may vary by organisational level with functional
performance indicators incorporated where appropriate.
Senior managers are eligible to participate in the long-term incentive schemes, namely the Performance Share Plan (PSP) and the
Restricted Share Plan (RSP), with opportunities varying across levels with the most senior managers having a bigger portion of their pay
delivered under the long-term incentive schemes. Metrics under the PSP are the same as those for Executive Directors.
In the UK, all employees are encouraged to become shareholders by participating in all-employee share plans on the same terms as Executive
Directors. Similar all-employee share schemes have been adopted for other jurisdictions with the goal of encouraging broader long-term
employee ownership.
Retirement benefits, typically in the form of a pension, are provided based on local market practice. Pension contribution rates for
Executive Directors under the defined contribution scheme are aligned with those available to the wider UK employee population.
Other benefits provided to the wider employee population reflect local market practice and legislative requirements.
The key difference between Executive Directors’ remuneration and the wider employee population is the increased emphasis on long-
term performance in respect of Executive Directors, with a greater percentage of their total remuneration being performance-related
and delivered in BAT shares. This includes an additional two-year holding period on vested LTIPs, and post-employment shareholding
requirements which do not apply to other employees other than members of the Management Board.
Fixed remuneration
Salary
–
Salary is a key element of total remuneration for all employees.
–
Salary ranges for each grade are set by reference to external market data, and individual positioning within the set salary ranges will
depend onlevel of experience, responsibility and individual performance.
–
Annual salary reviews typically take place in April each year.
In several markets Collective Labour Agreements (CLAs) exist covering some employees, therefore, some of the above principles may not apply.
Benefits and recognition
–
Benefits provided to employees reflect local market practice and legislative requirements.
–
The benefits architecture for the Group includes core benefits (such as medical insurance and life insurance) and local statutory
benefits and may be delivered as a combination of benefits in kind, cash allowance and flexible benefits.
–
Additional financial and non-financial rewards can be made for outstanding contributions to the business in exceptional circumstances.
Pension
–
Retirement benefits are provided to employees based on local market practice.
–
Under the UK Defined Contribution arrangements, the Company contributions for all UK employees is 10% of base salary rising to a maximum
of15% on a matching basis. For managers in senior management roles, the total contribution to the British American Tobacco
UK Pension Plan (“Plan”) is automatically restricted to £4,000 per annum in line with the UK government’s Tapered Annual Allowance.
The balance of any Company contributions due above this £4,000 limit is paid as a cash allowance or, alternatively, paid into the Defined
Contribution Unapproved Unfunded Retirement Benefits Scheme (DC UURBS). The DC UURBS closed to new entrants on 31 March 2021.
Employees can choose to opt out of the restriction and have all the Company contribution paid into the Plan.
BAT Annual Report and Form 20-F 2021
164
Variable remuneration
Short-term incentives
Short-term incentive schemes are designed to reward employees across the business for the delivery of financial, strategic and operational
targets. The Group operates various short-term incentive arrangements, as set out below, with participation dependent on role.
International Executive Incentive Scheme (IEIS)
– globally aligned scheme for all managers in senior management roles (c. 1,700
employees), including the Executive Directors.
–
Incentive opportunities for the IEIS participants are defined globally for each eligible grade.
–
A portion of any award receivable is deferred in BAT shares for three years, with the remaining portion paid in cash during the following year.
–
Dividend-equivalent payments on all unvested deferred shares are paid quarterly in cash via payroll.
Corporate annual bonus plans
– in operation for employees in corporate functions who are not eligible to participate in the IEIS (c.
15,000 employees).
–
Designed to mirror the basic construct of the IEIS with opportunity levels set locally.
–
Performance metrics aligned to those of the IEIS.
Functional incentive schemes
– in operation for employees in non-corporate functions, examples include trade marketing or factory
incentive schemes.
–
Opportunity levels are set locally and vary by grade.
–
Functional performance measures are incorporated into each scheme to ensure line of sight for participants.
Long-term incentives
Long-term incentive schemes are designed to reward and retain our senior talent while aligning the interests of leaders with those of our
shareholders. From 2020, we have moved from a single LTI plan to a segmented approach by grade as set out below.
Restricted Share Plan (RSP)
– globally aligned discretionary plan for managers at eligible grades in senior management roles (c.
540 employees), excluding the Executive Directors. Aligns scheme participants with the success of the Group through its share price.
–
Opportunity levels are defined globally for each eligible grade.
–
No performance conditions apply to awards.
–
Awards are typically granted in March of each year, and vest in full following the end of the three-year vesting period provided the
participant remains an employee of the Group on the vesting date.
–
Dividend-equivalent payments are paid on shares vesting.
Performance Share Plan (PSP)
– discretionary plan for our most senior managers (c. 160 employees), including the Executive Directors,
which rewards their contribution to the long-term global performance of the Company.
–
Consistent performance measures across all plan participants with opportunity levels defined globally for each eligible grade.
–
Awards vest only to the extent that the performance conditions are satisfied at the end of the three-year performance period.
–
Awards are typically granted in March of each year, and vest following the end of a three-year performance period.
–
Dividend-equivalent payments are paid on any shares vesting.
All-employee share schemes
–
In the UK, all employees are eligible to participate in the Company’s all-employee share schemes (c.2,500 employees) – the Partnership
Share Scheme, the Sharesave Scheme and the Share Incentive Plan – all of which are HMRC-approved plans, which are designed to
incentivise employees by giving them an opportunity tobuild shareholdings in the Company.
Annual Statement onRemuneration
Continued
Remuneration Report
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
165
Process in setting Executive Directors’ remuneration
The Committee considers the budgeted salary increases for the UK-based employee population, the guidance given to managers on
the range of salary increases and other remuneration arrangements and employment conditions for all UK-based employees when
determining remuneration for the Executive Directors.
It is expected that future salary increases for the Executive Directors will be in line with the range set out in the salary review guidelines for
the general UK employee population, except in exceptional circumstances, such as where a recently appointed Executive Director’s salary
is increased to reflect his or her growth in the role over time or where significant additional responsibilities are added to the role.
As a key principle, management provides the Remuneration Committee with visibility of the potential impact of proposed changes to the
Executive Directors’ Remuneration Policy on the wider employee population.
Workforce engagement
The Board keeps up to date with the current views of our workforce and provides the workforce with information, including on how
executive pay and the pay of the wider workforce are aligned, through a combination of engagement methods across multiple channels at
different levels of our organisation. These include town halls, works councils, webcasts, global independently managed speak-up channels,
our biennial ‘Your Voice’ global employee survey, and direct engagement through Directors’ market and site visits where possible.
Feedback from these channels is collected across the Group and are independently analysed to define the priority themes.
The consolidated feedback and themes are reviewed by our Board each year, as part of our Workforce Voice in the Boardroom
programme. This focuses on ensuring the Board understands the views of our workforce, and reviews details of the key themes identified
and how we have responded.
The views of our workforce are a key consideration for the Remuneration Committee when reviewing the reward priorities of the organisation.
In 2021 we conducted our latest ‘Your Voice’ global employee survey, with the results of this survey also serving as a factor in shaping the reward
agenda of the organisation. Although employees are not specifically consulted on the policy for Directors’ remuneration, there continues to be an
ongoing dialogue with employees, through a variety of channels, about the Company’s broader pay practices.
In addition to the Workforce Voice in the Boardroom programme, the Remuneration Committee also receives updates from management
on feedback received during the year where relevant to remuneration matters considered by the Remuneration Committee and takes
feedback into account as applicable in determining executive remuneration.
The Remuneration Committee is regularly updated on the pay principles and practices in operation across the Group and considers them in relation to
the implementation of the Directors’ Remuneration Policy, and in ensuring there is an appropriate degree of alignment throughout the Group.
BAT Annual Report and Form 20-F 2021
166
Responsibility of Directors
Governance
Statement of Directors’ Responsibilities in Respect
ofthe Annual Report and the Financial Statements
@
The Directors are responsible for preparing the Annual Report and
the Group and Parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and Parent
Company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements
in accordance with UK-adopted international accounting
standards and applicable law and have elected to prepare the
Parent Company financial statements in accordance with UK
Accounting Standards and applicable law, including FRS 101
Reduced Disclosure Framework
. In preparing these Group financial
statements, the Directors have also elected to comply with
IFRS as issued by the International Accounting Standards Board
(IFRSasissued by the IASB).
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Parent Company
and of the Group’s profit or loss for that period. In preparing each of
the Group and Parent Company financial statements, the Directors
are required to:
–
select suitable accounting policies and then apply
them consistently;
–
make judgements and estimates that are reasonable, relevant,
reliable and prudent;
–
for the Group financial statements, state whether they have
been prepared in accordance with UK-adopted international
accounting standards;
–
for the Parent Company financial statements, state whether
applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the Parent
Company financial statements;
–
assess the Group and Parent Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and
–
use the going concern basis of accounting unless the Directors
either intend to liquidate the Group or the Parent Company or to
cease operations, orhave no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent Company and
enable them to ensure that its financial statements comply with
the Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard
the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of
the Annual Report included on the Company’s website. Legislation
inthe UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Directors’ Declaration in Relation to Relevant
AuditInformation
@
Having made appropriate enquiries, each of the Directors who held
office at the date of approval of this Annual Report confirms that:
–
to the best of his or her knowledge and belief, there is no
relevantaudit information of which the Company’s auditors
areunaware; and
–
he or she has taken all steps that a Director might reasonably be
expected to have taken in order to make himself or herself aware
of relevant audit information and to establish that the Company’s
auditors are aware of that information.
Responsibility Statement of the Directors inRespect
of the Annual Financial Report
@
We confirm that to the best of our knowledge:
–
the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company and theundertakings included in the consolidation
taken as a whole; and
–
the Strategic Report and the Directors’ Report include a fair
review of the development and performance of the business and
the position of the Company and the undertakings included in
the consolidation taken as a whole, together with a description of
the principal risks and uncertainties that they face.
This responsibility statement has been approved and is signed by
order of the Board by:
Luc Jobin Tadeu Marroco
Chairman Finance and
Transformation Director
10 February 2022
British American Tobacco p.l.c.
Registered in England and Wales No. 3407696
@
onForm 20-F as filed with the SEC.
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Other Information
BAT Annual Report and Form 20-F 2021
167
Independent Auditor’s Report
@
To the Members of British American Tobacco p.l.c.
1 Our Opinion is Unmodified
We have audited the financial statements of British American Tobacco p.l.c. (“the Company”) for the year ended 31 December 2021 which
comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group and parent Company Statement of
Changes in Equity, the Group and parent Company Balance Sheets, the Group Cash Flow Statement, and the related notes, including the
accounting policies in note 1.
In our opinion:
–
the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2021
and of the Group’s profit for the year then ended;
–
the Group financial statements have been properly prepared in accordance with UK-adopted international accounting standards;
–
the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101
Reduced Disclosure Framework; and
–
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Additional opinion in relation to IFRS as issued by the IASB
As explained in the note to the Group financial statements, the Group, in addition to complying with its legal obligation to apply UK-
adopted international accounting standards, has also applied International Financial Reporting Standards as issued by the International
Accounting Standards Board (IASB).
In our opinion, the Group financial statements have been properly prepared in accordance with IFRS as issued by the IASB.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit
opinion is consistent with our report to the Audit Committee.
We were first appointed as auditor by the directors on 23 March 2015. The period of total uninterrupted engagement is for the 7 financial
years ended 31 December 2021. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance
with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services
prohibited by that standard were provided.
2 Key Audit Matters: Our Assessment of Risks of Material Misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements
and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those
which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. We summarise below the key audit matters (unchanged from 2020), in decreasing order of audit significance, in
arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest
entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in
the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and
consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
Goodwill and trademarks with indefinite lives impairment analysis – arising from the Reynolds American Inc. acquisition in 2017.
Refer to page 122 (Audit Committee report), page 186 (accounting policy) and pages 206 to 210 (financial disclosures).
Risk vs 2020:
The risk:
Forecast-based assessment: As a result of the 2017 acquisition of Reynolds American Inc. (“Reynolds American”), the Group, as at
31 December 2021 has goodwill and trademarks with indefinite lives of £33,021 million and £69,475 million, respectively (2020: goodwill
of £32,719 million and trademarks with indefinite lives of £68,839 million). There is inherent uncertainty with regard to assumptions and
estimates involved in the Group’s forecast-based assessment of the recoverability of the trademarks with indefinite lives and goodwill.
There is significant auditor judgement involved in evaluating: (i) the budgeted revenue and discount rates used in the analysis of the
recoverability of trademarks with indefinite lives and goodwill allocated to the Reynolds American cash-generating unit; and (ii) the
impact of the proposed menthol ban on the terminal value and the discount rate for the Camel and Newport indefinite life trademarks and
goodwill allocated to the Reynolds American cash-generating unit.
The effect of these matters is that, as part of our risk assessment for audit planning purposes, we determined that the value-in-use
calculations of both trademarks with indefinite lives and goodwill had a high degree of estimation uncertainty, with a potential range
of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.
In conducting our final audit work, we concluded that reasonably possible changes to the value-in-use of both trademarks with indefinite
lives and goodwill would not be expected to result in material impairment. The financial statements (note 12) disclose the sensitivity of the
carrying amounts of relevant trademarks with indefinite lives and goodwill estimated by the Group.
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Continued
Our response:
Control design and operation: Evaluating the processes and controls within the goodwill and trademarks with indefinite lives impairment
testing process, including controls over the development of the budgeted revenue and assessment of the impact of the proposed
menthol ban on the assumptions listed above;
Benchmarking and assessing assumptions: Assessing and challenging Reynolds American’s budgeted revenue against externally derived
publicly available data, including, broker and analyst reports, industry reports, media reports, macro-economic assumptions, academic
and scientific studies, and regulatory changes. In addition, and specifically for the Newport and Camel indefinite lived trademarks and the
goodwill allocated to the Reynolds American cash-generating unit, using relevant elements of this information to assess and challenge
the terminal value used in Reynolds American’s value-in-use based assessment of the recoverability of those assets;
Historical comparisons: Challenging the reasonableness of the assumptions, particularly budgeted revenue, by comparing the historical
projections to actual results to assess the Group’s ability to accurately forecast;
Assessment of the discount rate: We independently developed a range of discount rates with the assistance of our own valuations
specialist and compared these rates to those utilised by Reynolds American to assess their reasonableness;
Sensitivity analysis: Performing sensitivity analysis on the budgeted revenue to assess its impact on the Group’s determination that the
fair values of the Reynolds American goodwill and trademarks with indefinite lives exceed their carrying value; and
Assessing transparency: Assessing whether the Group’s disclosures detail the key estimates, judgements, and sensitivities with regard to
the impairment testing of trademarks with indefinite lives and the goodwill arising from the Reynolds American acquisition.
Our results:
We found the conclusion that there is no impairment of trademarks with indefinite lives and goodwill arising from the Reynolds American
acquisition to be acceptable (2020: acceptable).
Contingent liabilities arising from litigation in Canada
Refer to page 122 (Audit Committee report), page 189 (accounting policy) and pages 261 to 263 and 264 to 266 (financial disclosures).
Risk vs 2020:
The risk:
Dispute outcome: The Group is subject to a large number of claims including class actions, which could have a significant impact on the
results if potential exposures were to materialise. For our 2021 audit, in our judgement, the most significant risk continues to relate to
ongoing litigation in Canada. Imperial Tobacco Canada Limited (“Imperial”) has received an unfavourable judgement on the smoking and
health class actions certified by the Quebec Superior Court. As a result of this judgement, Imperial has filed for creditor protection under
the Companies’ Creditors Arrangement Act (the “CCAA”). In seeking protection under the CCAA, Imperial will look to resolve not only the
Quebec case but also all other tobacco litigation in Canada under an efficient and court supervised process, while continuing to trade in
the normal course of business.
The amounts involved are significant, and the Group’s application of accounting standards to determine the amount, if any, to be
provided as a liability or disclosed as a contingent liability, is inherently subjective. Significant judgement was involved in auditing this
determination, including evaluating the Group’s assessment of the relevant law, historical and pending court rulings, and the Group’s
ability to estimate the likelihood and extent of any future economic outflow arising from the ultimate resolution of the Canadian litigation.
The effect of these matters is that, as part of our risk assessment, we determined that the potential exposure to litigation requires a high
degree of judgement, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole,
and possibly many times that amount.
Our response:
Control design and operation: Evaluating the processes and controls within the legal exposure process, including controls over the
interpretation of relevant law and related court rulings and estimation of the likelihood and extent of any future economic outflow arising
from the ultimate resolution of the Canadian litigation;
Enquiry of lawyers: Reading letters received directly from the Group’s external and internal legal counsel that evaluated the current status
of the Canadian legal proceedings. We also inquired of internal legal counsel to evaluate their basis for conclusions in their letter, including
challenging that it is not possible to reliably estimate any potential liability based on the current status of the proceedings;
Assess local legal precedence: Assessing relevant historical and recent judgements passed by the judicial court authorities in relation to
the Canadian litigation and reading the related Canadian court rulings in order to challenge Imperial’s interpretation of the Canadian legal
proceedings and the related contingent liability disclosures; and
Assessing transparency: Assessing whether the Group’s disclosures in relation to the Canadian litigation adequately disclose the
potential liabilities.
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BAT Annual Report and Form 20-F 2021
169
Our results:
From the evidence obtained, we found the Group’s treatment of the contingent liabilities and related disclosures arising from litigation in
Canada to be acceptable (2020: acceptable).
Recoverability of parent Company’s investment in subsidiaries.
Refer to page 294 (accounting policy) and page 295 (financial disclosures). Risk vs 2020:
The risk:
Low risk, high value: The carrying amount of the parent Company’s investments in subsidiaries is £27,809 million (2020: £27,995 million)
which represents 71% (2020: 77%) of the Company’s total assets. Their recoverability is not a high risk of significant misstatement or
subject to significant judgement.
However, due to the materiality of investments in subsidiaries in the context of the parent Company financial statements, this is
considered to be the area that had the greatest effect on our overall parent Company audit.
Our response:
Tests of detail: Comparing the carrying amount of parent Company’s direct investments, representing 100% (2020: 100%) of the total
investment balance with the relevant subsidiary’s draft balance sheet to identify whether their net assets, being an approximation of their
minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been
profit-making.
We performed the tests above rather than seeking to rely on any of the parent Company’s controls because the nature of the balance is
such that we would expect to obtain audit evidence primarily through the detailed procedures described.
Our results:
We found the conclusion that there is no impairment of the investment in subsidiaries to be acceptable (2020: acceptable).
3 Our Application of Materiality and an Overview of the Scope of Our Audit
Materiality for the Group financial statements as a whole was set at £425 million (2020: £420 million), determined with reference to a
benchmark of Group profit before taxation. This represents 4.6% (2020: 4.7%) of the Group’s reported profit before taxation. Materiality for
the parent Company financial statements as a whole was set at £55 million (2020: £50 million) which is the component materiality for
the parent Company determined by the group audit engagement team. This is lower than the materiality we would otherwise have
determined by reference to Company net assets and represents 0.15% of the Company’s net assets (2020: 0.15%).
In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold,
performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account
balances add up to a material amount across the financial statements as a whole.
Performance materiality for the Group was set at 75% (2020: 75%) of materiality for the financial statements as a whole, which equates to
£318 million (2020: £315 million). We applied this percentage in our determination of performance materiality because we did not identify
any factors indicating an elevated level of risk.
Performance materiality for the parent Company was set at 75% (2020: 75%) of materiality for the financial statements as a whole, which
equates to £41.2 million (2020: £37.5 million). We applied this percentage in our determination of performance materiality because we did
not identify any factors indicating an elevated level of risk.
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £21 million
(2020: £20 million) in addition to other identified misstatements that warranted reporting on qualitative grounds.
5%
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Continued
Scope of our audit
The Group operates three shared service centres (2020: three) in Romania, Malaysia and Costa Rica, the outputs of which are included in
the financial information of the reporting components they service and therefore they are not separate reporting components. Each of
the service centres is subject to specified risk-focused audit procedures, predominantly the testing of transaction processing and review
controls. Additional procedures are performed at certain reporting components to address the audit risks not covered by the work
performed over the shared service centres.
We performed full scope audits for Group reporting purposes of 23 components (2020: 23 components). Audits of these components
were performed using materiality levels assigned by the group audit team, which were lower than the materiality level for the Group as a
whole, ranging from £55 million to £220 million (2020: £50 million to £200 million), and determined by reference to the size and risk profile
of the components.
Audits of one or more account balances were performed in respect of a further 10 components (2020: 13), using a materiality ranging from
£45 million to £90 million (2020: £40 to £70 million) assigned by the Group audit team. Specified audit procedures have been performed
at 2 components (2020: 2) using a materiality of £45 million (2020: £40 million). These 12 components for which we performed work other
than full scope audits for group reporting purposes were not individually significant but were included in the scope of our Group reporting
work in order to provide further coverage over the Group’s results. This is consistent with the approach that was adopted in 2020.
The work on 30 of the 35 components (2020: 33 of the 38 components) was performed by component auditors and the rest, including the
audit of the parent Company, was performed by the Group team.
The percentages of the Group’s revenue, the total profits and losses that make up the Group’s profit before taxation and the Group’s total
assets represented by the components within the scope of our work and procedures performed at corporate level are as follows:
Group revenue
83%
(84% 2020)
Group profit before tax
79%
(78% 2020)
Group total assets
96%
(95% 2020)
79%
4%
79%
5%
60%
18%
19%
57%
3%
93%
3%
92%
3%
Full scope for Group audit purposes 2021
Audit of one or more account balances 2021
Specified risk-focused audit procedures 2021
Full scope for Group audit purposes 2020
Audit of one or more account balances 2020
Specified risk-focused audit procedures 2020
Residual components
The remaining 17% (2020: 16%) of total group revenue, 21% (2020: 22%) of group profit before taxation and 4% (2020: 5%) of total group
assets is represented by 274 (2020: 295) reporting components, none of which individually represented more than 2% (2020: 2%) of any
of total Group revenue, Group profit before taxation or total Group assets. For the residual components, we performed analysis at an
aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these.
The Group team instructed component auditors, and the auditors of the shared service centres, as to the significant areas to be covered,
including the relevant risks detailed above and the information to be reported back.
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We were able to rely upon the Group’s internal control over financial reporting in several areas of our audit, where our controls testing
supported this approach, which enabled us to reduce the scope of our substantive audit work; in the other areas the scope of the audit
work performed was fully substantive.
Due to the travel restrictions imposed as a result of COVID-19, the Group team limited physical site visits to one component location in
the United States for the purpose of business understanding, risk assessment and oversight procedures through discussions with the
component team. This was performed as a virtual site visit in 2020.
Consistent with 2020, the Group team performed virtual site visits at the shared service centres in Costa Rica, Malaysia, and Romania for
the purpose of business understanding, risk assessment and performing detailed file reviews.
In addition, the Group team held an audit risk planning and strategy virtual global conference which in-scope component auditors
attended. Further to these visits and conference, the Group team also held regular telephone and/or online meetings as part of the audit
planning phase to explain our audit instructions and discuss the component auditors’ audit plans as well as performing detailed remote
file reviews upon the completion of the component auditors’ engagements. The findings reported to the Group audit team were discussed
in more detail, and any further work required by the Group team that was then performed by the component auditor.
4 The Impact of Climate Change on Our Audit
In planning our audit, we considered the potential impacts of risks arising from climate change on the Group’s business and its
financial statements.
The Group has set its targets under the Paris Agreement to be net carbon neutral in scope 1 and scope 2 emissions by 2030, and net
carbon neutral in scope 3 emissions by 2050. Further information has been provided in the Group’s Strategic Report on page 47. This year
has also seen the Group align their climate related disclosures with the recommendations of the Task Force on Climate Related Financial
Disclosure (“TCFD”) for the first time. These disclosures are included on pages 58 to 67 of the Annual Report.
Climate change risk could have a significant impact on the Group’s business as it adapts its strategy and operations to address the
potential financial risks which could arise from both the physical and transition risks associated with climate change. To evaluate and
assess the resilience of their business to climate change, the Group conducted a risk assessment exercise focusing on the impact of
climate change on their agricultural supply chain. Further information can be found on page 63 and 64.
As part of our audit, we have made enquiries of management to understand the extent of the potential impact of climate change risk on
the Group’s financial statements. We have performed a risk assessment of how climate risks facing the Group, particularly the agricultural
supply chain, and the Group’s strategy to mitigate these risks may affect the financial statements and our audit. Our risk assessment
focused on the risk climate change may pose to the determination of future cash flows. We also held discussions with our own climate
change professionals to challenge our risk assessment.
On the basis of our risk assessment, we determined that while climate change poses a risk to future access to tobacco and nicotine and
therefore to the forecast future cash flows, the risk to this year’s financial statements is not significant taking into account the extent
of headroom on the Reynolds American cash-generating unit and indefinite-life intangibles. As such, there was no impact on our key
audit matters.
We have read the climate related information in the front half of the Annual Report, which included the Group’s adoption of climate related
disclosures as recommended by the TCFD and considered consistency with the financial statements and our audit knowledge.
5 Going Concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Group or the
Company or to cease their operations, and as they have concluded that the Group’s and the Company’s financial position means that this
is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to
continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”).
We used our knowledge of the Group, its industry, and the general economic environment to identify the inherent risks to its business
model and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the
going concern period. The risks that we considered most likely to adversely affect the Group’s and Company’s available financial resources
over this period were:
–
The enactment of regulation that significantly impairs the Group’s ability to communicate, differentiate, market or launch its products; and
–
Product liability, regulatory or other significant cases may be lost or compromised resulting in a material loss or other consequence.
We also considered less predictable but realistic second order impacts, such as the impact COVID-19 and the erosion of customer or
supplier confidence, which could result in a rapid reduction of available financial resources.
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Continued
We considered whether these risks could plausibly affect the liquidity in the going concern period by comparing severe, but plausible
downside scenarios that could arise from these risks individually and collectively against the level of available financial resources indicated
by the Group’s financial forecasts.
We considered whether the going concern disclosure in note 1 to the financial statements gives a full and accurate description of the
Directors’ assessment of going concern.
Our conclusions based on this work:
–
we consider that the directors’ use of the going concern basis of accounting in the preparation of the financial statements
is appropriate;
–
we have not identified, and concur with the directors’ assessment that there is not, a material uncertainty related to events or
conditions that, individually or collectively, may cast significant doubt on the Group’s or Company’s ability to continue as a going
concern for the going concern period;
–
we have nothing material to add or draw attention to in relation to the directors’ statement in note 1 to the financial statements on
the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and
Company’s use of that basis for the going concern period, and we found the going concern disclosure in note 1 to be acceptable; and
–
the related statement under the Listing Rules set out on page 83 is materially consistent with the financial statements and our
audit knowledge.
However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with
judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Group or the Company
will continue in operation.
6 Fraud and Breaches of Laws and Regulations – Ability to Detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or conditions that could indicate an incentive or
pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included:
–
Enquiring of directors, the Audit Committee, and internal audit whether they have knowledge of any actual, suspected or alleged fraud,
and inspection of policy documentation as to the Group’s high-level policies and procedures to prevent and detect fraud, including the
internal audit function, and the Group’s channel for “whistleblowing”.
–
Reading Board, Audit Committee, Remuneration Committee, Nominations Committee, Transactions Committee, Corporate Committee
and Committees of the Board’s minutes.
–
Considering the International Executive Incentive Scheme and performance targets for senior management.
–
Using analytical procedures to identify any unusual or unexpected relationships.
–
Our forensic specialists assisted us in identifying fraud risk factors. This included attending the Risk Assessment and Planning
Discussion and participating in meetings with management to discuss matters relating to ongoing criminal investigations and
allegations of misconduct. With regards to anti-bribery and corruption, they assisted us in developing our audit approach to address
fraud risk factors and reviewed reporting deliverables submitted by component audit teams that were scoped in for additional anti-
bribery and corruption audit procedures.
We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit.
This included communication from the group to component audit teams of relevant fraud risks identified at the Group level and request to
component audit teams to report to the Group audit team any instances of fraud that could give rise to a material misstatement at Group.
As required by auditing standards, and taking into account possible pressures to meet profit targets, we perform procedures to address
the risk of management override of controls, in particular the risk that Group and component management may be in a position to
make inappropriate accounting entries and the risk of bias in accounting estimates. On this audit we do not believe there is a fraud risk
related to revenue recognition as the revenue model is non-complex with no material estimation or manual intervention, revenue is
disaggregated between a significant number of End Markets and remuneration targets are based on Group performance rather than End
Market performance.
We did not identify any additional fraud risks.
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In determining the audit procedures, we took into account the results of our evaluation and testing of the operating effectiveness of the
Group-wide fraud risk management controls.
We also performed procedures including:
–
Identifying journal entries to test from a Group perspective based on risk criteria and comparing the identified entries to supporting
documentation. These included those posted to revenue accounts, those approved by an individual not authorised to approve postings,
those posted to accounts that contain significant estimates and period-end adjustments and those posted to accounts which could
drive certain key metrics such as the bonus calculation.
–
Identifying journal entries to test for all components based on risk criteria and comparing the identified entries to supporting
documentation. These included those posted by senior finance management or directors, journal entry posted by a user who only
posted one entry for the fiscal year and those posted with an unusual combination.
–
Assessing whether the judgements made in making accounting estimates are indicative of a potential bias.
Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements
from our general commercial and sector experience, through discussion with the directors and other management (as required by
auditing standards), and from inspection of the Group’s regulatory and legal correspondence and discussed with the directors and other
management the policies and procedures regarding compliance with laws and regulations.
As the Group is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity’s
procedures for complying with regulatory requirements.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance
throughout the audit. This included communication from the Group to component audit teams of relevant laws and regulations identified
at the Group level, and a request for component auditors to report to the Group team any instances of non-compliance with laws and
regulations that could give rise to a material misstatement at the Group level.
The potential effect of these laws and regulations on the financial statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation
(including related companies legislation), distributable profits legislation, taxation legislation and pension legislation and we assessed the
extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material
effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the
following areas as those most likely to have such an effect: health and safety, anti-bribery and corruption, money-laundering, sanctions,
environmental protection legislation, food and drug administration, data privacy, competition and contract legislation recognising the
financial and regulated nature of the Group’s activities. Auditing standards limit the required audit procedures to identify non-compliance
with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence,
if any. Therefore if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not
detect that breach.
For the criminal investigations into allegations of misconduct by the governmental authorities’ matters discussed in note 31 we performed
inquiries, obtained legal confirmations, and assessed disclosures against our understanding from legal correspondence.
Context of the ability of the audit to detect fraud or breaches of law or regulation
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements
in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards.
For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial
statements, the less likely the inherently limited procedures required by auditing standards would identify it.
In addition, as with any audit, there remained a higher risk of non-detection of fraud, as these may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls. Our audit procedures are designed to detect material misstatement.
We are not responsible for preventing non-compliance or fraud and cannot be expected to detect non-compliance with all laws
and regulations.
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7 We Have Nothing to Report on the Other Information in the Annual Report
The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion
on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as
explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work
we have not identified material misstatements in the other information.
Strategic report and directors’ report
Based solely on our work on the other information:
–
we have not identified material misstatements in the strategic report and the directors’ report;
–
in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
–
in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies
Act 2006.
Disclosures of emerging and principal risks and longer-term viability
We are required to perform procedures to identify whether there is a material inconsistency between the directors’ disclosures in respect
of emerging and principal risks and the viability statement, and the financial statements and our audit knowledge.
Based on those procedures, we have nothing material to add or draw attention to in relation to:
–
the directors’ confirmation within the viability statement on page 92 that they have carried out a robust assessment of the emerging
and principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
–
the group principal risks disclosures describing these risks and how emerging risks are identified, and explaining how they are being
managed and mitigated; and
–
the directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have
done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation
that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including
any related disclosures drawing attention to any necessary qualifications or assumptions.
We are also required to review the viability statement, set out on page 92 under the Listing Rules. Based on the above procedures, we have
concluded that the above disclosures are materially consistent with the financial statements and our audit knowledge.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements
that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the
Group’s and Company’s longer-term viability.
Corporate governance disclosures
We are required to perform procedures to identify whether there is a material inconsistency between the directors’ corporate governance
disclosures and the financial statements and our audit knowledge.
Based on those procedures, we have concluded that each of the following is materially consistent with the financial statements and our
audit knowledge:
–
the directors’ statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and
understandable, and provides the information necessary for shareholders to assess the Group’s position and performance, business
model and strategy;
–
the section of the Annual Report describing the work of the Audit Committee, including the significant issues that the Audit Committee
considered in relation to the financial statements, and how these issues were addressed; and
–
the section of the Annual Report that describes the review of the effectiveness of the Group’s risk management and internal
control systems.
We are required to review the part of the Corporate Governance Statement relating to the Group’s compliance with the provisions of the
UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects.
Financial Statements
Independent Auditor’s Report
@
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
175
8 We Have Nothing to Report on the Other Matters on Which We are Required to Report by Exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
–
adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
–
the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns; or
–
certain disclosures of directors’ remuneration specified by law are not made; or
–
we have not received all the information and explanations we require for our audit.
We have nothing to report in these respects.
9 Respective Responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 166, the directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and
parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going
concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
10 The Purpose of Our Audit Work and to Whom We Owe Our Responsibilities
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006
and the terms of our engagement by the Company. Our audit work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditor’s report and the further matters we are required to state to them in
accordance with the terms agreed with the Company, and for no other purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or
for the opinions we have formed.
Philip Smart (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
10 February 2022
BAT Annual Report and Form 20-F 2021
176
Report of Independent Registered
Public Accounting Firm
To the Shareholders and Board of Directors of British American Tobacco p.l.c.
Financial Statements
This page is intentionally left blank
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Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
177
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BAT Annual Report and Form 20-F 2021
178
Group Income Statement
Financial Statements
For the years ended 31 December
Notes
2021
£m
2020
£m
2019
£m
Revenue
1
2 25,684 25,776 25,877
Raw materials and consumables used
(4,542 )
(4,583 )
(4,599 )
Changes in inventories of finished goods and work in progress 160 445 162
Employee benefit costs
3
(2,717 )
(2,744 )
(3,221 )
Depreciation, amortisation and impairment costs
4
(1,076 )
(1,450 )
(1,512 )
Other operating income
5 196 188 163
Loss on reclassification from amortised cost to fair value
(3 )
(3 ) (3 )
Other operating expenses
6
(7,468 )
(7,667 )
(7,851 )
Profit from operations
2 10,234 9,962 9,016
Net finance costs
8
(1,486 )
(1,745 )
(1,602 )
Share of post-tax results of associates and joint ventures 2, 9 415 455 498
Profit before taxation 9,163 8,672 7,912
Taxation on ordinary activities
10
(2,189 )
(2,108 )
(2,063 )
Profit for the year 6,974 6,564 5,849
Attributable to:
Owners of the parent 6,801 6,400 5,704
Non-controlling interests 173 164 145
Earnings per share
Basic
11 296.9 p 280.0 p 249.7 p
Diluted
11 295.6 p 278.9 p 249.0 p
Note:
1. Revenue is net of duty, excise and other taxes of £38,595 million, £39,172 million and £39,826 million for the years ended 31 December 2021, 2020 and 2019, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
Strategic Report
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Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
179
Group Statement of Comprehensive Income
For the years ended 31 December
Notes
2021
£m
2020
£m
2019
£m
Profit for the year 6,974 6,564 5,849
/(Other comprehensive income
expense)Items that may be reclassified subsequently to profit or loss: 509
(2,997 )
(3,216 )
Foreign currency translation and hedges of net investments in foreign operations
– differences on exchange from translation of foreign operations 32
(2,597 )
(2,967 )
– reclassified and reported in profit for the year – –
22(c) 291
– net investment hedges – net fair value gains/(losses) on derivatives 75
(16 ) 21
– net investment hedges – differences on exchange on borrowings 24
(163 )
(18 )
Cash flow hedges
– net fair value gains/(losses) 95
(257 )
(246 )
– reclassified and reported in profit for the year 32 90 53
– tax on net fair value (gains)/losses in respect of cash flow hedges 56
10(f) 44
(32 )
Investments held at fair value
– net fair value gains 9 – –
18
Associates – share of OCI, net of tax
9
(17 )
(98 )
(115 )
Items that will not be reclassified subsequently to profit or loss: 313 55
(507 )
Retirement benefit schemes
– net actuarial gains/(losses)
15 382 105
(582 )
– surplus recognition
15 10
(1 )
(7 )
– tax on actuarial (gains)/losses in respect of subsidiaries
10(f)
(82 )
(26 ) 75
Associates – share of OCI, net of tax
9 14 7
(34 )
Total other comprehensive income/(expense) for the year, net of tax 822
(2,942 )
(3,723 )
Total comprehensive income for the year, net of tax 7,796 3,622 2,126
Attributable to:
Owners of the parent 7,622 3,474 2,000
Non-controlling interests 174 148 126
The accompanying notes are an integral part of these consolidated financial statements.
BAT Annual Report and Form 20-F 2021
180
Financial Statements
Group Statement ofChangesinEquity
Attributable to owners of the parent
Notes
Share
capital
£m
Share
premium,
capital
redemption
and merger
reserves
£m
Other
reserves
£m
Retained
earnings
£m
Total
attributable
to owners
of parent
£m
Perpetual
hybrid
bonds
£m
Non-
controlling
interests
£m
Total
equity
£m
Balance at 1 January 2021 614 26,618 42,041 62,673 – 282 62,955
(6,600 )
Total comprehensive income for the
year comprising: – – 523 7,099 7,622 – 174 7,796
Profit for the year – – – 6,801 6,801 – 173 6,974
Other comprehensive income for the year – – 523 298 821 – 1 822
Other changes in equity
Cash flow hedges reclassified and
reported in total assets – – 45 – 45 – – 45
Employee share options
– value of employee services – – – 76 76 – – 76
28
– treasury shares used for share
option schemes – 4 – – – – –
(4 )
Dividends and other appropriations
– ordinary shares – – – – –
22(f)
(4,904 )
(4,904 )
(4,904 )
– to non-controlling interests – – – – – –
(162 )
(162 )
Purchase of own shares
– held in employee share ownership trusts – – – – –
(82 )
(82 )
(82 )
Perpetual hybrid bonds
– proceeds, net of issuance fees – – – – – 1,681 – 1,681
22(d)
– tax on issuance fees – – – – – 4 – 4
– coupons paid – – – – –
(6 ) (6 )
(6 )
– tax on coupons paid – – – 1 1 – – 1
Non-controlling interests – acquisitions – – – – –
27(
b)(5 ) (5 )
(5 )
Other movements –
non-controlling interests
27(b) – – – – – – 6 6
Other movements – – – – –
(4 ) (4 )
(4 )
Balance at 31 December 2021 614 26,622 44,212 65,416 1,685 300 67,401
(6,032 )
The accompanying notes are an integral part of these consolidated financial statements.
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Other Information
BAT Annual Report and Form 20-F 2021
181
Attributable to owners of the parent
Notes
Share
capital
£m
Share
premium,
capital
redemption
and merger
reserves
£m
Other
reserves
£m
Retained
earnings
£m
Total
attributable
to owners
of parent
£m
Non-
controlling
interests
£m
Total
equity
£m
Balance at 1 January 2020 614 26,609 63,902 258 64,160
(3,555 ) 40,234
Total comprehensive income for the
year comprising: – – 6,486 3,474 148 3,622
(3,012 )
Profit for the year – – – 6,400 6,400 164 6,564
Other comprehensive (expense)/income
for the year – – 86
(3,012 )
(2,926 )
(16 )
(2,942 )
Other changes in equity
Cash flow hedges reclassified and reported
in total assets – – – –
(33 )
(33 )
(33 )
Employee share options
– value of employee services – – – 88 88 – 88
28
– proceeds from new shares issued – 2 – – 2 – 2
– treasury shares used for share
option schemes – 7 – – – –
(7 )
Dividends and other appropriations
– ordinary shares – – – –
22(f)
(4,747 )
(4,747 )
(4,747 )
– to non-controlling interests – – – – –
(141 )
(141 )
Purchase of own shares
– held in employee share ownership trusts – – – –
(17 )
(17 )
(17 )
Other movements non-controlling interests – – – – – 17 17
27(
b)Other movements – – – 4 4 – 4
Balance at 31 December 2020 614 26,618 42,041 62,673 282 62,955
(6,600 )
Attributable to owners of the parent
Notes
Share
capital
£m
Share
premium,
capital
redemption
and merger
reserves
£m
Other
reserves
£m
Retained
earnings
£m
Total
attributable
to owners
of parent
£m
Non-
controlling
interests
£m
Total
equity
£m
Balance at 1 January 2019 614 26,606 38,557 65,444 244 65,688
(333 )
Total comprehensive income for the
year comprising: – – 5,190 2,000 126 2,126
(3,190 )
Profit for the year – – – 5,704 5,704 145 5,849
Other comprehensive expense for the year – –
(3,190 )
(514 )
(3,704 )
(19 )
(3,723 )
Other changes in equity
Cash flow hedges reclassified and reported
in total assets – – – –
(32 )
(32 )
(32 )
Employee share options
– value of employee services – – – 115 115 – 115
28
– proceeds from shares issued – 3 – – 3 – 3
Dividends and other appropriations
– ordinary shares – – – –
(3,476 )
(3,476 )
(3,476 )
– to non-controlling interests – – – – –
(148 )
(148 )
Purchase of own shares
– held in employee share ownership trusts – – – –
(117 )
(117 )
(117 )
Other movements non-controlling interests
27(a),(b) – – – – – 36 36
Other movements – – – –
(35 )
(35 )
(35 )
Balance at 31 December 2019 614 26,609 40,234 63,902 258 64,160
(3,555 )
The accompanying notes are an integral part of these consolidated financial statements.
BAT Annual Report and Form 20-F 2021
182
Financial Statements
Group Balance Sheet
31 December
Notes
2021
£m
2020
£m
Assets
Intangible assets
12 115,625 115,343
Property, plant and equipment
13 4,953 5,060
Investments in associates and joint ventures
14 1,948 1,796
Retirement benefit assets
15 918 714
Deferred tax assets
16 611 534
Trade and other receivables
17 210 242
Investments held at fair value
18 50 22
Derivative financial instruments
19 243 367
Total non-current assets 124,558 124,078
Inventories
20 5,279 5,998
Income tax receivable 117 79
Trade and other receivables
17 3,951 3,721
Investments held at fair value
18 456 242
Derivative financial instruments
19 182 430
Cash and cash equivalents
21 2,809 3,139
Assets classified as held-for-sale 13 3
Total current assets 12,807 13,612
Total assets 137,365 137,690
Equity – capital and reserves
Share capital
22(a) 614 614
Share premium, capital redemption and merger reserves 26,622 26,618
22(
b)Other reserves
22(c)
(6,032 )
(6,600 )
Retained earnings
22(c) 44,212 42,041
Owners of the parent 65,416 62,673
Perpetual hybrid bonds
22(d) 1,685 –
Non-controlling interests
22(e) 300 282
Total equity 67,401 62,955
Liabilities
Borrowings
23 35,666 39,927
Retirement benefit liabilities
15 1,239 1,524
Deferred tax liabilities
16 16,462 16,314
Other provisions for liabilities
24 392 387
Trade and other payables
25 982 1,064
Derivative financial instruments
19 79 41
Total non-current liabilities 54,820 59,257
Borrowings
23 3,992 4,041
Income tax payable 879 868
Other provisions for liabilities
24 461 598
Trade and other payables
25 9,577 9,693
Derivative financial instruments
19 235 278
Total current liabilities 15,144 15,478
Total equity and liabilities 137,365 137,690
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board
Luc Jobin
Chairman
10 February 2022
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
183
Group Cash Flow Statement
For the years ended 31 December
Notes
2021
£m
2020
£m
2019
£m
Profit for the year 6,974 6,564 5,849
Taxation on ordinary activities 2,189 2,108 2,063
Share of post-tax results of associates and joint ventures
(415 )
(455 )
(498 )
Net finance costs 1,486 1,745 1,602
Profit from operations 10,234 9,962 9,016
Adjustments for
– depreciation, amortisation and impairment costs
4 1,076 1,450 1,512
– decrease/(increase) in inventories 433
(144 )
(371 )
– (increase)/decrease in trade and other receivables 300
(393 )
(699 )
– decrease in receivables related to the charge in respect of the Quebec Class Actions – – 436
24
– (decrease)/increase in Master Settlement Agreement payable
6 369
(36 )
(124 )
– increase/(decrease) in trade and other payables 183 730
(320 )
– decrease in net retirement benefit liabilities
(104 )
(96 )
(40 )
– (decrease)/increase in other provisions for liabilities – 382
(145 )
– other non-cash items
27(d) 430 46 106
Cash generated from operating activities 11,678 11,567 10,948
Dividends received from associates 353 351 252
Tax paid
(2,314 )
(2,132 )
(2,204 )
Net cash generated from operating activities 9,717 9,786 8,996
Cash flows from investing activities
Interest received 33 48 80
Purchases of property, plant and equipment
(527 )
(511 )
(664 )
Proceeds on disposal of property, plant and equipment 31 44 34
Purchases of intangibles
(218 )
(244 )
(151 )
Purchases of investments
(369 )
(343 )
(191 )
Proceeds on disposals of investments 141 184 339
Investment in associates and acquisitions of other subsidiaries net of cash acquired 39
(133 )
(86 )
Disposal of subsidiary, net of cash disposed of – –
27(d)
(98 )
Net cash used in investing activities
(1,140 )
(783 )
(639 )
Cash flows from financing activities
Interest paid on borrowings and financing related activities
(1,479 )
(1,737 )
(1,601 )
Interest element of lease liabilities
(23 )
(26 )
(32 )
Capital element of lease liabilities
(154 )
(164 )
(154 )
Proceeds from increases in and new borrowings 978 9,826 4,247
Reductions in and repayments of borrowings
(4,843 )
(10,633 )
(5,640 )
Inflows/(outflows) relating to derivative financial instruments 229
(283 )
(564 )
Purchases of own shares held in employee share ownership trusts
(82 )
(18 )
(117 )
Proceeds from the issue of perpetual hybrid bonds, net of issuance costs – –
22(d) 1,681
Coupon paid on perpetual hybrid bonds – –
(6 )
Dividends paid to owners of the parent
(4,904 )
(4,745 )
(4,598 )
Capital injection from and purchases of non-controlling interests 1 17 20
30
Dividends paid to non-controlling interests
(150 )
(136 )
(157 )
Other 3 2 3
Net cash used in financing activities
(8,749 )
(7,897 )
(8,593 )
Net cash flows (used in)/generated from operating, investing and financing activities 1,106
(172 )
(236 )
Differences on exchange
(253 )
(253 )
(57 )
(Decrease)/increase in net cash and cash equivalents in the year
(425 ) 853
(293 )
Net cash and cash equivalents at 1 January 2,888 2,035 2,328
Net cash and cash equivalents at 31 December 2,463 2,888 2,035
21
The accompanying notes are an integral part of these consolidated financial statements.
BAT Annual Report and Form 20-F 2021
184
Financial Statements
Notes on Accounts
1 Accounting Policies
Basis of preparation
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board
(IASB) and UK-adopted international accounting standards
@
, and
in accordance with the provisions of the UK Companies Act 2006
@
.
UK-adopted international accounting standards differ in certain
respects from IFRS as issued by the IASB. The differences have no
impact on the Group’s consolidated financial statements for the
periods presented.
The consolidated financial statements have been prepared on a
going concern basis under the historical cost convention except as
described in the accounting policy below on financial instruments.
In performing its going concern assessment, management
considered forecasts and liquidity requirements within the going
concern period. This includes the impact of COVID-19, as well as
the payments arising from the Master Settlement Agreement due
in the U.S. in 2022 and other known liabilities or future payments
(including interim dividends), as they fall due.
The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities, and
the disclosure of contingent liabilities at the date of the financial
statements. The key estimates and assumptions are set out in
the accounting policies below, together with the related notes to
the accounts.
The critical accounting judgements include:
–
the identification and quantification of adjusting items, which are
separately disclosed as memorandum information, is explained
below and the impact of these on the calculation of adjusted
earnings per share is described in note11;
–
the determination as to whether to recognise provisions and the
exposures to contingent liabilities related to pending litigation or
other outstanding claims, as well as other contingent liabilities.
The accounting policy on contingent liabilities, which are not
provided for, is set out below and the contingent liabilities of the
Group are explained in note 31. Judgement is necessary to assess
the likelihood that a pending claim is probable (more likely than
not to succeed), possible or remote;
–
the determination as to whether control (subsidiaries), joint
control (joint arrangements), or significant influence (associates)
exists in relation to the investments held by the Group. This is
assessed after taking into account the Group’s ability to appoint
Directors to the entity’s Board, its relative shareholding
compared with other shareholders, any significant contracts
or arrangements with the entity or its other shareholders and
other relevant facts and circumstances. The application of these
policies to Group subsidiaries in territories including Canada is
explained in note 32;
–
the review of applicable exchange rates for transactions with and
translation of entities in territories where there are restrictions
on the free access to foreign currency, or multiple exchange
rates; and
–
the determination as to whether perpetual hybrid bonds should
be classified as equity instead of borrowings (note 22(d)).
The critical accounting estimates include:
–
the review of asset values, especially indefinite life assets such as
goodwill and certain trademarks and similar intangibles. The key
assumptions used in respect of the impairment testing are
the determination of cash-generating units, the budgeted and
forecast cash flows of these units, the long-term growth rate for
cash flow projections and the rate used to discount the cash flow
projections. These are described in note 12;
–
the estimation of and accounting for retirement benefit costs.
The determination of the carrying value of assets and liabilities,
as well as the charge for the year, and amounts recognised
in other comprehensive income, involves judgements made
in conjunction with independent actuaries. These involve
estimates about uncertain future events based on the
environment in different countries, including life expectancy
of scheme members, salary and pension increases, inflation,
as well as discount rates and asset values at the year-end.
The assumptions used by the Group and sensitivity analysis are
described in note 15; and
–
the estimation of amounts to be recognised in respect of
taxation and legal matters, and the estimation of other provisions
for liabilities and charges are subject to uncertain future events,
may extend over several years and so the amount and/or timing
may differ from current assumptions. The accounting policy for
taxation is explained below. The recognised deferred tax assets
and liabilities, together with a note of unrecognised amounts,
are shown in note 16, and a contingent tax asset is explained in
note 10(b). Other provisions for liabilities and charges are as set
out in note 24. Litigation related deposits are shown in note 17.
The application of these accounting policies to the payments
made and credits recognised under the Master Settlement
Agreement by Reynolds American Inc. (Reynolds American) is
described in note 6(b).
Such estimates and assumptions are based on historical
experience and various other factors that are believed to be
reasonable in the circumstances and constitute management’s
best judgement at the date of the financial statements. In the
future, actual experience may deviate from these estimates and
assumptions, which could affect the financial statements as the
original estimates and assumptions are modified, as appropriate, in
the year in which the circumstances change.
These consolidated financial statements were authorised for issue
by the Board of Directors on 10 February 2022.
Basis of consolidation
The consolidated financial information includes the financial
statements of British American Tobacco p.l.c. and its subsidiary
undertakings, collectively ‘the Group’, together with the Group’s
share of the results of its associates and joint arrangements.
A subsidiary is an entity controlled by the Group. The Group
controls an entity when the Group is exposed to, or has rights to,
variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity.
Non-controlling interests represent the share of earnings or equity
in subsidiaries that is not attributable, directly or indirectly, to
shareholders of the Group.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
185
@
onForm 20-F as filed with the SEC.
1 Accounting Policies
Continued
Associates comprise investments in undertakings, which are not
subsidiary undertakings or joint arrangements, where the Group’s
interest in the equity capital is long-term and over whose operating
and financial policies the Group exercises a significant influence.
They are accounted for using the equity method.
Joint arrangements comprise contractual arrangements where two
or more parties have joint control and where decisions regarding the
relevant activities of the entity require unanimous consent.
Joint operations are jointly-controlled arrangements where the
parties to the arrangement have rights to the underlying assets and
obligations for the underlying liabilities relating to the arrangement.
The Group accounts for its share of the assets, liabilities, income
and expenses of any such arrangement.
Joint ventures comprise arrangements where the parties to the
arrangement have rights to the net assets of the arrangement.
They are accounted for using the equity method.
Foreign currencies and hyperinflationary territories
The functional currency of the Parent Company is sterling and
this is also the presentation currency of the Group. The income
and cash flow statements of Group undertakings expressed
in currencies other than sterling are translated to sterling
using exchange rates applicable to the dates of the underlying
transactions. Average rates of exchange in each year are used
where the average rate approximates the relevant exchange
rate at the date of the underlying transactions. Assets and
liabilities of Group undertakings are translated at the applicable
rates of exchange at the end of each year. In territories where
there are restrictions on the free access to foreign currency or
multiple exchange rates, the applicable rates of exchange are
regularly reviewed.
The differences between retained profits translated at average and
closing rates of exchange are taken to reserves, as are differences
arising on the retranslation to sterling (using closing rates of
exchange) of overseas net assets at the beginning of the year,
and are presented as a separate component of equity. They are
recognised in the income statement when the gain or loss on
disposal of a Group undertaking is recognised.
Foreign currency transactions are initially recognised in the
functional currency of each entity in the Group using the exchange
rate ruling at the date of the transaction. Foreign exchange gains
and losses resulting from the settlement of such transactions
and from the translation of foreign currency assets and liabilities
at year-end rates of exchange are recognised in the income
statement, except when deferred in equity as qualifying cash flow
hedges, on intercompany net investment loans and qualifying net
investment hedges. Foreign exchange gains or losses recognised in
the income statement are included in profit from operations or net
finance costs depending on the underlying transactions that gave
rise to these exchange differences.
In addition, for hyperinflationary countries where the effect on the
Group results would be significant, the financial statements in local
currency are adjusted to reflect the impact of local inflation prior
to translation into sterling, in accordance with IAS 29
Financial
Reporting in Hyperinflationary Economies
. Where applicable,
IAS 29 requires all transactions to be indexed by an inflationary
factor to the balance sheet date, potentially leading to a monetary
gain or loss on indexation. In addition, the Group assesses the
carrying value of fixed assets after indexation and applies IAS 36
Impairment of Assets
, where appropriate, to ensure that the
carrying value correctly reflects the economic value of such assets.
The results and balance sheets of operations in hyperinflationary
territories are translated at the period end rate. In the case of
Venezuela, the Group uses an estimated exchange rate calculated
by reflecting the development of the general price index since the
Group last achieved meaningful repatriation of dividends.
Revenue
Revenue principally comprises sales of cigarettes, other
tobacco products, and nicotine products, to external customers.
Revenue excludes duty, excise and other taxes related to sales in
the period and is stated after deducting rebates, returns and other
similar discounts and payments to direct and indirect customers.
For vast majority of the Group’s sales, revenue is recognised when
control of the goods is transferred to a customer at a point in time;
this is usually evidenced by a transfer of the significant risks and
rewards of ownership upon delivery to the customer, which in
terms of timing is not materially different to the date of shipping.
Retirement benefit costs
The Group operates both defined benefit and defined contribution
schemes including post-retirement healthcare schemes.
For defined benefit schemes, the actuarial cost charged to profit
from operations consists of current service cost, net interest on
the net defined benefit liability or asset, past service cost and
the impact of any settlements. The net deficit or surplus for each
defined benefit pension scheme is calculated in accordance with
IAS 19
Employee Benefits
based on the present value of the defined benefit obligation at the balance sheet date less the fair value of
the scheme assets adjusted, where appropriate, for any surplus
restrictions or the effect of minimum funding requirements.
Some benefits are provided through defined contribution schemes
and payments to these are charged as an expense as they fall due.
Share-based payments
The Group has equity-settled and cash-settled share-based
compensation plans.
Equity-settled share-based payments are measured at fair value
at the date of grant. The fair value determined at the grant date
of the equity-settled share-based payments is expensed over the
vesting period, based on the Group’s estimate of awards that will
eventually vest. For plans where vesting conditions are based on
total shareholder returns, the fair value at date of grant reflects
these conditions, whereas earnings per share vesting conditions
are reflected in the calculation of awards that will eventually vest
over the vesting period.
For cash-settled share-based payments, a liability equal to the
portion of the services received is recognised at its current fair
value determined at each balance sheet date.
Fair value is measured by the use of the Black-Scholes option
pricing model, except where vesting is dependent on market
conditions when the Monte-Carlo option pricing model is used.
The expected life used in the models has been adjusted, based on
management’s best estimate, for the effects of non-transferability,
exercise restrictions and behavioural considerations.
BAT Annual Report and Form 20-F 2021
186
Financial Statements
Notes on Accounts
Continued
1 Accounting Policies
Continued
Research and development
Research expenditure is charged to income in the year in which it
is incurred. Development expenditure is charged to income in the
year it is incurred, unless it meets the recognition criteria of IAS 38
Intangible Assets
to be capitalised as an intangible asset.
Taxation
Taxation is chargeable on the profits for the period, together with
deferred taxation. The current income tax charge is calculated
on the basis of tax laws enacted or substantively enacted at the
balance sheet date in the countries where the Group’s subsidiaries,
associates and joint arrangements operate and generate
taxable income.
Deferred taxation is provided in full using the liability method for
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amount used for
taxation purposes. A deferred tax asset is recognised only to the
extent that it is probable that future taxable profits will be available
against which the asset can be utilised.
Deferred tax is determined using the tax rates that have been
enacted or substantively enacted by the balance sheet date and
are expected to apply when the related deferred tax asset is
realised or deferred tax liability is settled.
Tax is recognised in the income statement except to the extent
that it relates to items recognised in other comprehensive income
or directly in equity, in which case it is recognised in the statement
of other comprehensive income or the statement of changes
in equity.
The Group has exposures in respect of the payment or recovery
of a number of taxes. With effect from 1 January 2019, the Group
adopted the requirements of IFRIC 23
Uncertainty over Income Tax
Treatments
which requires that, where there is uncertainty as to
whether a particular tax treatment will be accepted by the relevant
taxation authority, the financial statements reflect the probable
outcome with estimated amounts determined based on the most
likely amount or expected value, depending on which method is
expected to better predict the resolution of the uncertainty. Prior to
1 January 2019, liabilities or assets for these payments or recoveries
were recognised at such time as an outcome became probable and
when the amount could reasonably be estimated.
Goodwill
Goodwill arising on acquisitions is capitalised and any impairment
of goodwill is recognised immediately in the income statement and
is not subsequently reversed.
Goodwill in respect of subsidiaries is included in intangible assets.
In respect of associates and joint ventures, goodwill is included in
the carrying value of the investment in the associated company or
joint venture. On disposal of a subsidiary, associate or joint venture,
the attributable amount of goodwill is included in the determination
of the profit or loss on disposal.
Intangible assets other than goodwill
The intangible assets shown on the Group balance sheet
consist mainly of trademarks and similar intangibles, including
certain intellectual property, acquired by the Group’s subsidiary
undertakings and computer software.
Acquired trademarks and similar assets are carried at cost less
accumulated amortisation and impairment. Trademarks with
indefinite lives are not amortised but are reviewed annually for
impairment. Other trademarks and similar assets are amortised
on a straight-line basis over their remaining useful lives, consistent
with the pattern of economic benefits expected to be received,
which do not exceed 20 years. Any impairments of trademarks are
recognised in the income statement, but increases in trademark
values are not recognised.
Computer software is carried at cost less accumulated
amortisation and impairment, and, with the exception of global
software solutions, is amortised on a straight-line basis over
periods ranging from three years to five years. Global software
solutions are software assets designed to be implemented on a
global basis and used as a standard solution by all of the operating
companies in the Group. Prior to 2021, these assets were amortised
on a straight-line basis over periods not exceeding 10 years.
Since 2021, global software solutions are amortised on a straight-
line basis over periods not exceeding 13 years. The revision in useful
economic life is a result of ongoing use of global software solutions
due to the extension of third-party supplier support. In 2021 and
2022, the estimated impact of this change in accounting estimate
is a reduction in annual amortisation expense of £26 million and, in
2023, a reduction in annual amortisation expense of £12 million.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and impairment. Depreciation is calculated on a
straight-line basis to write off the assets over their useful economic
life. No depreciation is provided on freehold land or assets
classified as held-for-sale. Freehold and leasehold property are
depreciated at rates between 2.5% and 4% per annum, and plant
and equipment at rates between 3% and 25% per annum.
Capitalised interest
Borrowing costs which are directly attributable to the acquisition,
construction or production of intangible assets or property, plant
and equipment that takes a substantial period of time to get ready
for its intended use or sale, are capitalised as part of the cost of
the asset.
Leased assets
With effect from 1 January 2019, the Group has applied IFRS 16
Leases
to contractual arrangements which are, or contain, leases
of assets, and consequently recognises right-of-use assets and
lease liabilities at the commencement of the leasing arrangement,
with the assets included as part of property, plant and equipment
in note 13 and the liabilities included as part of borrowings in
note 23.
In adopting IFRS 16, the Group applied the modified retrospective
approach with no restatement of prior periods, as permitted
by the Standard. The Group took advantage of certain practical
expedients available under the Standard, including ‘grandfathering’
previously recognised lease arrangements such that contracts
were not reassessed at the implementation date as to whether
they were, or contained, a lease, and leases previously classified
as finance leases under IAS 17
Leases
remained capitalised on the
adoption of IFRS 16.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
187
1 Accounting Policies
Continued
For leasing arrangements entered into after 1 January 2019, the
Group has also adopted several practical expedients available
under the Standard including not applying the requirements
of IFRS 16 to leases of intangible assets, applying the portfolio
approach where appropriate to do so, and to not apply the
recognition and measurement requirements of IFRS 16 to short-
term leases (leases of less than 12 months maximum duration)
or leases of low-value assets. Except for property-related
leases, non-lease components have not been separated from
lease components.
Lease liabilities are initially recognised at an amount equal to the
present value of estimated contractual lease payments at the
inception of the lease, after taking into account any options to
extend the term of the lease. Lease commitments are discounted
to present value using the interest rate implicit in the lease if this
can be readily determined, or the applicable incremental rate of
borrowing, as appropriate. Right-of-use lease assets are initially
recognised at an amount equal to the lease liability, adjusted for
initial direct costs in relation to the assets, then depreciated over
the shorter of the lease term and their estimated useful lives.
Prior to 1 January 2019, the Group applied IAS 17
Leases
.
Arrangements where the Group had substantially all the risks and
rewards of ownership of the leased asset were classified as finance
leases and were included as part of property, plant and equipment.
Under IAS 17, leases which were not classified as finance leases
were classified as operating leases and such arrangements
were not capitalised. Rental payments under operating leases
were charged to operating profit on a straight-line basis over the
lease term.
Impairment of non-financial assets
Assets are reviewed for impairment whenever events indicate
that the carrying amount of a cash-generating unit may not be
recoverable. In addition, assets that have indefinite useful lives are
tested annually for impairment. An impairment loss is recognised
to the extent that the carrying value exceeds the higher of the
asset’s fair value less costs to sell and its value-in-use.
A cash-generating unit is the smallest identifiable group of assets
that generates cash flows which are largely independent of the
cash flows from other assets or groups of assets. At the acquisition
date, any goodwill acquired is allocated to the relevant cash-
generating unit or group of cash-generating units expected to
benefit from the acquisition for the purpose of impairment testing
of goodwill.
Impairment of financial assets held at amortised cost
Loss allowances for expected credit losses on financial assets
which are held at amortised cost are recognised on initial
recognition of the underlying asset. As permitted by IFRS 9
Financial Instruments
, loss allowances on trade receivables arising
from the recognition of revenue under IFRS 15
Revenue from
Contracts with Customers
are initially measured at an amount
equal to lifetime expected losses. Allowances in respect of loans
and other receivables are initially recognised at an amount equal
to 12-month expected credit losses. Allowances are measured
at an amount equal to the lifetime expected credit losses where
the credit risk on the receivables increases significantly after
initial recognition.
Inventories
Inventories are stated at the lower of cost and net realisable
value. Cost is based on the weighted average cost incurred in
acquiring inventories and bringing them to their existing location
and condition, which will include raw materials, direct labour and
overheads, where appropriate. Net realisable value is the estimated
selling price less costs to completion and sale. Tobacco inventories
which have an operating cycle that exceeds 12 months are
classified as current assets, consistent with recognised
industry practice.
Biological Assets
The investments in associates and joint ventures shown in the
Group balance sheet include biological assets held by Organigram
Holdings Inc. In accordance with IAS 41
Agriculture
, the Group
measures biological assets at fair value less costs to sell up to the
point of harvest, at which point this becomes the basis for the
cost of finished goods inventories after harvest with subsequent
expenditures incurred on these being capitalised, where applicable,
in accordance with IAS 2
Inventories
. Unrealised fair value gains and losses arising during the growth of biological assets are
recognised immediately in the income statement.
Equity instruments
Instruments are classified as either financial liabilities or as
equity in accordance with the substance of the contractual
arrangements. Instruments that cannot be settled in the Group’s
own equity instruments and that include no contractual obligation
to deliver cash or another financial asset are classified as equity.
Equity instruments issued by the Group are recognised at the
proceeds received, net of issuance costs.
On 27 September 2021, the Group issued two €1 billion perpetual
hybrid bonds. As the Group has the unconditional right to avoid
transferring cash or another financial asset in relation to these
bonds, they are classified as equity instruments in the consolidated
financial statements.
Financial instruments
The Group’s business model for managing financial assets is set
out in the Group Treasury Manual which notes that the primary
objective with regard to the management of cash and investments
is to protect against the loss of principal. Additionally, the Group
aims: to maximise Group liquidity by concentrating cash at the
Centre, to align the maturity profile of external investments with
that of the forecast liquidity profile, to wherever practicable,
match the interest rate profile of external investments to that
of debt maturities or fixings, and to optimise the investment
yield within the Group’s investment parameters. The majority
of financial assets are held in order to collect contractual cash
flows (typically cash and cash equivalents and loans and other
receivables), but some assets (typically investments) are held for
investment potential.
Financial assets and financial liabilities are recognised when
the Group becomes a party to the contractual provisions of the
relevant instrument and derecognised when it ceases to be a
party to such provisions. Such assets and liabilities are classified
as current if they are expected to be realised or settled within
12 months after the balance sheet date. If not, they are classified as
non-current. In addition, current liabilities include amounts where
the entity does not have an unconditional right to defer settlement
of the liability for at least 12 months after the balance sheet date.
BAT Annual Report and Form 20-F 2021
188
Financial Statements
Notes on Accounts
Continued
1 Accounting Policies
Continued
The Group early adopted the phase one and phase two
Amendments to IFRS 9
Financial Instruments
and IFRS 7
Financial
Instruments: Disclosures
regarding Interest Rate Benchmark
Reform in 2019 and 2020 respectively. The Amendments provide
an exemption for certain hedging relationships directly affected by
changes in interest rate benchmarks where the reform gives rise to
uncertainties regarding the interest rate designated as a hedged
risk, or the timing or amount of interest rate cashflows of either the
hedged item or of the hedging instrument, such that without the
exemption the relationship might not qualify for hedge accounting.
In addition, the Amendments provide a practical expedient for
financial assets and financial liabilities that are modified or have
existing contractual terms activated that change the basis for
determining the contractual cash flows as a result of Interest Rate
Benchmark Reform, such that the change to the contractual cash
flows is applied prospectively by revising the effective interest rate.
Non-derivative financial assets
are classified on initial
recognition in accordance with the Group’s business model as
investments, loans and receivables, or cash and cash equivalents
and accounted for as follows:
–
Investments:
these are non-derivative financial assets
that cannot be classified as loans and other receivables or
cash and cash equivalents. Dividend and interest income
on these investments are included within finance income
when the Group’s right to receive payments is established.
This category includes financial assets at fair value through
profit and loss and financial assets at fair value through other
comprehensive income.
–
Loans and other receivables:
these are non-derivative
financial assets with fixed or determinable payments that
are solely payments of principal and interest on the principal
amount outstanding, that are primarily held in order to collect
contractual cash flows. These balances include trade and other
receivables, which are measured at amortised cost, using the
effective interest rate method, and stated net of allowances
for credit losses, and deposits with banks and other financial
institutions which cannot be classified as cash and cash
equivalents. In addition, as explained in note 17, certain litigation
related deposits are recognised as assets within loans and other
receivables where management has determined that these
payments represent a resource controlled by the entity as a
result of past events. These deposits are held at the fair value
of consideration transferred less impairment, if applicable, and
have not been discounted.
–
Cash and cash equivalents:
cash and cash equivalents include
cash in hand and deposits held on call, together with other
short-term highly liquid investments including investments
in certain money market funds. Cash equivalents normally
comprise instruments with maturities of three months or less
at their date of acquisition. In the cash flow statement, cash and
cash equivalents are shown net of bank overdrafts, which are
included as current borrowings in the liabilities section on the
balance sheet.
Fair values for quoted investments are based on observable market
prices. If there is no active market for a financial asset, the fair value
is established by using valuation techniques principally involving
discounted cash flow analysis.
Non-derivative financial liabilities
, including borrowings and
trade payables, are stated at amortised cost using the effective
interest method. For borrowings, their carrying value includes
accrued interest payable, as well as unamortised issue costs.
As shown in note 23, certain borrowings are subject to fair value
hedges, as defined below.
Derivative financial assets and liabilities
are initially recognised,
and subsequently measured, at fair value, which includes accrued
interest receivable and payable where relevant. Changes in their fair
values are recognised as follows:
–
for derivatives that are designated as cash flow hedges, the changes
in their fair values are recognised directly in other comprehensive
income, to the extent that they are effective, with the ineffective
portion being recognised in the income statement. Where the
hedged item results in a non-financial asset, the accumulated
gains and losses, previously recognised in other comprehensive
income, are included in the initial carrying value of the asset (basis
adjustment) and recognised in the income statement in the same
periods as the hedged item. Where the underlying transaction does
not result in such an asset, the accumulated gains and losses are
reclassified to the income statement in the same periods as the
hedged item;
–
for derivatives that are designated as fair value hedges, the carrying
value of the hedged item is adjusted for the fair value changes
attributable to the risk being hedged, with the corresponding entry
being made in the income statement. The changes in fair value of
these derivatives are also recognised in the income statement;
–
for derivatives that are designated as hedges of net investments in
foreign operations, the changes in their fair values are recognised
directly in other comprehensive income, to the extent that they
are effective, with the ineffective portion being recognised in the
income statement. Where non-derivatives such as foreign currency
borrowings are designated as net investment hedges, the relevant
exchange differences are similarly recognised. The accumulated
gains and losses are reclassified to the income statement when the
foreign operation is disposed of; and
–
for derivatives that do not qualify for hedge accounting or are not
designated as hedges, the changes in their fair values are recognised
in the income statement in the period in which they arise. These are
referred to as ‘held-for-trading’.
In order to qualify for hedge accounting, the Group is required to
document prospectively the economic relationship between the item
being hedged and the hedging instrument. The Group is also required
to demonstrate an assessment of the economic relationship between
the hedged item and the hedging instrument, which shows that the
hedge will be highly effective on an ongoing basis. This effectiveness
testing is re-performed periodically to ensure that the hedge has
remained, and is expected to remain, highly effective.
Hedge accounting is discontinued when a hedging instrument is
derecognised (e.g. through expiry or disposal), or no longer qualifies
for hedge accounting. Where the hedged item is a highly probable
forecast transaction, the related gains and losses remain in equity
until the transaction takes place, when they are reclassified to the
income statement in the same manner as for cash flow hedges
as described above. When a hedged future transaction is no
longer expected to occur, any related gains and losses, previously
recognised in other comprehensive income, are immediately
reclassified to the income statement.
Derivative fair value changes recognised in the income statement
are either reflected in arriving at profit from operations (if the
hedged item is similarly reflected) or in finance costs.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
189
@
Denotes phrase, paragraph or similar that does not form part ofBAT’s Annual Report
onForm 20-F as filed with the SEC.
1 Accounting Policies
Continued
Dividends
The Company pays interim quarterly dividends, and the Group
recognises the interim dividend in the period in which it is paid.
Segmental analysis
The Group is organised and managed on the basis of its geographic
regions. These are the reportable segments for the Group as they
form the focus of the Group’s internal reporting systems and are
the basis used by the chief operating decision maker, identified
as the Management Board, for assessing performance and
allocating resources.
The Group is primarily a single product business providing
cigarettes and other tobacco products. While the Group has
clearly differentiated brands, global segmentation between a wide
portfolio of brands is not part of the regular internally reported
financial information. The results of New Category products are
reported as part of the results of each geographic region, and
currently individually and in aggregate represent less than 10% of
the Group’s revenue and operating profit in total.
The prices agreed between Group companies for intra-group
sales of materials, manufactured goods, charges for royalties,
commissions, services and fees, are based on normal commercial
practices which would apply between independent businesses.
Royalty income, less related expenditure, is included in the region in
which the licensor is based.
Adjusting items
Adjusting items are significant items of income or expense in
revenue, profit from operations, net finance costs, taxation and
the Group’s share of the post-tax results of associates and joint
ventures which individually or, if of a similar type, in aggregate,
are relevant to an understanding of the Group’s underlying
financial performance because of their size, nature or incidence.
In identifying and quantifying adjusting items, the Group
consistently applies a policy that defines criteria that are required
to be met for an item to be classified as adjusting. These items are
separately disclosed in the segmental analyses or in the notes to
the accounts as appropriate.
The Group believes that these items are useful to users of the
Group financial statements in helping them to understand the
underlying business performance and are used to derive the
Group’s principal non-GAAP measures of adjusted revenue,
adjusted profit from operations, adjusted diluted earnings per
share and
@
operating cash flow conversion ratio
@
, all of which are
before the impact of adjusting items and which are reconciled from
revenue, profit from operations, diluted earnings per share,
@
cash
conversion ratio and net cash generated from operating activities
@
.
Provisions
Provisions are recognised when either a legal or constructive
obligation as a result of a past event exists at the balance sheet
date, it is probable that an outflow of economic resources will be
required to settle the obligation and a reasonable estimate can be
made of the amount of the obligation.
Contingent liabilities and contingent assets
Subsidiaries and associate companies are defendants in tobacco-
related and other litigation. Provision for this litigation (including
legal costs) is made at such time as an unfavourable outcome
becomes probable and the amount can be reasonably estimated.
Contingent assets are possible assets whose existence will only
be confirmed by future events not wholly within the control of
the entity and are not recognised as assets until the realisation of
income is virtually certain.
Where a provision has not been recognised, the Group records its
external legal fees and other external defence costs for tobacco-
related and other litigation as these costs are incurred.
As explained in note 17, certain litigation-related deposits are
recognised as assets within loans and other receivables where
management has determined that these payments represent a
resource controlled by the entity. These deposits are held at the fair
value of consideration transferred less impairment, if applicable,
and have not been discounted.
Repurchase of share capital
When share capital is repurchased, the amount of consideration
paid, including directly attributable costs, is recognised as
a deduction from equity. Repurchased shares which are not
cancelled, or shares purchased for the employee share ownership
trusts, are classified as treasury shares and presented as a
deduction from total equity.
Future changes to accounting policies
A number of interpretations and revisions to existing standards
have been issued which will be applicable to the Group financial
statements in future years, but are not expected to have a material
effect on reported profit or equity or on the disclosures in the
financial statements.
BAT Annual Report and Form 20-F 2021
190
Financial Statements
Notes on Accounts
Continued
2 Segmental Analyses
The chief operating decision maker, the Management Board, reviews adjusted profit from operations at constant currencies to evaluate
segment performance and allocate resources to the overall business on a geographic region basis. The Management Board also reviews
at constant currencies adjusted revenues on a geographic region basis, which are included within adjusted profit from operations.
Regional Directors are responsible for delivering the operating and financial results of their Region inclusive of all product categories.
Therefore, the results of New Categories (comprising Tobacco Heating Products, Vapour products and Modern Oral products) are
reported to the Management Board as part of the results of each geographic region. However, additional information has been provided
to disaggregate revenue based on product category to enable investors to better compare the Group’s business performance across
periods and by reference to the Group’s investment activity. Interest income, interest expense, share of post-tax results of associates and
joint ventures and taxation are centrally managed, and accordingly, such items are not presented by segment as they are excluded from
the measure of segment profitability.
The four geographic regions are the reportable segments for the Group as they form the focus of the Group’s internal reporting systems
and are the basis used by the Management Board for assessing performance and allocating resources. Transactions between Group
subsidiaries are conducted on arm’s length terms in accordance with appropriate transfer pricing rules and Organisation for Economic
Cooperation & Development (OECD) principles. The Management Board reviews current and prior year adjusted segmental revenue and
adjusted profit from operations at constant rates of exchange. The constant rate comparison provided for reporting segment information
is based on a retranslation, at prior year exchange rates, of the current year results of the Group, including intercompany royalties payable
in foreign currency to UK entities. However, the Group does not adjust for the normal transactional gains and losses in operations which
are generated by movements in exchange rates.
In respect of the U.S. region, all financial statements and financial information provided by or with respect to the U.S. business or RAI (and/
or RAI and its subsidiaries (collectively, the ‘Reynolds Group’)) are prepared on the basis of US GAAP and constitute the primary financial
statements or financial information of the U.S. business or RAI (and/or the Reynolds Group). Solely for the purpose of consolidation within
the results of BAT p.l.c. and the BAT Group, this financial information is then converted to IFRS. To the extent any such financial information
provided in these financial statements relates to the U.S. business or RAI (and/or the Reynolds Group), it is provided as an explanation of
the U.S. business’s or RAI’s (and/or the Reynolds Group’s) primary US GAAP based financial statements and information.
Effective 1 January 2022, the North African markets of Algeria, Egypt, Libya, Morocco, Sudan and Tunisia, which currently form part of the
ENA region, will be moved to the APME region.
The following table shows 2021 revenue and adjusted revenue at current rates, and 2021 adjusted revenue translated using 2020 rates of
exchange. The 2020 figures are stated at the 2020 rates of exchange.
2021
2020
Adjusted
Revenue
Constant
rates
£m
Translation
exchange
£m
Adjusted
Revenue
Current
rates
£m
Adjusting
items
Current
rates
£m
Revenue
Current
rates
£m
Adjusted
Revenue
£m
Adjusting
items
£m
Revenue
£m
U.S.
12,530
(839)
11,691
–
11,69111,473
–
11,473APME
4,535
(344)
4,191
–
4,1914,537
–
4,537AMSSA
4,067
(266)
3,801
–
3,8013,772
–
3,772ENA
6,429
(428)
6,001
–
6,0015,994
–
5,994Revenue
27,561
(1,877)
25,684
–
25,68425,776
–
25,776Note:
adjusting items in revenue are in respect of excise included in goods acquired from a third party under short-term arrangements and then passed on to customers. This is deemed as
adjusting due to the distorting nature to revenue and operating margin. From 2020 onwards, such arrangements have been discontinued or are immaterial such that no adjustments have been
made in 2020 and 2021.
The following table shows 2020 revenue and adjusted revenue at current rates, and 2020 adjusted revenue translated using 2019 rates of
exchange. The 2019 figures are stated at the 2019 rates of exchange.
2020 2019
Adjusted
Revenue
Constant
rates
£m
Translation
exchange
£m
Adjusted
Revenue
Current
rates
£m
Adjusting
items
Current
rates
£m
Revenue
Current
rates
£m
Adjusted
Revenue
£m
Adjusting
items
£m
Revenue
£m
U.S.
11,536
(63)
11,473
–
11,47310,373
–
10,373APME
4,644
(107)
4,537
5,153–
4,537–
5,153AMSSA
4,321
(549)
3,772
–
3,7724,261
–
4,261ENA
6,169
(175)
5,994
–
5,9946,040 50 6,090
Revenue
26,670
(894)
25,776
–
25,77625,827
50
25,877
Note:
adjusting items in revenue are in respect of excise included in goods acquired from a third party under short-term arrangements and then passed on to customers. This is deemed as
adjusting due to the distorting nature to revenue and operating margin.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
191
2 Segmental Analyses
Continued
The following table shows 2021 profit from operations and adjusted profit from operations at current rates, and 2021 adjusted profit from
operations translated using 2020 rates of exchange. The 2020 figures are stated at the 2020 rates of exchange.
2021
2020
Adjusted*
segment
result
Constant
rates
£m
Translation
exchange
£m
Adjusted*
segment
result
Current
rates
£m
Adjusting*
items
£m
Segment
result
Current
rates
£m
Adjusted*
segment
result
£m
Adjusting*
items
£m
Segment
result
£m
U.S.
6,343
(456)
5,887
(321)
5,566
5,784
(809)
4,975
APME
1,833
(116)
1,717
(430)
1,287
1,853
(381)
1,472
AMSSA
1,688
(98)
1,590
(94)
1,496
1,618
(65)
1,553
ENA
2,088
(132)
1,956
(71)
1,885
2,110
(148)
1,962
Profit from operations
11,952
(802)
11,150
(916)
10,234
11,365
(1,403)
9,962
Net finance costs
(1,486)
(1,745)
Share of post-tax results of associates
and joint ventures
415
455
Profit before taxation
9,163
8,672
Taxation on ordinary activities
(2,189)
(2,108)
Profit for the year
6,974
6,564
* The adjustments to profit from operations are explained in notes 3, 4, 6(d), 6(f), 6(g) and 7.
The following table shows 2020 profit from operations and adjusted profit from operations at current rates, and 2020 adjusted profit from
operations translated using 2019 rates of exchange. The 2019 figures are stated at the 2019 rates of exchange.
2020 2019
Adjusted*
segment
result
Constant
rates
£m
Translation
exchange
£m
Adjusted*
segment
result
Current
rates
£m
Adjusting*
items
£m
Segment
result
Current
rates
£m
Adjusted*
segment
result
£m
Adjusting*
items
£m
Segment
result
£m
U.S.
5,816
(32)
5,784
(809)
4,975
5,036
(626)
4,410
APME
1,909
(56)
1,853
(381)
1,472
(306)2,059
1,753
AMSSA
1,796
(178)
1,618
(65)
1,553
(638)1,842
1,204
ENA
2,140
(30)
2,110(148)
2,1931,962
(544)
1,649
Profit from operations
11,661
(296)
11,365(1,403)
9,962
11,130 (2,114)
9,016
Net finance costs
(1,745)
(1,602)
Share of post-tax results of associates
and joint ventures
455
498
Profit before taxation
8,672
7,912
Taxation on ordinary activities
(2,108)
(2,063)
Profit for the year
6,564
5,849
* The adjustments to profit from operations are explained in notes 4, 5, 6(d), 6(f), 6(g) and 7.
BAT Annual Report and Form 20-F 2021
192
Financial Statements
Notes on Accounts
Continued
2 Segmental Analyses
Continued
Adjusted profit from operations at constant rates of £11,952 million (2020: £11,661 million; 2019: £11,032 million) excludes adjusting
depreciation, amortisation and impairment charges as explained in notes 4 and 7. These are excluded from segmental adjusted profit from
operations at constant rates as follows:
2021
2020
Adjusted
depreciation,
amortisation
and
impairment
Constant
rates
£m
Translation
exchange
£m
Adjusted
depreciation,
amortisation
and
impairment
Current
rates
£m
Adjusting
items
£m
Depreciation,
amortisation
and
impairment
Current rates
£m
Adjusted
depreciation,
amortisation
and
impairment
£m
Adjusting
items
£m
Depreciation,
amortisation
and
impairment
£m
U.S.
210
(7)
203
276
479
204
272
476
APME
154
(8)
146
16720
166
274
441
AMSSA
131
(8)
12356
179
121
34
155
ENA
266
(14)
252
–
252259
119
378
761
(37)
724
352
1,076
751
699
1,450
2020 2019
Adjusted
depreciation,
amortisation
and
impairment
Constant
rates
£m
Translation
exchange
£m
Adjusted
depreciation,
amortisation
and
impairment
Current
rates
£m
Adjusting
items
£m
Depreciation,
amortisation
and
impairment
Current
rates
£m
Adjusted
depreciation,
amortisation
and
impairment
£m
Adjusting
items
£m
Depreciation,
amortisation
and
impairment
£m
U.S.
205 (1) 204
272
476
258
391
649
APME
170
167(3)
274
441
163
182
345
AMSSA
137
(16)
137121
34
155
35
172
ENA
266
(7)
378259
119
216
130
346
778
(27)
751
699
1,5121,450
774
738
Additional information by product category
Although the Group’s operations are managed on a Regional basis, additional information for revenue is provided based on product
category as follows:
Revenue
2021
£m
2020
£m
2019
£m
Combustibles
22,029
22,752
23,001
New Categories
2,054
1,443
1,255
Vapour
927
611
401
THP
853
634
728
Modern Oral
274
198
126
Traditional Oral
1,118
1,160
1,081
Other
483
421
540
Revenue
25,684
25,776
25,877
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
193
2 Segmental Analyses
Continued
External revenue and non-current assets other than financial instruments, deferred tax assets and retirement benefit assets are analysed
between the UK and all foreign countries at current rates of exchange as follows:
United Kingdom
All foreign countries
Group
Revenue is based on location of sale
2021
£m
2020
£m
2019
£m
2021
£m
2020
£m
2019
£m
2021
£m
2020
£m
2019
£m
External revenue
209
188
178
25,475
25,588
25,699
25,684
25,776
25,877
United Kingdom
All foreign countries
Group
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Intangible assets
481
487
115,144
114,856
115,625
115,343Property, plant and equipment
339
344
4,614
4,716
4,953
5,060
Investments in associates and joint ventures
8
8
1,940
1,788
1,948
1,796
The consolidated results of the Reynolds Group operating in the U.S. met the criteria for separate disclosure under the requirements
of IFRS 8
Operating Segments
. Revenue arising from the operations of the Reynolds Group, inclusive of the sales made to fellow
Group companies, in 2021, 2020 and 2019 was £11,707 million, £11,481 million and £10,417 million, respectively. The majority of sales
are to customers based in the U.S. Non-current assets attributable to the operations of the Reynolds Group were £106,495 million
(2020: £105,549 million).
The main acquisitions comprising the goodwill balance of £43,194 million (2020: £43,319 million), included in intangible assets, are provided
in note 12. Included in investments in associates and joint ventures are amounts of £1,759 million (2020: £1,724 million) attributable to the
investment in ITC Ltd. Further information is provided in notes 9 and 14.
3 Employee Benefit Costs
2021
£m
2020
£m
2019
£m
Wages and salaries
2,315
2,277
2,651
Social security costs
185
194
223
Other pension and retirement benefit costs (note 15)
139
182
227
Share-based payments – equity and cash-settled (note 28)
78
91
120
2,717
2,744
3,221
Included within employee benefits costs are expenses in relation to the Group’s restructuring and integration initiatives of £160 million
(2020: £91 million; 2019: £364 million), as explained in note 7.
On 7 October 2021, a partial buy-out was concluded in the U.S. with approximately US$1.9 billion (£1.4 billion) of plan liabilities being
removed from the balance sheet, resulting in a settlement gain of £35 million, which is reported in the income statement, and recognised
as an adjusting item.
4 Depreciation, Amortisation and Impairment Costs
2021
£m
2020
£m
2019
£m
Intangibles – amortisationandimpairmentoftrademarksandsimilarintangibles
333
360
508
129
129
108
57
209
194
Property,plantand equipment – depreciation and impairment
557
752
702
1,076
1,450
1,512
Enumerated below are movements in costs that have impacted depreciation, amortisation and impairment in 2021, 2020 and 2019.
These include changes in our underlying business performance, as well as impact of adjusting items, as defined in note 1.
BAT Annual Report and Form 20-F 2021
194
Financial Statements
Notes on Accounts
Continued
4 Depreciation, Amortisation and Impairment Costs
Continued
Intangibles – amortisation and impairment of trademarks and similar intangibles
Acquisitions in previous years have resulted in the capitalisation of trademarks and similar intangibles, including those which are
amortised over their expected useful lives, which do not exceed 20 years. The amortisation and impairment of these acquired trademarks
and similar intangibles are charged to the income statement as adjusting. In 2021, the amortisation and impairment of these acquired
trademarks and similar intangibles is £306 million (2020: £339 million; 2019: £481 million). In 2019, the Group incurred an impairment charge
of £129 million, which included the partial impairment of the Kodiak brand as a result of declining volumes.
Impairment of goodwill
The impairment of goodwill is charged to the income statement as adjusting, and further information is provided in note 12(e).
During 2021, the Group impaired £3 million of goodwill held in Myanmar as a result of the decision to cease activities in the market.
The Group also recognised a goodwill impairment charge of £54 million in 2021 due to continued difficult trading conditions in Peru as
aconsequence of the COVID-19 pandemic.
During 2020, the Group impaired the goodwill arising from Malaysia amounting to £197 million, goodwill arising from the acquisition
ofTwisp of £11 million and goodwill arising from the acquisition of Blue Nile of £1 million.
During 2019, the Group impaired the goodwill arising from the Bentoel acquisition, amounting to £172 million, goodwill arising from
theVapeWild acquisition of £12 million and goodwill arising from the Highendsmoke acquisition of £10 million.
Property, plant and equipment – depreciation and impairment
The following items are included within depreciation and impairment of property, plant and equipment:
–
Restructuring and integration related depreciation and impairment costs and reversals were a net credit of £11 million (2020: £151 million
net cost; 2019: £63 million net cost) resulting from obsolete machines in relation to downsizing and factory rationalisation as mentioned
in note 7; and
–
Gains and losses recognised on disposal of property, plant and equipment.
5 Other Operating Income
Other operating income of £196 million (2020: £188 million; 2019: £163 million) comprises income that is associated with the Group’s
normal activities, but which falls outside the definition of turnover and includes one-off capital profits on property sales and one-off
disposals of fixed assets.
As explained in note 31, the Group recognised £5 million (2020: £58 million; 2019: £86 million) in respect of a tax case in Brazil. In addition,
during 2021, £130 million of the unrecognised contingent asset in respect of historical VAT on social contributions claims was sold to
financial institutions for £45 million.
Also, in 2021, R.J. Reynolds Tobacco Company (RJRT) reached an agreement with several Master Settlement Agreement (MSA) states to
waive RJRT’s claims under the MSA in connection with a settlement between those MSA states and a non-participating manufacturer,
S&M Brands, Inc. (S&M Brands), under which the states released certain claims against S&M Brands in exchange for receiving a portion
ofthe funds S&M Brands had deposited into escrow accounts in those states pursuant to the states’ escrow statutes. In consideration
forwaiving claims, RJRT, together with Santa Fe Natural Tobacco Company, received approximately £40 million from the escrow funds
paid to those MSA states under their settlement with S&M Brands.
In 2019, as discussed in note 7, certain items of operating income have been incurred as part of the Group’s restructuring and
integration activities.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
195
6 Other Operating Expenses
(a) Items included within other operating expenses
The following items are included within other operating expenses:
2021
£m
2020
£m
2019
£m
Other operating expenses
7,468
7,667 7,851
The following items are included within other operating expenses:
Master settlement agreement (note 6(b),(d))
2,486
2,783
2,163
Marketing expenses in operating profit (note 6(c))
1,242
1,096
1,149
Inventory write-offs (note 20)
215
309
255
Research and development expenses (excluding employee benefit costs and depreciation) (note 6(e))
141
121
126
Loss on disposal of BAT Pars (note 6(f))
358
– –
Excise, VAT and penalties in respect of disputes in Turkey, South Korea and Russia (note 6(g))
26
(40)
202
Judgment in respect of Quebec class actions (note 6(h))
–
–
436
Exchange differences
19
(29)
22
Hedge ineffectiveness within operating profit
(5)
(3)
(5)
Expenses relating to short-term leases
8
10 16
Expenses relating to leases of low-value assets
1
1 1
Gains arising from sale and leaseback transactions
–
(1)
–
Auditor’s remuneration (note 6(i))
27.1
28.3
25.3
(b) Master Settlement Agreement
In 1998, the major U.S. cigarette manufacturers (including the R.J. Reynolds Tobacco Company, Lorillard and Brown & Williamson,
businesses which are now part of the Reynolds Group) entered into the Master Settlement Agreement (MSA) with attorneys general representing
most U.S. states and territories. The MSA imposes a perpetual stream of future payment obligations on the major U.S. cigarette manufacturers.
The amounts of money that the participating manufacturers are required to annually contribute are based upon, amongst other things, the
volume of cigarettes sold and market share (based on cigarette shipments in that year).
During 2012, R.J. Reynolds Tobacco Company, Santa Fe Natural Tobacco Company (SFNTC), various other tobacco manufacturers, 17 states, the
District of Columbia and Puerto Rico reached an agreement related to the Non-Participating Manufacturer (NPM) adjustment under the MSA,
and three more states joined the agreement in 2013. Under this agreement, R.J. Reynolds Tobacco Company has received credits of more than
US$1 billion, in respect of its Non-Participating Manufacturer (NPM) Adjustment claims related to the period from 2003 to 2012. These credits
have been applied against the companies’ MSA payments over a period of five years from 2013, subject to, and dependent upon, meeting the
various ongoing performance obligations. During 2014, two additional states agreed to settle NPM disputes related to claims for the period
2003 to 2012. R.J. Reynolds Tobacco Company has received US$170 million in credits, which has been applied over a five-year period from 2014.
During 2015, another state agreed to settle NPM disputes related to claims for the period 2004 to 2014 and included a method to determine future
adjustments from 2015 forward. R.J. Reynolds Tobacco Company has received US$285 million in credits, which was applied over a four-year
period from 2016. During 2016, no additional states agreed to settle NPM disputes. During 2017, two more states agreed to settle NPM disputes
related to claims for the period 2004 to 2014. It is estimated that R.J. Reynolds Tobacco Company will receive US$61 million in credits, which will
be applied over a five-year period from 2017. During 2018, nine more states agreed to settle NPM disputes related to claims for the period 2004 to
2019, with an option through 2022, subject to certain conditions. It is estimated that R.J. Reynolds Tobacco Company will receive US$182 million in
credits for settled periods through 2017, which will be applied over a five-year period from 2018. Also, in 2018, one additional state agreed to settle
NPM disputes related to claims for the period 2004 to 2024, subject to certain conditions. It is estimated that R.J. Reynolds Tobacco Company
will receive US$205 million in credits for settled periods through 2017, which will be applied over a five-year period from 2019. In the first quarter of
2020, certain conditions set forth in the 2017 and 2018 agreements were met for those 10 states. In addition, in August 2020, 24 states, the District
of Columbia and Puerto Rico agreed to settle NPM disputes related to claims for the period 2018 to 2022. Credits in respect of future years’
payments and the NPM Adjustment claims would be accounted for in the applicable year and will not be treated as adjusting items. Only credits
inrespect of prior year payments are included as adjusting items.
In 2020, R.J. Reynolds Tobacco Company recognised additional expenses under the state settlement agreements in the States of Mississippi,
Florida, Texas and Minnesota. R.J. Reynolds Tobacco Company recognised US$241 million of expense for payment obligations to the State of
Florida for the ITG Brands, LLC acquired brands from the date of divestiture, June 12, 2015, as a result of an unfavourable judgment. In addition,
R.J. Reynolds Tobacco Company recognised US$264 million related to the resolution of claims against it in the States of Texas, Minnesota
and Mississippi for payment obligations to those states for the ITG Brands, LLC acquired brands from the date of divestiture. Finally, R.J.
Reynolds Tobacco Company settled certain related claims with Phillip Morris USA under the state settlement agreements in the states of
Mississippi, Texas and Minnesota for US$8 million. Additional information related to the resolution of these claims is included in notes 6(d) and 31.
During 2021, an additional US$17 million expense was recognised in relation to the final resolution of the Texas and Minnesota claims.
The BAT Group is subject to substantial payment obligations under the MSA and the state settlement agreements with the States of
Mississippi, Florida, Texas and Minnesota (such settlement agreements, collectively State Settlement Agreements). Reynolds Group’s
operating subsidiaries’ expenses and payments under the MSA and the State Settlement Agreements for 2021 amounted to
US$3,420 million (2020: US$3,572 million; 2019: US$2,762 million) in respect of settlement expenses and US$3,744 million (2020:
US$2,848 million; 2019: US$2,918 million) in respect of settlement cash payments.
BAT Annual Report and Form 20-F 2021
196
Financial Statements
Notes on Accounts
Continued
6 Other Operating Expenses
Continued
(c) Marketing expenses in operating profit
Certain marketing activities, such as discounts or allowances provided to customers, are required to be deducted from revenue as
explained in note 1. Other marketing expenses, such as point of sale and promotional materials, media advertising and sponsorship,
andconsumer research, are reported as operating expenses and have been shown in the table above.
(d) Litigation costs
Litigation costs included within other operating expenses, and reported as an adjusting item, were £54 million (2020: £87 million;
2019: £236 million) predominantly related to other litigation costs including
Engle
progeny.
In 2020, also included as an adjusting item was a charge of £400 million incurred largely in respect of charges following the development
in cases regarding payment obligations under the state settlement agreements with Florida, Texas, Minnesota and Mississippi for brands
previously sold to a third party. The Group recognised a charge of £188 million in the period for a final judgment of a case in the Florida
court. The Group continues to pursue indemnification remedies in a Delaware court for payments made to Florida as a result of this
judgment, as explained in note 31. During 2020, the Group also recognised a provision of £212 million related to the settlement discussions
with other manufacturers and the States of Texas, Minnesota and Mississippi for payment obligations related to these brands in prior
years. During 2021, an additional £12 million expense was recognised in relation to the final resolution of the Texas and Minnesota claims.
(e) Research and development
Total research and development costs, including employee benefit costs and depreciation, are £304 million (2020: £307 million;
2019: £376 million). Included in the 2019 research and development costs is £65 million of costs primarily related to packages in respect
ofemployee benefit reductions as part of the Group’s 2019 restructuring initiative (Quantum), as discussed in note 7.
(f) Loss on disposal of BAT Pars
On 6 August 2021, the Group disposed of its Iranian subsidiary, B.A.T. Pars Company PJSC (BAT Pars). Included within other operating
expenses, and recognised as an adjusting item, is a charge of £358 million comprising £272 million of foreign exchange reclassified from
other comprehensive income (note 22(c)(i)) and an impairment charge and associated costs of £88 million. In addition, a credit of £2 million
was recognised in relation to a partial unwind of discounting on the deferred proceeds. More information has been provided in note27(d).
(g) Tax disputes in Turkey, South Korea and Russia
The settlement of tax disputes in Turkey, South Korea and Russia were recognised as adjusting items.
Turkey
As explained in note 31, British American Tobacco Tutun Mamulleri Sanayi ve Ticaret Anonim Sirketi (BAT Tutun) was subject to a series
of tax audits mainly on inventory movements for the years 2015, 2016 and 2019. In August 2021, BAT Tutun applied under the relevant tax
amnesty law to settle its retrospective tax assessments. Based on the settlement through the tax amnesty procedure, BAT Tutun agreed
to pay £47 million in 18 instalments from 1 November 2021 until 31 July 2024. Of the £47 million, £30 million of excise and penalties were
recognised and charged to operating profit, £11 million as interest in net finance costs (note 8(b)) and £6 million in taxation.
South Korea
As explained in note 31, on 16 September 2021, Rothmans Far East B.V. Korea Branch Office received £4 million in relation to a VAT case.
In line with the treatment of the associated expense incurred in 2016, the cash received was recognised as an adjusting item.
Russia
In August 2019, the Russian tax authority issued a final audit report to JSC British American Tobacco-SPb (BAT SpB) related to the
application of legislation introduced in 2017 that prospectively limited the amount of production that could take place prior to excise tax
increases, without being subject to higher excise tax rates. The final audit report sought to retrospectively apply the legislation to the
years 2015 to 2017. BAT SpB submitted an appeal to the Federal Tax Services (FTS) objecting to the findings. The FTS accepted some
ofBAT SpB’s arguments and, on 27 January 2020, a final claim was issued by the FTS. As a consequence, the Group recognised a charge
of£202 million. The Group also recognised an interest charge of £50 million (note 8(b)).
In 2020, a credit of £40 million was recognised in relation to the 2019 charge discussed above, of which £14 million was offset in the
adjusting items included in taxation (note 10(d)).
(h) Quebec class actions
In 2019, a charge of £436 million was incurred in respect of the Quebec class actions, as explained in note 31, and charged as an
adjusting item.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
197
6 Other Operating Expenses
Continued
(i) Auditor’s remuneration
2021
£m
2020
£m
2019
£m
Auditor’s remuneration
Total expense for audit services pursuant to legislation:
– fees to KPMG LLP for Parent Company and Group audit
8.7
8.7
6.8
– fees to KPMG LLP firms and associates for local statutory and Group reporting audits
9.5
9.9 9.0
Total audit fees expense – KPMG LLP firms and associates
18.2
18.6 15.8
Audit fees expense to other firms
0.2
0.2
0.1
Total audit fees expense
18.4
18.8 15.9
Fees to KPMG LLP firms and associates for other services:
– audit-related assurance services
8.0
8.5 8.5
– other assurance services
0.3
0.5 0.5
– tax advisory services
–
– –
– tax compliance
–
– –
– audit of defined benefit schemes of the Company
0.4
0.5 0.4
– other non-audit services
–
– –
8.7
9.5 9.4
The total auditor’s remuneration to KPMG firms and associates included above are £26.9 million (2020: £28.1 million; 2019: £25.2 million).
Under SEC regulations, the remuneration to KPMG firms and associates of £26.9 million in 2021 (2020: £28.1 million; 2019: £25.1 million)
is required to be presented as follows: audit fees £26.2 million (2020: £27.5 million; 2019: £24.7 million), audit-related fees £0.4 million
(2020: £0.5 million; 2019: £0.4 million), tax fees £nil (2020: £nil; 2019: £nil) and all other fees £0.3 million (2020: £0.1 million; 2019: £0.1 million).
Audit-related fees are in respect of services provided to associated pension schemes. All other fees are in respect of other assurance
services, including those provided over information derived from the financial information systems subject to audit or over the controls
over those systems.
7 Restructuring and Integration Costs
Restructuring costs reflect the costs incurred as a result of initiatives to improve the effectiveness and the efficiency of the Group as
a globally integrated enterprise. These costs represent additional expenses incurred that are not related to the normal business and
day-to-day activities. These initiatives include the costs associated with Quantum, being a review of the Group’s organisational structure
announced in 2019 to simplify the business and create a more efficient, agile and focused company. In 2019 and 2020, these also included
a review of the Group’s manufacturing operations. It is expected that such restructuring programmes (related to Quantum) will be
substantially complete by the end of 2022.
The costs of the Group’s initiatives are included in profit from operations under the following headings:
2021
£m
2020
£m
2019
£m
Employee benefit costs (note 3)
160
91
364
Depreciation, amortisation and impairment costs (note 4)
(11)
151
63
Other operating income (note 5)
–
–
(7)
Other operating expenses
1
166
145
150
408
565
The adjusting charge in 2021 relates to the cost of employee packages in respect of Quantum and the ongoing costs associated with
initiatives to improve the effectiveness and efficiency of the Group as a globally integrated organisation. In addition, Quantum initiatives in
certain countries have resulted in the move to above market business models utilising local distributors as importers. As a consequence,
with the cessation of a physical presence in these markets, foreign exchange previously recognised in Other Comprehensive Income for
these countries has been reclassified to the income statement and reported within other operating expenses (note 22(c)(i)).
Included under the Quantum initiatives above is a charge of £27 million, including £4 million for foreign exchange reclassified from equity
(note 22(c)(i)), related to the Group’s withdrawal from Myanmar. In addition, as set out in note 4, goodwill in relation to Myanmar was
impaired and charged to the income statement. These costs were recognised in 2021 as an adjusting item.
BAT Annual Report and Form 20-F 2021
198
Financial Statements
Notes on Accounts
Continued
7 Restructuring and Integration Costs
Continued
The depreciation, amortisation and impairment costs in 2021 include a credit of £25 million due to a partial reversal of previously estimated
impairment following the revision of factory rationalisation initiatives.
Included within other operating expenses is a credit of £59 million representing the release of an accrual on the successful conclusion of
the dispute with former shareholders of Reynolds American, as explained in note 31.
The adjusting charges in 2020 and 2019 relate to the ongoing restructuring costs associated with the implementation of revisions to the
Group’s operating model, mainly in relation to Quantum, including the cost of packages in respect of permanent headcount reduction
and permanent employee benefit reductions in the Group. The costs also cover the downsizing and factory rationalisation activities in the
Netherlands and Hungary in 2020, Germany in 2019, and Russia and APME in both 2020 and 2019.
Also, in 2020, as a consequence of a reduction in volumes due to the significant increase in excise in Indonesia, the Group announced
a restructuring programme which included the partial closure of the factory operations in Indonesia. As a result of this decision, a
£69 million impairment was recognised in respect of machinery. This impairment charge related to some of the machinery in use as well
as machinery held for future use which, following the significant changes in consumer preferences, is not expected to be brought in to
manufacturing in the future.
Also included in other operating income in 2019 are amounts related to cash and reversal of deferred consideration associated with the
acquisition of TDR d.o.o. (TDR) (note 27).
8 Net finance Costs
(a) Net finance costs/(income)
2021
£m
2020
£m
2019
£m
Interest expense
1,436
1,605
1,676
Interest expense on lease liabilities
24
26
32
Facility fees
33
23 10
Interest and fair value related to early repurchase of bonds (note 8(b))
–
142
–
Interest related to adjusting tax payables (note 8(b))
31
11
80
Fair value changes on derivative financial instruments and hedged items
252
(217)
367
Fair value change on other financial items (note 8(b))
24
– –
Exchange differences
(279)
205
(479)
Finance costs
1,521
1,795
1,686
Interest under the effective interest method
(35)
(50)
(84)
Finance income
(35)
(50)
(84)
Net finance costs
1,486
1,745
1,602
The Group manages foreign exchange gains and losses and fair value changes on a net basis excluding adjusting items, which are
explained in note 8(b). The derivatives that generate the fair value changes are explained in note 19.
Facility fees principally relate to the Group’s central banking facilities.
In October 2020, the Group completed a tender offer to repurchase sterling-equivalent £2,653 million of bonds, including £24 million
of accrued interest. Following this, in November 2020, the Group also completed a ‘make-whole’ bond redemption exercise of sterling-
equivalent £462 million of bonds, including £6 million of accrued interest. Further details on the tender offer and ‘make-whole’ redemption
exercise are provided in note 26. Other costs directly associated with the early repurchase of bonds, including the premium paid, were
treated as adjusting items, as detailed in note 8(b).
(b) Adjusting items included in net finance costs
Adjusting items are significant items in net finance costs which individually or, if of a similar type, in aggregate, are relevant to an
understanding of the Group’s underlying financial performance.
In 2021, as part of the disposal of the Group’s operations in Iran (note 27(d)), a provision of £24 million was charged to net finance costs
against non-current investments held at fair value due to the uncertainty around recovery of these funds.
In addition, the Group recognised interest on adjusting tax payables of £31 million (2020: £11 million; 2019: £80 million), which included
interest of £20 million (2020: £21 million; 2019: £28 million) in relation to the Franked Investment Income Group Litigation Order (FII GLO)
(note 10(b)), an amnesty tax payment in Turkey of £11 million (2020: £nil; 2019: £nil) and £nil (2020: net credit of £10 million; 2019: charge of
£50 million) in respect of the excise dispute (note 6(g)) and withholding tax in Russia.
In 2020, the Group incurred additional interest costs of £157 million and fair value gains of £15 million in relation to the early repurchase
of bonds.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
199
9 Associates and Joint Ventures
2021
2020 2019
Total
£m
Group’s
share
£m
Total
£m
Group’s
share
£m
Total
£m
Group’s
share
£m
Revenue
7,668
2,164
7,001
1,983
7,581
2,158
Profit from operations
1,911
567
2,006
591
2,386
704
Net finance costs
13
2
(6)
(2)
(7)
(2)Profit on ordinary activities before taxation
1,924
569
2,000
589
2,379
702
Taxation on ordinary activities
(499)
(147)
(421)
(125)
(666)
(196)Profit on ordinary activities after taxation
1,425
422
1,579
464
1,713
506
Non-controlling interests
(22)
(7)
(30) (9)
(27)
(8)
Post-tax results of associates and joint ventures
1,403
415
1,549
455
1,686
498
Enumerated below are movements that have impacted the post-tax results of associates and joint ventures in 2021, 2020 and 2019.
The amounts below were reported as adjusting items under the share of profit from associates in the income statement.
(a) Adjusting items
In 2021, the Group’s interest in ITC Ltd. (ITC) decreased from 29.42% to 29.38% (2020: 29.46% to 29.42%; 2019: 29.57% to 29.46%) as a
result of ITC issuing ordinary shares under the ITC Employee Share Option Scheme. The issue of these shares and change in the Group’s
share of ITC resulted in a gain of £6 million (2020: £17 million; 2019: £25 million), which is treated as a deemed partial disposal and included
in the income statement.
In 2021, due to a challenging operating environment, the investment in Kamaran Industry & Investment Company, one of the Group’s
associates in Yemen, was impaired. This resulted in a charge of £18 million to the income statement.
As detailed in note 14, as a result of the liquidation of Tisak d.d., the Group reclassified the foreign exchange previously recognised in other
comprehensive income to the income statement. This resulted in a credit of £2 million to the income statement.
Also, in 2021, the Group incurred a £2 million charge in relation to the amortisation of acquired intangibles associated with the acquisition
of Organigram in March 2021, as described in note 14.
In 2020, ITC recognised a charge in respect of the cost of leaf tobacco stocks destroyed in a third-party warehouse fire, the Group’s share
of which was £4 million.
(b) Other financial information
The Group’s share of the results of associates and joint ventures is shown in the table below.
2021
2020 2019
Group’s
share
£m
Group’s
share
£m
Group’s
share
£m
Profit on ordinary activities after taxation
– attributable to owners of the Parent
415
455
498
Other comprehensive income:
Items that may be reclassified to profit and loss
(17)
(98)
(115)
Items that will not be reclassified to profit and loss
14
(34)
7
Total comprehensive income
412
323
390
BAT Annual Report and Form 20-F 2021
200
Financial Statements
Notes on Accounts
Continued
9 Associates and Joint Ventures
Continued
Summarised financial information of the Group’s associates and joint ventures is shown below.
2021
ITC
£m
Others
£m
Total
£m
Revenue
5,312
2,356
7,668
Profit on ordinary activities before taxation
1,931
(7)
1,924
Post-tax results of associates and joint ventures
1,427
(24)
1,403
Other comprehensive income
(11)
–
(11)Total comprehensive income
1,416
(24)
1,392
2020
ITC
£m
Others
£m
Total
£m
Revenue
4,892
2,109
7,001
Profit on ordinary activities before taxation
1,930
70
2,000
Post-tax results of associates and joint ventures
1,495
54
1,549
Other comprehensive income
(450)
–
(450)Total comprehensive income
1,045
54
1,0992019
ITC
£m
Others
£m
Total
£m
Revenue
5,556
2,025
7,581
Profit on ordinary activities before taxation
2,322
57
2,379
Post-tax results of associates and joint ventures
1,646
40
1,686Other comprehensive income
(365)
–
(365)Total comprehensive income
1,281
40
1,321
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
201
10 Taxation on Ordinary Activities
(a) Summary of taxation on ordinary activities
2021
£m
2020
£m
2019
£m
UK corporation tax
(25)
38
8
Comprising:
– current year tax expense
1
38
41
– adjustments in respect of prior periods
(26)
–
(33)
Overseas tax
2,401
2,387
2,047
Comprising:
– current year tax expense
2,418
2,369
2,074
– adjustments in respect of prior periods
(17)
18
(27)
Total current tax
2,376
2,425
2,055
Deferred tax
(187)
(317)
8
Comprising:
– deferred tax relating to origination and reversal of temporary differences
(29)
(184)
55
– deferred tax relating to changes in tax rates
(158)
(133)
(47)
2,189
2,108
2,063
(b) 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 were 18 corporate groups in the FII GLO as at 31 December 2021. 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 Supreme Court gave permission for a number of issues to
be appealed in two separate hearings. The first, in February 2020, concerned the time limit for bringing claims. HMRC sought to challenge
existing case law. In November 2020, the Supreme Court handed down its judgment. The Supreme Court agreed to overturn existing case
law partially but introduced a new test for determining whether claims of this type are in time. The case has been remitted to the High
Court to apply that new test to the facts. The second hearing was heard in December 2020 and concerned issues relating to the type of
claims BAT is entitled to bring. The judgment from the second hearing was handed down in July 2021. Applying that judgment reduces the
value of the FII claim to approximately £0.3 billion, mainly as the result of the application of simple interest and the limitation to claims for
advance corporation tax offset against lawful corporation tax charges, which is subject to the determination of the timing issue by the
High Court and any subsequent appeal.
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 withholding of the 45% tax have been lodged by the Group. The First
Tier Tribunal found in favour of HMRC in July 2017 and the Group’s appeal to the Upper Tribunal was heard in July 2018 and judgment has
not yet been handed down.
The net £0.9 billion held by the Group is higher than the current value of the claim referred to above. 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. The receipt, net of
the deduction by HMRC, is held within trade and other payables as disclosed in note 25. Any future recognition as income will be treated
as an adjusting item, due to the size of the amount, with interest of £20 million for the 12 months to 31 December 2021 (2020: £21 million;
2019: £28 million) accruing on the balance, which was also treated as an adjusting item.
The final resolution of all issues in the litigation is likely to take a number of years and the Group intends from 2022 onwards to commence
annual interim repayments to HMRC of at least £50 million per annum.
BAT Annual Report and Form 20-F 2021
202
Financial Statements
Notes on Accounts
Continued
10 Taxation on Ordinary Activities
Continued
(c) Factors affecting the taxation charge
The taxation charge differs from the standard 19% (2020: 19%; 2019: 19%) rate of corporation tax in the UK. The major causes of this
difference are listed below:
2021
2020 2019
£m
%
£m
%
£m
%Profit before tax
9,163
8,672
7,912
Less: share of post-tax results of associates and joint ventures
(see note 9)
(415)
(455) (498)
8,748
8,217
7,414
Tax at 19% (2020 and 2019: 19%) on the above
1,662
19.0
1,561
19.0
1,409
19.0Factors affecting the tax rate:
Tax at standard rates other than UK corporation tax rate
319
3.6
368
4.5
353
4.8
Other national tax charges
184
2.1
142
1.7
147
2.0
Permanent differences
87
1.0
20
0.3
122
1.6
Overseas withholding taxes
189
2.2
155
1.9
106
1.4Double taxation relief on UK profits
(23)
(0.3)
(22)
(0.3) (29)
(0.4)
(Utilised)/unutilised tax losses
(10)
(0.1)
5
0.1
16 0.2
Adjustments in respect of prior periods
(43)
(0.5)
18
0.2
(60) (0.8)
Deferred tax relating to changes in tax rates
(158) (1.8)
(133) (1.6)
(47)
(0.6)
Additional net deferred tax (credits)/charges
(18)
(0.2)
(6)
(0.1)
46
0.6
2,189
25.0
2,108
25.7
2,063
27.8
(d) Adjusting items included in taxation
In 2021, adjusting items in taxation included a net credit of £91 million mainly relating to the revaluation of deferred tax liabilities arising on
trademarks recognised in the Reynolds American acquisition in 2017 due to changes in U.S. state tax rates.
In 2020, adjusting items in taxation included a net credit of £35 million mainly relating to the release of a provision regarding the
application of overseas withholding tax, the revaluation of deferred tax liabilities arising on trademarks recognised in the Reynolds
American acquisition in 2017 due to changes in U.S. state tax rates and the excise dispute in Russia (note 6(g)).
In 2019, adjusting items in taxation total a credit of £65 million relating primarily to changes in U.S. state tax rates, relating to the
revaluation of deferred tax liabilities arising on trademarks recognised in the Reynolds American acquisition in 2017.
(e) Tax on adjusting items
In addition, the tax on adjusting items, separated between the different categories, as per note 11, amounted to £119 million
(2020: £287 million; 2019: £373 million). The adjustment to the adjusted earnings per share (note 11) also includes £6 million
(2020: £8 million; 2019: £17 million) in respect of the non-controlling interests’ share of the adjusting items net of tax.
(f) Tax on items recognised directly in other comprehensive income
2021
£m
2020
£m
2019
£m
Current tax
(4)
(5)
(7)
Deferred tax
(110)
23
138
(Charged)/credited to other comprehensive income
(114)
18
131
(g) Tax on items recognised directly in equity
In relation to the perpetual hybrid bonds issued on 27 September 2021 (note 22(d)), tax relief of £5 million has been recognised on the
issuance costs and coupon incurred.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
203
11 Earnings Per Share
Earnings used in the basic, diluted and headline earnings per share calculation represent the profit attributable to the ordinary equity
shareholders after deducting amounts representing the coupon on perpetual hybrid bonds on a pro-rata basis regardless of whether
coupons have been deferred or paid in the period. Below is a reconciliation of the earnings used to calculate earnings per share:
2021
£m
2020
£m
2019
£m
Earnings attributable to owners of the parent
6,801
6,400
5,704
Coupon on perpetual hybrid bonds
(15)
– –
Tax on coupon on perpetual hybrid bonds
3
– –
Earnings
6,789
6,400
5,704
Below is a reconciliation from basic to diluted earnings per share:
2021
2020 2019
Earnings
£m
Weighted
average
numberof
shares
m
Earnings
pershare
pence
Earnings
£m
Weighted
average
numberof
shares
m
Earnings
pershare
pence
Earnings
£m
Weighted
average
numberof
shares
m
Earnings
pershare
pence
Basic earnings per share (ordinary
shares of 25p each)
6,789
2,287
296.9
6,400
2,286
280.0
5,704
2,284
249.7
Share options
–
10
(1.3)
– 9 7
(1.1)
–(0.7)
Diluted earnings per share
6,789
2,297
295.6
6,400
2,295
278.9
5,704
2,291
249.0
Adjusted earnings per share calculation
Earnings have been affected by a number of adjusting items, which are described in notes 3 to 10. Adjusting items are significant items
in the profit from operations, net finance costs, taxation and the Group’s share of the post-tax results of associates and joint ventures
which individually or, if of a similar type, in aggregate, are relevant to an understanding of the Group’s underlying financial performance.
The Group believes that these items are useful to users of the Group financial statements in helping them to understand the underlying
business performance. To illustrate the impact of these items, an adjusted earnings per share calculation is shown below.
Basic
2021
2020 2019
Notes
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Basic earnings per share
6,789
296.9
6,400
280.0
5,704
249.7
Effect of restructuring and integration costs
7
150
6.5
408
17.8
565
24.7
Tax and non-controlling interests on restructuring
and integration costs
(39)
(1.7)
(64)
(2.8)
(101)
(4.4)
Effect of amortisation and impairment of goodwill,
trademarks and similar intangibles
4
363
15.9
548
24.0
675
29.6
Tax and non-controlling interests on amortisation
and impairment of goodwill, trademarks and
similar intangibles
(71)
(3.1)
(77)
(3.4)
(115)
(5.0)
Effect of associates’ adjusting items net of tax
9(a)
12
0.5
(13)
(0.6)
(25)
(1.1)
Effect of Quebec class action
6(h)
– –
– –
436
19.1
Tax on Quebec class action
– –
– –
(124)
(5.4)
Effect of excise and VAT disputes
6(g)
26
1.1
(40)
(1.7) 202
8.9
Tax on excise and VAT disputes
10(d)
(3)
(0.1)
14
0.6(16)
(0.7)
Effect of disposal of BAT Pars
6(f)
358
15.7
– – – –
Other adjusting items
3,6(d)
19
0.8
487
21.2 236 10.3
Tax effect on other adjusting items
(5)
(0.2)
(104)
(4.5)
(50)
(2.2)
Deferred tax relating to changes in tax rates
10
(98)
(4.3)
(21)
(0.9)
(49)
(2.2)
Effect of early repurchase of bonds
8(b)
– –
142
6.2
– –
Tax effect of early repurchase of bonds
– –
(32)
(1.4)
– –
Effect of interest on FII GLO settlement and other
8(b)
55
2.4
11
0.5
80
3.5
Tax effect of interest on FII GLO settlement
and other
– –
(4)
(0.2)
– –
Effect of retrospective guidance on WHT
10(d)
– –
(42)
(1.8)
– –
Adjusted earnings per share (basic)
7,556
330.4
7,613 418
333.0
7,324.8
BAT Annual Report and Form 20-F 2021
204
Financial Statements
Notes on Accounts
Continued
11 Earnings Per Share
Continued
Diluted
2021
2020 2019
Notes
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Diluted earnings per share
6,789
295.6
6,400
278.9
5,704
249.0
Effect of restructuring and integration costs
7
150
6.6
408
17.7
565
24.7
Tax and non-controlling interests on restructuring
and integration costs
(39)
(1.7)
(64)
(2.8)
(101)
(4.4)
Effect of amortisation and impairment of goodwill,
trademarks and similar intangibles
4
363
15.8
548
23.9
675
29.5
Tax and non-controlling interests on amortisation
and impairment of goodwill, trademarks and
similar intangibles
(71)
(3.1)
(77)
(3.4)
(115)
(5.0)
Effect of associates’ adjusting items net of tax
9(a)
12
0.5
(13)
(0.6)
(25)
(1.1)
Effect of Quebec class action
6(h)
– –
– –
436
19.0
Tax on Quebec class action
– –
– –
(124)
(5.4)
Effect of excise and VAT disputes
6(g)
26
1.1
(40)
(1.7) 202
8.8
Tax on excise and VAT disputes
10(d)
(3)
(0.1)
14
0.6(16)
(0.7)
Effect of disposal of BAT Pars
6(f)
358
15.6
– – – –
Other adjusting items
3,6(d)
19
0.8
487
21.2 236 10.3
Tax effect on other adjusting items
(5)
(0.2)
(104)
(4.5)
(50)
(2.2)
Deferred tax relating to changes in tax rates
10
(98)
(4.3)
(21)
(0.9)
(49)
(2.2)
Effect of early repurchase of bonds
8(b)
– –
142
6.2
– –
Tax effect of early repurchase of bonds
– –
(32)
(1.4)
– –
Effect of interest on FII GLO settlement and other
8(b)
55
2.4
11
0.5
80
3.5
Tax effect of interest on FII GLO settlement
and other
– –
(4)
(0.2)
– –
Effect of retrospective guidance on WHT
10(d)
– –
(42)
(1.8)
– –
Adjusted earnings per share (diluted)
7,556
329.0
7,613
331.7
7,418323.8
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
205
11 Earnings Per Share
Continued
Headline earnings per share as required by the JSE Limited
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 1/2021 ‘Headline Earnings’, as issued by the South African Institute of
Chartered Accountants.
Basic
2021
2020 2019
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Basic earnings per share
6,789
296.9
6,400
280.0
5,704
249.7
Effect of impairment of intangibles, property, plant and
equipment and assets held-for-sale
138
6.0
465
20.3
518
22.7
Tax and non-controlling interests on impairment of intangibles
and property, plant and equipment
(42)
(1.8)
(74)
(3.3)
(79)
(3.5)Effect of (gains)/losses on disposal of property, plant and
equipment, held-for-sale assets, partial/full termination of IFRS
16 leases, and sale and leaseback
(10)
(0.4)
(26)
(1.1)
7
0.3
Tax and non-controlling interests on disposal of property, plant
and equipment, held-for-sale assets, partial/full termination of
IFRS 16 leases, and sale and leaseback
2
0.1
8
0.3
–(1)
Effect of impairment of BAT Pars
83
3.6
– – – –
Tax on impairment of BAT Pars
– –
– – – –
Effect of foreign exchange reclassification from reserves to the
income statement
– Subsidiaries
291
12.7
– – – –
– Associates
(2)
(0.1)
– – – –
Issue of shares and change in shareholding in associate
(6) (0.3)
(17)
(0.7)
(25)
(1.1)
Headline earnings per share (basic)
7,24 3
316.7
6,756
295.5
6,124
268.1
Diluted
2021
2020 2019
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Earnings
£m
Earnings
per share
pence
Diluted earnings per share
6,789
295.6
6,400
278.9
5,704
249.0
Effect of impairment of intangibles, property, plant and
equipment and assets held-for-sale
138
6.0
465
20.3
518
22.5
Tax and non-controlling interests on impairment of intangibles
and property, plant and equipment
(42)
(1.8)
(74)
(3.3)
(79)
(3.4)
Effect of (gains)/losses on disposal of property, plant and
equipment, held-for-sale assets, partial/full termination of IFRS
16 leases, and sale and leaseback
(10)
(0.4)
(26)
(1.1)
7
0.3
Tax and non-controlling interests on disposal of property, plant
and equipment, held-for-sale assets, partial/full termination of
IFRS 16 leases, and sale and leaseback
2
0.1
8
0.3
–(1)
Effect of impairment of BAT Pars
83
3.6
– – – –
Tax on impairment of BAT Pars
– –
– – – –
Effect of foreign exchange reclassification from reserves to the
income statement
– Subsidiaries
291
12.6
– – – –
– Associates
(2)
(0.1)
– – – –
Issue of shares and change in shareholding in associate
(6) (0.3)
(17)
(0.7)
(25)
(1.1)
Headline earnings per share (diluted)
7,243
315.3
6,756
294.4
6,124
267.3
BAT Annual Report and Form 20-F 2021
206
Financial Statements
Notes on Accounts
Continued
12 Intangible Assets
(a) Overview of intangible assets
2021
Goodwill
£m
Computer
software
£m
Trademarks
and
similar
intangibles
£m
Assets in
the course of
development
£m
Total
£m
1 January
Cost
43,319
1,307
12073,598
118,344
Accumulated amortisation and impairment
(885)
(2,116)
(3,001)
Net book value at 1 January
43,319
422
12071,482
115,343
Differences on exchange
(68)
(3)
640
–
569
Additions
– internal development
– – –
139 139
– separately acquired
– –
60
33
93
Reallocations
–
118
–18
(136)
Amortisation charge
–
(116)
–(319)
(435)
Impairment
(57)
(13)
(14)
–
(84)31 December
Cost
43,194
1,266
74,227
156
118,843
Accumulated amortisation and impairment
(858)
(2,360)
(3,218)
Net book value at 31 December
43,194
408
71,867
156115,625
2020
Goodwill
£m
Computer
software
£m
Trademarks
and
similar
intangibles
£m
Assets in
the course of
development
£m
Total
£m
1 January
Cost
44,316
1,207
75,726
115
121,364
Accumulated amortisation and impairment
(780)
(1,797)
(2,577)
Net book value at 1 January
44,316
427
73,929
115 118,787
Differences on exchange
(824)
(3)
(2,252)
–
(3,079)
Additions
– internal development
– – –
142 142
– acquisitions (note 27)
36
–
39
–75
– separately acquired
– –
103
13
116
Reallocations
–
127
–23
(150)
Amortisation charge
–
(121)
–(338)
(459)
Impairment
(209)
(8)
(239)(22)
–
31 December
Cost
43,319
1,307
73,598
120
118,344
Accumulated amortisation and impairment
(885)
(2,116)
(3,001)
Net book value at 31 December
43,319
422
71,482
120
115,343
(b) Goodwill
Goodwill of £43,194 million (2020: £43,319 million) is included in intangible assets in the balance sheet of which the following are the
significant acquisitions: Reynolds American £33,021 million (2020: £32,719 million); Rothmans Group £4,408 million (2020: £4,591 million);
Imperial Tobacco Canada £2,345 million (2020: £2,304 million); ETI (Italy) £1,384 million (2020: £1,474 million) and ST (principally
Scandinavia) £1,043 million (2020: £1,111 million). The principal allocations of goodwill in the Rothmans’ acquisition are to the cash-
generating units of Europe and South Africa, with the remainder mainly relating to operations in APME.
During 2021, the Group recognised a goodwill impairment charge of £57 million (2020: £209 million) as explained in note 12(e)(iv) below.
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Other Information
BAT Annual Report and Form 20-F 2021
207
12 Intangible Assets
Continued
(c) Trademarks and similar intangibles
Trademarks and similar intangibles with indefinite lives
The net book value of trademarks and similar intangibles with indefinite lives is £69,475 million (2020: £68,839 million) and relates to the
acquisition of Reynolds American. The trademarks acquired, including Newport, Camel, Natural American Spirit, Grizzly and Pall Mall, all
of which are part of the Group’s Strategic Portfolio of key brands, form the core focus of the U.S. business and receive significant support
in the form of dedicated internal resources, forecasting and, where appropriate, marketing investment. These trademarks have significant
market share and positive cashflow growth expectations. There are no regulatory or contractual restrictions on the use of the trademarks,
and there are no plans by management to significantly redirect resources elsewhere. Consequently, in the view of management, these
trademarks do not have a foreseeable and definite end to their ability to generate future cash flows and hence are not amortised.
Trademarks and similar intangibles with definite lives
The majority of trademarks and similar intangibles with definite lives relate to trademarks acquired in previous years. These trademarks
are amortised over their expected useful lives, which do not exceed 20 years. Included in the net book value of trademarks and similar
intangibles are trademarks relating to the acquisition of Reynolds American £2,038 million (2020: £2,260 million). In 2020, the Group
acquired the formulations, brands, associated know-how and other relevant assets owned by Dryft Sciences, LLC, relating to its white
nicotine pouch products. These have been accounted as trademarks with a value of £103 million (see note 27(c)).
Also, in 2020, due to the migration to Vuse and difficult trading conditions in South Africa and the delisting of certain brands in Belize,
theGroup recognised an impairment charge of £18 million.
(d) Computer software and assets in the course of development
Included in computer software and assets in the course of development are internally developed assets with a carrying value of
£517 million (2020: £513 million). The costs of internally developed assets include capitalised expenses of employees working full time on
software development projects, third-party consultants and software licence fees from third-party suppliers.
The Group has £2 million of future contractual commitments (2020: £6 million) related to intangible assets.
(e) Impairment testing
(i) Overview
a. Estimation uncertainty
As described in note 1, the critical accounting estimates used in the preparation of the consolidated financial statements include the
review of asset values, especially indefinite life assets such as goodwill and certain trademarks and similar intangibles.
There is significant judgement with regard to assumptions and estimates involved in the forecasting of future cash flows, which form the
basis of the assessment of the recoverability of these assets, with the effect that the value-in-use of calculations incorporate estimation
uncertainty, particularly for certain assets held in relation to the Canadian, U.S., Malaysian, Peruvian and South African markets and the
Global Travel Retail (GTR) business.
b. Impact of climate change
The impact of climate change on the future cash flows has been considered for scenarios analysed in terms of future access to tobacco
and nicotine. The climate change scenario analyses – conducted in line with TCFD recommendations – undertaken this year did not
identify any material financial impact.
(ii) Impairment testing – Trademarks and similar intangibles with indefinite lives (brands)
The trademarks and similar intangibles with indefinite lives (brands) have been tested for impairment on a value-in-use basis. The value-
in-use calculations use cash flows based on detailed brand budgets prepared by management using projected sales volumes, revenues
and projected brand profitability covering a five-year horizon and, thereafter, grown into perpetuity. Corporate costs are allocated to
the brand budgets based on either specific allocations, where appropriate, or based on volumes. The pre-tax discount rates, ranging
between 8.71% and 9.94%, and long-term growth rates of between 0.75% and 1%, applied to the brand value-in-use calculations have been
determined by local management based on experience, specific market and brand trends and pricing and cost expectations. Following the
application of a reasonable range of sensitivities, there was no indication of impairment.
Refer to note 12(e)(v) for further information on the Newport and Camel brand impairment testing. As the trademarks and similar
intangibles with indefinite lives relate to the acquisition of Reynolds American, the brand budgets used in the value-in-use calculations
have also been incorporated into the budget information used in the impairment testing of the Reynolds American goodwill.
BAT Annual Report and Form 20-F 2021
208
Financial Statements
Notes on Accounts
Continued
12 Intangible Assets
Continued
(iii) Cash-generating units and information on goodwill impairment testing
In 2021, goodwill was allocated for impairment testing purposes to 17 (2020: 19) individual cash-generating units – one in the U.S.
(2020:one), six in APME (2020: six), six in AMSSA (2020: seven) and four in ENA (2020: five).
The number of cash-generating units in AMSSA and ENA reduced by one as a result of the 2020 impairment of goodwill in Twisp and
BlueNile (note 12(e)(iv)).
2021
2020
Carrying
amount
£m
Pre-tax
discount
rate
%
Carrying
amount
£m
Pre-tax
discount rate
%
Cash-generating unit
Reynolds American
33,021
8.4
32,719
7.6
Europe
5,362
6.1
5,639
6.2
Canada
2,345
19.3
2,304
19.1
Australia
719
6.8
756
7.9
South Africa
512
14.6
552
11.5
Singapore
352
8.2
356
9.6
GTR
233
7.7
241
6.5
Malaysia
226
11.2
232 10.3
Peru
91
10.7
145
9.5
Other
333
6.8
375
7.8
Total
43,194
43,319
Included within ‘Other’ above is goodwill arising on various acquisitions that have been allocated to eight cash-generating units which are, individually, insignificant. The pre-tax discount rate
represents the weighted average pre-tax discount rate.
The recoverable amounts of all cash-generating units have been determined on a value-in-use basis. The key assumptions for the
recoverable amounts of all units are the budgeted volumes, revenues, operating margins and terminal growth rates, which directly impact
the cash flows, and the discount rates used in the calculation. The long-term growth rate is used purely for the impairment testing of
goodwill under IAS 36
Impairment of Assets
and does not reflect long-term planning assumptions used by the Group for investment
proposals or for any other assessments.
Pre-tax discount rates, as shown above, were used in the impairment testing, based on the Group’s weighted average cost of
capital, taking into account the cost of capital and borrowings, to which specific market-related premium adjustments are made.
These adjustments are derived from external sources and are based on the spread between bonds (or credit default swaps, or similar
indicators) issued by the U.S. or comparable governments and by the relevant local government, adjusted for the Group’s own credit
market risk. For ease of use and consistency in application, these results are periodically calibrated into bands based on internationally
recognised credit ratings. The long-term growth rates and discount rates have been applied to the budgeted cash flows of each cash-
generating unit. These cash flows have been determined by local management based on experience, specific market and brand trends,
aswell as pricing and cost expectations. These have been endorsed by Group management as part of the consolidated Group’s budget.
(iv) Impairment testing – Goodwill (excluding Reynolds American and Canada)
The value-in-use calculations use cash flows based on detailed financial budgets prepared by management covering a one-year period
extrapolated over a 10-year horizon with growth of 3% (2020: 3%) in years 2 to 10 having been assumed as the long-term volume decline
is more than offset by pricing to drive revenue growth. A 10-year horizon is considered appropriate based on the Group’s history of profit
and cash growth, its well-balanced portfolio of brands and the industry in which it operates. For recent acquisitions and start-up ventures
the detailed financial budget is expanded to reflect the medium-term plan of the country or market management spanning five years
or beyond.
As a result of difficult trading conditions, the above assumptions were amended to reflect the short- to medium-term plans of the country
or area management spanning up to a period of five years for the Malaysian, GTR, South African and Peruvian cash-generating units.
Having recognised an impairment charge in 2020 due to difficult trading conditions in Malaysia (£197 million), including high incidence
of illicit trade and downtrading, the Malaysian CGU assessment was amended to reflect the short- to medium-term country plans.
As aresult of the assessment, in 2021, no further deterioration in performance was identified requiring further impairment consideration.
The Group will continue to monitor Malaysia’s performance going forward to identify if any impairment triggers materialise.
During 2021, GTR continued to experience difficult trading conditions as a consequence of the COVID-19 pandemic, as global travel
continued to be significantly constrained. As a result, management prepared forecasted cashflows assuming a phased recovery,
alongside maintaining the long-term growth rate at 0%. Following the application of a reasonable range of sensitivities, there was no
indication of impairment. For the GTR cash-generating unit headroom to reduce to £nil, the forecast cash flows would need to reduce by
a further 79% in each forecast year or the pre-tax discount rate would need to increase to 29.7%. Management believes that the duty-free
business will recover and therefore both scenarios are not considered, at this stage, to be reasonably possible.
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Other Information
BAT Annual Report and Form 20-F 2021
209
12 Intangible Assets
Continued
South Africa continues to recover from a five-month sales ban in 2020, with the forecasted cashflows prepared to reflect the continued
expected recovery. Following the application of a reasonable range of sensitivities, there was no indication of impairment. For the South
African cash-generating unit headroom to reduce to £nil, the forecast cash flows would need to reduce by a further 23% in each forecast
year or the pre-tax discount rate would need to increase to 18.9%. Management believes that the post-ban recovery will continue in South
Africa and therefore both scenarios are not considered by management, at this stage, to be reasonably possible.
In Peru, due to continued difficult trading conditions as a consequence of the COVID-19 pandemic and its impact on the forecasted
operating cashflows, the Group had recognised an impairment charge of £54 million in 2021. This partial impairment reduces the carrying
value of goodwill to £91 million. Also, in 2021, the Group impaired in full the goodwill of Myanmar resulting in an impairment charge of
£3 million.
The table below shows the headroom and the impairment charge that would be recognised if the assumptions used in the value-in-use
calculation were changed:
Carrying
amount of
CGU
£m
Headroom
£m
Increase in
discount
rate
1
£m
Decrease in
cash flows
1
£m
Increase in
terminal
value
1
£m
Change in headroom/impairment charge
Cash-generating unit
Peru
1
91
–
(14)
(10)
(11)
Note:
1. Peru: reasonably possible changes in key assumptions that would result in additional impairment would be a 1.6% increase in the pre-tax discount rate, a 10% decrease in forecast cash flows
reflecting a permanent loss in volumes arising from the COVID-19 pandemic or a 1% increase in terminal decline.
With the exception of the Peruvian cash-generating unit, following the application of a reasonable range of sensitivities to all the cash-
generating units, and after reflecting the impairments above, there was no indication of any further impairment.
In 2020, the Group also impaired in full the goodwill arising from the acquisitions of Twisp in South Africa and Blue Nile in Sudan due
to difficult trading conditions in these markets. This resulted in the recognition of impairment charges of £11 million and £1 million,
respectively.
(v) Impairment testing – Reynolds American
Goodwill relating to Reynolds American and the Newport and Camel trademarks
On 29 April 2021, the FDA reconfirmed its intention to issue a proposed product standard to ban menthol as a characterising flavour in
cigarettes. Management notes that the FDA announcement does not itself constitute a ban on menthol in cigarettes, and any proposed
regulation of menthol in cigarettes would need to be introduced through the established U.S. comprehensive rule-making process, the
timetable and outcome for which was, and remains, uncertain. Management continues to believe that any ban, given the mechanisms and
processes required to be followed in the U.S., is unlikely to be implemented within the next five years. In addition, it is unclear how any such
potential U.S. regulation might affect the manufacture and marketing of Group combustible brands containing menthol. The base case
scenario used in the impairment model therefore does not include any potential impact of changes in regulation in relation to menthol
flavourings in combustibles within the five-year discrete forecast period. Any potential impacts have been captured within the terminal
growth rate and discount rates applied.
The Group has a long-standing track record of managing regulatory shifts and, in the event of regulatory change, the Group remains
confident in its ability to navigate that environment successfully.
Since 2018, having considered the combination of the risk of implementation and impact of any change in regulations, the Group has not
recognised any impairment on either the Newport or Camel brands or the Reynolds American goodwill, as management concluded that
there would not be a significant impact to the value-in-use.
The carrying amounts for Reynolds American goodwill, Newport and Camel brands intangibles were £33,021 million, £29,517 million
and £12,485 million, respectively (2020: £32,719 million, £29,248 million and £12,371 million). The value-in-use calculations for brands,
as described in note 12(e)(ii) above, have been incorporated in the base case scenario used in the Reynolds American goodwill model.
The value-in-use calculations have been prepared based on a five-year cash flow forecast which assumes long-term volume decline
of cigarettes. This decline is more than offset by pricing. After this forecast, a growth rate of 1% has been assumed for Reynolds
American goodwill, 0.75% for Newport and 0.85% for Camel and a pre-tax discount rate of 8.4% (2020: 7.6%), 9.9% (2020: 8.3%) and 9.4%
(2020: 8.3%), respectively.
BAT Annual Report and Form 20-F 2021
210
Financial Statements
Notes on Accounts
Continued
12 Intangible Assets
Continued
The excess of value-in-use earnings over the carrying values (headroom) of the Reynolds American goodwill and the Newport and Camel
brands intangibles would be reduced to nil if the following individual changes, none of which are considered reasonably possible by
management, were made to the key assumptions used in the impairment model.
Reynolds
American
goodwill
%
Newport
%
Camel
%
Assumptions
Decrease in revenue by
7.2
15.1
15.2
Increase in pre-tax discount rate by
1.6
2.5
2.9
Decrease in terminal value rate by
1.4
5.1
5.6
For Reynolds American goodwill, the change in revenue assumption is based on combustibles revenue in the five-year forecast reducing
by 7.2% in each year and assumes that other assumptions are not changed. For Newport and Camel, the change in revenue assumption is
based on the revenue in the five-year forecast reducing by 15.1% and 15.2%, respectively in each year and assumes that other assumptions
are not changed.
(vi) Impairment testing – Canada
Goodwill relating to Imperial Tobacco Canada Ltd (ITCAN)
In March 2019, ITCAN obtained an Initial Order from the Ontario Superior Court of Justice granting it protection under the Companies’
Creditors Arrangement Act (CCAA). If the CCAA bankruptcy protection were to end, significant liabilities might crystallise. As a
consequence, to reflect the risk to future operating cash flows, the value-in-use calculations have been prepared based on a five-
year cash flow forecast, after which a growth rate of -2.5% and a pre-tax discount rate of 19.3% (2020: 19.1%) have been assumed.
Further information on the Quebec Class Actions and CCAA can be found in note 31.
In addition to the increase in discount rate, a reasonable range of sensitivities was applied to the value-in-use calculation, and there was
no indication of impairment.
The excess of value-in-use earnings over the carrying values (headroom) of the ITCAN goodwill would be reduced to nil if the following
individual changes, none of which are considered reasonably possible by management, were made to the key assumptions used in the
impairment model. The change in revenue assumption is based on combustibles revenue in the five-year forecast reducing by 27.4% in
each year and assumes that other assumptions are not changed.
Canada
goodwill
%
Assumptions
Decrease in revenue by
27.4
Increase in pre-tax discount rate by
14.7
The £2,345 million of goodwill relating to ITCAN on the Group’s balance sheet at 31 December 2021 will continue to be reviewed on
a regular basis. Any future impairment charge would result in a non-cash charge to the income statement that will be treated as an
adjusting item.
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Other Information
BAT Annual Report and Form 20-F 2021
211
13 Property, Plant and Equipment
(a) Overview of property, plant and equipment, including right-of-use assets
2021
Freehold
property
£m
Leasehold
property
£m
Plant,
equipment
and other
owned
£m
Plant,
equipment
and other
leased
£m
Assets in the
course of
construction
£m
Total
£m
1 January
Cost
1,518
798
5,807
217
764
9,104
Accumulated depreciation and impairment
(444)
(315)
(3,175)
(110)
(4,044)
Net book value at 1 January
1,074
483
2,632
107
764
5,060
Differences on exchange
(23) (22)
(135)
(203)(5)
(18)Additions
– right-of-use assets
–
88
–76
–164
– separately acquired
– 1
45
–508
554
Reallocations
44
51
441
1
(537)
–Depreciation
(35)
(110)
(303)(57)
–
(505)
Impairment
(4)
(2)
(37)
(54)–
(11)
Right-of-use assets – reassessments, modifications
and terminations
–
(11)
–(5)
–(16)
Disposals
(7)
(1)
(12)
– –
(20)
Net reclassifications as held-for-sale
(16)
– –
(11)
–(27)
31 December
Cost
1,421
847
5,750
247706
8,971
Accumulated depreciation and impairment
(388)
(370)
(3,130)
(130)(4,018)
Net book value at 31 December
1,033
477
2,620
117
706
4,953
2020
Freehold
property
£m
Leasehold
property
£m
Plant,
equipment
and other
owned
£m
Plant,
equipment
and other
leased
£m
Assets in the
course of
construction
£m
Total
£m
1 January
Cost
1,503
785
5,795215
921
9,219
Accumulated depreciation and impairment
(427)
(229)
(2,974)
(71)
(3,701)
Net book value at 1 January
1,076
556
2,821
144
921
5,518
Differences on exchange
(38) (25)
(150)
(4)
(55)
(272)
Additions
– right-of-use assets
–
67
–36
–103
– separately acquired
2 –
40
–459 501
– acquisition of subsidiaries (note 27(a))
– 1 – – – 1
Reallocations
84
14
–427
(525)
–Depreciation
(38)
(118)
(313)(62)
–
(531)
Impairment
(5)
(1)
(184)
–
(36) (226)
Right-of-use assets – reassessments, modifications
and terminations
–
(11)
–(7)
–(18)
Disposals
(7)
– –
(9)
–(16)
Net reclassifications as held-for-sale
– – – – – –
31 December
Cost
1,518
798
5,807
217
9,104764
Accumulated depreciation and impairment
(444)
(315)
(3,175)
(110)
(4,044)
Net book value at 31 December
1,074
483
2,632
107
764
5,060
Refer to notes 4 and 7 for more information on property, plant and equipment impairments. The £27 million (2020: £nil) of assets
reclassified as held-for-sale primarily relates to the disposal of the Iranian subsidiary, BAT Pars, as disclosed on note 27(d).
The Group has £90 million of future contractual commitments (2020: £110 million) related to property, plant and equipment.
BAT Annual Report and Form 20-F 2021
212
Financial Statements
Notes on Accounts
Continued
13 Property, Plant and Equipment
Continued
(b) Right-of-use assets
In accordance with IFRS 16
Leases
, the right-of-use assets related to leased properties have been included in the asset class ‘Leasehold
Property’ (note 13(c)) and other right-of-use assets have been reported under ‘Plant, equipment and other leased’.
The Group leases various offices, warehouses, retail spaces, equipment and vehicles through its subsidiaries across the globe.
Arrangements are entered into in the course of ordinary business, and lease terms are negotiated on an individual basis and contain a
wide range of different terms and conditions reflecting local commercial practice. The lease agreements do not impose any covenants
other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for
borrowing purposes.
Assets representing ‘plant, equipment and other’ relate to leases of various assets including tobacco vending machines, industrial
equipment and distribution vehicles in Brazil, Japan, Pakistan, Poland, Romania, Switzerland, U.S. and other countries.
(c) Leasehold property
As of 31 December 2021, the Group holds £165 million (2020: £132 million) of leasehold properties acquired and another £312 million
(2020: £351 million) of right-of-use leased properties.
Assets representing ‘leasehold property’ relate to leases in respect of offices, retail space, warehouses and manufacturing facilities
occupied by Group subsidiaries and include property leases with lease terms of more than five years in Brazil, Bangladesh, Germany,
Mexico, Romania, Singapore and Vietnam, amongst other countries. In addition, capitalised expenditure representing leasehold
improvements is included in this asset class.
2021
£m
2020
£m
Leasehold land and property comprises
– net book value of long leasehold
14
17
– net book value of short leasehold
463
466
477
483
2021
Leasehold property net book value movements for the year
ended 31 December 2021
Net book
value at
1 January
£m
Differences
on exchange
£m
Depreciation and
impairment
£m
Other net
movements*
£m
Net book
value at
31 December
£m
– Property acquired (IAS16)
132
(8) (13)
54
165
– Right-of-use properties (IFRS16)
351
(14)
(99)
74
312
483
(22)
(112)
128
477
2020
Leasehold property net book value movements for the year
ended 31 December 2020
Net book
value at
1 January
£m
Differences on
exchange
£m
Depreciation and
impairment
£m
Other net
movements*
£m
Net book value
at 31 December
£m
– Property acquired (IAS16)
135 132
(6)
14(11)
– Right-of-use properties (IFRS16)
421
(19)
(108)
57
351
556
(25)
(119)
71
483
* Property acquired (IAS 16
Property, plant and equipment
) other net movements represent additions (directly acquired and/or transferred from assets in the course of construction) net of
disposals, whereas the right-of-use properties (IFRS 16) other net movements relates to new leases net of reassessments, modifications and terminations as reported in the Property, plant
and equipment movement table in note 13(a). Other net movements also includes £nil (2020: £1 million) in relation to acquired companies.
(d) Freehold property
As of 31 December 2021, the Group owns freehold property amounting to £1,033 million (2020: £1,074 million), representing factories,
warehouses and office buildings together with adjoining land, mainly in the U.S., UK, Bangladesh, Indonesia and South Korea.
2021
£m
2020
£m
Cost of freehold land within freehold property on which no depreciation is provided
242
251
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Other Information
BAT Annual Report and Form 20-F 2021
213
14 Investments in Associates and Joint Ventures
2021
£m
2020
£m
1 January
1,796
1,860
Total comprehensive income (note 9)
412
323
Dividends
(392)
(394)
Additions (note 27(c))
130
5
Other equity movements
2
2
31 December
1,948
1,796
Non-current assets
1,286
1,021
Current assets
1,144
1,155
Non-current liabilities
(83)
(61)
Current liabilities
(399)
(319)
1,948
1,796
ITC Ltd. (Group’s share of the market value is £7,839 million (2020: £7,574 million))
1,759
1,724
Other listed associates (Group’s share of the market value is £232 million (2020: £184 million))
154
26
Unlisted associates
35
46
1,948
1,796
The principal associate undertaking of the Group is ITC Ltd. (ITC). Included within the dividends amount of £392 million (2020: £394 million)
are £383 million (2020: £386 million) attributable to dividends declared by ITC.
Organigram Inc.
On 11 March 2021, the Group announced a strategic collaboration agreement with Organigram Inc., a wholly owned subsidiary of publicly
traded Organigram Holdings Inc. (collectively, Organigram). Under the terms of the transaction, a Group subsidiary acquired a 19.9%
equity stake in Organigram Holdings Inc. (listed on both the Nasdaq and Toronto Stock Exchange under the symbol ‘OGI’) to become its
largest shareholder.
The Group’s share of the fair value of net assets acquired included £49 million of intangibles and £30 million of goodwill, representing a
strategic premium to enter the legal cannabis market in North America.
The carrying value of the investment at 31 December 2021 is £125 million, which is higher than the value implied by the market price of
individual shares at that date. Due to the likelihood of short-term volatility in the share price, third-party valuations were considered which
indicate a valuation for the Group’s investment in excess of the current carrying value. Any potential impairment of the investment would
be immaterial to the Group. Management will continue to monitor the carrying value, in line with IAS 36, over the course of future periods.
Tisak d.d.
The Group’s investment in Tisak d.d. (Tisak) was acquired as part of the TDR transaction (note 27). During 2016, the Group entered into
an agreement with Tisak’s parent Agrokor d.d. (Agrokor) to convert certain outstanding trading balances into long-term loans and an
additional shareholding in Tisak. As part of the agreement, Agrokor had the right to reacquire the additional shareholding in Tisak. As a
consequence of this, while the Group had legal ownership of the additional shareholding, it did not consider that the shares provided any
additional equity interest and continued to account for 26% of the equity of Tisak. In 2017, due to the financial difficulties of Agrokor and
Tisak, the Group fully impaired this investment resulting in a charge of £27 million to the income statement in that year that was reported
as an adjusting item. In July 2018, Agrokor’s creditors approved a settlement plan proposed by Agrokor’s administrators. The settlement
plan has not returned any value to the Group, and Tisak was liquidated on 21 September 2021.
BAT Annual Report and Form 20-F 2021
214
Financial Statements
Notes on Accounts
Continued
14 Investments in Associates and Joint Ventures
Continued
ITC Ltd.
ITC is an Indian conglomerate based in Kolkata and maintains a presence in cigarettes, hotels, paper and packaging, agri-business and other
fast-moving goods (e.g. confectionery, branded apparel, personal care, stationery and safety matches). BAT’s interest in ITC is 29.38%.
ITC prepares accounts on a quarterly basis with a 31 March year-end. As permitted by IAS 28
Investments in associates and joint ventures
,
results up to 30 September 2021 have been used in applying the equity method. This is driven by the availability of information at the
half-year, to be consistent with the treatment in the Group’s interim accounts. Any further information available after the date used for
reporting purposes is reviewed and any material items adjusted for in the final results. The latest published information available is at
31 December 2021.
2021
£m
2020
£m
Non-current assets
3,889
3,399
Current assets
3,391
3,513
Non-current liabilities
(231)
(194)
Current liabilities
(1,061)
(858)
5,988
5,860
Group’s share of ITC Ltd. (2021: 29.38%; 2020: 29.42%)
1,759
1,724
15 Retirement Benefit Schemes
The Group operates various funded and unfunded defined benefit schemes, including pension and post-retirement healthcare schemes, and
defined contribution pension schemes through its subsidiary undertakings in multiple jurisdictions, with its most significant arrangements being
in the U.S., UK, Canada, Germany, Switzerland and the Netherlands. Together, schemes in these territories account for over 90% of the total
underlying obligations of the Group’s defined benefit arrangements and over 70% of the defined benefit net costs charged to adjusted profit.
Pension obligations consist mainly of final salary pension schemes which provide benefits to members in the form of a guaranteed
level of pension payable for life. The level of benefits provided depends on members’ length of service and their salary in the final years
leading up to retirement. In addition, the Group operates several healthcare benefit schemes, of which the most significant are in the
U.S. and Canada. The majority of defined benefit schemes allow for the future accrual of benefits. With the exception of arrangements
required under local regulations, most of the Group’s arrangements are closed to new entrants.
Benefits provided through defined contribution schemes are charged as an expense as payments fall due. The liabilities arising in respect
of defined benefit schemes are determined in accordance with the advice of independent, professionally qualified actuaries, using the
projected unit credit method. It is Group policy that all schemes are formally valued at least every three years.
Through its defined benefit pension schemes and healthcare benefit schemes, the Group is exposed to a number of risks, including:
–
Asset volatility:
The scheme liabilities are calculated using discount rates set by reference to bond yields. If scheme assets
underperform this yield, e.g. due to stock market volatility, this will create a deficit. However, most funded schemes hold a proportion of
assets which are expected to outperform bonds in the long term, and the majority of schemes by value are subject to local regulation
regarding funding deficits.
–
Changes in bond yields:
A decrease in corporate bond yields will increase scheme liabilities, although this will be partially offset by an
increase in the value of the schemes’ bond holdings, ‘buy-in’ insurance assets or other hedging instruments.
–
Inflation risk:
Some of the Group’s pension obligations are linked to inflation, and higher inflation will lead to higher liabilities, although
in most cases, caps on the level of inflationary increases are in place in the scheme rules, while some assets and derivatives provide
specific inflation protection.
–
Life expectancy:
The majority of the schemes’ obligations are to provide benefits for the life of the member, so increases in life
expectancy will result in an increase in the plans’ liabilities. Assumptions regarding mortality and mortality improvements are regularly
reviewed in line with actuarial tables and scheme specific experience.
The Group has an internal body, the Pensions Executive Committee (PEC), that is chaired by the Finance and Transformation Director. The PEC
sets and oversees a set of philosophies, policies and practices in respect of post-employment benefits including, but not limited to, design,
funding, investment strategy, risk management and governance. It also reviews significant changes to defined benefit schemes in the countries
with the most significant liabilities, and defined contribution schemes in the countries with the most significant costs. Significant changes to
defined benefit arrangements include scheme closures to future accrual and risk management exercises such as the ‘buy-in’ and ‘buy-out’
transactions referred to below.
A ‘buy-out’ transaction is where a pension scheme derecognises all (or part) of its liabilities, removing it from the balance sheet, by
permanently transferring those obligations from the sponsoring employer to a third-party provider and eliminating all further legal or
constructive obligation to the pension scheme or to the sponsoring employer. By contrast, with a ‘buy-in’ transaction the scheme liabilities
remain on the balance sheet and the sponsoring employer remains responsible for the fulfilment of the pension obligations. However,
these obligations are de-risked through the purchase of an insurance product designed to match the underlying cash flows of the pension
liability reducing the risks associated with improved longevity and interest and discount rate movements. The Group consequently
benefits from the ‘buy-in’ as it reduces the individual scheme’s reliance on the Group for future cash funding requirements.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
215
15 Retirement Benefit Schemes
Continued
All of the Group’s arrangements, including funded schemes where formal trusts or equivalents are required, have been developed
and are operated in accordance with local practices and regulations where applicable in the countries concerned. Responsibility for
the governance of these schemes, including specific investment decisions and funding contribution schedules, generally lies with the
trustees, or equivalent bodies, of each arrangement. The trustees will usually consist of representatives appointed by both the sponsoring
company and the beneficiaries.
The funded arrangements in the Group have policies on investment management, including strategies over a preferred long-term
investment profile, and schemes in certain territories including Canada and the Netherlands manage their bond portfolios to match
the weighted average duration of scheme liabilities. In addition, as noted below, certain arrangements in the UK and Canada have been
de-risked through the purchase of insurance policies. The majority of funded schemes are subject to local regulations regarding funding
requirements. Contributions to defined benefit schemes are determined after consultation with the respective trustees and actuaries
of the individual externally funded schemes, and after taking into account regulatory requirements in each territory. The Group’s
contributions to funded defined benefit schemes in 2022 in total are expected to be £83 million compared to £74 million in 2021.
U.S.
In the U.S., the main funded pension plans are the
Reynolds American Retirement Plan
(PEP) and the
Retirement Income Plan for Certain
RAI Affiliates
(Affiliates), and the only funded healthcare scheme is the
Brown & Williamson Tobacco Corporation Welfare & Fringe Benefit
Plan
, all of which are established with corporate trustees that are required to run the plans in accordance with the plan’s rules and to
comply with all relevant legislation, including the Employee Retirement Income Security Act of 1974.
The corporate trustees act as custodians with a committee of local management acting in a fiduciary capacity with regard to investment
decisions, risk mitigation and administration of the arrangements. Contributions to the various funded plans are agreed with the named
fiduciary, scheme actuaries and the committee of local management after taking account of statutory requirements including the
Pension Protection Act of 2006, as amended. Through its U.S. subsidiaries, the Group may make significant contributions, either as
required by statutory requirements or at the discretion of the Group, with the aim of maintaining a funding status of at least 90% and
remaining fully funded in the long term. During 2021, the Group did not contribute to its funded pension and post-retirement plans in the
U.S. and does not expect to do so in 2022.
For funded plans in the U.S., the trustees employ a risk mitigation strategy which seeks to balance pension plan returns with a reasonable
level of funded status volatility. Based on this framework, the asset allocation has two primary components. The first component is the
hedging portfolio, which uses extended duration fixed income holdings (typically U.S. Government and investment grade corporate bonds)
and, to a lesser extent, derivatives to match a portion of the interest rate risk associated with the benefit obligations, thereby reducing
expected funded status volatility. The second component is the return-seeking portfolio, which is designed to enhance portfolio returns.
The return-seeking portfolio is broadly diversified across asset classes.
On 7 October 2021, the Group concluded a transaction affecting portions of the membership of the PEP and the Affiliates plans referred
to above, allowing the Group to fully settle portions of its liability by transferring the obligations to the Metropolitan Tower Life Insurance
Company in a buy-out. Approximately US$1.9 billion (£1.4 billion) of plan liabilities have been removed from the balance sheet, resulting in a
settlement gain of £35 million.
At 31 December 2021, the PEP and Affiliates plans referred to above were reporting surpluses under IAS 19 totalling £463 million
(2020: £232 million). Under the rules of these plans, after assuming the gradual settlement of the plan liabilities over the lives of the
arrangements, any surplus would be returnable to the Group in the event of a termination or could otherwise be repurposed for other
existing or replacement benefit plans, and accordingly, no surplus restrictions have been recognised.
United Kingdom
In the UK, the main pension arrangement is the
British American Tobacco UK Pension Fund
(UKPF), which is established under trust law
and has a corporate trustee that is required to run the scheme in accordance with the UKPF’s Trust Deed and Rules and to comply with
the Pension Scheme Act 1993, Pensions Act 1995, Pensions Act 2004 and all other relevant legislation. With effect from 1 July 2020, UKPF
was closed to further accrual of benefits with all active members becoming deferred members. A past service credit was recognised on
the difference between the salary increase assumption for active members and the inflation assumption for deferred members at the
date of the plan amendment and curtailment of benefits.
The formal triennial actuarial valuation of the UKPF was last carried out with an effective date of 31 March 2020. This showed that UKPF
had a surplus of £139 million on a Technical Provisions basis, in accordance with the statutory funding objective. The Trustee also has a
Long-Term Funding Target to be fully funded on a Solvency Liabilities basis by 2026, and on this basis UKPF had a surplus of £7 million at
the valuation date. Under IAS 19, this was reported as a net retirement benefit asset of £293 million (2020: £389 million).
Following the completion of the valuation noted above, the Trustee and the Group agreed a new Schedule of Contributions with an effective
date of 5 October 2020. This schedule was subsequently replaced with a new Schedule with an effective date of 30 March 2021, such that
the Group made no contributions in 2021 but is committed to pay £18 million in July 2022 and £18 million in July 2023 as contributions towards
further de-risking of UKPF’s assets and securing members’ benefits. Contributions were £21 million in 2020 and £30 million in 2019.
Under the UKPF scheme rules, the Trustee does not have a unilateral power to commence a wind up of UKPF, and the Group has
recognised a surplus as an unconditional right to a refund assuming the gradual settlement of the UKPF liabilities over the life of the
scheme with any future surplus returnable to the Group at the end of the life of the scheme. The funding commitment is not considered
onerous and no additional liabilities or surplus restrictions have been recognised.
BAT Annual Report and Form 20-F 2021
216
Financial Statements
Notes on Accounts
Continued
15 Retirement Benefit Schemes
Continued
As part of its risk management strategy, on 31 May 2019, the UK Trustee entered into a buy-in agreement with Pension Insurance
Corporation plc (‘PIC’) to acquire an insurance policy with the intent of matching a specific part of UKPF’s future cash flows arising from
the accrued pension liabilities of retired and deferred members and improving the security to the UKPF and its members. On an IAS 19
basis, the subsequent fair value of the insurance policy matches the present value of the liabilities being insured. On 19 May 2021, the
Trustee entered into an agreement with PIC to acquire a second buy-in policy which involved the transfer of £383 million of assets held by
UKPF to PIC. As a result of these transactions, approximately 84% of the assets held by UKPF (2020: 75%) are represented by the buy-in
contracts, covering 91% of UKPF’s liabilities (2020: 83%).
For the residual assets held by UKPF, the current allocation is broadly split as 75% in risk reducing assets and 25% in return seeking assets.
The return seeking portfolio is invested in illiquid assets which, in the normal course of events, will wind down naturally over time, with
their value being realised as the investments mature. This is consistent with the Trustee’s ultimate target which is to be 100% invested
in risk reducing assets or matching assets. Given the strong funding position of UKPF as shown in the 31 March 2020 Actuarial valuation,
the Trustee will continue to review the investment strategy and may look to increase the proportion of risk-reducing or matching assets,
commensurate with their ultimate target to further reduce UKPF’s exposure to asset volatility.
Other territories
Payments made to pensioners by the operating companies in Germany, net of income on scheme assets, are deemed to be company
contributions to the Contractual Trust Arrangements and are anticipated to be around £37 million in 2022 and £33 million per annum for
the four years after that.Contributions to pension schemes in Canada, Netherlands and Switzerland in total are anticipated to be around
£11 million in 2022 and then also around £11 million per annum for the four years after that.
For schemes in the Netherlands reporting surpluses of £77 million (2020: £26 million), these surpluses have been recognised as an
unconditional right to a refund assuming the gradual settlement of the pension liabilities over the life of the scheme, with any future
surplus returnable to the Group at the end of the life of the scheme. For schemes in surplus in Canada of £27 million (2020: £19 million), the
economic benefit has been calculated as a combination of the expected level of administration expenses which may be charged to the
plan assets in accordance with the plan rules, which economically represents a potential surplus refund, and the value of the employer
reserve account as defined in legislation, which represents a potential reduction in contributions on an ongoing basis or a surplus refund at
the end of the life of the scheme.
On 2 September 2021, the Group through its Canadian subsidiaries entered into a buy-in agreement with five insurers to acquire insurance
policies that operate as assets of its largest Canadian scheme, the Imasco Pension Fund Society Plan (Society Plan), by transferring plan
assets of CAD $766 million (£451 million). The transaction was met entirely from the pension plan assets with no further funding required
from the Group. The buy-in covered all the Society Plan’s liabilities in relation to pensioners and deferred members as well as the pensions
accrued up to 31 December 2020 for active members. The Group consequently benefits from the buy-in as it reduces the Society Plan’s
reliance on the Group for future cash funding requirements. For the residual assets, the Society Plan is 100% invested in risk reducing
assets, consistent with the Canadian subsidiary’s ultimate de-risking target.
Unfunded arrangements
The majority of benefit payments are from trustee administered funds, however, there are also a number of unfunded schemes where the
sponsoring company meets the benefit payment obligation as it falls due, including UK-based Defined Benefit and Defined Contribution
Unapproved Unfunded Retirement Benefit Schemes (DB UURBS and DC UURBS respectively). The DC UURBS credits accrued in the year
are increased in line with the Company’s Weighted Average Cost of Debt and the scheme is therefore treated as a defined benefit scheme
under IAS 19. For unfunded pension schemes in the U.S. and UK, 38% of the liabilities reported at year-end are expected to be settled by
the Group within 10 years, 28% between 10 and 20 years, 19% between 20 and 30 years, and 15% thereafter. For unfunded healthcare
schemes in the U.S. and Canada, 63% of the liabilities reported at year-end are expected to be settled by the Group within 10 years, 27%
between 10 and 20 years, 8% between 20 and 30 years, and 2% thereafter.
The amounts recognised in the balance sheet are determined as follows:
Pension schemes Healthcare schemes
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Present value of funded scheme liabilities
(9,859)
(11,970)
(225)
(253)
(10,084)
(12,223)
Fair value of funded scheme assets
10,644
12,403
172
173
10,816
12,576
785
433
(53)
732(80)
353
Unrecognised funded scheme surpluses
(16)
(16)
–
(16)–
(16)
769
417
(53)(80)
716
337
Present value of unfunded scheme liabilities
(555)
(602)
(482)
(545)
(1,037)
(1,147)
214
(185)
(535)
(625)
(321)
(810)
The above net (liability)/asset is recognised in the balance sheet as follows:
– retirement benefit scheme liabilities
(702)
(897)
(537)
(627)
(1,239)
(1,524)
– retirement benefit scheme assets
916
712
2
2
918
714
214
(185)
(535)
(625)
(321)
(810)
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
217
15 Retirement Benefit Schemes
Continued
The net liabilities of funded pension schemes by territory are as follows:
Liabilities
Assets
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
– U.S.
(3,378)
(5,012)
3,748
5,144
370
132
– UK
(3,357)
(3,485)
3,645
3,866
288
381
– Germany
(913)
(1,035)
896
918
(17)
(117)
– Canada
(706)
(756)
724
758
18
2
– Netherlands
(769)
(873)
846
893
2077
– Switzerland
(317)
(348)
311
312
(36)(6)
– Rest of Group
(419)
(461)
474
512
55
51Funded schemes
(9,859)
(11,970)
10,644
12,403
785
433
Of the Group’s unfunded pension schemes, 57% (2020: 54%) relate to arrangements in the UK and 32% (2020: 32%) relate to arrangements
in the U.S., while 85% (2020: 85%) of the Group’s unfunded healthcare arrangements relate to arrangements in the U.S.
The amounts recognised in the income statement are as follows:
Pension schemes Healthcare schemes
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Defined benefit schemes
Service cost
– current service cost
60
72
2
2
62
74
– past service credit, curtailments and settlements
(29)
(12)
–
–
(29)
(12)
Net interest on the net defined benefit liability
– interest on scheme liabilities
226
300
19
27
245
327– interest on scheme assets
(226)
(289)
(5)
(7)
(231)
(296)
– interest on unrecognised funded scheme surpluses
1
1
––
11
32
72
16
22
48
94
Defined contribution schemes
91
88
–
91–
88
Total amount recognised in the income statement (note 3)
123
160
16
22
139182
The above charges are recognised within employee benefit costs in note 3 and include a credit of £23 million in 2021 (2020: charge of
£10 million) in respect of settlements, past service costs and defined contribution costs reported as part of the restructuring costs
and other adjusting items charged in arriving at profit from operations (note 7). Included in current service cost in 2021 is £15 million
(2020: £16 million) of administration costs. Current service cost is stated after netting employee contributions, where applicable.
The movements in scheme liabilities are as follows:
Pension schemes Healthcare schemes
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Present value at 1 January
12,572
12,032
798
829
13,370
12,861
Differences on exchange
(122)
(106)
5
(23)
(117)
(129)
Current service cost
60
72
2
2
62
74
Past service credit and settlements
(1,426)
(58)
–
–
(1,426)
(58)
Interest on scheme liabilities
226
300
19
27
245
327Contributions by scheme members
3
1
––
31
Benefits paid
(705)
(737)
(55)
(58)
(760)
(795)
Actuarial losses/(gains)
– arising from changes in demographic assumptions
147
26
3
(7)
150
19
– arising from changes in financial assumptions
(394)
1,032
(18)
59(412)
1,091Experience losses/(gains)
53
10
(47)
(31)
6
(21)Present value at 31 December
10,414
12,572
707
798
11,121
13,370
Changes in financial assumptions principally relate to discount rate movements in both years. Past service and settlements in the table
above includes amounts relating to the U.S. buy-out transaction during the year.
BAT Annual Report and Form 20-F 2021
218
Financial Statements
Notes on Accounts
Continued
15 Retirement Benefit Schemes
Continued
Scheme liabilities by scheme membership:
Pension schemes Healthcare schemes
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Active members
1,090
1,305
41
54
1,131
1,359
Deferred members
1,750
1,897
1
1,8992
1,751
Retired members
7,574
9,370
665
742
8,239
10,112
Present value at 31 December
10,414
12,572
707
798
11,121
13,370
Approximately 95% of scheme liabilities in both years relate to guaranteed benefits.
The movements in funded scheme assets are as follows:
Pension schemes Healthcare schemes
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Fair value of scheme assets at 1 January
12,403
11,682
173
178
12,576
11,860
Differences on exchange
(116)
(117)
–
(7)
(116)
(124)
Settlements
(1,397)
(45)
–
(45)–
(1,397)
Interest on scheme assets
226
289
5
7
231
296
Company contributions
74
103
–
103–
74
Contributions by scheme members
3
3
––
33
Benefits paid
(668)
(696)
(13)
(681)(15)
(711)
Actuarial gains
119
1,184
7
10
126
1,194
Fair value of scheme assets at 31 December
10,644
12,403
172
173
10,816
12,576
The actuarial gains and losses in both years principally relate to movements in the fair values of scheme assets including revaluations
on initial recognition and subsequent remeasurement of insurance assets acquired in the buy-in transactions referred to above.
Actual returns are stated net of applicable taxes and fund management fees. Past service and settlements in the table above includes
amounts relating to the U.S. buy-out transaction during the year.
Scheme assets have been diversified into equities, bonds and other assets and are typically invested via fund investment managers into
both pooled and segregated mandates of listed and unlisted equities and bonds.
Pension schemes Healthcare schemes
Total
2021
£m
2020
£m
2021
£m
2020
£m
2021
£m
2020
£m
Equities – listed
741
1,259
6
5
747
1,264
Equities – unlisted
892
992
65
68
957
1,060
Bonds – listed
1,929
2,432
5
5
1,934
2,437
Bonds – unlisted
1,924
3,163
72
73
1,996
3,236
Other assets – listed
543
202
15
13
558
215
Other assets – unlisted
4,615
4,355
9
9
4,624
4,364
Fair value of scheme assets at 31 December
10,644
12,403
172
173
10,816
12,576
In the above analysis, investments via equity-based investment funds are shown under listed equities, and investments via bond-based
investment funds are shown under listed bonds. Other assets include insurance contracts, cash and other deposits, derivatives and other
hedges, recoverable taxes, infrastructure investments and investment property.
In the U.S., pension plan assets are invested using active investment strategies and multiple investment management firms.
Managers within each asset class cover a range of investment styles and approaches.Allowable investment types include global equity,
fixed income, real assets, private equity and absolute return.The range of allowable investment types utilised for pension assets provides
enhanced returns and more widely diversifies the plan.
As noted above, during 2021 and 2019, the UKPF Trustee acquired insurance policies that operate as a UK Fund investment asset in
a buy-in transaction. The residual assets now predominantly consist of liability driven investments and absolute return funds as well
as a proportion of illiquid investments, such as private equity and infrastructure investments. Insurance policies acquired in buy-in
transactions in the UK and Canada are included within ‘other assets-unlisted’ in the table above.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
219
15 Retirement Benefit Schemes
Continued
The fair values of listed scheme assets were derived from observable data including quoted market prices and other market data,
including market values of individual segregated investments and of pooled investment funds where quoted. The fair value of buy-in
insurance products was estimated as the present value of the underlying obligations covered by the insurance policy. The fair values
of other unlisted assets were derived from cash flow projections of estimated future income after taking into account the estimated
recoverable value of these assets.
The recognition of retirement benefit surpluses on the balance sheet is restricted where the economic benefit, in the form of a potential
refund or reduction in future contributions, has a present value which is less than the net assets of the scheme. The movements in the
unrecognised scheme surpluses, recognised in other comprehensive income, are as follows:
Pension schemes Healthcare schemes
Total
2021
£m
2020
£m
2019
£m
2021
£m
2020
£m
2019
£m
2021
£m
2020
£m
2019
£m
Unrecognised funded scheme
surpluses at 1 January
(16)
(28)
(20)
–
(16)– –
(28)
(20)
Differences on exchange
2
3
–(1)
– –
23
(1)
Interest on unrecognised funded
scheme surpluses
(1)
(1)
(1)– –
–
–(1)
–
Movement in year (note 22)
(1)
10
(7)
–
– –
(1)
10
(7)
Unrecognised funded scheme
surpluses at 31 December
(16)
(16)
(28)
–
(16)– –
(16)
(28)
The principal actuarial assumptions (weighted to reflect individual scheme differences) used in the following territories are shown below.
In both years, discount rates are determined by reference to normal yields on high quality corporate bonds at the balance sheet date.
2021
2020
U.S.
UK
Germany
NetherlandsCanada
Switzerland
U.S.
UK
Germany
Canada
Netherlands
Switzerland
Rate of increase in salaries (%)
3.4
–
2.5 2.5
1.4 1.2
3.4
–
2.5
3.0
2.1 1.1
Rate of increase in pensions in
payment (%)
2.5
3.4
1.8
Nil
1.1
Nil2.5
3.0
1.5
0.9Nil
Nil
Rate of increase in deferred
pensions (%)
0.1
3.0
1.11.8
Nil
–
–
2.2
–1.5
Nil
0.9
Discount rate (%)
3.0
1.8 1.3
1.02.8
0.2
2.6
1.4
0.9
2.3
0.5–
General inflation (%)
2.5
3.4
1.8
2.0 2.0 1.0
2.5
3.0 2.0 0.9
1.5
2.02021
2020
U.S.
UK
Germany
NetherlandsCanada
Switzerland
U.S.
UK
Germany
Canada
Netherlands
Switzerland
Weighted average duration
of liabilities (years)
12.3
16.7 13.6
11.0
13.317.1
11.6
17.0
11.014.0
18.0
13.4
BAT Annual Report and Form 20-F 2021
220
Financial Statements
Notes on Accounts
Continued
15 Retirement Benefit Schemes
Continued
For healthcare inflation in the U.S., the assumption is 7.0% for 2021 (2020: 6.0%) and in Canada, the assumption is 5.0% for both years.
Mortality assumptions are subject to regular review. The principal schemes used the following tables:
U.S.
PRI-2012 mortality tables without collar or amount, projected with MP-2021 generational projection (2020:
PRI-2012 mortality tables without collar or amount, projected with MP-2020 generational projection)
UK
S2PA (YOB) with the CMI (2020) improvement model with a 1.25% long-term improvement rate (2020: S2PA (YOB)
with the CMI (2019) improvement model with a 1.25% long-term improvement rate)
Germany
RT Heubeck 2018 G (both years)
Canada
CPM-2014 Private Table (both years)
Netherlands
AG Prognosetafel 2020 (both years)
Switzerland
LPP/BVG 2020 base table with CMI projection factors for mortality improvements with a 1.5% long-term
improvement rate (2020: LPP/BVG 2015 base table with CMI projection factors for mortality improvements with a
1.5% long-term improvement rate)
Based on the above, the weighted average life expectancy, in years, for mortality tables used to determine benefit obligations is as follows:
U.S.
UK
Germany
NetherlandsCanada
Switzerland
Male
Female
MaleFemale
MaleFemale
MaleFemale
MaleFemale
MaleFemale
31 December 2021
Member age 65
(current life expectancy)
21.6
23.5
21.922.9
23.924.2
20.5
22.0
24.3
20.7
24.1
23.6
Member age 45
(life expectancy at age 65)
22.1
24.0
24.5
23.025.9
23.2
26.2
25.3
22.8
25.823.8
25.531 December 2020
Member age 65
(current life expectancy)
20.4
22.4 22.8
20.624.1
18.323.8
21.6
24.0
24.0
21.9 23.9
Member age 45
(life expectancy at age 65)
21.9
23.8
24.5
23.825.9
24.923.1
26.0
22.6
22.7
25.7
25.8
For the remaining territories, typical assumptions are that real salary increases will be from 0% to 8.0% (2020: 0% to 9.0%) per annum and
discount rates will be from 0% to 11.0% (2020: 0% to 12.0%) above inflation. Pension increases, where allowed for, are generally assumed
to be in line with inflation. Assumptions of life expectancy are in line with best practice in each territory. For countries where there is not a
deep market in such corporate bonds, the yield on government bonds is used.
The valuation of retirement benefit schemes involves judgements about uncertain future events. Sensitivities in respect of the key
assumptions used to measure the principal pension schemes as at 31 December 2021 are set out below. These sensitivities show the
hypothetical impact of a change in each of the listed assumptions in isolation, with the exception of the sensitivity to inflation which
incorporates the impact of certain correlating assumptions such as salary increases. While each of these sensitivities holds all other
assumptions constant, inpractice such assumptions rarely change in isolation, while asset values also change, and the impacts may
offset to some extent.
1 year
increase
£m
1 year
decrease
£m
0.25
percentage
point
increase
£m
0.25
percentage
point
decrease
£m
Average life expectancy – increase/(decrease) of scheme liabilities
271
(267)
Rate of inflation – increase/(decrease) of scheme liabilities
182
(175)
Discount rate – (decrease)/increase of scheme liabilities
(327)
346
A one percentage point increase in healthcare inflation would increase healthcare scheme liabilities by £33 million, and a one percentage
point decrease would decrease liabilities by £25 million. The income statement effect of this change in assumption is not material.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
221
16 Deferred Tax
Net deferred tax (liabilities)/assets comprise:
Stock
relief
£m
Excess of
capital
allowances
over
depreciation
£m
Tax
losses
£m
Undistributed
earnings of
associates and
subsidiaries
£m
Retirement
benefits
£m
Trademarks
£m
Other
temporary
differences
£m
Total
£m
1 January 2021
(13)
(189)
58
(231)
246
(16,784)1,133
(15,780)
Differences on exchange
(3)
5
(3)2
(4)
4(149)
(148)
Credited/(charged) to the
income statement
12
(16)
34
8
63(22)
(50)
29
Credited/(charged) relating to changes
in tax rates
– –
49
5(3)
91
16
158
Charged to other
comprehensive income
– – – –
(78)
–(32)
(110)
31 December 2021
(4)
(151)
94
(221)
139
1,071(16,779)
(15,851)
1 January 2020
(45)
(208)
79
(318)279
(17,408)
(16,626)995
Differences on exchange
4 –
13
8(3)
528
(44)
506
Credited/(charged) to the
income statement
28
(6)
(21)
(18)
(12)
75
138
184
Credited relating to changes in tax rates
–
12
397
–21
–133
(Charged)/credited to other
comprehensive income
– – – –
(21)
–44
23
31 December 2020
(13)
(189)
58
(15,780)(231)
246
(16,784)
1,133
The net deferred tax liabilities are reflected in the Group balance sheet as follows: deferred tax asset of £611 million and deferred tax
liability of £16,462 million (2020: deferred tax asset of £534 million and deferred tax liability of £16,314 million), after offsetting assets and
liabilities where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred income taxes relate
tothe same fiscal authority.
At the balance sheet date, the Group has not recognised a deferred tax asset in respect of unused tax losses of £342 million
(2020: £342 million) which have no expiry date and unused tax losses of £452 million (2020: £458 million) which will expire within the next
20 years.
In 2021 and 2020 the Group has not recognised any deferred tax asset in respect of deductible temporary differences which have no
expiry date and has not recognised £148 million (2020: £173 million) in respect of deductible temporary differences which will expire within
the next 10years.
At the balance sheet date, the Group has unused tax credits of £80 million (2020: £80 million) which have no expiry date. No amount of
deferred tax has been recognised in respect of these unused tax credits.
At the balance sheet date, the aggregate amount of undistributed earnings of subsidiaries which would be subject to dividend withholding
tax and for which no withholding tax liability has been recognised was £0.9 billion (2020: £0.6 billion).
BAT Annual Report and Form 20-F 2021
222
Financial Statements
Notes on Accounts
Continued
17 Trade and Other Receivables
2021
£m
2020
£m
Trade receivables
2,998
2,763
Loans and other receivables
755
696
Prepayments and accrued income
408
504
4,161
3,963
Current
3,951
3,721
Non-current
210
242
4,161
3,963
The majority of receivables are held in order to collect contractual cash flows, in accordance with the Group’s business model for
managing financial assets, and hence are measured at amortised cost. In certain countries, however, the Group has entered into
factoring arrangements and periodically sells certain trade receivables to banks and other financial institutions, without recourse, for
cash. These trade receivables have been derecognised from the statement of financial position to reflect the transfer by the Group of
substantially all of the risks and rewards of the receivables, including credit risk. Consequently, the cash inflows have been recognised
within operating cash flows. Typically in these arrangements, the Group also acts as a collection agent for the bank. At 31 December
2021, the value of trade receivables derecognised through the factoring arrangements where the Group acts as a collection agent was
£562 million (2020: £600 million) and where the Group does not act as a collection agent was £8 million (2020: £25 million). Included in
trade receivables above is £110 million (2020: £205 million) of trade debtor balances which were available for factoring under these
arrangements. In addition, the Group participates in certain supply chain finance programmes utilised by our customers allowing us to
receive payment for invoices earlier than the agreed due date at a discounted value. At 31 December 2021, the value of trade receivables
derecognised through these arrangements was £171 million (2020: £131 million).
Included in loans and other receivables are £84 million of litigation related deposits (2020: £78 million). Management has determined that
these payments represent a resource controlled by the entity, as a result of past events and from which future economic benefits are
expected to flow to the entity either by being recoverable on conclusion of ongoing appeal processes or by reducing amounts potentially
payable should the appeal process fail. These deposits are held at the fair value of consideration transferred less impairment, if applicable.
The effect of discounting would be immaterial.
Also included in loans and other receivables are deposits that do not meet the definition of cash and cash equivalents as well as loans
provided to farmers. The cash flows arising from these transactions are included in investing activities and have been reconciled to the
cash flow statement in note 18.
Prepayments and accrued income include £24 million (2020: £8 million) of accrued income primarily in relation to rebates.
Amounts receivable from related parties including associated undertakings are shown in note 30.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
223
17 Trade and Other Receivables
Continued
Trade and other receivables have been reported in the balance sheet net of allowances as follows:
2021
£m
2020
£m
Trade receivables – gross
3,035
2,804
Trade receivables – allowance
(37)
(41)
Loans and other receivables – gross
755
696
Loans and other receivables – allowance
–
–
Prepayments and accrued income
408
504
Net trade and other receivables per balance sheet
4,161
3,963
The movements in the allowance account are as follows:
2021
2020
Trade
receivables
£m
Loans
and other
receivables
£m
Total
£m
Trade
receivables
£m
Loans
and other
receivables
£m
Total
£m
1 January
41
–
4127
10
37Differences on exchange
(2)
–
(2)(2)
–
(2)Provided in the year
7 – 7
31
–
31
Released
(9)
–
(9)(15)
(10)
(25)
31 December
37
–
3741
–
41As permitted by IFRS 9, the loss allowance on trade receivables arising from the recognition of revenue under IFRS 15 is initially measured
at an amount equal to lifetime expected losses. Allowances in respect of loans and other receivables are initially recognised at an amount
equal to 12-month expected credit losses. Allowances are measured at an amount equal to the lifetime expected credit losses where the
credit risk on the receivables increases significantly after initial recognition.
The Group holds bank guarantees, other guarantees and credit insurance in respect of some of the past due debtor balances.
Trade and other receivables are predominantly denominated in the functional currencies of subsidiary undertakings apart from the
following: U.S. dollar: 2.2% (2020: 2.6%), UK sterling: 0.1% (2020: 0.1%), Euro: 3.6% (2020: 0.4%) and other currencies: 0.9% (2020: 1.7%).
There is no material difference between the above amounts for trade and other receivables and their fair value due to the short-term
duration of the majority of trade and other receivables as determined using discounted cash flow analysis. There is no concentration of
credit risk with respect to trade receivables as the Group has a large number of internationally dispersed customers.
BAT Annual Report and Form 20-F 2021
224
Financial Statements
Notes on Accounts
Continued
18 Investments Held at Fair Value
2021
2020
Fair value
through P&L
Fair value
through OCI
Total
£m
Fair value
through P&L
Fair value
through OCI
Total
£m
1 January
255
9
264
127
8
135
Difference on exchange
3 1 4
(23)
–
(23)Additions
327
18
345
247
1
248
Disposals
(98)
–
(98)(111)
–
(111)Provisions
(24)
–
(24)– – –
Fair value movements
6 9
15
15
–
1531 December
469
37
506
255
9
264
Current
456
–
456242
–
242Non-current
13
37
50
13
9
22
469
37
506
255
9
264
The Group’s investments principally consist of non-derivative financial assets that cannot be classified as loans and other receivables
orcash and cash equivalents, as well as investments made by the Group’s corporate venture capital unit, Btomorrow Ventures.
Investments held at fair value through profit and loss principally consist of government securities, indexed deposits, treasury bills or other
treasury products with maturities of more than three months which, if held for less than 12 months, form part of the Group’s definition
of net debt. Investments held at fair value through other comprehensive income (OCI) include equity investments in various start-up
businesses which are held for their strategic value.
Investments held at fair value through profit and loss above include restricted amounts of £351 million (2020: £115 million) due to
investments held by subsidiaries in CCAA protection (note 32), as well as £61 million (2020: £97 million) subject to potential exchange
control restrictions.
In 2021, as part of the disposal of the Group’s operations in Iran (note 27(d)), a provision of £24 million (2020: £nil) against non-current
investments held at fair value was charged to net finance costs as recoverability of these funds is not certain.
Investments held at fair value are predominantly denominated in the functional currencies of subsidiary undertakings with less than 4%
inother currencies (2020: less than 2% in other currencies).
The classification of these investments under the IFRS 13
Fair value measurement
fair value hierarchy is given in note 26.
There is no material difference between the investments held at fair value and their gross contractual values.
Below is a reconciliation of the fair value investments cash flows to the cash flow statement – investing activities:
2021
£m
2020
£m
Cash outflow from investments held at fair value
345
248
Cash outflow from loans and other receivables
24
95
Cash outflows from investments per cash flow statement
369
343
Cash inflow from investments held at fair value
(98)
(111)
Cash inflow from loans and other receivables
(43)
(73)
Cash inflows from investments per cash flow statement
(141)
(184)
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
225
19 Derivative Financial Instruments
The fair values of derivatives are determined based on market data (primarily yield curves, implied volatilities and exchange rates) to
calculate the present value of all estimated flows associated with each derivative at the balance sheet date. In the absence of sufficient
market data, fair values would be based on the quoted market price of similar derivatives. The classification of these derivative assets
andliabilities under the IFRS13 fair value hierarchy is given in note 26.
2021
2020
Assets
£m
Liabilities
£m
Assets
£m
Liabilities
£m
Fair value hedges
– interest rate swaps
5 2
20
–
– cross-currency swaps
114
–
255
–
Cash flow hedges
– cross-currency swaps
107
35
189
–
– forward foreign currency contracts
81
35
62
100
Net investment hedges
– forward foreign currency contracts
62
81
211
43
Held-for-trading*
– interest rate swaps
28
34
45
53
– forward foreign currency contracts
28
127
15
123
Total
425
314
797
319
Current
182
235
430
278
Non-current
243 79
367
41
425
314
797
319
Derivatives
– in respect of net debt**
273
182
518
172
– other
152
132
279
147
425
314
797
319
* Derivatives which do not meet the tests for hedge accounting under IFRS 9 or which are not designated as hedging instruments are referred to as ‘held-for-trading’. These derivatives
principally consist of interest rate swaps and forward foreign currency contracts which have not been designated as hedges due to their value changes offsetting with other
components of net finance costs relating to financial assets and financial liabilities. The Group does not use derivatives for speculative purposes. All derivatives are undertaken for risk
management purposes.
** Derivatives in respect of net debt are in a net asset position of £91 million as at 31 December 2021 (2020: net asset position of £346 million). The Group’s net debt is presented in note 23.
For cash flow hedges, the timing of expected cash flows is as follows: assets of £188 million (2020: £251 million) of which £78 million
(2020: £98 million) is expected within one year and £107 million (2020: £143 million) beyond five years and liabilities of £70 million
(2020: £100 million) of which £33 million (2020: £94 million) is expected within one year and £nil (2020: £nil) beyond five years.
The Group’s cash flow hedges are principally in respect of sales or purchases of inventory and certain debt instruments. A certain number
of forward foreign currency contracts were used to manage the currency profile of external borrowings and are reflected in the currency
table in note 23. Interest rate swaps have been used to manage the interest rate profile of external borrowings and are reflected in the
re-pricing table in note 23.
BAT Annual Report and Form 20-F 2021
226
Financial Statements
Notes on Accounts
Continued
19 Derivative Financial Instruments
Continued
The tables below set out the maturities of the Group’s derivative financial instruments on an undiscounted contractual basis, based on
spot rates.
The maturity dates of all gross-settled derivative financial instruments are as follows:
2021
2020
Assets
Liabilities
Assets
Liabilities
Inflow
£m
Outflow
£m
Inflow
£m
Outflow
£m
Inflow
£m
Outflow
£m
Inflow
£m
Outflow
£m
Within one year
– forward foreign currency contracts
5,743
(4,727)
12,407
(12,096)
7,34 5
(6,567)
10,661
(10,185)
– cross-currency swaps
14
(22)
17
(36)
1,756
(1,655)
– –
Between one and two years
– forward foreign currency contracts
807
(779)
143
(113)
522
(498)
285
(266)
– cross-currency swaps
705
(592)
665
(689)
33
(54)
– –
Between two and three years
– cross-currency swaps
9
(15)
10
(15)1,446
(1,261)
– –
Between three and four years
– cross-currency swaps
9
(15)
460
(445)
19
(29)
– –
Between four and five years
– cross-currency swaps
9 –
(15)
–469
(451)
– –
Beyond five years
– cross-currency swaps
726
(579)
– –
767
(594)
– –
8,022
(6,744)
13,702
(13,394)
12,357
(11,109)
10,946
(10,451)
The maturity dates of net-settled derivative financial instruments, which primarily relate to interest rate swaps, are as follows:
2021
2020
Assets
Inflow/
(outflow)
£m
Liabilities
Outflow/
(inflow)
£m
Assets
Inflow/
(outflow)
£m
Liabilities
Outflow/
(inflow)
£m
Within one year
127
225
296
263
Between one and two years
25
19
26
21
Between two and three years
23
11
16
18
Between three and four years
(2)
11
– –
Between four and five years
–
12
– –
Beyond five years
–
(17)
– –
173
261
338
302
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
227
19 Derivative Financial Instruments
Continued
The items designated as hedging instruments are as follows:
2021
2020
Nominal amount
of hedging
instrument
£m
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Nominal amount
of hedging
instrument
£m
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Interest rate risk exposure:
Fair value hedges
– interest rate swaps
4,413
(35)
757
(5)
– cross-currency swaps
672
(52)
1,428
66
Cash flow hedges
– cross-currency swaps
1,751
69
2,822
(155)
Foreign currency risk exposure:
Cash flow hedges
– forward foreign currency contracts
3,573
49
3,279
(36)
Net investment hedges (derivative related)
– forward foreign currency contracts
6,120
(27)
5,922
156
Net investment hedges (non-derivative related)
– debt (carrying value) in borrowings designated as net investment hedges
of net assets
368
(24)
392
21
20 Inventories
2021
£m
2020
£m
Raw materials and consumables
2,100
2,362
Finished goods and work in progress
3,046
3,549
Goods purchased for resale
133
87
5,279
5,998
Inventories pledged as security for liabilities amount to £nil (2020: £2 million). Write-offs taken to other operating expenses in the
Group income statement were £215 million (2020: £309 million; 2019: £255 million). In 2020, this included £24 million in relation to the
restructuring in Indonesia (refer to note 7) and £47 million as a result of the decision to withdraw glo Sens from Japan. Goods purchased
for resale include Group brands produced under third-party contract manufacturing arrangements.
BAT Annual Report and Form 20-F 2021
228
Financial Statements
Notes on Accounts
Continued
21 Cash and Cash Equivalents
2021
£m
2020
£m
Cash and bank balances
2,529
2,940
Cash equivalents
280
199
2,809
3,139
The carrying value of cash and cash equivalents approximates their fair value.
Cash and cash equivalents are denominated in the functional currency of the subsidiary undertaking or other currencies as shown below:
2021
£m
2020
£m
Functional currency
2,422
2,597
U.S. dollar
170
197
Euro
92
170
Other currencies
125
175
2,809
3,139
In the Group cash flow statement, net cash and cash equivalents are shown after deducting bank overdrafts and accrued interest where
applicable, as follows:
2021
£m
2020
£m
Cash and cash equivalents as above
2,809
3,139
Less overdrafts and accrued interest
(346)
(251)
Net cash and cash equivalents
2,463
2,888
Cash and cash equivalents also include £42 million (2020: £48 million) of cash that is held as a hedging instrument.
Restricted cash
Cash and cash equivalents include restricted amounts of £1,024 million (2020: £878 million) due to subsidiaries in CCAA protection
(note 32), as well as £305 million (2020: £455 million) principally due to exchange control restrictions, including amounts of £92 million
(2020: £141 million) where the underlying restrictions are expected to be short-term in nature.
22 Capital and Reserves
(a) Share capital
Ordinary
shares of 25p each
Number of shares
£m
Allotted and fully paid
1 January 2021
2,456,591,597
614.14
Changes during the year
– share option schemes
26,191
0.01
31 December 2021
2,456,617,788
614.15
Allotted and fully paid
1 January 2020
2,456,520,738
614.12
Changes during the year
– share option schemes
70,859
0.02
31 December 2020
2,456,591,597
614.14
Allotted and fully paid
1 January 2019
2,456,415,884
614.09
Changes during the year
– share option schemes
104,854 0.03
31 December 2019
2,456,520,738
614.12
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
229
22 Capital and Reserves
Continued
Share capital
The Company’s ordinary shares are fully paid and no further contribution of capital may be required by the Company from the
shareholders.All ordinary shares rank equally with regard to participation in dividends and to share in the proceeds of the Company’s
residual assets upon a winding up of the Company. Shareholders may, by ordinary resolution, declare final dividends, but not in excess
ofthe amount recommended by the Directors. Holders of ordinary shares have no pre-emptive rights.
On a show of hands every shareholder who is present in person at a general meeting is entitled to one vote regardless of the number of
shares held by the shareholder, unless a poll is demanded. On a poll, every shareholder who is present in person or by proxy has one vote
for every share held by the shareholder. The Company’s Annual General Meeting voting is undertaken by way of a poll.
All rights attached to the Company’s shares held by the Group as treasury shares are suspended until those shares are reissued.
(b) Share premium account, capital redemption reserves and merger reserves comprise:
Share
premium
account
£m
Capital
redemption
reserves
£m
Merger
reserves
£m
Total
£m
31 December 2021
107
101
26,414
26,622
31 December 2020
103 101
26,414
26,618
31 December 2019
94
101
26,414
26,609
Share premium account
The share premium account includes the difference between the value of shares issued and their nominal value. The share premium
increase includes £nil (2020: £2 million; 2019: £3 million) in respect of ordinary shares issued under the Company’s share option schemes.
A further £4 million (2020: £7 million; 2019: £nil) increase in share premium is related to shares repurchased and not cancelled that
have been transferred from the Company to other Group undertakings, to be granted to certain employees on vesting of awards, and
represents the excess of transfer price of the share over the original weighted average cost of shares.
Capital redemption account
On the purchase of own shares as part of the share buy-back programme for shares which are cancelled, a transfer is made from
retained earnings to the capital redemption reserve equivalent to the nominal value of shares purchased. Purchased shares which are not
cancelled are classified as treasury shares and presented as a deduction from total equity.
Merger reserve account
The merger reserve comprises:
a. In 1999, shares were issued for the acquisition of the Rothmans International B.V. Group and the difference between the fair value of
shares issued and their nominal value of £3,748 million was credited to merger reserves; and
b. On 25 July 2017, the Group announced the completion of the acquisition of the remaining 57.8% of RAI not already owned by the
Group. Shares were issued for the acquisition and the difference between the fair value of shares issued and their nominal value of
£22,666 million was credited to merger reserves.
BAT Annual Report and Form 20-F 2021
230
Financial Statements
Notes on Accounts
Continued
22 Capital and Reserves
Continued
(c) Equity attributed to owners of the parent – movements in other reserves and retained earnings (which are after deducting
treasury shares) comprise:
Retained earnings
Translation
reserve
(i)
£m
Hedging
reserve
(ii)
£m
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
Other
(v)
£m
Total other
reserves
£m
Treasury
shares
(vi)
£m
Other
£m
1 January 2021
(6,830)
(504)
(6,600)(18)
179
573
(5,150)
47,191
Comprehensive income and expense
Profit for the year
– – – – – – –
6,801
Foreign currency translation and hedges
of net investments in foreign operations
– differences on exchange from
translation of foreign operations
31
– – – –
31– –
– reclassified and reported in profit for
the year
291
– – – –
291– –
– net investment hedges – net fair value
gains on derivatives
75
– – – –
75– –
– net investment hedges – differences on
exchange on borrowings
24
– – – –
24– –
Cash flow hedges
– net fair value gains
– – – –
95
–95
–– reclassified and reported in profit for
the year
– – – –
32
–32
–– tax on net fair value gains in respect of
cash flow hedges (note 10(f))
– – – –
(32)
–(32)
–Investments held at fair value
– net fair value gains
– – 9 – – 9 – –
Associates – share of OCI, net of tax
(note 9)
(18)
1 – – –
(17)– –
Retirement benefit schemes
– net actuarial gains (note 15)
– – – – – – –
382
– surplus recognition (note 15)
– – – – – – –
(1)
– tax on actuarial gains in respect of
subsidiaries (note 10(f))
– – – – – – –
(82)
Associates – share of OCI, net of tax
(note 9)
– – –
15
–15
–(1)
Other changes in equity
Cash flow hedges reclassified and
reported in total assets
– – – –
45
–45
–Employee share options
– value of employee services
– – – – – – –
76
– treasury shares used for share
option schemes
– – – – – –
13
(17)
Dividends and other appropriations
– ordinary shares
– – – – – – –
(4,904)
Purchase of own shares
– held in employee share ownership trusts
– – – – – –
(82)
–Perpetual hybrid bonds
– coupons paid
– – – – – – –
(6)
– tax on coupons paid
– – – – – – – 1
Non-controlling interests – acquisitions
(note 27(b))
– – – – – – –
(5)
Other movements
– – – – – –
97 (101)
31 December 2021
(6,427)
(363)
(6,032)6
179
573
(5,122)
49,334
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
231
22 Capital and Reserves
Continued
Retained earnings
Translation
reserve
(i)
£m
Hedging
reserve
(ii)
£m
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
Other
(v)
£m
Total other
reserves
£m
Treasury
shares
(vi)
£m
Other
£m
1 January 2020
(3,974)
(346)
13
179
573
(3,555)
(5,261)
45,495
Comprehensive income and expense
Profit for the year
– – – – – – –
6,400
Foreign currency translation and hedges
of net investments in foreign operations
– differences on exchange from
translation of foreign operations
(2,582)
– – – –
(2,582)– –
– net investment hedges – net fair value
losses on derivatives
(16)
– – – –
(16)– –
– net investment hedges – differences on
exchange on borrowings
(163)
– – – – –
(163)
–Cash flow hedges
– net fair value losses
– – – –
(256)
–(256)
–– reclassified and reported in profit for
the year
– – – –
90
–90
–– tax on net fair value losses in respect of
cash flow hedges (note 10(f))
– – – –
44
–44
–Associates – share of OCI, net of tax
(note 9)
(95)
(3)
(98)– – –
– –
Retirement benefit schemes
– net actuarial gains (note 15)
– – – – – – –
105
– surplus recognition (note 15)
– – – – – – –
10
– tax on actuarial gains in respect of
subsidiaries (note 10(f))
– – – – – – –
(26)
Associates – share of OCI, net of tax
(note 9)
– – –
(31)
–(31)
–(3)
Other changes in equity
Cash flow hedges reclassified and
reported in total assets
– – – –
(33)
–(33)
–Employee share options
– value of employee services
– – – – – – –
88
– treasury shares used for share
option schemes
– – – – – – 9
(16)
Dividends and other appropriations
– ordinary shares
– – – – – – –
(4,747)
Purchase of own shares
– held in employee share ownership trusts
– – – – – –
(17)
–Other movements
– – – – – –
119 (115)
31 December 2020
(6,830)
(504)
(6,600)(18)
179
573
(5,150)
47,191
BAT Annual Report and Form 20-F 2021
232
Financial Statements
Notes on Accounts
Continued
22 Capital and Reserves
Continued
Retained earnings
Translation
reserve
(i)
£m
Hedging
reserve
(ii)
£m
Fair value
reserve
(iii)
£m
Revaluation
reserve
(iv)
£m
Other
(v)
£m
Total other
reserves
£m
Treasury
shares
(vi)
£m
Other
£m
1 January 2019
(914)
(177)
6
179573
(5,242)(333)
43,799
Comprehensive income and expense
Profit for the year
– – – – – – –
5,704
Foreign currency translation and hedges
of net investments in foreign operations
– differences on exchange from
translation of foreign operations
(2,948)
– – – –
(2,948)– –
– net investment hedges – net fair value
gains on derivatives
21
– – – – –
21
–– net investment hedges – differences on
exchange on borrowings
(18)
– – – – –
(18)
–Cash flow hedges
– net fair value losses
– – – –
(246)
–(246)
–– reclassified and reported in profit for
the year
– – – –
53
–53
–– tax on net fair value losses in respect of
cash flow hedges (note 10(f))
–
56
– – –
56
– –
Associates – share of OCI, net of tax
(note 9)
(115)
– – – –
(115)– –
Retirement benefit schemes
– net actuarial losses (note 15)
– – – – – – –
(582)
– surplus recognition (note 15)
– – – – – – –
(7)
– tax on actuarial losses in respect of
subsidiaries (note 10(f))
– – – – – – –
75
Associates – share of OCI, net of tax
(note 9)
– – 7 – – 7 – –
Other changes in equity
Cash flow hedges reclassified and
reported in total assets
– – – –
(32)
–(32)
–Employee share options
– value of employee services
– – – – – – –
115
Dividends and other appropriations
– ordinary shares
– – – – – – –
(3,476)
Purchase of own shares
– held in employee share ownership trusts
– – – – – –
(117)
–Other movements
– – – – – –
98
(133)
31 December 2019
(3,974)
(346)
13
179
573
(3,555)
(5,261)
45,495
i. Translation reserve:
The translation reserve is explained in the accounting policy on foreign currencies in note 1.
In 2021, included within the differences on exchange from translation of foreign operations is £291 million which has been reclassified
from reserves to the income statement and recognised in other operating expenses as an adjusting item. The £291 million comprises
£272 million in respect of the disposal of BAT Pars (note 27(d)) and £19 million from the Group exiting certain countries. As a result of
Quantum initiatives, the Group has withdrawn its operations from Myanmar and, in certain countries, the Group has moved to above
market business models utilising local distributors as importers. As a consequence, with the cessation of a physical presence in these
markets, foreign exchange previously recognised in other comprehensive income for these countries has been reclassified to the
income statement.
As detailed in note 14, as a result of the liquidation of Tisak d.d., the Group reclassified to the income statement the foreign exchange
previously recognised in associates other comprehensive income. This resulted in a credit of £2 million to the income statement.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
233
22 Capital and Reserves
Continued
ii. Hedging reserve:
The hedging reserve is explained in the accounting policy on financial instruments in note 1.
Of the amounts reclassified from the hedging reserve and reported in profit for the year, a loss of £29 million (2020: £16 million gain;
2019: £12 million gain) and a gain of £6 million (2020: £19 million gain; 2019: £3 million gain) were reported within revenue and raw materials
and consumables, respectively, together with a loss of £4 million (2020: £2million loss; 2019: £11 million gain) reported in other operating
expenses, and a gain of £59 million (2020: £57 million gain; 2019: £27 million gain) reported within net finance costs.
The Group hedges certain foreign currency denominated borrowings with cross-currency interest rate swaps. As permitted by IFRS 9
Financial Instruments
, the foreign currency basis spreads have been separated from the hedging instrument and are recognised in
reserves as a ‘cost of hedging’ and are reclassified to the income statement in the same period in which profit and loss is affected by the
hedged expected cashflows as a component of the associated interest expense. The basis spreads are disclosed within hedging reserves
as they are not material. Included within the balance of hedging reserves at 31 December 2021 is an accumulated gain of £4 million
(2020: £9 million; 2019: £14 million) in respect of the cost of hedging.
iii. Fair value reserve:
The fair value reserve is explained in the accounting policy on financial instruments in note 1. Fair value gains and losses arising from
investments held at fair value through other comprehensive income are recognised in this reserve.
iv. Revaluation reserve:
The revaluation reserve relates to the acquisition of the cigarette and snus business of ST in 2008.
v. Other reserves:
Other reserves comprise:
(a) £483 million which arose in 1998 from merger accounting in a Scheme of Arrangement and Reconstruction whereby British American
Tobacco p.l.c. acquired the entire share capital of B.A.T Industries p.l.c. and the share capital of that company’s principal financial
services subsidiaries was distributed, so effectively demerging them; and
(b) In the 1999 Rothmans transaction, convertible redeemable preference shares were issued as part of the consideration. The discount
on these shares was amortised by crediting other reserves and charging retained earnings. The £90 million balance in other reserves
comprises the accumulated balance in respect of the preference shares converted during 2004.
vi. Treasury shares:
Total equity attributable to owners of the parent is stated after deducting the cost of treasury shares which include £4,823 million
(2020: £4,836 million; 2019: £4,845 million) for shares repurchased and not cancelled and £299 million (2020: £314 million; 2019: £416 million)
in respect of the cost of own shares held in employee share ownership trusts. The reduction in the shares repurchased and not cancelled
is primarily due to shares reissued to satisfy the vesting of U.S. share options.
The previous share buy-back programme was suspended from 30 July 2014. As at 31 December 2021, treasury shares include 6,269,959
(2020: 6,053,158; 2019: 8,275,677) shares held in trust and 161,930,217 (2020: 162,347,246; 2019: 162,645,590) shares repurchased and not
cancelled as part of the Company’s share buy-back programme. From March 2020, the Company has utilised shares acquired in the share
buy-back programme to satisfy shared-based payment awards made to certain employees. On 10 February 2022, the Board approved a
proposed £2 billion share repurchase programme for 2022.
(d) Perpetual hybrid bonds
On 27 September 2021, the Group issued two €1 billion perpetual hybrid bonds amounting to £1,703 million, which have been classified as
equity. Issuance costs of these bonds, amounting to €26 million (£22 million), have been recognised within equity.
These bonds include redemption options exercisable at the Group’s discretion from September 2026 to December 2026 (the 3% perpetual
hybrid bond) and June 2029 to September 2029 (the 3.75% perpetual hybrid bond), on specified dates thereafter, or in the event of specific
circumstances (such as a change in IFRS or tax regime) as set out in the individual terms of each issue.
The coupons associated with these perpetual hybrid bonds are fixed at 3% until 2026 and 3.75% until 2029, respectively, and would reset
to rates determined by the contractual terms of each instrument on certain dates thereafter. The bonds are perpetual in nature and do not
have maturity dates for the repayment of principal. The contractual terms of the perpetual hybrid bonds allow the Group to defer coupon
payments, however certain contingent events could trigger mandatory payments of such deferred coupons, including the payment of
dividends on and the repurchase of ordinary shares, subject to certain exceptions in each case. The full terms and conditions of such
events can be found in the prospectus dated 27 September 2021 which is available under the debt facilities section of the Group’s debt
microsite (bat.com/debt). As the Group has the unconditional right to avoid transferring cash or another financial asset in relation to these
bonds, they are classified as equity instruments in the consolidated financial statements.
During the year, the Group did not defer any eligible coupon payments and in December 2021 paid a coupon of £6 million on the 3%
December 2026 bond which has been recognised within equity. The fair value of these bonds at 31 December 2021 is £1,651 million.
(e) Non-controlling interests
Movements in non-controlling interests primarily relate to profit for the year and dividends (reported as a movement in retained earnings)
and differences on exchange arising from the translation into sterling (reported as a movement in other reserves). Information on
subsidiaries with material non-controlling interests is provided in note 32.
BAT Annual Report and Form 20-F 2021
234
Financial Statements
Notes on Accounts
Continued
22 Capital and Reserves
Continued
(f) Dividends and other appropriations
The interim quarterly dividend payment for the year ended 31 December 2020 of 215.6p per ordinary share (31 December 2019: 210.4p per
ordinary share) was payable in four equal instalments: amounts payable in May 2021 of £1,241 million (May 2020: £1,185 million), August
2021 of £1,228 million (August 2020: £1,195 million), November 2021 of £1,232 million (November 2020: £1,206 million) and £1,236 million in
February 2022 (February 2021: £1,203 million) respectively. The total dividends recognised as an appropriation from reserves in 2021 was
£4,904 million (2020: £4,747 million).
The Board has declared an interim dividend of 217.8p per ordinary share of 25p, for the year ended 31 December 2021, payable in four equal
quarterly instalments of 54.45p per ordinary share in May 2022, August 2022, November 2022 and February 2023. These payments will
be recognised as appropriations from reserves in 2022 and 2023. The total amount payable is estimated to be £5,003 million based on the
number of shares outstanding at the date of these accounts.
23 Borrowings
Currency
Maturity dates
Interest rates
2021
£m
2020
£m
Eurobonds
Euro
2022 to 2045
0.9% to 3.1%
7,316
8,875
Euro*
–
984
UK sterling
2022 to 2055
2.1% to 7.3%
4,086
4,590
Swiss franc
2026
1.4%
203
540
Bonds issued pursuant to Rules under the
U.S.Securities Act (as amended)
U.S. dollar
2022 to 2050
1.7% to 8.1%
25,625
25,461
U.S. dollar
2022
USD 3m LIBOR + 88bps
554
548
Bonds and notes
37,784
40,998
Commercial paper
269
–
Other loans
500
1,929
Bank loans
313
317
Bank overdrafts
346
249
Lease liabilities
446
475
39,658
43,968
* As at 31 December 2021, there were no outstanding floating Eurobonds in euro currency (2020: £984 million, 3M EURIBOR + 50bps).
Perpetual hybrid bonds issued by the Group have been classified as equity (note 22(d)) and therefore excluded from borrowings.
Other loans comprise £500 million (2020: £nil) relating to a bilateral facility and £nil (2020: £1,929 million) relating to a term loan.
Commercial paper is issued at competitive rates to meet short-term borrowing requirements as and when needed.
Current borrowings per the balance sheet include interest payable of £460 million at 31 December 2021 (2020: £499 million).
Included within borrowings are £9,197 million (2020: £5,356 million) of borrowings subject to fair value hedges where their amortised cost
has been increased by £101 million (2020: £173 million).
The fair value of borrowings is estimated to be £40,557 million (2020: £47,029 million) of which £38,683 million (2020: £44,059 million) has
been calculated using quoted market prices and is within level 1 of the fair value hierarchy and £1,874 million (2020: £2,970 million) has been
calculated based on discounted cash flow analysis and is within level 3 of the fair value hierarchy.
Amounts secured on Group assets including property, plant and equipment, inventory and receivables as at 31 December 2021 are
£10 million (2020: £21 million). The majority of lease liabilities are also secured against the associated assets.
Borrowings are repayable as follows:
Per balance sheet
Contractual gross maturities
2021
£m
2020
£m
2021
£m
2020
£m
Within one year
3,992
4,041
4,860
4,901
Between one and two years
2,484
4,049
3,740
5,355
Between two and three years
3,853
2,587
5,092
3,829
Between three and four years
4,090
3,854
5,034
5,095
Between four and five years
2,739
4,108
3,675
5,025
Beyond five years
22,500
25,329
32,203
35,848
39,658
43,968
54,604
60,053
The contractual gross maturities in each year include the borrowings maturing in that year together with forecast interest payments
on all borrowings which are outstanding for all or part of that year.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
235
23 Borrowings
Continued
Borrowings are denominated in the functional currency of the subsidiary undertaking or other currencies as shown below:
Functional
currency
£m
U.S.
dollar
£m
UK
sterling
£m
Euro
£m
Other
currencies
£m
Total
£m
31 December 2021
Total borrowings
30,363
2,837
453
5,775
230
39,658
Effect of derivative financial instruments
– cross-currency swaps
2,219
–
(450)
–(1,973)
(204)
– forward foreign currency contracts
(24)
(464)
–
58
2432
32,558 39,456
2,373
6623
3,860
31 December 2020
Total borrowings
32,000
2,700
43,968452
8,221
595
Effect of derivative financial instruments
– cross-currency swaps
3,795
–
(450)
(3,536) (265)
(456)– forward foreign currency contracts
593
(460)
–
(520)
7394
36,388
2,240
2
7244,165
43,519
The exposure to interest rate changes when borrowings are re-priced is as follows:
Within
1 year
£m
Between
1-2 years
£m
Between
2-3 years
£m
Between
3-4 years
£m
Between
4-5 years
£m
Beyond
5 years
£m
Total
£m
31 December 2021
Total borrowings
3,999
2,477
3,853
4,090
2,73922,500 39,658
Effect of derivative financial instruments
– interest rate swaps
4,192
–
(1,107)(500)
–
(2,585)
–– cross-currency swaps
566
(652)
–
(19)–
(99)(204)
8,757
1,825
3,353 2,964 2,739
19,816
39,454
31 December 2020
Total borrowings
6,519
1,568
2,594
3,855
4,108
25,324
43,968
Effect of derivative financial instruments
– interest rate swaps
219
(219)
– – – – –
– cross-currency swaps
454
–
(744)
–(23)
(143)
(456)
7,192
1,349 1,850
3,855
4,085
25,181
43,512
Lease liabilities are repayable as follows:
Per balance sheet
Contractual gross maturities
2021
£m
2020
£m
2021
£m
2020
£m
Within one year
126
137
142
156
Between one and two years
93
98
106
114
Between two and three years
66
71
76
80
Between three and four years
49
47
56
55
Between four and five years
38
35
43
41
Beyond five years
74
87
103
104
446
475
526
550
For more information on leasing arrangements, refer to note 13(b).
As at 31 December 2021, the Group’s undrawn committed borrowing facilities (note 26) amount to £7,850 million (2020: £9,366 million)
with £4,850 million maturing within one year (2020: £6,366 million maturing within one year), £150 million maturing between three and four
years and with £2,850 million maturing between four and five years (2020: £3,000 million maturing between four to five years).
BAT Annual Report and Form 20-F 2021
236
Financial Statements
Notes on Accounts
Continued
23 Borrowings
Continued
The Group’s composition and movements in net debt are presented below along with a reconciliation to the financing activities
in the Group Cash Flow Statement:
2021
£m
Opening
balance
Cash flow
Foreign
exchange
Fair value,
accrued
interest
andother
Closing
balance
Borrowings (excluding lease liabilities)*
43,493
(3,768) (387)
(126)
39,212
Lease liabilities
475
(154) (22)
147446
Derivatives in respect of net debt (note 19)
(346)
(22)
277
–
(91)
Cash and cash equivalents (note 21)
(3,139)
75
258
(3)
(2,809)
Current investments held at fair value (note 18)
(242) (205) (2)
(7)
(456)
40,241
(4,074)
124
11
36,3022020
£m
Opening
balance
Subsidiaries
acquired
Cash flow
Foreign
exchange
Fair value,
accrued
interest
andother
Closing
balance
Borrowings (excluding lease liabilities)*
44,787
–
(1,049)
(195)
(50)43,493
Lease liabilities
579
1
(164) (24)
83
475
Derivatives in respect of net debt (note 19)
(143)
–
(240)
(134)
171
(346)
Cash and cash equivalents (note 21)
(2,526)
(96)
(768)
264
(13)
(3,139)
Current investments held at fair value (note 18)
(123)
–
(119)
20
(20)
(242)
42,574
(95)
(2,340)
(69)
171
40,241
* Borrowings as at 31 December 2021 include £754 million (2020: £790 million) in respect of the purchase price adjustments relating to the acquisition of Reynolds American.
‘Fair value, accrued interest and other’ movements in lease liabilities in 2021 mainly comprise additions of £147 million (2020: £85 million)
(net of reassessments, modifications and terminations), see note 13(a). The movement of £7 million (2020: £20 million) in current
investments held at fair value represents the fair value gains for these investments.
2021
£m
2020
£m
Cash flows per net debt statement
(4,074)
(2,340)
Non-financing cash flows included in net debt
33
1,129
Interest paid
(1,479)
(1,737)
Interest element of lease liabilities
(23)
(26)
Remaining cash flows relating to derivative financial instruments
251
(43)
Purchases of own shares held in employee share ownership trusts
(82)
(18)
Proceeds from issue of perpetual hybrid bonds
1,681
–
Coupon paid on perpetual hybrid bonds
(6)
–
Dividends paid to owners of the parent
(4,904)
(4,745)
Capital injection from and purchase of non-controlling interests
1
17
Dividends paid to non-controlling interests
(150)
(136)
Other
3
2
Net cash used in financing activities per cash flow statement
(8,749)
( 7,897)
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
237
24 Provisions for Liabilities
Restructuring
of existing
businesses
£m
Employee-
related
benefits
£m
Fox River
£m
Other
provisions
£m
Total
£m
1 January 2021
241
38
70
636 985
Differences on exchange
(13)
(3)
–
(23)
(39)
Provided in respect of the year (*)
32
27
–
199
258
Utilised during the year
(81)
(21)
(8)(241)
(351)
– in respect of MSA litigation (Texas, Minnesota, Mississippi)
– – –
(199) (199)
– in respect of other
(81)
(21)
(8)(42)
(152)
31 December 2021
179
41
62
571
853
Analysed on the balance sheet as
– current
123
14
3168
461
– non-current
56
27
54
255
392
179
41
62
571
853
Restructuring
of existing
businesses
£m
Employee-
related
benefits
£m
Fox River
£m
Other
provisions
£m
Total
£m
1 January 2020
298
28
73
659 1,058
Differences on exchange
5
(2)
–(57)
(54)
Subsidiaries acquired
– – – 6 6
Provided in respect of the year (*)
60
19
–
312
391
– in respect of MSA litigation (Texas, Minnesota, Mississippi)
– – –
212 212
– in respect of other
60
19
–
100
179
Utilised during the year
(122)
(7)
(3)
(284)
(416)
– in respect of excise dispute in Russia
– – –
(226) (226)
– in respect of other
(122)
(7)
(3)
(58)
(190)
31 December 2020
241
38
70
636 985
Analysed on the balance sheet as
– current
165 23
1
409
598
– non-current
76
15
69
227
387
241
38
70
636 985
* Amounts provided above are shown net of reversals of unused provisions which include reversals of £20 million (2020: £72 million) for restructuring of existing businesses, £1 million
(2020: £4 million) for employee benefits and £147 million (2020: £125 million) for other provisions, of which £34 million (2020: £4 million) was reclassified to trade and other payables.
The restructuring provisions relate to the restructuring and integration costs incurred and are reported as adjusting items. The principal
restructuring activities in 2021 and 2020 are as described in note 7 and primarily include the cost of employee packages and long-term
social plans associated with redundancy programmes from previous years. Provisions associated with redundancy packages are
determined based on termination packages offered in each country. The long-term social plans primarily relate to social plans in Germany,
which span over several years and are based on actuarial calculations. These are discounted to present value using Central Bank rates.
We do not consider the effect of discounting to be material. While some elements of the non-current provisions of £56 million will unwind
over several years, as termination payments are made over extended periods in some countries, it is estimated that approximately 97%
ofthese non-current provisions will unwind within five years.
Employee-related benefits mainly relate to employee benefits other than post-employment benefits. The principal components of these
provisions are gratuity and termination awards, ‘jubilee’ payments due after a certain service period and expected payments associated
with long-term disability. The majority of these provisions are calculated by actuaries. It is estimated that approximately 84% of the non-
current provisions of £27 million will unwind within five years.
A provision of £274 million was made in 2011 for a potential claim under a 1998 settlement agreement entered into by a Group subsidiary in
respect of the clean-up of sediment in the Fox River. On 30 September 2014, the Group, NCR, Appvion and Windward Prospects entered
into a funding agreement; the details of this agreement are explained in note 31. This agreement led to payments of £2 million in 2021
(2020: £2 million). In addition, the Group incurred legal costs of £6 million (2020: £1 million), which were also charged against the provision.
It is expected that the non-current provision will unwind within five years.
BAT Annual Report and Form 20-F 2021
238
Financial Statements
Notes on Accounts
Continued
24 Provisions for Liabilities
Continued
Other provisions comprise balances set up in the ordinary course of general business that cannot be classified within the other
categories, such as sales returns and onerous contracts, together with amounts in respect of supplier, excise and other disputes.
The nature of the amounts provided in respect of disputes is such that the extent and timing of cash flows are difficult to estimate and
theultimate liability may vary from the amounts provided. Other provisions also include a provision for interest of £150 million in relation
tothe Franked Investment Income Group Litigation Order (FII GLO), as mentioned in notes 8(b) and 10(b). The provision is calculated
basedon the UK central bank base rate plus 2% and has been charged to net finance costs. As there is uncertainty over the potential
timing of the utilisation, as explained in note 10(b), the provision has been reported as a non-current provision.
In 2020, the Group recognised a provision of US$272 million (£212 million) in relation to the ITG Brands, LLC MSA litigation agreements with
the States of Texas, Minnesota and Mississippi which was utilised in 2021. Further details are provided in note 31.
On 1 March 2019, the Quebec Court of Appeal in Montreal upheld the Superior Court’s decision of May 2015 (reducing ITCAN’s share of
the judgment due to a change in interest computation to a maximum of CAD$9.2 billion). The Court of Appeal also upheld the previously
stated requirements for the defendants to deposit CAD$1.1 billion into an escrow account. The Board of Directors of ITCAN reassessed
the recoverability of the litigation related deposit and, accordingly, the Group recognised a charge against the income statement of
CAD$758 million (£436 million) in 2019, reflecting the amount of the judgment that is considered to be probable and estimable in line with
IAS 37
Provisions, Contingent Liabilities and Contingent Assets
. Consequently, the Group utilised the litigation related deposit which was
shown as a receivable at 31 December 2018 (within trade and other receivables) against the current estimate of the liability and both the
provision and litigation related deposit were reduced accordingly. Further details are provided in note 31.
In 2019, the Group recognised a provision of £252 million in relation to the Russia excise dispute. The provision was utilised in January 2020,
when the tax claim was paid.
25 Trade and Other Payables
2021
£m
2020
£m
Trade payables
3,923
3,722
Duty, excise and other taxes
3,148
3,410
Accrued charges and deferred income
2,095
2,228
FII GLO (note 10(b))
963
963
Social security and other taxation
55
53
Sundry payables
375
381
10,559
10,757
Current
9,577
9,693
Non-current
982
1,064
10,559
10,757
As explained in note 17, the Group acts as a collection agent for banks and other financial institutions in certain debt factoring
arrangements. The cash collected in respect of these arrangements that has not yet been remitted amounts to £137 million
(2020: £128 million) and is included in sundry payables.
In addition, the Group has certain Supply Chain Financing (SCF) or ‘reverse factoring’ arrangements in place. The principal purpose of
these arrangements is to provide the supplier with the option to access liquidity earlier through the sale of its receivables due from
the Group to a bank or other financial institution prior to their due date. Management has determined that the Group’s payables to
these suppliers have neither been extinguished nor have the liabilities been significantly modified by these arrangements. The value of
amounts payable, invoice due dates and other terms and conditions applicable, from the Group’s perspective, remain unaltered, with
only the ultimate payee being changed. At 31 December 2021, the value of amounts payable under the SCF programmes was £251 million
(2020: £48 million). The cash outflows in respect of these arrangements have been recognised within operating cash flows. Included in
this amount is £156 million of leaf payables where the standard payment terms with the vendor is 150 days, consistent with credit terms
normally available in certain markets.
Accrued charges and deferred income include £1 million of deferred income (2020: £nil) and £58 million (2020: £55 million) in respect of
interest payable mainly related to tax matters. FII GLO of £963 million relates to receipts in 2015, in respect of the Franked Investment
Income Government Litigation Order (note 10(b)). Amounts payable to related parties including associated undertakings are shown in
note 30.
There is no material difference between the above amounts for trade and other payables and their fair value due to the short-term
duration of the majority of trade and other payables, as determined using discounted cash flow analysis.
Trade and other payables are predominantly denominated in the functional currencies of subsidiary undertakings with less than 6% in
other currencies (2020: less than 5% in other currencies).
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
239
26 Financial Instruments and Risk Management
Management of financial risks
One of the principal responsibilities of Treasury is to manage the
financial risks arising from the Group’s underlying operations.
Specifically, Treasury manages, within an overall policy framework
set by the Group’s Main Board and Corporate Finance Committee
(CFC), the Group’s exposure to funding and liquidity, interest
rate, foreign exchange and counterparty risks. The Group’s
treasury position is monitored by the CFC which meets regularly
throughout the year and is chaired by the Group Finance Director.
The approach is one of risk reduction within an overall framework
ofdelivering total shareholder return.
The Group defines capital as net debt (note 23) and equity (note
22). There are no externally imposed capital requirements for
the Group. Group policies include a set of financing principles
that provide a framework within which the Group’s capital base
is managed and, in particular, the policies on dividends (as a
percentage of long-term sustainable earnings) and share buy-
back are decided. The key objective of the financing principles is
to appropriately balance the interests of equity and debt holders
in driving an efficient financing mix for the Group. The Group’s
average cost of debt in 2021 is 3.5% (2020: 3.6%).
The Group manages its financial risks in line with the classification
of its financial assets and liabilities in the Group’s balance sheet and
related notes. The Group’s management of specific risks is dealt
with as follows:
Liquidity risk
It is the policy of the Group to maximise financial flexibility and
minimise refinancing risk by issuing debt with a range of maturities,
generally matching the projected cash flows of the Group and
obtaining this financing from a wide range of sources. The Group
has a target 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 2021,
the average centrally managed debt maturity was 10.1 years
(2020: 9.9 years) and the highest proportion of centrally managed
debt maturing in a single rolling year was 18.6.% (2020: 16.4%).
Perpetual hybrid bonds are treated as equity (note 22 (d)) and
therefore not included within the debt maturity analysis.
The Group utilises cash pooling and zero balancing bank account
structures in addition to intercompany loans and borrowings to
mobilise cash efficiently within the Group. The key objectives
of Treasury in respect of cash and cash equivalents are to
protect their principal value, to concentrate cash at the centre,
to minimise the required debt issuance and to optimise the yield
earned. The amount of debt issued by the Group is determined by
forecasting the net debt requirement after the mobilisation of cash.
The Group continues to target a solid investment-grade credit
rating. In January 2017, Moody’s and S&P revised the Group’s rating
to Baa2 and BBB+ with stable outlook, respectively, following the
announcement of the Reynolds American acquisition. The Group’s
strategy is to continue deleveraging and is seeking to recover
to Baa1/BBB+ in the medium term. The Group is confident of its
continued ability to successfully access the debt capital markets
for future refinancing requirements.
As part of its short-term cash management, the Group invests
in a range of cash and cash equivalents, including money market
funds, which are regarded as highly liquid and are not exposed to
significant changes in fair value. These are kept under continuous
review as described in the credit risk section below. At 31 December
2021, the Group does not have any investments in money market
funds (2020: £nil).
As part of its working capital management, in certain countries,
theGroup has entered into factoring arrangements and supply
chain financing arrangements. These are explained in further detail
in note 17 and note 25.
Subsidiary companies are funded by share capital and retained
earnings, loans from the central finance companies on commercial
terms, or through local borrowings by the subsidiaries in
appropriate currencies to predominantly fund short- to medium-
term working capital requirements.
Available facilities in current year:
It is Group policy that short-term sources of funds (including
drawings under both the Group US$4 billion U.S. commercial paper
(U.S. CP) programme and the Group £3 billion euro commercial
paper (ECP) programme) are backed by undrawn committed
lines of credit and cash. Commercial paper is issued by B.A.T.
International Finance p.l.c, B.A.T. Netherlands Finance B.V. and B.A.T
Capital Corporation and guaranteed by British American Tobacco
p.l.c.. At 31 December 2021, commercial paper of £269 million was
outstanding (2020: £nil). Cashflows relating to commercial paper
that have maturity periods of three months or less are presented
on a net basis in Group’s cash flow statement.
At 31 December 2021, the Group had access to a £5.85 billion
revolving credit facility. This facility was undrawn at 31 December
2021. In 2021, the Group exercised the first of the one-year
extension options on both tranches of the revolving credit facility
with the second one-year extension subsequently exercised in
February 2022. Effective March 2022, therefore, the £2.85 billion
364-day tranche will be extended to March 2023 at the reduced
amount of £2.7 billion and £2.5 billion of the five-year tranche will
be extended from March 2026 to March 2027 (with £3.0 billion of
this tranche remaining available until March 2025 and £2.85 billion
remaining available from March 2025 to March 2026).
During 2021, the Group extended short-term bilateral facilities
totalling £2.5 billion until March or April 2022, some with extension
options to extend for further periods. As at 31 December 2021,
£500 million was drawn on a short-term basis. Of such short-
term bilateral facilities, in December 2021, the Group amended
and extended a total of £500 million until December 2022 and
subsequent to year end, the Group amended and extended a
further £500 million until January 2023 and effective April 2022, an
additional £350 million was agreed to be extended until October
2022 and £500 million until April 2023. Cashflows relating to
bilateral facilities that have maturity periods of three months or less
are presented on a net basis in the Group’s cash flow statement.
BAT Annual Report and Form 20-F 2021
240
Financial Statements
Notes on Accounts
Continued
26 Financial Instruments and Risk Management
Continued
Issuance, drawdowns and repayments in current year:
–
In February 2021, the Group repaid a €650 million bond
at maturity;
–
In June 2021, the Group repaid £500 million of the £1,929 million
term loan that has a maturity date in January 2022; the remaining
£1,429 million was repaid in September 2021;
–
In July, August, September and November 2021, the Group repaid
£500 million, €1,100 million, CHF 400 million and €500 million of
bonds at maturity, respectively; and
–
The Group issued perpetual hybrid bonds totalling €2 billion in
September 2021. Please refer to note 22(d) for further details.
Available facilities in prior year:
In March 2020, the Group refinanced its £6 billion revolving
credit facility consisting of a £3 billion 364-day tranche (with
two one-year extension options and a one-year term-out option),
and a £3 billion five-year tranche (with two one-year extension
options). The facility no longer contains a financial covenant. As at
31 December 2020, the facility was undrawn.
In March and April 2020, the Group arranged short-term bilateral
facilities with core relationship banks for a total amount of
approximately £4.8 billion, strengthening the Group’s liquidity
position and further mitigating liquidity risks during the COVID-19
crisis. The bilateral facilities have since been reduced to a total
amount of approximately £3.4 billion. At 31 December 2020, these
facilities were undrawn.
Issuance, drawdowns and repayments in prior year:
–
In April 2020, the Group accessed the U.S. dollar market under
its SEC Shelf Programme, raising a total of US$2.4 billion across
three tranches. Additionally, the Group accessed the European
market under its EMTN programme, raising a total of €1.7 billion
across two tranches;
–
In May and June 2020, the Group repaid US$750 million and
US$770.8 million bonds at maturity, respectively. Additionally, in
June 2020, the Group raised £500 million in the sterling market
under its EMTN Programme;
–
In July 2020, the Group repaid a €600 million bond and a
£1.9 billion term loan at maturity, and in August 2020, the Group
repaid a US$1 billion bond at maturity;
–
In September 2020, the Group accessed the U.S. dollar market
under its SEC Shelf programme, raising a total of US$6.25 billion
across five tranches. The Group also made a tender offer to
repurchase portions of seven series of bonds prior to their
maturities. The tender offer was completed in October 2020,
totalling US$3.2 billion under five series of bonds, £70 million
and €100 million under two separate series of bonds, all of which
would have otherwise matured in 2021 and 2022; and
–
In October 2020, the Group exercised the make whole
redemption provision to fully redeem the remaining amounts
outstanding following the tender offer on three series of bonds
that would have otherwise matured in 2022. In November 2020,
the balance outstanding on these bonds was repurchased,
totalling US$597.6 million.
Currency risk
The Group is subject to exposure on the translation of the net
assets of foreign currency subsidiaries and associates into its
reporting currency, sterling. The Group’s primary balance sheet
translation exposures are to the U.S. dollar, Canadian dollar, euro,
Danish krone, Swiss franc, South African rand, Russian rouble,
Brazilian real, Australian dollar, Malaysian ringgit, Singaporean
dollar and Indian rupee. These exposures are kept under continuous
review. The Group’s policy on borrowings is to broadly match the
currency of these borrowings with the currency of cash flows
arising from the Group’s underlying operations. Within this overall
policy, the Group aims to minimise all balance sheet translation
exposure where it is practicable and cost-effective to do so
through matching currency assets with currency borrowings.
The main objective of these policies is to protect shareholder value
by increasing certainty and minimising volatility in earnings per
share. At 31 December 2021, the currency profile of the Group’s
gross debt, after taking into account derivative contracts, was
68% U.S. dollar (2020: 63%), 13% euro (2020: 13%), 13% sterling
(2020: 19%) and 6% other currencies (2020: 5% other currencies).
The Group faces currency exposures arising from the translation
of profits earned in foreign currency subsidiaries and associates
and joint arrangements; these exposures are not normally hedged.
Exposures also arise from:
(i) foreign currency denominated trading transactions undertaken
by subsidiaries. These exposures comprise committed and highly
probable forecast sales and purchases, which are offset wherever
possible. The remaining exposures are hedged within the Treasury
policies and procedures with forward foreign exchange contracts
and options, which are designated as hedges of the foreign
exchange risk of the identified future transactions; and
(ii) forecast dividend flows from subsidiaries to the centre.
To ensure cash flow certainty, the Group enters into forward
foreign exchange contracts which are designated as net
investment hedges of the foreign exchange risk arising from the
investments in these subsidiaries.
IFRS 7 requires a sensitivity analysis that shows the impact on
the income statement and on items recognised directly in other
comprehensive income of hypothetical changes of exchange rates
in respect of non-functional currency financial assets and liabilities
held across the Group. All other variables are held constant
although, in practice, market rates rarely change in isolation.
Financial assets and liabilities held in the functional currency of the
Group’s subsidiaries, as well as non-financial assets and liabilities
and translation risk, are not included in the analysis. The Group
considers a 10% strengthening or weakening of the functional
currency against the non-functional currency of its subsidiaries
as a reasonably possible change. The impact is calculated with
reference to the financial asset or liability held as at the year-end,
unless this is unrepresentative of the position during the year.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
241
26 Financial Instruments and Risk Management
Continued
A 10% strengthening of functional currencies against non-
functional currencies would result in pre-tax profit being £53 million
lower (2020: £61 million lower; 2019: £16 million lower) and items
recognised directly in other comprehensive income being
£144 million higher (2020: £57 million higher; 2019: £22 million
lower). A 10% weakening of functional currencies against non-
functional currencies would result in pre-tax profit being £65 million
higher (2020: £74 million higher; 2019: £20 million higher) and
items recognised directly in other comprehensive income being
£177 million lower (2020: £70 million lower; 2019: £27 million higher).
The exchange sensitivities on items recognised directly in other
comprehensive income relate to hedging of certain net asset
currency positions in the Group, as well as on cash flow hedges in
respect of future transactions, but do not include sensitivities in
respect of exchange on non-financial assets or liabilities.
Interest rate risk
The objectives of the Group’s interest rate risk management policy
are to lessen the impact of adverse interest rate movements
on the earnings, cash flow and economic value of the Group.
Additional objectives are to minimise the cost of hedging and the
associated counterparty risk.
During 2020, the Group financial covenant, being gross interest cover,
was removed from the centrally managed banking facilities.
In order to manage its interest rate risk, the Group maintains both
floating rate and fixed rate debt. The Group sets targets (within
overall guidelines) for the desired ratio of floating to fixed rate debt
on a net basis (at least 50% fixed on a net basis in the short to
medium term) as a result of regular reviews of market conditions
and strategy by the Corporate Finance Committee and the board
of the main central finance company. At 31 December 2021, the
relevant ratios of floating to fixed rate borrowings were 10:90
(2020:7:93) on a net basis. Underlying borrowings are arranged on
both a fixed rate and a floating rate basis and, where appropriate,
the Group uses derivatives, primarily interest rate swaps to vary
the fixed and floating mix, or forward starting swaps to manage
the refinancing risk. The interest rate profile of liquid assets is taken
into account in determining the net interest rate exposure.
IFRS 7 requires a sensitivity analysis that shows the impact on
the income statement and on items recognised directly in other
comprehensive income of hypothetical changes of interest rates
in respect of financial assets and liabilities of the Group. All other
variables are held constant although, in practice, market rates
rarely change in isolation. For the purposes of this sensitivity
analysis, financial assets and liabilities with fixed interest rates
are not included. The Group considers a 100 basis point change in
interest rates a reasonably possible change except where rates are
less than 100 basis points. In these instances, it is assumed that the
interest rates increase by 100 basis points and decrease to zero for
the purpose of performing the sensitivity analysis. The impact is
calculated with reference to the financial asset or liability held as at
the year-end, unless this is unrepresentative of the position during
the year.
A 100 basis point increase in interest rates would result in
pre-tax profit being £44 million lower (2020: £31 million lower;
2019: £143 million lower). A 100 basis point decrease in interest rates,
or less where applicable, would result in pre-tax profit being £47 million
higher (2020: £29 million higher; 2019: £108 million higher). The effect
of these interest rate changes on items recognised directly in other
comprehensive income is not material in either year.
In accordance with the UK Financial Conduct Authority’s
announcement on 27 July 2017, and following the decision taken
by global regulators in 2018 to replace Interbank Offered Rates
with alternative nearly risk-free rates, such benchmark rates are
expected to be largely discontinued after 2021. The IASB addressed
the effects of interest rate benchmark reform on financial
reporting, with two phases of Amendments to IFRS 9
Financial
Instruments
(and other Standards) which the Group adopted in its
Year End 2019 and 2020 accounts, respectively, as explained in the
accounting policies (note 1). The impact on the Group’s profit or
equity from the application of these amendments was not material.
In January 2021, the Group confirmed adherence to the ISDA 2020
IBOR Fallbacks Protocol as published by the International Swaps
and Derivatives Association, Inc. (ISDA) on 23 October 2020 (the
Protocol), ensuring that appropriate fallback rates can apply to
derivatives in the event of LIBOR discontinuation.
As at 31 December 2021, the Group has a floating rate bond with a
nominal value US$750 million (£554 million) (2020: US$750 million
(£549 million)) that is due to mature in August 2022 before
USD LIBOR ceases. £1,929 million of floating rate borrowings
outstanding at 31 December 2020 were repaid during the year.
In addition, the Group has bilateral facilities totalling £2.5 billion
of which £500 million was drawn down at 31 December 2021.
The contractual language on these facilities was updated during
2021 such that all drawings are based on SONIA with effect from
the end of November 2021. The Group’s syndicated revolving
credit facility (undrawn at 31 December 2021 and 2020) has
historically had references to USD LIBOR, EURIBOR and GBP
LIBOR. This facility includesmarket standard LIBOR replacement
language, and with effect from June 2021 the agreement has
adopted SOFR and SONIA as the alternative benchmark rates in
respect of USD LIBOR and GBP LIBOR, respectively.
Following announcements by the respective regulators, EURIBOR
and USD LIBOR are now expected to continue for the foreseeable
future, with USD LIBOR rates potentially discontinued after
June 2023.
The Group has a total of nine derivatives that may be impacted by
an interest rate benchmark reform of which two are free-standing
derivatives (EUR interest rate swaps) maturing in January 2023
with nominal values of €750 million (£630 million). There are
three derivatives (USD interest rate swaps) in fair value hedge
relationship with nominal value US$300 million (£221 million)
maturing in June 2022 (before USD LIBOR cessation) and therefore
no further exposure arises.
The remaining four impacted derivatives (cross currency
interest rate swaps) with nominal values totalling €800 million
(£672 million) maturing in October 2023 are in fair value hedge
relationships which are indexed to the sterling LIBOR interest
rates. The Group is party to the ISDA fallback protocol and in
January 2022, it automatically replaced the GBP LIBOR with an
economically equivalent interest rate derivatives referencing
SONIA on their reset date. The Group has updated the respective
hedge documentation accordingly since the uncertainty regarding
the transition for these four derivatives has ceased. The hedge
relationship on these derivatives will continue with any resulting
ineffectiveness likely to be immaterial.
BAT Annual Report and Form 20-F 2021
242
Financial Statements
Notes on Accounts
Continued
26 Financial Instruments and Risk Management
Continued
The Group therefore believes that any outstanding contracts
on 1 January 2022 with interest rates based on LIBOR or similar
benchmarks will adequately provide for alternate calculations
ofinterest in the event that they are unavailable.
Credit risk
The Group has no significant concentrations of customer credit
risk. Subsidiaries have policies in place requiring appropriate
credit checks on potential customers before sales commence.
The process for monitoring and managing credit risk once sales
tocustomers have been made varies depending on local practice
inthe countries concerned.
Certain territories have bank guarantees, other guarantees or
credit insurance provided in the Group’s favour in respect of Group
trade receivables, the issuance and terms of which are dependent
on local practices in the countries concerned. All derivatives are
subject to ISDA agreements or equivalent documentation.
Cash deposits and other financial instruments give rise to
credit risk on the amounts due from the related counterparties.
Generally, the Group aims to transact with counterparties with
strong investment grade credit ratings. However, the Group
recognises that due to the need to operate over a large geographic
footprint, this will not always be possible. Counterparty credit risk
is managed on a global basis by limiting the aggregate amount
and duration of exposure to any one counterparty, taking into
account its credit rating. The credit ratings of all counterparties
arereviewed regularly.
The Group ensures that it has sufficient counterparty credit
capacity of requisite quality to undertake all anticipated
transactions throughout its geographic footprint, while at the same
time ensuring that there is no geographic concentration in the
location of counterparties.
With the following exceptions, the maximum exposure to the credit
risk of financial assets at the balance sheet date is reflected by the
carrying values included in the Group’s balance sheet. The Group
has entered into short-term risk participation agreements in
relation to certain leaf supply arrangements and the maximum
exposure under these would be £89 million (2020: £88 million).
In addition, the Group has entered into a guarantee arrangement
to support a short-term bank credit facility with distribution
and supply chain partner. The maximum exposure under the
arrangement would be £1 million (2020: £36 million).
Price risk
The Group is exposed to price risk on investments held by the
Group, which are included in investments held at fair value on
the consolidated balance sheet, but the quantum of such is
not material.
Hedge accounting
In order to qualify for hedge accounting, the Group is required
to document prospectively the economic relationship between
the item being hedged and the hedging instrument. The Group
is also required to demonstrate an assessment of the economic
relationship between the hedged item and the hedging instrument,
which shows that the hedge will be highly effective on an ongoing
basis. This effectiveness testing is repeated periodically to ensure
that the hedge has remained, and is expected to remain, highly
effective. The prospective effectiveness testing determines that an
economic relationship between the hedged item and the hedging
instrument exists.
In accordance with the Group Treasury Policy, the exact hedge
ratios and profile of a hedge relationship will depend on several
factors, including the desired degree of certainty and reduced
volatility of net interest costs and market conditions, trends
and expectations in the relevant markets. The sources of
ineffectiveness include spot and forward differences, impact of
time value and timing differences between periods in the hedged
item and hedging instrument.
The Group’s risk management strategy has been explained in
further detail under the interest rate risk and currency risk sections
of this note.
Fair value estimation
The fair values of financial assets and liabilities with maturities
of less than one year, other than derivatives, are assumed to
approximate their book values. For other financial instruments
which are measured at fair value in the balance sheet, the basis
forfair values is described below.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
243
26 Financial Instruments and Risk Management
Continued
Fair value hierarchy
The following table presents the Group’s financial assets and liabilities that are measured at fair value in accordance with IFRS 13
classification hierarchy:
2021
2020
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Assets at fair value
Investment held at fair value (note 18)
405
–
101
506
171
–
93
264
Derivatives relating to
– interest rate swaps (note 19)
–
33
–33
–
65
–65
– cross-currency swaps (note 19)
–
221
–221
–
444
–444
– forward foreign currency contracts
(note 19)
–
171
–171
–
288
–288
Assets at fair value
405
425
101
931
171
797
93
1,061
Liabilities at fair value
Derivatives relating to
– interest rate swaps (note 19)
–
36
–36
–
53
–53
– cross-currency swaps (note 19)
–
35
–35
– – – –
– forward foreign currency contracts
(note 19)
–
243
–243
–
266
–266
Liabilities at fair value
–
314
–314
–
319
–319
Level 2 financial instruments are not traded in an active market, but the fair values are based on quoted market prices, broker/dealer
quotations, or alternative pricing sources with reasonable levels of price transparency. The Group’s level 2 financial instruments include
OTC derivatives.
Netting arrangements of derivative financial instruments
The gross fair value of derivative financial instruments as presented in the Group balance sheet, together with the Group’s rights of offset
associated with recognised financial assets and recognised financial liabilities subject to enforceable master netting arrangements and
similar agreements, is summarised as follows:
2021
2020
Amount
presented in
the Group
balance
sheet*
£m
Related
amounts
not offset in
the Group
balance
sheet
£m
Net
amount
£m
Amount
presented in
the Group
balance
sheet*
£m
Related
amounts
not offset in
the Group
balance
sheet
£m
Net
amount
£m
Financial assets
– Derivative financial instruments (note 19)
425
(184)
241
797
(237)
560
Financial liabilities
– Derivative financial instruments (note 19)
(314)
184
(130)
(319)
237
(82)
111
–
111478
–
478* No financial instruments have been offset in the Group balance sheet.
The Group is subject to master netting arrangements in force with financial counterparties with whom the Group trades derivatives.
The master netting arrangements determine the proceedings should either party default on their obligations. In case of any event of
default, the non-defaulting party will calculate the sum of the replacement cost of outstanding transactions and amounts owed to it
bythe defaulting party. If that sum exceeds the amounts owed to the defaulting party, the defaulting party will pay the balance to the
non-defaulting party. If the sum is less than the amounts owed to the defaulting party, the non-defaulting party will pay the balance to
thedefaulting party.
BAT Annual Report and Form 20-F 2021
244
Financial Statements
Notes on Accounts
Continued
26 Financial Instruments and Risk Management
Continued
The hedged items by risk category are presented below:
2021
Carrying
amount of the
hedgeditem
£m
Accumulated
amount of fair
value hedge
adjustments
on the hedged
item included
in the carrying
amount of the
hedgeditem
£m
Line item in
the statement
of financial
position where
the hedged item
isincluded
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Cash flow
hedgereserve
(gross of tax)
£m
Fair value hedges
Interest rate risk
– borrowings (liabilities)
9,197
101
Borrowings
87
Cash flow hedges
Interest rate risk
– borrowings (liabilities)
2,132
Borrowings
(69)
(538)
2020
Carrying
amount of the
hedgeditem
£m
Accumulated
amount of fair
value hedge
adjustments
on the hedged
item included
in the carrying
amount of the
hedgeditem
£m
Line item in
the statement
of financial
position where
the hedged item
is included
Changes in fair
value used for
calculating
hedge
ineffectiveness
£m
Cash flow
hedgereserve
(gross of tax)
£m
Fair value hedges
Interest rate risk
– borrowings (liabilities)
5,356
173
Borrowings
(57)
Cash flow hedges
Interest rate risk
– borrowings (liabilities)
2,816
Borrowings
155
(628)
£368 million (2020: £392 million) of the Group’s borrowings are designated as net investment hedge instruments of the Group’s net
investments in foreign operations. In line with the Group’s risk management policies, the net investment hedge relationships are reviewed
periodically. A number of these relationships had matured in 2019. The change in the value used for calculating hedge ineffectiveness for
hedged items designated under net investment hedge relationships is £24 million (2020: £21 million).
As at 31 December 2021, the accumulated balance of the cash flow hedge reserve was a loss of £363 million (2020: loss of £504 million)
including an accumulated loss of £538 million (2020: loss of £628 million) in relation to interest rate exposure and foreign currency
exposure arising from borrowings held by the Group, and an accumulated gain of £116 million (2020: gain of £139 million) in relation to
deferred tax arising from cash flow hedges. The remainder related to the Group’s foreign currency exposure on forecasted transactions
and cost of hedging (note 22(c)(ii)).
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
245
27 Changes in the Group
(a) Acquisitions
The Group acquired certain businesses and other tobacco assets
as noted below. The financial impact of these transactions to the
Group were immaterial individually and in aggregate. Except as
noted, there were no material differences between the fair value
and book values of net assets acquired in business combinations.
On 12 November 2020, the Group acquired 100% of the share
capital in
Eastern Tobacco Company for Trading
, formerly known
as Rafique Mohammed Sudki Jad Establishment for Trading when
acting as BAT’s distributor in Saudi Arabia (KSA), for £50 million
(SAR 246 million). Goodwill of £36 million, representing anticipated
synergies, and trademarks and similar intangibles of £39 million, as
well as £96 million of cash and cash equivalents, were recognised
on acquisition.
On 8 April 2019, the Group via its U.S. subsidiary R.J. Reynolds Vapor
Company (RJR Vapor), acquired a 45% stake in
VapeWild Holdings
LLC
, a vertically integrated vapour manufacturer and retailer
for US$40 million. This was followed by a further acquisition of
15% on 24 June 2019 for US$8 million, giving the Group a 60%
interest for US$48 million (£36 million). The Group consolidated
VapeWild as a subsidiary from the date of the first investment.
Goodwill of £11 million, representing a strategic premium to enter
this segment of the U.S. vapour market, and trademarks and
similar intangibles of £39 million were recognised on acquisition.
Following the announcements with regard to flavours in vapour
in the U.S., goodwill was impaired in full in 2019. The business
was subsequently discontinued and liquidation proceedings
commenced in December 2020.
On 21 December 2017, the Group signed an agreement to acquire
100% of the share capital of
Twisp Proprietary Limited
, a South
African e-cigarette/nicotine vapour company with a market
share of circa 70% within South Africa and a leading presence in
shopping malls via its branded kiosks outlets. Completion of the
proposed acquisition was conditional upon South African anti-
trust clearance, which was given in the second half of 2019 and
BAT acquired control on 30 September 2019 for a purchase price
of £25 million of which £6 million was deferred and contingent
upon future performance in the market. Goodwill of £12 million,
representing a strategic premium to enter this segment of
the South African vapour market, and trademarks and similar
intangibles of £15 million were recognised on acquisition. Due to
difficult trading conditions, the goodwill and intangibles were fully
impaired in 2020 and deferred consideration adjusted by £3 million.
The final payment of deferred consideration of £3 million was paid
in 2021.
On 5 May 2017, the Group acquired certain tobacco assets, including
a distribution company,
Express Logistic and Distribution EOOD
(ELD)
, from Bulgartabac Holding AD in Bulgaria. The assets acquired,
including brands and other intangibles of £117 million, were purchased
for a total consideration of £110 million, of which £28 million was
contingent upon future performance in the market. £14 million of this
was paid during 2018 and £13 million of this was paid during 2019.
Subsequently, ELD was disposed of in 2019 at carrying value.
On 4 January 2017, the Group completed the acquisition of 100% of
Winnington Holding AB
, a Swedish manufacturer of ‘white’ snus,
for a purchase price of £31 million. Goodwill of £8 million and brands
and similar intangibles of £28 million were recognised. £8 million of
the consideration was contingent on post-acquisition targets being
met and was substantially settled in January 2019.
On 17 November 2015, the Group acquired 100% of
Blue Nile
Cigarette Company Limited
from a private shareholder. The fair
value of the consideration payable was £45 million of which £8 million
was contingent on achievement of certain post-acquisition targets.
Subsequent payments in respect of this were £1 million in 2016,
£5 million in 2017, £1 million in 2018 and £1 million in 2019.
On 30 September 2015, the Group acquired
TDR
and other
tobacco and retail assets from Adris Grupa d.d. (Adris) for a total
enterprise value of €550 million. Part of the consideration was
contingent upon certain targets being met post-acquisition,
and £5 million of this was paid in January 2017. In 2019, the Group
reached an agreement with Adris regarding the level of contingent
consideration such that any remaining amounts would not be
paid by the Group and the Group received €3 million in full and
final settlement of all claims between Adris and the Group.
Consequently, €9 million of cash and deferred consideration was
recognised as other income (note 7).
(b) Non-controlling interests
In 2021, the Group made a capital contribution to
Brascuba
Cigarrillos S.A.
at a cost of £6 million (2020: £17 million;
2019: £20 million). This contribution was in proportion to a capital
contribution made by the non-controlling interest to the company
and as such, the Group’s shareholding remains unchanged.
In addition, in 2021, as part of a Voluntary Tender Offer for the non-
controlling interests of the Group’s Indonesian subsidiary, the Group
acquired 0.2% additional shares at a cost of £4 million as explained in
note 30.
Also in 2021, the Group acquired a further 2.7% in
Hrvatski Duhani
d.d. Tobacco Leaf Processing
at a cost of £1 million.
(c) Other transactions
(i) Organigram
On 11 March 2021, the Group announced a strategic collaboration
agreement with Organigram Inc., a wholly owned subsidiary of
publicly traded Organigram Holdings Inc. (collectively, Organigram).
Under the terms of the transaction, a Group subsidiary acquired
a 19.9% equity stake in Organigram Holdings Inc. (listed on both
the Nasdaq and Toronto Stock Exchange under the symbol ‘OGI’)
to become its largest shareholder, with the ability to appoint two
directors to Organigram Holdings Inc.’s board of directors and
representation on its investment committee. At closing, one BAT
nominee, Mr. Jeyan Heper, was added to the board. A second
nominee and a replacement for Mr. Heper, who resigned on
31 October 2021, are expected to be proposed in due course.
The Group accounts for the investment as an associate.
The Group’s investment provides a significant injection of capital for
Organigram that will enable them to expand and accelerate their R&D
and product development activities and support business expansion.
The Group’s investment of £129 million has been allocated against the
Group’s share of Organigram’s net assets, including the recognition
of £49 million of intangibles, and goodwill of £30 million, which
represents a strategic premium to enter the legal cannabis market in
North America.
During 2021, Organigram acquired all of the issued and outstanding
shares of The Edibles & Infusions Corporation (EIC) for an initial
consideration of CAD$22 million, payable in shares.
BAT Annual Report and Form 20-F 2021
246
Financial Statements
Notes on Accounts
Continued
27 Changes in the Group
Continued
Organigram also acquired all of the issued and outstanding shares
of Laurentian Organic Inc. for consideration of CAD$36 million,
payable in cash and shares. The impact of these transactions on
the Group was not material. As a result of these transactions, the
Group’s shareholding was reduced to 18.8%. Potential additional
shares are payable on both transactions upon the acquired
businesses achieving certain earnout milestones. The transactions
and results of these changes are immaterial to the Group and
organic measures, excluding the results of these acquisitions, are
not presented.
(ii) Other acquisitions
During 2021, the Group increased its ownership of a wholesale
producer and distributor operating in the agriculture sector
based in Uzbekistan,
FE “Samfruit” JSC
to 42.61%, for £1 million. During 2020, the ownership was increased to 38.63%, for £5 million.
On 20 October 2020, the Group acquired the formulations, brands,
associated know-how and other relevant assets owned by
Dryft
Sciences, LLC
(DSL) relating to its white nicotine pouch products
for consideration of up to US$150 million payable in accordance
with the achievement of certain milestones. The transaction
has been accounted for as an asset acquisition, rather than
as a business combination, as the intellectual property and
associated assets acquired do not represent an integrated set of
activities required by IFRS for business combination accounting.
Consequently, the consideration payable has been assigned to the
acquired assets by relative fair value.
On 10 January 2019, the Group acquired a minority stake in
AYR Limited
, a vapour technology company based in the UK,
for £8 million, with the potential to increase this in the future.
The investment terms also provide for the Group and AYR to agree
a commercial collaboration agreement under which the Group and
AYR will jointly develop future vaping products.
(d) Disposals
On 25 June 2021, the Group agreed to dispose of its Iranian
subsidiary,
B.A.T. Pars Company PJSC
(BAT Pars) to DTM ME FZE
LLC. Accordingly, BAT Pars was classified as held-for-sale at that
date and £152 million of assets, primarily comprised £98 million of
cash and cash equivalents, £38 million of inventory and £14 million
of property, plant and equipment, were transferred to held-for-sale
assets. Also, £24 million of liabilities, primarily comprised £10 million
of trade creditors and £8 million of corporation tax payable, were
transferred to held-for-sale liabilities. Subsequently an impairment
charge and associated costs of £88 million was recognised in the
income statement and treated as an adjusting item.
Completion took place on 6 August 2021. The value of the
consideration, in Euros, is subject to the finalisation of the
completion accounts process, as well as various other
matters, with payment deferred until September 2022.
Discounted estimated proceeds of £45 million have been
recognised as a current receivable. At 31 December 2021, a credit
of £2 million was recognised in operating profit in relation to a
partial unwind of discounting on the deferred proceeds. In addition,
£272 million in respect of foreign exchange previously recognised in
other comprehensive income has been reclassified to the income
statement. The financial impact of this has also been treated as an
adjusting item.
The held-for-sale impairment charge of £83 million and the foreign
exchange reclassification of £272 million which were charged to
the income statement have been included as non-cash items in the
cash flow statement.
In compliance with IAS 7
Statement of cash flows
, the £98 million
of cash and cash equivalents held at the date of disposal have been
reported as a cash outflow under investing activities.
In addition, £24 million of related investments held at fair value
were provided against as a charge to net finance costs given
uncertainties regarding recovery of these funds.
28 Share-based Payments
The Group operates a number of share-based payment
arrangements of which the two principal ones are:
Long-Term Incentive Plan (LTIP)
Awards granted from 2020 under the Long-Term Incentive Plan are
the Performance Share Plan and the Restricted Share Plan with the
following conditions:
Performance Share Plan (PSP):
nil-cost options released three
years from date of grant. Payout is subject to performance
conditions based on earnings per share (40% of grant), operating
cash flow (20% of grant), total shareholder return (20% of
grant)and net turnover (20% of grant)in 2021, 2020 and 2019.
Total shareholder return combines the share price and dividend
performance of the Company by reference to one comparator
group. Participants are not entitled to dividends prior to the
exercise of the options. A cash equivalent dividend accrues through
the vesting period and is paid on vesting. Both equity and cash-
settled PSP awards are granted in March each year.
Restricted Share Plan (RSP):
Nil-cost options released three years
from date of grant and may be subject to forfeit if a participant
leaves employment before the end of the three-year holding period.
Participants are not entitled to dividends prior to the exercise of the
options. A cash equivalent dividend accrues through the vesting
period and is paid on vesting. Both equity- and cash-settled RSP
awards are granted in March.
Awards granted in 2019 are nil-cost options exercisable after
three years from date of grant with a contractual life of 10 years.
The performance conditions and the dividend entitlement attached
to these awards are identical to the PSP award mentioned above.
Both equity and cash-settled LTIP awards were granted in March.
Following the acquisition of Reynolds American on 25 July 2017,
underlying Reynolds American shares for LTIPs were replaced with
BAT American Depositary Shares (ADS). LTIP awards for ADSs
are measured against the performance conditions of Reynolds
American at the maximum of 150% at the vesting date. Equity-
settled LTIPs were granted by Reynolds American in March each
year with options exercisable after three years from the date of
grant with the payment made no later than 90 days from date of
vesting. Participants are not entitled to dividends prior to exercise
of the options.
Deferred Share Bonus Scheme (DSBS)
Free ordinary shares released three years from date of grant and
may be subject to forfeit if a participant leaves employment before
the end of the three-year holding period. Participants receive
a separate payment equivalent to a proportion of the dividend
payment during the holding period. Both equity- and cash-settled
deferred shares are granted in March each year.
The Group also has a number of other arrangements which are not
material for the Group and these are as follows:
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
247
28 Share-based Payments
Continued
Sharesave Scheme (SAYE)
Options granted in March each year from 2011 onwards (previously, November until 2009, and no options were granted during 2010) by
invitation at a 20% discount to the market price. Options to this equity-settled scheme are exercisable at the end of a three-year or five-
year savings contract. Participants are not entitled to dividends prior to the exercise of the options. The maximum amount that can be
saved by a participant in this way is £6,000 in any tax year.
Share Reward Scheme (SRS) and International Share Reward Scheme (ISRS)
Free shares granted in April each year (maximum £3,600 in any year) under the equity-settled schemes are subject to a three-year holding
period. Participants receive dividends during the holding period which are reinvested to buy further shares.
Partnership Share Scheme
Open to all eligible employees, where employees can allocate part of their pre-tax salary to purchase shares in British American Tobacco
p.l.c. The maximum amount that can be allocated in this way to any individual is £1,800 in any tax year. The shares purchased are held in a
UK-based trust and are normally capable of transfer to participants tax-free after a five-year holding period.
Share-based payment expense
The amounts recognised in the income statement in respect of share-based payments were as follows:
2021
2020 2019
Equity-
settled
£m
Cash-
settled
£m
Equity-
settled
£m
Cash-
settled
£m
Equity-
settled
£m
Cash-
settled
£m
LTIP (note (a))
30
–
36
–
58
1DSBS (note (b))
39
2
44
3
50
4Other schemes
7 –
8 – 7 –
Total recognised in the income statement (note 3)
76
2
88
3
115
5Share-based payment liability
The Group issues to certain employees cash-settled share-based payments that require the Group to pay the intrinsic value of these
share-based payments to the employee at the date of exercise. The Group has recorded liabilities in respect of vested and unvested
grants at the end of 2021 and 2020:
2021
2020
Vested
£m
Unvested
£m
Vested
£m
Unvested
£m
LTIP
0.1 1.1
0.3
1.5
DSBS
0.1
6.4
0.2
5.7
Total liability
0.2
7.5
0.5
7.2
(a) Long-Term incentive Plan
Details of the movements for the equity- and cash-settled LTIP scheme during the years ended 31 December 2021 and 31 December 2020,
were as follows:
2021
2020
Equity-
settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
Equity-
settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
Outstanding at start of year
10,000
274
9,193
318
Granted during the period
3,440
81
3,856
109
Exercised during the period
(1,639)
(48)
(1,590) (63)
Forfeited during the period
(1,910)
(64)
(1,459) (90)
Outstanding at end of year
9,891
243
10,000
274
Exercisable at end of year
611
29
690
27
As at 31 December 2021, the Group has 9,891,000 shares (2020: 10,000,000 shares) outstanding which includes 2,650,364 shares (2020: 2,876,738
shares) which are related to Reynolds American LTIP awards from which nil shares (2020: nil shares) are exercisable at the end of the year.
The weighted average British American Tobacco p.l.c. share price at the date of exercise for share options exercised during the period was
£27.67 (2020: £29.37; 2019: £28.31) for equity-settled and £27.59 (2020: £28.68; 2019: £30.87) for cash-settled options.
The weighted average British American Tobacco p.l.c. share price for ADS on the New York Stock Exchange at the date of exercise for share
options exercised during the period relating to equity-settled Reynolds American LTIP awards was US$35.93 (2020: US$40.04; 2019: US$36.35).
BAT Annual Report and Form 20-F 2021
248
28 Share-based Payments
Continued
The outstanding shares for the year ended 31 December 2021 had a weighted average remaining contractual life of 3.7 years (2020: 8.1 years;
2019: 8.2 years) for the equity-settled scheme, 1.70 years for Reynolds American equity-settled scheme (2020: 1.72 years; 2019: 1.93 years) and
4.1 years (2020: 8.1 years; 2019: 8.3 years) for the cash-settled share-based payment arrangements.
(b) Deferred Share Bonus Scheme
Details of the movements for the equity- and cash-settled DSBS scheme during the years ended 31 December 2021 and 31 December
2020, were as follows:
2021
2020
Equity-
settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
Equity-
settled
Number
of options
in thousands
Cash-settled
Number
of options
in thousands
Outstanding at start of year
4,141
200
3,748
282
Granted during the period
1,562
179
1,829 109
Exercised during the period
(1,497)
(142)
(1,368)
(175)
Forfeited during the period
(65)
(14)
(68)
(16)
Outstanding at end of year
4,141
223
4,141
200
Exercisable at end of year
– 1
91
4
The weighted average British American Tobacco p.l.c. share price at the date of exercise for share options exercised during the financial
year was £27.58 (2020: £28.08; 2019: £28.40) for equity-settled and £27.70 (2020: £28.06; 2019: £30.06) for cash-settled options.
The outstanding shares for the year ended 31 December 2021 had a weighted average remaining contractual life of 1.3 years (2020: 1.4
years; 2019: 1.5 years) for the equity-settled scheme and 1.3 years (2020: 1.4 years; 2019: 1.5 years) for the cash-settled scheme.
Valuation assumptions
Assumptions used in the Black-Scholes models to determine the fair value of share options at grant date were as follows:
2021
2020
LTIP
DSBS
LTIP
DSBS
Expected volatility (%)
27.0 27.0
25.0 25.0
Average expected term to exercise (years)*
3.0 3.0
3.5 / 3.03.0
Risk-free rate (%)
0.2 0.2
0.2 0.2
Expected dividend yield (%)
7.7 7.7
7.9 7.9
Share price at date of grant (£)
27.94 27.94
26.33 26.33
Fair value at grant date (£)*
19.87 / 22.20
22.20
21.23 / 20.76
20.76
Fair value at grant date (£)* – Management Board
17.35 / 22.20
22.20
21.23 / 20.76
20.76
* Where two figures have been quoted for the Long-Term Incentive Plan, the numbers relate to PSP and RSP awards, respectively.
Market condition features were incorporated into the Monte-Carlo models for the total shareholder return elements of the LTIP, in
determining fair value at grant date. Assumptions used in these models were as follows:
2021
LTIP (PSP)
2020
LTIP (PSP)
Average share price volatility FMCG comparator group (%)
23
21
Average correlation FMCG comparator group (%)
29
31
Fair values determined from the Black-Scholes and Monte-Carlo models use assumptions revised at the end of each reporting period for
cash-settled share-based payment arrangements.
The expected British American Tobacco p.l.c. share price volatility was determined taking account of the return index (the share price
index plus the dividend reinvested) over a five-year period. The FMCG share price volatility and correlation was also determined over the
same periods. The average expected term to exercise used in the models has been adjusted, based on management’s best estimate,
forthe effects of non-transferability, exercise restrictions and behavioural conditions, forfeiture and historical experience.
The risk-free rate has been determined from market yield curves for government gilts with outstanding terms equal to the average
expected term to exercise for each relevant grant. The expected dividend yield was determined by calculating the yield from the last two
declared dividends divided by the grant share price.
In addition to these valuation assumptions, LTIP awards, excluding RSP, contain earnings per share performance conditions. As these are non-
market performance conditions they are not included in the determination of fair value of share options at the grant date, however, they are
used to estimate the number of awards expected to vest. This pay-out calculation is based on expectations published in analysts’ forecasts.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
249
29 Group Employees
The average number of persons employed by the Group and its associates during the year, including Directors, was 82,868 (2020: 89,182).
2021
Number
2020
Number
U.S.
4,789
4,914
APME
10,488
12,703
AMSSA
16,799
17,869
ENA
22,289
23,957
Subsidiary undertakings
54,365
59,443
Associates
28,503
29,739
82,868
89,182
Included within the employee numbers for ENA are certain employees in the UK in respect of central functions. Some of the costs of these
employees are allocated or charged to the various regions and markets in the Group.
30 Related Party Disclosures
The Group has a number of transactions and relationships with related parties, as defined in IAS 24
Related Party Disclosures
, all of which
are undertaken in the normal course of business. Transactions with CTBAT International Limited (a joint operation) are not included in
these disclosures as the results are immaterial to the Group.
Intercompany transactions and balances are eliminated on consolidation and therefore are not disclosed.
Transactions and balances with associates relate mainly to the sale and purchase of cigarettes and tobacco leaf. The Group’s share of
dividends from associates, included in other net income in the table below, was £392 million (2020: £394 million; 2019: £239 million).
2021
£m
2020
£m
2019
£m
Transactions
– revenue
524
495
511
– purchases
(123)
(80) (79)
– other net income
387
388
248
Amounts receivable at 31 December
48
33
42
Amounts payable at 31 December
(3)
(5)
(2)
On 5 October 2021, PT Bentoel Internasional Investama Tbk (Bentoel) announced its intention to delist from the Indonesia Stock Exchange
and go private by conducting a Voluntary Tender Offer (VTO). As part of this, in two phases in November and December 2021, the Group
acquired an additional 0.2% of shares in Bentoel from independent shareholders at a cost of £4 million and terminated the total return
swap (as explained in note 32).
As set out in note 27, in March 2021, the Group acquired a 19.9% equity stake in Organigram. The Group and Organigram also entered into
a Product Development Collaboration Agreement following which a Centre of Excellence has been established to focus on developing the
next generation of cannabis products with an initial focus on cannabidiol (CBD). The Centre of Excellence is located at Organigram’s indoor
facility in New Brunswick, Canada, which holds the Health Canada licences required to conduct R&D activities with cannabis products.
Both the Group and Organigram are contributing scientists, researchers, and product developers to the Centre of Excellence, which is
governed and supervised by a steering committee consisting of an equal number of senior members from each company. Both partners
share a commitment to continue to maintain the highest regulatory and ethical standards. Furthermore, as part of the transaction, the
Group and Organigram have agreed to grant each other a royalty-free licence to certain intellectual property to enable the development
ofnew and potentially disruptive, novel products. Both parties have the ability to independently commercialise any products developed
asa result of the collaboration under their own brands.
During 2021, the Group increased its ownership of a wholesale producer and distributor operating in the agriculture sector based in
Uzbekistan, FE “Samfruit” JSC to 42.61%, for £1 million. In 2020 the Group increased its ownership to 38.63% for £5 million.
During 2021, the Group made a capital contribution in Brascuba Cigarrillos S.A. at a cost of £6 million (2020: £17 million; 2019: £20 million).
There was a capital reduction in CTBAT International Limited of approximately US$171 million with funds remitted prorate to investors
in 2021.
Also in 2021, the Group acquired a further 2.7% in Hrvatski Duhani d.d. Tobacco Leaf Processing at a cost of £1 million.
During 2019, the Group acquired 60% of VapeWild Holdings LLC and a minority stake in AYR Limited. Please refer to note 27 for the
VapeWild Holdings LLC business that was discontinued and liquidated in 2020.
BAT Annual Report and Form 20-F 2021
250
30 Related Party Disclosures
Continued
The key management personnel of British American Tobacco consist of the members of the Board of Directors of British American
Tobacco p.l.c. and the members of the Management Board. No such person had any material interest during the year in a contract of
significance (other than a service contract) with the Company or any subsidiary company. The term key management personnel in this
context includes their close family members.
2021
£m
2020
£m
2019
£m
The total compensation for key management personnel, including Directors, was:
– salaries and other short-term employee benefits
18
17
26
– post-employment benefits
1
2 4
– share-based payments
16
13
23
35
32
53
The following table, which is not part of IAS 24 disclosures, shows the aggregate emoluments of the Directors of the Company.
Executive Directors
Chairman
Non-Executive DirectorsTotal
2021
£’000
2020
£’000
2019
£’000
2021
£’000
2020
£’000
2019
£’000
2021
£’000
2020
£’000
2019
£’000
2021
£’000
2020
£’000
2019
£’000
Salary; fees; benefits;
incentives
– salary
2,119
2,026
2,356
2,0262,119
2,356
– fees
727
714
695
1,045
1,028
9691,772
1,742
1,664
– taxable benefits
420
744
608
55
77
137
2
72
310
477
893
1,055
– short-term incentives
4,128
3,274
4,791
3,2744,128
4,791
– long-term incentives
3,399
1,294
4,420
1,2943,399
4,420
Sub-total
10,066
7,338
12,175
782
791
1,100832
1,047
1,279
11,895
9,229
14,286
Pension; other emoluments
– pension
318
304
686
304318
686
– other emoluments
6
20
47
206
47
Sub-total
324
324
733
324324
733
Total emoluments
10,390
7,662
12,908
782
791
832
1,047
1,100
1,279
12,219
9,553
15,019
Aggregate gains on LTIP shares exercised in the year
Award
Exercised
LTIP
shares
Exercise
date
Priceper
share
(£)
Aggregate
gain
(£)
Jack Bowles
26 March 2018
23,731
10 May 202128.25
670,401
Tadeu Marroco
26 March 2018
15,310
29 March 2021
28.27 432,737
LTIP – Value of awards 2018
Shares
Price per
share
(£)
1
Face
value
(£)
Jack Bowles
43,785
38.94
1,704,988
Tadeu Marroco
28,248
38.94
1,099,977
Note:
1. For information only as awards are made as nil-cost options.
In 2021, no Sharesave were exercised by Executive Directors.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
251
31 Contingent Liabilities and Financial Commitments
1.
The Group is subject to contingencies pursuant to
requirements that it complies with relevant laws, regulations
and standards.
2.
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, if it is probable that an
outflow of economic resources will be required to settle the
obligation and if the amount of the obligation can be reliably
estimated, a provision will be recognised based on best
estimates and management judgement.
3.
There are, however, contingent liabilities in respect of litigation,
taxes in some countries and guarantees for which no provisions
have been made.
General Litigation Overview
4.
There are a number of legal and regulatory actions, proceedings
and claims against Group companies related to tobacco
and New Category products that are pending in a number
of jurisdictions. These proceedings include, among other
things, claims for personal injury (both individual claims and
class actions) and claims for economic loss arising from the
treatment of smoking- and health-related diseases (such as
medical recoupment claims brought by local governments).
5.
The plaintiffs in these cases seek recovery on a variety of
legal theories, including negligence, strict liability in tort,
design defect, failure to warn, fraud, misrepresentation,
violations of unfair and deceptive trade practices statutes,
conspiracy, public nuisance, medical monitoring and violations
of competition and antitrust laws. The plaintiffs seek various
forms of relief, including compensatory and, where available,
punitive damages, treble or multiple damages and statutory
damages and penalties, creation of medical monitoring and
smoking cessation funds, disgorgement of profits, attorneys’
fees, and injunctive and other equitable relief.
6.
Although alleged damages often are not determinable
from a complaint, and the law governing the pleading and
calculation of damages varies from jurisdiction to jurisdiction,
compensatory and punitive damages have been specifically
pleaded in a number of cases, sometimes in amounts ranging
into the hundreds of millions and even hundreds of billions
of sterling.
7.
With the exception of the
Engle
progeny cases described
below, the Group continues to win the majority of tobacco-
related litigation claims that reach trial, and a very high
percentage of the tobacco-related litigation claims brought
against them, including
Engle
progeny cases, continue to
be dismissed at or before trial. Based on their experience in
tobacco-related litigation and the strength of the defences
available to them in such litigation, the Group’s companies
believe that their successful defence of tobacco-related
litigation in the past will continue in the future.
8.
Group companies generally do not settle claims. However,
Group companies may enter into settlement discussions in
some cases, if they believe it is in their best interests to do so.
Exceptions to this general approach include, but are not limited
to, actions taken pursuant to ‘offer of judgment’ statutes
and Filter Cases, as defined below. An ‘offer of judgment,’ if
rejected by the plaintiff, preserves the Group’s right to recover
attorneys’ fees under certain statutes in the event of a verdict
favourable to the Group. Such offers are sometimes made
through court-ordered mediations. Other settlements by
Group companies include the State Settlement Agreements (as
defined in paragraph 41 below), the funding by various tobacco
companies of a US$5.2 billion (approximately £3.8 billion) trust
fund contemplated by the Master Settlement Agreement (as
described in paragraph 41 below) to benefit tobacco growers,
the original
Broin
flight attendant case, and most of the Engle
progeny cases pending in U.S. federal court, after the initial
docket of over 4,000 such cases was reduced to approximately
400 cases. The Group believes that the circumstances
surrounding these claims are readily distinguishable from the
current categories of tobacco-related litigation claims involving
Group companies.
9.
Although the Group intends to defend all pending cases
vigorously, and believes that the Group’s companies have
valid bases for appeals of adverse verdicts and valid defences
to all actions, and that an outflow of resources related to any
individual case is not considered probable, litigation is subject
to many uncertainties, and, generally, it is not possible to
predict the outcome of any particular litigation pending against
Group companies, or to reasonably estimate the amount or
range of any possible loss. Furthermore, a number of political,
legislative, regulatory and other developments relating to the
tobacco industry and cigarette smoking have received wide
media attention. These developments may negatively affect
the outcomes of tobacco-related legal actions and encourage
the commencement of additional similar litigation. Therefore,
the Group does not provide estimates of the financial effect of
the contingent liabilities represented by such litigation, as such
estimates are not practicable.
10.
The following table lists the categories of the tobacco-related
actions pending against Group companies as of 31 December
2021 and the increase or decrease from the number of cases
pending against Group companies as of 31 December 2020.
Details of the quantum of past judgments awarded against
Group companies, the majority of which are under appeal,
are also identified along with any settlements reached during
the relevant period. Given the volume and more active nature
of the Engle progeny cases and the Filter Cases in the U.S.
described below, and the fluctuation in the number of such
cases and amounts awarded from year to year, the Group
presents judgment or settlement figures for these cases on
a three-year basis. Where no quantum is identified, either no
judgment has been awarded against a Group company, or
where a verdict has been reached no quantification of damages
has been given, or no settlement has been entered into.
Further details on the judgments, damages quantification and
settlements are included within the case narratives below. For a
discussion of the non-tobacco related litigation pending against
the Group, see note 31, paragraph 83, et seq.
BAT Annual Report and Form 20-F 2021
252
31 Contingent Liabilities and Financial Commitments
Continued
Case Type
Case Numbers as at
31 December 2021
Case Numbers as at
31 December 2020
(note 1)
Change in Number
Increase/(decrease)
U.S. tobacco-related actions
Medical reimbursement cases (note 2)
2
2
No change
Class actions (note 3)
20
20
No change
Individual smoking and health cases (note 4)
222
189
33
Engle
Progeny Cases (note 5)
1,071
1,400
(329)
Broin
II Cases (note 6)
1,200
1,227
(27)
Filter Cases (note 7)
46
48
(2)
State Settlement Agreements – Enforcement and Validity (note 8)
2
4
(2)
Non-U.S. tobacco-related actions
Medical reimbursement cases
19
19
No changeClass actions (note 9)
12
12
No change
Individual smoking and health cases (note 10)
52
68
(16)
(Note 1) This includes cases to which the Reynolds American Inc. (Reynolds American) group companies were a party at such date.
(Note 2) This category of cases includes the Department of Justice action. See note 31, paragraphs 20-24.
(Note 3) See note 31, paragraphs 25-38.
(Note 4) This category of cases includes smoking and health cases alleging personal injuries caused by tobacco use or exposure brought
by or on behalf of individual plaintiffs based on theories of negligence, strict liability, breach of express or implied warranty and violations
of state deceptive trade practices or consumer protection statutes. The plaintiffs seek to recover compensatory damages, attorneys’
fees and costs and punitive damages. Out of the 222 active individual smoking and health cases, six judgments have been returned in the
plaintiffs’ favour, awarding damages totalling approximately US$150.1 million (approximately £110.8 million), which are pending post-trial in
trial courts or on appeal. For a further description of these cases, see note 31, paragraphs 39-40.
(Note 5) In July 1998, trial began in
Engle v. R.J. Reynolds Tobacco Co
., a then-certified class action filed in Circuit Court, Miami-Dade
County, Florida, against U.S. cigarette manufacturers, including R. J. Reynolds Tobacco Co. (RJRT) (individually, and as successor by
merger to Lorillard Tobacco Company (Lorillard Tobacco)) and Brown & Williamson Holdings, Inc. (formerly Brown & Williamson Tobacco
Corporation) (B&W). In July 2000, the jury in Phase II awarded the class a total of approximately US$145 billion (approximately £107.1 billion)
in punitive damages, apportioned US$36.3 billion (approximately £26.8 billion) to RJRT, US$17.6 billion (approximately £13 billion) to
B&W, and US$16.3 billion (approximately £12 billion) to Lorillard Tobacco. This decision was appealed and ultimately resulted in the
Florida Supreme Court in December 2006 decertifying the class and allowing judgments entered for only two of the three
Engle
class
representatives to stand and setting aside the punitive damages award. Putative
Engle
class members were permitted to file individual
lawsuits, deemed ‘
Engle
progeny cases’, against the
Engle
defendants, within one year of the Supreme Court’s decision (subsequently
extended to 11 January 2008). Between the period 1 January 2019 and 31 December 2021, 21 judgments have been returned in the plaintiffs’
favour, awarding damages totalling approximately US$225 million (approximately £166.1 million). Certain of these judgments have been
appealed by RJRT and in certain other cases, RJRT still had time to appeal, as of 31 December 2021. For a further description of the
Engle
progeny cases, see note 31, paragraphs 29-38 seq.
(Note 6)
Broin v. Philip Morris, Inc
. was a class action filed in Circuit Court in Miami-Dade County, Florida in 1991 and brought on behalf of flight attendants alleged to have suffered from diseases or ailments caused by exposure to Environmental Tobacco Smoke (ETS) in
airplane cabins. Group companies and other cigarette manufacturer defendants settled
Broin
, agreeing to pay a total of US$300 million
(approximately £221.5 million) to fund research on the detection and cure of tobacco-related diseases and US$49 million (approximately
£36.2 million) in plaintiffs’ counsel’s fees and expenses. Group companies’ share of these payments totalled US$174 million (approximately
£128.5 million).
Broin
II cases refer to individual cases by class members. There have been no
Broin
II trials since 2007. For a further description of the
Broin
II cases, see note 16 to paragraph 40.(Note 7) Includes claims brought against Lorillard Tobacco and Lorillard Inc. by individuals who seek damages resulting from their alleged
exposure to asbestos fibres that were incorporated into filter material used in one brand of cigarettes manufactured by a predecessor to
Lorillard Tobacco for a limited period of time ending more than 50 years ago. Since 1 January 2019, Lorillard Tobacco and RJRT have paid, or
have reached agreement to pay, a total of approximately US$25.9 million (approximately £19.1 million) in settlements to resolve 102 Filter
Cases. See note 17 to paragraph 40.
(Note 8) Group companies’ expenses and payments under the State Settlement Agreements for 2021 amounted to approximately
US$3.4 billion (approximately £2.5 billion) in respect of settlement expenses and US$3.7 billion (approximately £2.7 billion) in respect
of settlement cash payments. See note 31, paragraph 43. The pending cases referred to above relate to the enforcement, validity or
interpretation of the State Settlement Agreements in which RJRT, B&W or Lorillard Tobacco is a party. See note 31, paragraphs 41-54.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
253
31 Contingent Liabilities and Financial Commitments
Continued
(Note 9) Outside the United States, there are 12 class actions
being brought against Group companies as of 31 December
2021. These include class actions in the following jurisdictions:
Canada (11) and Venezuela (1). For a description of the Group
companies’ class actions, see note 31, paragraphs 70-81.
Pursuant to the judgment in 2015 in the two Quebec class actions,
the plaintiffs were awarded damages and interest in the amount
of CAD$15.6 billion, most of which were on a joint and several
basis (approximately £9.1 billion), of which the Group companies’
share was CAD$10.4 billion (approximately £6.1 billion). On 1 March
2019, the Quebec Court of Appeal handed down a judgment
which largely upheld and endorsed the lower court’s previous
decision in the Quebec Class Actions, as further described below.
The share of the judgment for Imperial Tobacco Canada Limited
(Imperial), the Group’s operating company in Canada, was reduced
to approximately CAD$9.2 billion (approximately £5.4 billion). For a
further description of the Quebec Class Actions, see paragraph 76.
All of the class actions in Canada are currently stayed pursuant to a
court order. See paragraph 58.
(Note 10) As at 31 December 2021, the jurisdictions with the
most active individual cases against Group companies were, in
descending order: Brazil (23), Italy (11), Canada (5), Argentina (5),
Chile (4) and Ireland (2). There were a further two jurisdictions with
one active case only. Out of these 52 cases, one case in Argentina
(
Baldassare
) returned a first instance judgment on 28 December
2020, in the amount of ARS 685,976 (approximately £5,000) in
compensatory damages and ARS 2,500,000 (approximately
£18,000) in punitive damages (plus interest), in the plaintiffs’ favour
as of 31 December 2021. BAT Argentina filed a notice of appeal of
the judgment on 3 February 2021.
11.
Certain terms and phrases used in this note 31 may require
some explanation.
a.
‘Judgment’ or ‘final judgment’ refers to the final decision of
the court resolving the dispute and determining the rights
and obligations of the parties. At the trial court level, for
example, a final judgment generally is entered by the court
after a jury verdict and after post-verdict motions have
been decided. In most cases, the losing party can appeal a
verdict only after a final judgment has been entered by the
trial court.
b.
‘Damages’ refers to the amount of money sought by a
plaintiff in a complaint, or awarded to a party by a jury or,
in some cases, by a judge. ‘Compensatory damages’ are
awarded to compensate the prevailing party for actual
losses suffered, if liability is proved. In cases in which
there is a finding that a defendant has acted wilfully,
maliciously or fraudulently, generally based on a higher
burden of proof than is required for a finding of liability for
compensatory damages, a plaintiff also may be awarded
‘punitive damages’. Although damages may be awarded at
the trial court stage, a losing party may be protected from
paying any damages until all appellate avenues have been
exhausted by posting a supersedeas bond. The amount
of such a bond is governed by the law of the relevant
jurisdiction and generally is set at the amount of damages
plus some measure of statutory interest, modified at the
discretion of the appropriate court or subject to limits set
by a court or statute.
c.
‘Settlement’ refers to certain types of cases in which
cigarette manufacturers, including RJRT, B&W and Lorillard
Tobacco, have agreed to resolve disputes with certain
plaintiffs without resolving the cases through trial.
d.
All sums set out in note 31 have been converted to GBP and
US$ using the following end closing rates: GBP 1 to US$
1.3545, GBP 1 to CAD$ 1.7109, GBP 1 to EURO 1.1910, GBP 1 to
BRL 7.5443, GBP 1 to AOA 763.1513, GBP 1 to NGN 711.7127,
GBP 1 to KRW 1610.1000, GBP 1 to HRK 8.9537, GBP 1 to JPY
155.9717, GBP 1 to QAR 4.9316, GBP 1 to SAR 5.0852 and
GBP 1 to ARS 139.0908.
U.S. Tobacco Litigation
12.
Group companies, notably RJRT (individually and as successor
by merger to Lorillard Tobacco) and B&W as well as other
leading cigarette manufacturers, are defendants in a number of
product liability cases. In a number of these cases, the amounts
of compensatory and punitive damages sought are significant.
13.
The total number of U.S. tobacco product liability cases
pending at 31 December 2021 involving RJRT, B&W and/or
Lorillard Tobacco was approximately 2,573. As at 31 December
2021, British American Tobacco (Investments) Limited
(Investments) has been served as a co-defendant in one of
those cases (2018:1). No other UK-based Group company has
been served as a co-defendant in any U.S. tobacco product
liability case pending as at 31 December 2021.
14.
Since many of these pending cases seek unspecified damages,
it is not possible to quantify the total amounts being claimed,
but the aggregate amounts involved in such litigation are
significant, possibly totalling billions of U.S. dollars. The cases
fall into four broad categories: medical reimbursement cases;
class actions; individual cases; and other claims.
15.
RJRT (individually and as successor by merger to Lorillard
Tobacco), American Snuff Co., Santa Fe Natural Tobacco
Company, Inc. (SFNTC), R.J. Reynolds Vapor Company (RJR
Vapor), Reynolds American, Lorillard Inc., other Reynolds
American affiliates and indemnitees, including but not limited
to B&W (collectively, the Reynolds Defendants), believe that
they have valid defences to the tobacco-related litigation claims
against them, as well as valid bases for appeal of adverse
verdicts against them. The Reynolds Defendants have, through
their counsel, filed pleadings and memoranda in pending
tobacco-related litigation that set forth and discuss a number
of grounds and defences that they and their counsel believe
have a valid basis in law and fact.
16.
Scheduled trials. Trial schedules are subject to change, and
many cases are dismissed before trial. In the U.S., there are
57 cases, exclusive of
Engle
progeny cases, scheduled for trial
as of 31 December 2021 through 31 December 2022, for the
Reynolds Defendants: 39 individual smoking and health cases,
15 Filter Cases, and 3 non-smoking and health cases. There are
also approximately 151
Engle
progeny cases against RJRT
(individually and as successor to Lorillard Tobacco) and B&W
scheduled for trial through 31 December 2022. It is not known
how many of these cases will actually be tried.
17.
Trial results. From 1 January 2019 through 31 December 2021,
53 trials occurred in individual smoking and health, Engle
progeny, and Filter Cases in which the Reynolds Defendants
were defendants, including five where mistrials were declared.
Verdicts in favour of the Reynolds Defendants and, in some
cases, other defendants, were returned in 15 cases, tried in
Florida (11), Oregon (1), and Massachusetts (3). Verdicts in favour
of the plaintiffs were returned in 24 cases, which were tried in
Florida (21), Massachusetts (2) and New Mexico (1). Six of the
cases (four in Florida, one in New York, and one in Connecticut)
were dismissed during trial. Two cases were punitive damages
retrials. One case in Massachusetts is awaiting a decision.
BAT Annual Report and Form 20-F 2021
254
31 Contingent Liabilities and Financial Commitments
Continued
(a) Medical Reimbursement Cases
18.
These civil actions seek to recover amounts spent by
government entities and other third-party providers on
healthcare and welfare costs claimed to result from illnesses
associated with smoking.
19.
At 31 December 2021, one U.S. medical reimbursement
suit (
Crow Creek Sioux Tribe v. American Tobacco Co.
) was
pending against RJRT, B&W and Lorillard Tobacco in a Native
American tribal court in South Dakota. The plaintiffs seek to
recover actual and punitive damages, restitution, funding of a
clinical cessation programme, funding of a corrective public
education programme, and disgorgement of unjust profits from
sales to minors. No other medical reimbursement suits are
pending against these companies by county or other political
subdivisions of the states.
U.S. Department of Justice Action
20.
On 22 September 1999, the U.S. Department of Justice
brought an action in the U.S. District Court for the District of
Columbia against various industry members, including RJRT,
B&W, Lorillard Tobacco, B.A.T Industries p.l.c. (Industries) and
Investments (
United States v. Philip Morris USA Inc.
). The U.S.
Department of Justice initially sought (1) recovery of federal
funds expended in providing health care to smokers who
developed alleged smoking-related diseases pursuant to the
Medical Care Recovery Act and Medicare Secondary Payer
provisions of the Social Security Act and (2) equitable relief
under the civil provisions of the Racketeer Influenced and
Corrupt Organizations Act (RICO), including disgorgement of
roughly US$280 billion (approximately £206.7 billion) in profits
the government contended were earned as a consequence
of a purported racketeering ‘enterprise’ along with certain
‘corrective communications’. In September 2000, the district
court dismissed the government’s Medical Care Recovery Act
and Medicare Secondary Payer claims. In February 2005, the
U.S. Court of Appeals for the DC Circuit (the DC Circuit) ruled
that disgorgement was not an available remedy.
21.
Industries was dismissed for lack of personal jurisdiction on
28 September 2000. In addition, Investments was a defendant
at the trial, but intervening changes in controlling law post-
trial led to a 28 March 2011 court ruling that the court’s
Final Judgment and Remedial Order no longer applied to
Investments prospectively, and for this reason, Investments
would not have to comply with any of the remaining injunctive
remedies being sought by the government. As the government
did not appeal the 28 March 2011 ruling, this means that
Investments is no longer in the case and is not subject to any
injunctive relief that the court is expected to order against
the remaining defendants. As the case continued as against
RJRT and Lorillard Tobacco with respect to injunctive relief and
related matters, the following is noted.
22.
The non-jury trial of the RICO portion of the claim began on
21 September 2004 and ended on 9 June 2005. On 17 August
2006, the federal district court issued its Final Judgment and
Remedial Order, which found certain defendants, including
RJRT, B&W, Lorillard Tobacco and Investments, had violated
RICO, but did not impose any direct financial penalties.
The district court instead enjoined the defendants from
committing future racketeering acts, participating in certain
trade organisations, making misrepresentations concerning
smoking and health and youth marketing, and using certain
brand descriptors such as ‘low tar’, ‘light’, ‘ultra-light’, ‘mild’
and ‘natural’. The district court also ordered the defendants to
issue ‘corrective communications’ on five subjects, including
smoking and health and addiction, and to comply with further
undertakings, including maintaining websites of historical
corporate documents and disseminating certain marketing
information on a confidential basis to the government.
In addition, the district court placed restrictions on the
defendants’ ability to dispose of certain assets for use in
the United States, unless the transferee agrees to abide by
the terms of the district court’s order, and ordered certain
defendants to reimburse the U.S. Department of Justice its
taxable costs incurred in connection with the case.
23.
Defendants, including RJRT, B&W, Lorillard Tobacco and
Investments, appealed, and the U.S. government cross-
appealed to the DC Circuit. On 22 May 2009, the DC Circuit
affirmed the federal district court’s RICO liability judgment,
but vacated the order and remanded for further factual
findings and clarification as to whether liability should be
imposed against B&W, based on changes in the nature of
B&W’s business operations (including the extent of B&W’s
control overtobacco operations). The court also remanded on
three other discrete issues relating to the injunctive remedies,
including for the district court ‘to reformulate’ the injunction on
the use of low-tar descriptors ‘to exempt foreign activities that
have no substantial, direct, and foreseeable domestic effects,’
and for the district court to evaluate whether corrective
communications could be required at point-of-sale displays
(which requirement the DC Circuit vacated). On 28 June 2010,
the U.S. Supreme Court denied the parties’ petitions for
further review.
24.
On 22 December 2010, the district court dismissed B&W from
the litigation. In November 2012, the trial court entered an
order setting forth the text of the corrective statements and
directed the parties to engage in discussions with the Special
Master to implement them. After various proceedings and
appeals, the federal district court in October 2017 ordered
RJRT and the other U.S. tobacco company defendants to fund
the publishing of compelled public statements in various U.S.
media outlets, including in newspapers, on television, on the
companies’ websites, and in onserts on cigarette packaging.
The compelled public statements in newspapers and on
television were completed in 2018 and in package onserts were
completed in mid-2020. Also, the compelled public statements
now appear on RJRT websites. The district court is considering
mandating the display of the compelled public statements at
retail point of sale; an evidentiary hearing is scheduled to begin
on 13 June 2022.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
255
31 Contingent Liabilities and Financial Commitments
Continued
(b) Class Actions
25.
At 31 December 2021, RJRT, B&W and Lorillard Tobacco were
named as defendants in two separate actions attempting to
assert claims on behalf of classes of persons allegedly injured
or financially impacted by their smoking, one asserting claims
of violation of the Americans With Disabilities Act of 1990,
and SFNTC was named in 16 separate cases relating to the
use of the words ‘natural,’ ‘100% additive-free,’ or ‘organic’ in
Natural American Spirit advertising and promotional materials.
If the classes are or remain certified, separate trials may be
needed to assess individual plaintiffs’ damages. Among the
pending class actions, 16 specified the amount of the claim in
the complaint and alleged that the plaintiffs were seeking in
excess of US$5 million (approximately £3.7 million) and one that
alleged that the plaintiffs were seeking less than US$75,000
(approximately £55,370) per class member plus unspecified
punitive damages.
No Additive/Natural/Organic Claim Cases
26.
A total of 16 pending putative class actions were filed in nine
U.S. federal district courts against SFNTC, a subsidiary of
Reynolds American, which cases generally allege, in various
combinations, violations of state deceptive and unfair trade
practice statutes, and claim state common law fraud, negligent
misrepresentation, and unjust enrichment based on the use
of descriptors such as ‘natural’, ‘organic’ and ‘100% additive-
free’ in the marketing, labelling, advertising, and promotion of
SFNTC’s Natural American Spirit brand cigarettes. In these
actions, the plaintiffs allege that the use of these terms
suggests that Natural American Spirit brand cigarettes are
less harmful than other cigarettes and, for that reason, violated
state consumer protection statutes or amounted to fraud or
a negligent or intentional misrepresentation. The actions seek
various categories of recovery, including economic damages,
injunctive relief (including medical monitoring and cessation
programmes), interest, restitution, disgorgement, treble and
punitive damages, and attorneys’ fees and costs. In April
2016, in response to a motion by the various plaintiffs, the U.S.
Judicial Panel on Multidistrict Litigation (JPML) consolidated
these cases for pre-trial purposes before a federal court in
New Mexico. On 21 December 2017, that court granted the
defendants’ motion to dismiss in part, dismissing a number
of claims with prejudice, and denied it in part. The district
court conducted a five-day hearing on the motion for class
certification and on the motion challenging the admissibility of
expert opinion testimony in December 2020. The parties filed
post-hearing briefs in January 2021 and filed proposed findings
of fact and conclusions of law in February 2021. A decision
is pending.
Other Putative Class Actions
27.
Jones v. American Tobacco Co
. is a putative class action filed in
December 1998 in the Circuit Court, Jackson County, Missouri.
The action was brought by a plaintiff on behalf of a putative
class of Missouri tobacco product users and purchasers
against various defendants, including RJRT, B&W and Lorillard
Tobacco alleging that the plaintiffs’ use of the defendants’
tobacco products has caused them to become addicted to
nicotine, and seeking an unspecified amount of compensatory
and punitive damages. There is currently no activity in this case.
28.
Young v. American Tobacco Co.
is a case filed in November
1997 in the Circuit Court, Orleans Parish, Louisiana against
various U.S. cigarette manufacturers, including RJRT and B&W,
and parent companies of such manufacturers. This putative
ETS class action was brought on behalf of a putative class of
Louisiana residents who, though not themselves cigarette
smokers, have been exposed to second-hand smoke from
cigarettes manufactured by the defendants, and who allegedly
suffered injury as a result of that exposure, and seeks an
unspecified amount of compensatory and punitive damages.
In March 2016, the court entered an order staying the case,
including all discovery, pending the completion of an ongoing
smoking cessation programme ordered by the court in a now-
concluded Louisiana state court certified class action,
Scott v.
American Tobacco Co.
Engle
Class Action and
Engle
Progeny Cases (Florida)
29.
In July 1998, trial began in
Engle
v. R. J. Reynolds Tobacco Co
.,
a then-certified class action filed in Circuit Court, Miami-
Dade County, Florida, against U.S. cigarette manufacturers,
including RJRT, B&W and Lorillard Tobacco. The then-certified
class consisted of Florida citizens and residents, and their
survivors, who suffered from smoking-related diseases that
first manifested between 5 May 1990, and 21 November 1996,
and were caused by an addiction to cigarettes. In July 1999, the
jury in this Phase I found against RJRT, B&W, Lorillard Tobacco
and the other defendants on common issues relating to the
defendants’ conduct, general causation, the addictiveness of
cigarettes, and entitlement to punitive damages.
30.
In July 2000, the jury in Phase II awarded the class a total of
approximately US$145 billion (approximately £107.1 billion) in
punitive damages, apportioned US$36.3 billion (approximately
£26.8 billion) to RJRT, US$17.6 billion (approximately £13 billion)
to B&W, and US$16.3 billion (approximately £12 billion) to
Lorillard Tobacco. The three class representatives in the
Engle
class action were awarded US$13 million (approximately
£9.6 million) in compensatory damages.
31.
This decision was appealed and ultimately resulted in the
Florida Supreme Court in December 2006 decertifying the
class and allowing judgments entered for only two of the
three
Engle
class representatives to stand and setting aside
the punitive damages award. The court preserved certain
of the jury’s Phase I findings, including that cigarettes can
cause certain diseases, nicotine is addictive, and defendants
placed defective cigarettes on the market, breached duties
of care, concealed health-related information and conspired.
Putative
Engle
class members were permitted to file individual
lawsuits, deemed ‘
Engle
progeny cases’, against the
Engle
defendants, within one year of the Supreme Court’s decision
(subsequently extended to 11 January 2008).
32.
During 2015, RJRT and Lorillard Tobacco, together with
Philip Morris USA Inc. (PM USA), settled virtually all of the
Engle
progeny cases then pending against them in federal
district court. The total amount of the settlement was
US$100 million (approximately £73.8 million) divided as
follows: RJRT US$42.5 million (approximately £31.4 million);
PM USA US$42.5 million (approximately £31.4 million); and
Lorillard Tobacco US$15 million (approximately £11.1 million).
The settlement covered more than 400 federal
Engle
progeny cases but did not cover 12 federal progeny cases previously
tried to verdict and then pending on post-trial motions or
appeal, and two federal progeny cases filed by different lawyers
from the ones who negotiated the settlement for the plaintiffs.
BAT Annual Report and Form 20-F 2021
256
31 Contingent Liabilities and Financial Commitments
Continued
33.
As at 31 December 2021, there were approximately 1,071
Engle
progeny cases pending in which RJRT, B&W and/or Lorillard Tobacco have all been named as defendants and served. These cases include claims by or on behalf of 1,304 plaintiffs. In addition, as of
31 December 2021, RJRT was aware of four additional
Engle
progeny cases that have been filed but not served. The number of pending cases fluctuates for a variety of reasons, including voluntary and involuntary dismissals. Voluntary dismissals include cases in which
a plaintiff accepts an ‘offer of judgment’ from RJRT, Lorillard Tobacco and/or RJRT’s affiliates and indemnitees. An offer of judgment,
if rejected by the plaintiff, preserves RJRT’s and Lorillard Tobacco’s right to recover attorneys’ fees under Florida law in the event
of a verdict favourable to RJRT or Lorillard Tobacco, or affiliates of such entities. Such offers are sometimes made through court-
ordered mediations.
34.
41 trials occurred in
Engle
progeny cases in Florida state and federal courts against RJRT, B&W and/or Lorillard Tobacco from 1 January 2019 through 31 December 2021, and additional state court trials are scheduled for 2022.
35.
The following chart identifies the number of trials in
Engle
progeny cases as at 31 December 2021 and additional information about the adverse judgments entered:
Trials/verdicts/judgments of individual
Engle
progeny cases from 1 January 2019 through 31 December 2021:
Total number of trials
41
Number of trials resulting in plaintiffs’ verdicts
21**
Total damages awarded in final judgments against RJRT
US$224,990,000 (approximately
£166 million)
Amount of overall damages comprising ‘compensatory damages’ (approximately) US$65,440,000 (of overall
US$224,990,000) (approximately
£48 million of £166 million)
Amount of overall damages comprising ‘punitive damages’ (approximately)
US$159,550,000 (of overall
US$224,990,000) (approximately
£118 million of £166 million)
** Of the 21 trials resulting in plaintiffs’ verdicts 1 January 2019 to 31 December 2021 (note 11):
Number of adverse judgments appealed by RJRT
13 (note 12)
Number of adverse judgments, in which RJRT still has time to file an appeal
4
Number of adverse judgments in which an appeal was not, and can no longer be, sought
3
Appeals of individual
Engle
progeny cases 1 January 2019 to 31 December 2021:Number of adverse judgments appealed by RJRT
15 (note 13)
Note 11:
the 21 trials include two cases that were tried twice
(Gloger v. R.J. Reynolds Tobacco Co. and Bessent-Dixon v. R.J. Reynolds Tobacco Co.) and one case (Robert Miller v. R.J.
Reynolds Tobacco Co.
) where plaintiff moved for a mistrial following a plaintiff’s verdict where the jury awarded no compensatory or punitive damages, and an adverse judgment has not yet
been entered. Plaintiff’s motion for new trial on compensatory damages was granted and RJRT appealed.
Note 12:
of the 13 adverse verdicts appealed by RJRT as a result of judgments arising in the period 1 January 2019 to 31 December 2021:
a. 5 appeals remain undecided in the District Courts of Appeal; and
b. 8 appeals were decided and/or closed in the District Court of Appeals. Of these 8 appeals, 4 were affirmed in favour of plaintiff (review of by the Florida Supreme Court has been sought in
3 of the 4 cases), 3 were reversed for a new trial, and 1 was voluntarily dismissed and judgment paid.
Note 13:
of the 15 adverse judgments appealed by RJRT (during the period 1 January 2019 to 31 December 2021):
a. 5 appeals remain undecided in the District Courts of Appeal;
b. 9 appeals were decided and/or closed in the District Courts of Appeal, and 1 appeal was reversed by the Eleventh Circuit. Of these appeals, 5 were affirmed in favour of plaintiff, 3 in which
review of Florida Supreme Court was sought, 1 was voluntarily dismissed and judgment paid, 1 in which the Eleventh Circuit reversed the district court’s denial of Defendants’ motion for
judgment in accordance with the verdict, and 3 were reversed for a new trial; and
c does not include four cases that were appealed prior to the relevant time period but which remain pending before the Florida Supreme Court.
36.
By statute, Florida applies a US$200 million (approximately £147.7 million) bond cap to all
Engle
progeny cases in the aggregate.
Individual bond caps for any given
Engle
progeny case vary depending on the number of judgments in effect at a given time. Judicial attempts by several plaintiffs in the
Engle
progeny cases to challenge the bond cap as violating the Florida Constitution have failed.In addition, bills have been introduced in sessions of the Florida legislature that would eliminate the
Engle
progeny bond cap, but those bills have not been enacted as of 31 December 2021.
37.
In 2021, RJRT or Lorillard Tobacco paid judgments in five
Engle
progeny cases. Those payments totalled US$15.14 million (approximately
£11.2 million) in compensatory or punitive damages. Additional costs were paid in respect of attorneys’ fees and statutory interest.
38.
In addition, accruals for damages and attorneys’ fees and statutory interest for two cases (
Starr-Blundell v. R. J. Reynolds Tobacco Co.
and Hardin v. R. J. Reynolds Tobacco Co.
) was recorded in Reynolds American’s consolidated balance sheet as of 31 December 2021 to
the value of US$208,400 (approximately £153,860).
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
257
31 Contingent Liabilities and Financial Commitments
Continued
(c) Individual Cases
39.
As of 31 December 2021, 222 individual cases were pending in the United States against RJRT, B&W and/or Lorillard Tobacco.
This category of cases includes smoking and health cases alleging personal injuries caused by tobacco use or exposure brought by or
on behalf of individual plaintiffs based on theories of negligence, strict liability, breach of express or implied warranty, and violations
of state deceptive trade practices or consumer protection statutes. The plaintiffs seek to recover compensatory damages, attorneys’
fees and costs, and punitive damages. The category does not include the
Engle
progeny cases,
Broin
II cases, and Filter Cases
discussed above and below. One of the individual cases is brought by or on behalf of an individual or his/her survivors alleging personal
injury as a result of exposure to ETS.
40.
The following chart identifies the number of individual cases pending as of 31 December 2021 as against the number pending as of
31 December 2020, along with the number of
Engle
progeny cases,
II cases, and Filter Cases, which are discussed further below.Broin
Case Type
U.S.
Case Numbers
31 December
2021
U.S.
Case Numbers
31 December
2020
Change in
Number
Increase/
(Decrease)
Individual Smoking and Health Cases (note 14)
222 189
33
Engle
Progeny Cases (Number of Plaintiffs) (note 15)
1,071 (1,304) 1,400 (1,725)
(329) (421)
Broin
II Cases (note 16)
1,200
1,227
(27)
Filter Cases (note 17)
46
48
(2)
(Note 14) Out of the 222 pending individual smoking and health cases, six have received adverse verdicts or judgments in the court of first
instance or on appeal, and the total amount of those verdicts or judgments is approximately US$150.1 million (approximately £110.8 million).
(Note 15) The number of
Engle
progeny cases will fluctuate as cases are dismissed or if any of the dismissed cases are appealed. Please see earlier table in paragraph 35.
(Note 16)
Broin
v. Philip Morris, Inc. was a class action filed in Circuit Court in Miami-Dade County, Florida in 1991 and brought on behalf of flight attendants alleged to have suffered from diseases or ailments caused by exposure to ETS in airplane cabins. In October 1997,
RJRT, B&W, Lorillard Tobacco and other cigarette manufacturer defendants settled
Broin
, agreeing to pay a total of US$300 million
(approximately £221.5 million) in three annual US$100 million (approximately £73.8 million) instalments, allocated among the companies
by market share, to fund research on the early detection and cure of diseases associated with tobacco smoke. It also required those
companies to pay a total of US$49 million (approximately £36.2 million) for the plaintiffs’ counsel’s fees and expenses. RJRT’s portion of
these payments was approximately US$86 million (approximately £63.5 million); B&W’s was approximately US$57 million (approximately
£42.1 million); and Lorillard Tobacco’s was approximately US$31 million (approximately £22.9 million). The settlement agreement, among
other things, limits the types of claims class members may bring and eliminates claims for punitive damages. The settlement agreement
also provides that, in individual cases by class members that are referred to as
Broin
II lawsuits, the defendants will bear the burden of proof with respect to whether ETS can cause certain specifically enumerated diseases, referred to as ‘general causation’. With respect
to all other liability issues, including whether an individual plaintiff’s disease was caused by his or her exposure to ETS in airplane cabins,
referred to as ‘specific causation’, individual plaintiffs will bear the burden of proof. On 7 September 1999, the Florida Supreme Court
approved the settlement. There have been no
Broin
II trials since 2007. There have been periodic efforts to activate cases and the Group expects this to continue over time.
(Note 17) Includes claims brought against Lorillard Tobacco and Lorillard Inc. by individuals who seek damages resulting from their alleged
exposure to asbestos fibres that were incorporated into filter material used in one brand of cigarettes manufactured by a predecessor
to Lorillard Tobacco for a limited period of time ending more than 50 years ago. Pursuant to the terms of a 1952 agreement between
P. Lorillard Company and H&V Specialties Co., Inc. (the manufacturer of the filter material), Lorillard Tobacco is required to indemnify
Hollingsworth & Vose for legal fees, expenses, judgments and resolutions in cases and claims alleging injury from finished products sold
by P. Lorillard Company that contained the filter material. As of 31 December 2021, Lorillard Tobacco and/or Lorillard Inc. was a defendant
in 46 Filter Cases. Since 1 January 2019, Lorillard Tobacco and RJRT have paid, or have reached agreement to pay, a total of approximately
US$25.9 million (approximately £19.1 million) in settlements to resolve 102 Filter Cases.
(d) State Settlement Agreements
41.
In November 1998, the major U.S. cigarette manufacturers, including RJRT, B&W and Lorillard Tobacco, entered into the
Master Settlement Agreement (MSA) with attorneys general representing 46 U.S. states, the District of Columbia and certain
U.S. territories and possessions. These cigarette manufacturers previously settled four other cases, brought on behalf of
Mississippi, Florida, Texas and Minnesota, by separate agreements with each state (collectively and with the MSA, the ‘State
Settlement Agreements’).
42.
These State Settlement Agreements settled all health care cost recovery actions brought by, or on behalf of, the settling jurisdictions;
released the defending major U.S. cigarette manufacturers from various additional present and potential future claims; imposed
future payment obligations in perpetuity on RJRT, B&W, Lorillard Tobacco and other major U.S. cigarette manufacturers; and placed
significant restrictions on their ability to market and sell cigarettes and smokeless tobacco products. In accordance with the MSA,
various tobacco companies agreed to fund a US$5.2 billion (approximately £3.8 billion) trust fund to be used to address the possible
adverse economic impact of the MSA on tobacco growers.
BAT Annual Report and Form 20-F 2021
258
31 Contingent Liabilities and Financial Commitments
Continued
43.
RJRT and SFNTC are subject to the substantial payment obligations under the State Settlement Agreements. Payments under the
State Settlement Agreements are subject to various adjustments for, among other things, the volume of cigarettes sold, relative
market share, operating profit and inflation. Reynolds American’s operating subsidiaries’ expenses and payments under the State
Settlement Agreements for 2018, 2019, 2020 and 2021 and the projected expenses and payments for 2022 and onwards are set forth
below (in millions of U.S. dollars)*:
2018 2019 2020
2021
20222023 and
thereafter
Settlement expenses
$2,741
$2,762
$3,572
$3,420
Settlement cash payments
$917
$2,918
$2,848
$3,744
Projected settlement expenses
$>3,300
$>3,200
Projected settlement cash payments
$>3,100
$>3,200
* Subject to adjustments for changes in sales volume, inflation, operating profit and other factors. Payments are allocated among the companies on the basis of relative market share or
other methods.
44.
The State Settlement Agreements have materially adversely affected RJRT’s shipment volumes. Reynolds American believes that
these settlement obligations may materially adversely affect the results of operations, cash flows or financial position of Reynolds
American and RJRT in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in U.S.
cigarette sales in the premium and value categories, RJRT’s share of the domestic premium and value cigarette categories, and the
effect of any resulting cost advantage of manufacturers not subject to the State Settlement Agreements.
45.
In addition, the MSA includes an adjustment that potentially reduces the annual payment obligations of RJRT, Lorillard Tobacco and
the other signatories to the MSA, known as ‘Participating Manufacturers’ (PMs). Certain requirements, collectively referred to as
the ‘Adjustment Requirements’, must be satisfied before the Non-Participating Manufacturers (NPM) Adjustment for a given year
is available: (i) an Independent Auditor must determine that the PMs have experienced a market share loss, beyond a triggering
threshold, to those manufacturers that do not participate in the MSA (such non-participating manufacturers being referred to as
NPMs); and (ii) in a binding arbitration proceeding, a firm of independent economic consultants must find that the disadvantages of
the MSA were a significant factor contributing to the loss of market share. This finding is known as a significant factor determination.
46.
When the Adjustment Requirements are satisfied, the MSA provides that the NPM Adjustment applies to reduce the annual payment
obligation of the PMs. However, an individual settling state may avoid its share of the NPM Adjustment if it had in place and diligently
enforced during the entirety of the relevant year a ‘Qualifying Statute’ that imposes escrow obligations on NPMs that are comparable
to what the NPMs would have owed if they had joined the MSA. In such event, the state’s share of the NPM Adjustment is reallocated
to other settling states, if any, that did not have in place and diligently enforce a Qualifying Statute.
47.
RJRT and Lorillard Tobacco are or were involved in NPM Adjustment proceedings concerning the years 2003 to 2019. In 2012, RJRT,
Lorillard Tobacco, and SFNTC entered into an agreement (the Term Sheet) with certain settling states that resolved accrued and
potential NPM adjustments for the years 2003 through 2012 and, as a result, RJRT and SFNTC collectively received, or are to receive,
more than US$1.1 billion (approximately £812.1 million) in credits that, in substantial part, were applied to MSA payments in 2014
through 2017. After an arbitration panel ruled in September 2013 that six states had not diligently enforced their qualifying statutes in
the year 2003, additional states joined the Term Sheet. RJRT executed the NPM Adjustment Settlement Agreement on 25 September
2017 (which incorporated the Term Sheet). Since the NPM Adjustment Settlement Agreement was executed, an additional 10 states
have joined. NPM proceedings are ongoing and could result in further reductions of the companies’ MSA-related payments.
48.
On 18 January 2017, the State of Florida filed a motion to join Imperial Tobacco Group, PLC (ITG) as a defendant and to enforce the
Florida State Settlement Agreement, which motion sought payment under the Florida State Settlement Agreement of approximately
US$45 million (approximately £33.2 million) with respect to the four brands (Winston, Salem, Kool and Maverick) that were sold to
ITG in the divestiture of certain assets, on 12 June 2015, by subsidiaries or affiliates of Reynolds American and Lorillard, together with
the transfer of certain employees and certain liabilities, to a wholly owned subsidiary of Imperial Brands plc (the Divestiture), referred
to as the ‘Acquired Brands’. The motion also claimed future annual losses of approximately US$30 million per year (approximately
£22.1 million) absent the court’s enforcement of the Florida State Settlement Agreement. The State’s motion sought, among other
things, an order declaring that RJRT and ITG are in breach of the Florida Settlement Agreement and are required, jointly and severally,
to make annual payments to the State under the Florida State Settlement Agreement with respect to the Acquired Brands. In addition,
on 18 January 2017, PM USA filed a motion to enforce the Florida State Settlement Agreement, asserting among other things that RJRT
and ITG breached that agreement by failing to make settlement payments as to the Acquired Brands, which PM USA asserts has
improperly shifted settlement payment obligations to PM USA. On 27 January 2017, RJRT sought leave to file a supplemental pleading
for breach by ITG of its obligations regarding joinder into the Florida State Settlement Agreement. The Florida court, on 30 March 2017,
ruled that ITG should be joined into the enforcement action.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
259
31 Contingent Liabilities and Financial Commitments
Continued
49.
After a bench trial, on 27 December 2017 the court entered
an order holding that RJRT (not ITG) is liable for annual
settlement payments for the Acquired Brands, finding that
ITG did not assume liability for annual settlement payments
under the terms of the asset purchase agreement relating to
the Divestiture and RJRT remained liable for payments under
the Florida State Settlement Agreement as to the Acquired
Brands. In January 2018, the auditor of the Florida State
Settlement Agreement adjusted the final 2017 invoice for the
annual payment and amended the 2015 and 2016 invoices for
the respective annual payment and the net operating profit
penalty for each of those years under the Florida Settlement
Agreement, based on the auditor’s interpretation of the court’s
order.The adjusted invoices reflected amounts due to both the
State of Florida and PM USA.In total, the estimated additional
amounts due were US$99 million (approximately £73.1 million)
with US$84 million (approximately £62 million) to the State of
Florida and US$16 million (approximately £11.8 million) to PM
USA.RJRT advised the auditor that it disputed these amounts,
and therefore no further amounts were due or would be paid
for those years pending the final resolution of RJRT’s appeal
of the court’s order.On 23 January 2018, RJRT filed a notice of
appeal, and on 25 January 2018, RJRT filed an amended notice
of appeal, and PM USA filed a notice of appeal as to the court’s
ruling as to ITG.On 26 January 2018, the State moved for
recovery of its attorneys’ fees and costs from RJRT.The State
and PM USA filed a joint motion for the entry of final judgment
on 1 February 2018. The court declined to enter a final
judgment until after resolution of the dispute between RJRT
and PM USA regarding PM USA’s assertion that settlement
payment obligations have been improperly shifted to PM USA.
On 15 August 2018, the court entered a final judgment in the
action (the Final Judgment). As a result of the Final Judgment,
PM USA’s challenge to RJRT’s accounting assumptions
related to the Acquired Brands was rendered moot, subject
to reinstatement if ITG joins the Florida State Settlement
Agreement or if judgment is reversed. On 29 August 2018, RJRT
filed a notice of appeal on the Final Judgment. On 7 September
2018, PM USA filed a notice of appeal with respect to the
court’s ruling as to ITG. On 12 September 2018, RJRT filed a
motion to consolidate RJRT’s appeal with the appeal filed by PM
USA, which was granted on 1 October 2018. Appellate briefing
was completed on 6 February 2020. Oral argument, originally
scheduled for 7 April 2020, was conducted through video
conference on 9 June 2020. On 29 July 2020, Florida’s Fourth
District Court of Appeal affirmed the Final Judgement.
On 12 August 2020, RJRT filed a motion for rehearing or for
certification to the Florida Supreme Court of the 29 July 2020
decision. On 10 June 2020, RJRT posted an additional bond in
the amount of US$84,102,984.75 (approximately £62.1 million),
over the US$103,694,155.08 (approximately £76.6 million) bond
initially posted, to cover additional disputed amounts plus two
years of statutory interest. The total amount RJRT bonded for
its appeal was US$187,797,139.83 (approximately £138.6 million).
RJRT’s motion for rehearing or certification to the Florida
Supreme Court was denied on 18 September 2020 and its
motion for review was denied by the Florida Supreme Court on
18 December 2020. On 5 October 2020, RJRT satisfied the Final
Judgment (approximately US$192,869,589.86 (approximately
£142,400,000)) and paid approximately US$3.2 million
(approximately £2.4 million) of Florida’s attorneys’ fees.
RJRT’s appellate bonds were released to RJRT by order dated
5 November 2020. RJRT is seeking indemnification from ITG in
the Delaware action, as described below.
50.
On 17 February 2017, ITG filed an action in the Court of Chancery
of the State of Delaware seeking declaratory relief against
Reynolds American and RJRT. In its complaint, ITG asked
the court to declare various matters related to its rights and
obligations under the asset purchase agreement (and related
documents) relating to the Divestiture with respect to the
subject of the Florida enforcement litigation. On 24 March 2017,
Reynolds American and RJRT answered the ITG complaint
and counterclaimed. Cross-motions for partial judgment on
the pleadings were filed focusing on whether ITG’s obligation
to use ‘reasonable best efforts’ to join the Florida State
Settlement Agreement continued after the 12 June 2015 closing.
On 30 November 2017, following argument, the Delaware
court ruled in favour of RJRT, holding that ITG’s obligation to
use its reasonable best efforts to join the Florida Settlement
Agreement did not terminate due to the closing of the asset
purchase agreement relating to the Divestiture. On 4 January
2019, RJRT filed another motion for partial judgment on the
pleadings seeking to resolve two contract-interpretation
questions under the asset purchase agreement: first, to the
extent RJRT is held liable for any settlement payments based
on post-closing sales of the Acquired Brands, ITG assumed
this liability, and second, that the asset purchase agreement
does not entitle ITG to a unique protection from an equity-
fee law that does not yet exist in a Previously Settled State.
Argument on RJRT’s motion for partial judgment was heard on
4 June 2019. On 23 September 2019, the Delaware Chancery
Court declined to resolve, at that time, the first issue, whether
ITG had assumed any liability imposed on RJRT for making
settlement payments on ITG’s brands. The court concluded
that both sides had presented reasonable interpretations of the
asset purchase agreement, which was therefore ambiguous,
so the court would receive any parole evidence that may exist
to help interpret the intent of the asset purchase agreement
on assumed liabilities. The court granted RJRT’s motion on the
second issue and ruled that ITG could not refuse to join the
Florida State Settlement Agreement unless a joinder exempted
it from a future equity-fee statute. On 11 October 2019, ITG filed
in the Chancery Court a motion to seek interlocutory appeal
in the Delaware Supreme Court on the second issue, which
was denied on 31 October 2019. On 31 October 2019, ITG filed a
notice of interlocutory appeal directly to the Delaware Supreme
Court, which was denied on 7 November 2019. Following the
settlement of the Minnesota and Texas enforcement litigation,
as described below, claims in the Delaware litigation with
respect to those states were voluntarily dismissed by
orders entered, respectively, on 7 April 2021 and 2 June 2021.
On 20 August 2021, Reynolds American and RJRT amended
their counterclaims to account for those settlements, as well as
the resolution of the Florida enforcement litigation, described
above, which included adding a claim for indemnification for the
Final Judgment in Florida. Discovery is ongoing and scheduled
to end in early 2022. A hearing on summary judgment motions
is scheduled to follow, and trial is scheduled to begin on
8 September 2022.
51.
On 26 March 2018, the State of Minnesota filed a motion against
RJRT to enforce the Minnesota State Settlement Agreement,
which motion sought payments under the Minnesota State
Settlement Agreement of approximately US$40 million
(approximately £29.5 million) with respect to the Acquired Brands.
The motion also claimed future annual losses of approximately
US$15 million (approximately £11.1 million) absent the court’s
enforcement of the Minnesota State Settlement Agreement.
BAT Annual Report and Form 20-F 2021
260
The State of Minnesota also filed a separate complaint against
ITG, which complaint sought the same payments. The State’s
motion against RJRT and complaint against ITG sought, among
other things, an order declaring that RJRT and ITG were in
breach of the Minnesota State Settlement Agreement and
were jointly and severally liable to make annual payments to
the State of Minnesota under the Minnesota State Settlement
Agreement with respect to the Acquired Brands. In addition,
on 28 March 2018, PM USA filed a motion to enforce the
Minnesota State Settlement Agreement, asserting, among
other things, that RJRT and ITG breached the Minnesota
State Settlement Agreement by failing to make settlement
payments as to the Acquired Brands, which PM USA asserted
had improperly shifted settlement payment obligations to PM
USA. On 27 March 2018, the Minnesota court consolidated
the motions to enforce and separate complaint against ITG
into one proceeding captioned
In re Petition of the State of
Minnesota for an Order Compelling Payments of Settlement
Proceeds Related to ITG Brands LLC
, Court File No. 62-CV-18-
1912. On 11 June 2018, the court held a scheduling conference
in the case and by order dated 21 June 2018, set a discovery
schedule for the case, under which discovery is complete.
A hearing on the motions to enforce to determine if RJRT and/
or ITG are liable to make payments on the Acquired Brands was
held on 26 June 2019. On 24 September 2019, the Minnesota
District Court issued an Order and Memorandum, holding
RJRT liable for settlement payments on the Acquired Brands,
and determining the issue of whether ITG is a ‘successor
or assign’ of RJRT under the Minnesota State Settlement
Agreement is unresolved, reasoning ITG’s status depends on
whether it satisfied its post-closing obligation to expend its
reasonable best efforts to join the Minnesota State Settlement
Agreement. On 23 December 2019, ITG filed a motion in the
Minnesota District Court seeking certification of an appeal of
certain questions arising from the 24 September 2019 order.
On 21 January 2020, a hearing was held on ITG’s motion seeking
certification of an appeal. On 19 February 2020, the Minnesota
District Court entered an Order and Memorandum denying
ITG’s motion for certification. A multi-day hearing to determine
whether ITG is liable for settlement payments was completed
on 9 September 2020. The parties filed post-hearing briefs on
13 November 2020. A status conference was held on 3 March
2021, during which the parties agreed to notify the Court
of the status of settlement discussions by 15 March 2021.
On 15 March 2021, the parties resolved all claims and an order
of dismissal was entered by the Minnesota district court on
17 March 2021.
52.
On 28 January 2019, the State of Texas filed motions in the
original Texas health care reimbursement case, brought against
the tobacco industry that led to the Texas State Settlement
Agreement, to join ITG as a defendant and to enforce the Texas
State Settlement Agreement against RJRT and ITG, seeking
payment under the Texas State Settlement Agreement of
approximately US$125 million (approximately £92.3 million)
with respect to the Acquired Brands that were sold to ITG in
the Divestiture.The motion also claimed future annual losses
of an unspecified amount absent the court’s enforcement of
the Texas State Settlement Agreement. The State’s motion
sought, among other things, an order declaring that RJRT, or
in the alternative, ITG, is in breach of the Texas Settlement
Agreement and is required to make annual payments to the
State under the Texas State Settlement Agreement with
respect to the Acquired Brands. In addition, on 29 January 2019,
PM USA filed a motion to enforce the Texas State Settlement
Agreement, asserting among other things that RJRT and
ITG breached that agreement by failing to make settlement
payments as to the Acquired Brands, which PM USA asserts
has improperly shifted settlement payment obligations to PM
USA. After completion of discovery, a hearing on the motions
to enforce was held on 30 October 2019. On 25 February
2020, the Court entered a Memorandum Opinion and Order
holding that RJRT remains liable for settlement payments on
the Acquired Brands under the Texas Settlement Agreement.
The Court further held that, although ITG is unambiguously an
assign within the meaning of the Texas Settlement Agreement,
a final determination of the scope of ITG’s obligations under
the asset purchase agreement is to be determined in the
litigation pending before the Delaware Court. Pursuant to the
Court’s direction, on 9 March 2020 the parties submitted a
status report indicating the remaining issues before the Court
include RJRT’s position that the Court should subtract the
equity fee payments made on the Acquired Brands by ITG’s
distributors from the settlement payments due by RJRT after
including the Acquired Brands in calculating damages, whether
a final judgment should be entered in favour of ITG, whether
a partial final judgment should be entered against RJRT and
the State’s request for an award of attorneys’ fees and costs
against RJRT and/or ITG. On 5 May 2020 the Court entered
final judgment (later clarified in a 14 August 2020 amended
judgment) on the State’s motion, ordering RJRT to pay all
settlement amounts due on the Acquired Brands under the
Texas Settlement Agreement; granting RJRT a full dollar-for-
dollar set-off for all equity fee payments made on the Acquired
Brands by ITG or its distributors, but holding RJRT liable for any
equity fee payments that are lawfully refunded; and ordering
the case closed, to be reopened after ITG’s liability under the
asset purchase agreement is determined by the Delaware
Court. ITG’s equity fee payments to Texas for the Acquired
Brands currently equal approximately 90% of the annual Texas
settlement payments for those brands. Thus, the settlement
payments for those Acquired Brands exceed ITG’s equity
fee payments by approximately US$3 million (approximately
£2.2 million) per year. As such, RJRT would owe approximately
US$3 million (approximately £2.2 million) a year after an equity
fee credit. Due to how the profit penalty is allocated, RJRT will
pay approximately US$10 million (approximately £7.4 million)
less in 2019 in Texas payments than it would have paid had ITG
joined, with that trend continuing in future years. However,
because ITG made equity fee payments at a substantially
lower rate before 2019, and because of how the profit penalty
was calculated before now, RJRT owed approximately
US$260.4 million (before interest) (approximately £192.2 million)
in past payments under the judgment through 2020. On 3 and
4 June 2020, respectively, RJRT and ITG filed notices of appeal
of the 5 May 2020 judgment. In August 2020, RJRT filed a
notice of appeal, and in September 2020, the State and ITG filed
notices of appeal from the portion of the judgment denying
the motion to remove the equity fee set-off. RJRT moved to
dismiss ITG’s appeal for lack of jurisdiction, which motion was
ordered by the Fifth Circuit Court of Appeals to be argued with
ITG’s appeal. On 2 November 2020 RJRT filed its appellate brief.
On 19 January 2021 the parties filed responses. On 21 May 2021,
the parties entered into a settlement agreement resolving
all claims. On 27 May 2021, the parties filed a stipulation
dismissing all claims, and on 28 May 2021, the Fifth Circuit
dismissed the parties’ appeals.
Financial Statements
Notes on Accounts
Continued
31 Contingent Liabilities and Financial Commitments
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
261
31 Contingent Liabilities and Financial Commitments
Continued
53.
In June 2015, ITG joined the Mississippi Settlement Agreement.
On 26 December 2018, PM USA filed a Motion to Enforce
Settlement Agreement against RJRT and ITG alleging RJRT and
ITG failed to act in good faith in calculating the base-year net
operating profits for the Acquired Brands, claiming damages of
approximately US$6 million (approximately £4.4 million) through
2017. On 21 February 2019, the Chancery Court of Jackson County,
Mississippi held a scheduling conference and issued a discovery
schedule order. A hearing on PM USA’s Motion to Enforce
Settlement Agreement originally scheduled for 3-6 May 2021
was adjourned on consent of the parties to 11-12 August 2021.
On 8 June 2021, PM USA and RJRT entered into a settlement
agreement resolving the outstanding payment calculation issues.
On 11 June 2021, the Mississippi Chancery Court entered an order
withdrawing PM USA’s motion to enforce. On 3 December 2019,
the State of Mississippi filed a Notice of Violation and Motion
to Enforce the Settlement Agreement in the Chancery Court
of Jackson County, Mississippi against RJRT, PM USA and ITG,
seeking a declaration that the base year 1997 net operating profit
to be used in calculating the Net Operating Profit Adjustment
was not affected by the change in the federal corporate tax rate
in 2018 from 35% to 21%, and an order requiring RJRT to pay the
approximately US$5 million (approximately £3.7 million) difference
in its 2018 payment because of this issue. Determination of this
issue may affect RJRT’s annual payment thereafter. A hearing on
Mississippi’s Motion to Enforce Settlement Agreement occurred
on 6-7 October 2021.
54.
In January 2021, RJRT reached an agreement with several MSA
states to waive RJRT’s claims under the MSA in connection with
a settlement between those MSA states and a non-participating
manufacturer, S&M Brands, Inc. (S&M Brands), under which the
states released certain claims against S&M Brands in exchange
for receiving a portion of the funds S&M Brands had deposited
into escrow accounts in those states pursuant to the states’
escrow statutes. In consideration for waiving claims, RJRT,
together with SFNTC, received approximately $55.4 million
from the escrow funds paid to those MSA states under their
settlement with S&M Brands.
Tobacco-Related Litigation Outside the U.S.
55.
As at 31 December 2021:
a.
medical reimbursement actions are being brought in
Angola, Brazil, Canada, Nigeria and South Korea;
b.
class actions are being brought in Canada and Venezuela;
and
c.
active tobacco product liability claims against the Group’s
companies existed in 12 markets outside the U.S. The only
markets with five or more claims were Argentina, Brazil,
Canada, Nigeria and Italy.
(a) Medical reimbursement cases
Angola
56.
In or about November 2016, BAT Angola affiliate Sociedade
Unificada de Tabacos de Angola (SUT) was served with a
collective action filed in the Provincial Court of Luanda, 2nd Civil
Section, by the consumer association Associação Angolana dos
Direitos do Consumidor (AADIC). The lawsuit seeks damages of
AOA 800,000,000 (approximately £1,000,000) allegedly incurred
by the Angolan Instituto Nacional do Controlo do Cancro (INCC)
for the cost of treating tobacco-related disease, non-material
damages allegedly suffered by certain individual smokers
on the rolls of INCC, and the mandating of certain cigarette
package warnings. SUT filed its answer to the claim on or
about5 December 2016. The case remains pending.
Argentina
57.
In 2007, the non-governmental organisation the Argentina Tort
Law Association (ATLA) and Emma Mendoza Voguet brought
a reimbursement action against Nobleza Piccardo S.A.I.C.y.F.
(Nobleza) and Massalín Particulares. The case is being heard in
the Contentious Administrative Court. The parties filed conclusive
briefs on 20 May 2019. On 11 May 2021, the Court dismissed the
case on the basis of plaintiffs’ lack of legal standing to bring the
suit. Plaintiffs did not appeal within the applicable deadline and
accordingly the judgment dismissing the case has become final.
Canada
58.
On 1 March 2019, the Quebec Court of Appeal handed down a
judgment which largely upheld and endorsed the lower court’s
previous decision in two Quebec class actions (the Quebec
Class Actions), as further described below. The share of the
judgment for Imperial, the Group’s operating company in Canada,
is approximately CAD $9.2 billion (approximately £5.4 billion).
As a result of this judgment, there were attempts by the
Quebec plaintiffs to obtain payment out of the CAD $758 million
(approximately £443 million) on deposit with the court. JTI-
MacDonald Corp (a co-defendant in the cases) filed for creditor
protection under the Companies’ Creditors Arrangement Act
(the CCAA) on 8 March 2019. A court order to stay all tobacco
litigation in Canada against all defendants (including RJRT and its
affiliate R.J. Reynolds Tobacco International Inc. (collectively, the
RJR Companies)) until 4 April 2019 was obtained, and the need
for a mediation process to resolve all the outstanding litigation
across the country was recognised. On 12 March 2019 Imperial
filed for creditor protection under the CCAA. In its application
Imperial asked the Ontario Superior Court to stay all pending or
contemplated litigation against Imperial, certain of its subsidiaries
and all other Group companies that were defendants in the
Canadian tobacco litigation, including British American Tobacco
p.l.c. (the Company), Investments, Industries and Carreras
Rothmans Limited (collectively, the UK Companies). On 22 March
2019, Rothmans, Benson & Hedges Inc. also filed for CCAA
protection and obtained a stay of proceedings (together with
the other two stays, the Stays). The Stays are currently in place
until 31 March 2022. While the Stays are in place, no steps are to
be taken in connection with the Canadian tobacco litigation with
respect to any of the defendants.
59.
The below represents the state of the referenced litigation as at the
advent of the Stays.
60.
Following the implementation of legislation enabling provincial
governments to recover health-care costs directly from tobacco
manufacturers, 10 actions for recovery of health-care costs
arising from the treatment of smoking- and health-related
diseases have been brought. These proceedings name various
Group companies as defendants, including the UK Companies
and Imperial as well as the RJR Companies. Pursuant to the
terms of the 1999 sale of RJRT’s international tobacco business
to Japan Tobacco Incorporated (JTI), JTI has agreed to indemnify
RJRT for all liabilities and obligations (including litigation costs)
arising in respect of the Canadian recoupment actions. Subject to
a reservation of rights, JTI has assumed the defence of the RJR
Companies in these actions.
61.
The 10 cases were proceeding in British Columbia, New Brunswick,
Newfoundland and Labrador, Ontario, Quebec, Manitoba, Alberta,
Saskatchewan, Nova Scotia and Prince Edward Island. The enabling
legislation is in force in all 10 provinces. In addition, legislation has
received Royal Assent in two of the three territories in Canada, but
has yet to be proclaimed into force.
BAT Annual Report and Form 20-F 2021
262
31 Contingent Liabilities and Financial Commitments
Continued
Canadian province
Act pursuant to which
Claim was brought
Companies named as
Defendants
Current stage
British Columbia Tobacco Damages
and Health Care
Costs Recovery
Act 2000
Imperial, Investments,
Industries, Carreras
Rothmans Limited,
the RJR Companies
and other former
Rothmans Group
companies have been
named as defendants
and served.
The defences of Imperial, Investments, Industries, Carreras
Rothmans Limited and the RJR Companies have been filed,
and document production and discoveries were ongoing.
On 13 February 2017 the Province delivered an expert report
dated October 2016, quantifying its damages in the amount
of CAD$118 billion (approximately £69 billion). No trial date has
been set. The federal government is seeking CAD$5 million
(approximately £2.9 million) jointly from all the defendants in
respect of costs pertaining to the third-party claim, now dismissed.
New Brunswick
Tobacco Damages
and Health Care
Costs Recovery
Act 2006
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
The defences of Imperial, the UK Companies and the RJR
Companies have been filed and document production and
discoveries are substantially complete. The most recent expert
report filed by the Province estimated a range of damages between
CAD $11.1 billion (approximately £6.5 billion) and CAD $23.2 billion
(approximately £13.6 billion), including expected future costs.
Following a motion to set a trial date, the New Brunswick Court of
Queen’s Bench ordered that the trial commence on 4 November
2019. On 7 March 2019, the New Brunswick Court of Queen’s
Bench released a decision which requires the Province to produce
a substantial amount of additional documentation and data to the
defendants. As a result, the original trial date of 4 November 2019
would have been delayed. No new trial date has been set.
Ontario
Tobacco Damages
and Health Care
Costs Recovery
Act 2009
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
The defences of Imperial, the UK Companies and the RJR
Companies have been filed. The parties completed significant
document production in the summer of 2017 and discoveries
commenced in the autumn of 2018. On 15 June 2018, the Province
delivered an expert report quantifying its damages in the range of
CAD$280 billion (approximately £163.7 billion) – CAD$630 billion
(approximately £368.2 billion) in 2016/2017 dollars for the period
1954 – 2060, and the Province amended the damages sought
in its Statement of Claim to CAD$330 billion (approximately
£192.9 billion). On 31 January 2019, the Province delivered a further
expert report claiming an additional amount between CAD
$9.4 billion (approximately £5.5 billion) and CAD$10.9 billion in
damages (approximately £6.4 billion) in respect of ETS. No trial date
has been set.
Newfoundland
and Labrador
Tobacco Health Care
Costs Recovery
Act 2001
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
The case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been filed
and the Province began its document production in March 2018.
Damages have not been quantified by the Province. No trial date
has been set.
Saskatchewan
Tobacco Damages
and Health Care
Costs Recovery
Act 2007
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed and the Province has delivered a test shipment of documents.
Damages have not been quantified by the Province. No trial date
has been set.
Manitoba
Tobacco Damages
Health Care Costs
Recovery Act 2006
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been filed
and document production commenced. Damages have not been
quantified by the Province. No trial date has been set.
Alberta
Crown’s Right of
Recovery Act 2009
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed and the Province commenced its document production.
The Province has stated its claim to be worth CAD$10 billion
(approximately £5.8 billion). No trial date has been set.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
263
Canadian province
Act pursuant to which
Claim was brought
Companies named as
Defendants
Current stage
Quebec
Tobacco Related
Damages and Health
Care Costs Recovery
Act 2009
Imperial, Investments,
Industries, the RJR
Companies and
Carreras Rothmans
Limited have been
named as defendants
and served.
The case is at an early case management stage. The defences of
Imperial, Investments, Industries, Carreras Rothmans Limited and
the RJR Companies have been filed. Motions over admissibility of
documents and damages discovery have been filed but not heard.
The Province is seeking CAD$60 billion (approximately £35.1 billion).
No trial date has been set.
Prince Edward Island
Tobacco Damages
and Health Care
Costs Recovery
Act 2009
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been filed
and the next step was expected to be document production, which
the parties deferred for the time being. Damages have not been
quantified by the Province. No trial date has been set.
Nova Scotia
Tobacco Health Care
Costs Recovery
Act 2005
Imperial, the UK
Companies and the
RJR Companies
have been named
as defendants
and served.
This case is at an early case management stage. The defences of
Imperial, the UK Companies and the RJR Companies have been
filed. The Province provided a test document production in March
2018. Damages have not been quantified by the Province. No trial
date has been set.
Nigeria
62.
British American Tobacco (Nigeria) Limited (BAT Nigeria), the Company and Investments have been named as defendants in a medical
reimbursement action by the federal government of Nigeria, filed on 6 November 2007 in the Federal High Court, and in similar
actions filed by the Nigerian states of Kano (9 May 2007), Oyo (30 May 2007), Lagos (13 March 2008), Ogun (26 February 2008), and
Gombe (17 October 2008) commenced in their respective High Courts. In the five cases that remain active, the plaintiffs seek a total of
approximately 10.6 trillion Nigerian naira (approximately £14.9 billion) in damages, including special, anticipatory and punitive damages,
restitution and disgorgement of profits, as well as declaratory and injunctive relief.
63.
The suits claim that the state and federal government plaintiffs incurred costs related to the treatment of smoking-related illnesses
resulting from allegedly tortious conduct by the defendants in the manufacture, marketing, and sale of tobacco products in Nigeria,
and assert that the plaintiffs are entitled to reimbursement for such costs. The plaintiffs assert causes of action for negligence,
negligent design, fraud and deceit, fraudulent concealment, breach of express and implied warranty, public nuisance, conspiracy, strict
liability, indemnity, restitution, unjust enrichment, voluntary assumption of a special undertaking, and performance of another’s duty
to the public.
64.
The Company and Investments have made a number of challenges to the jurisdiction of the Nigerian courts. Such challenges are still
pending (on appeal) against the federal government and the states of Lagos, Kano, Gombe and Ogun. The underlying cases are stayed
or adjourned pending the final outcome of these jurisdictional challenges. In the state of Oyo, on 13 November 2015, and 24 February
2017, respectively, the Company’s and Investments’ jurisdictional challenges were successful in the Court of Appeal and the issuance
of the writ of summons was set aside.
South Korea
65.
In April 2014, Korea’s National Health Insurance Service (NHIS) filed a healthcare recoupment action against KT&G (a Korean tobacco
company), PM Korea and BAT Korea (including BAT Korea Manufacturing). The NHIS is seeking damages of roughly 54 billion Korean
Won (approximately £33.5 million) in respect of health care costs allegedly incurred by the NHIS treating patients with lung (small cell
and squamous cell) and laryngeal (squamous cell) cancer between 2003 and 2012. Court hearings in the case, which constitute the
trial, commenced in September 2014. On 20 November 2020, the court issued a judgment in favour of the defendants and dismissing
all of the plaintiff’s claims. The NHIS filed an appeal of the judgment on 11 December 2020. Appellate proceedings commenced in June
2021 and remain ongoing.
31 Contingent Liabilities and Financial Commitments
Continued
BAT Annual Report and Form 20-F 2021
264
31 Contingent Liabilities and Financial Commitments
Continued
Brazil
66.
On 21 May 2019, the Federal Attorney’s Office (AGU) in Brazil
filed an action in the Federal Court of Rio Grande do Sul against
the Company, the BAT Group’s Brazilian subsidiary Souza Cruz
LTDA (Souza Cruz), Philip Morris International, Philip Morris
Brazil Indústria e Comércio LTDA and Philip Morris Brasil
S/A, asserting claims for medical reimbursement for funds
allegedly expended by the federal government as public health
care expenses to treat 26 tobacco-related diseases over the
last five years and that will be expended in perpetuity during
future years, including diseases allegedly caused both by
cigarette smoking and exposure to ETS. The action includes
a claim for moral damages allegedly suffered by Brazilian
society to be paid into a public welfare fund. The action is
for an unspecified amount of monetary compensation, as
the AGU seeks a bifurcated action in which liability would be
determined in the first phase followed by an evidentiary phase
to ascertain damages.
67.
On 19 July 2019, the trial court ordered that service of the
action on the Company be effected via service on Souza Cruz.
On 6 August 2019, Souza Cruz refused to receive service on
behalf of the Company due to Souza Cruz’s lack of power to
receive the summons on behalf of the Company and such
refusal was attached to the case files on 9 August 2019.
On 7 August 2019, Souza Cruz was served with the complaint
by the AGU and Souza Cruz’s acknowledgement of service was
attached to the case files on 12 August 2019.
68.
On 19 August 2019, Souza Cruz filed an interlocutory appeal
challenging the 19 July 2019 trial court order permitting the AGU
to effect service on the Company by serving Souza Cruz and
requesting a stay of the proceedings until the appeal is decided.
Souza Cruz also appealed the fact that several documents
attached to the AGU’s complaint are in English, without proper
translation, and it also appealed the very short term of 30 days
for the defendants to prepare their defences.
69.
On 20 August 2019, Souza Cruz informed the trial court about
the appeal and the trial court entered an order, which ordered
the closure of the online system preventing the parties from
submitting any petition so that no prejudice would be caused
to the defendants and permitted the AGU, within 15 days of
its notification, to respond to the argument that the service
of a foreign defendant via its Brazilian subsidiary constituted
improper service. On 21 August 2019, the substitute reporting
judge of the appellate court, having been notified that the
trial court judge had in the meantime issued a new decision
(thereby revoking the previous decision), ruled that the appeal
filed had therefore been rendered moot. The AGU filed its
submission in the trial court on 19 September 2019, and Souza
Cruz filed a reply submission on 25 September 2019. Souza Cruz
reported on 4 February 2020 that the trial court ruled that
service of the Company via its Brazilian subsidiary constituted
proper service, denied the request for additional time to file
defences, denied the request to have the foreign language
documents attached to the initial complaint fully translated
into Portuguese, and ordered that defences be filed within
30 business days.On 18 February 2020, Souza Cruz filed an
interlocutory appeal (including a request to stay the deadline
to file defences). On 12 March 2020, the court denied the
request for a stay. On 11 May 2020, the Company filed a petition
to intervene in Souza Cruz’s interlocutory appeal. On 17 June
2020, AGU filed its opposition to Souza Cruz’s interlocutory
appeal. The Company filed a reply submission on 8 July 2020.
On 15 July 2020, the court denied the interlocutory appeal.
Souza Cruz and the Company submitted on 6 August 2020
requests for clarification of this appellate decision. The court
granted the Company’s request to intervene, and rejected
Souza Cruz and the Company’s request for clarification of the
appellate decision, which decision became final on 6 June 2021.
Souza Cruz and the Company filed their respective defences on
12 May 2020. On 19 May 2020, a notice was sent to the Public
Prosecutor’s Office (MPF) regarding the AGU’s request that
the MPF join the action as a plaintiff. The MPF, in its response
filed 10 July 2020, rejected the AGU’s request, and declined
to join the action as party, but will act as an ‘inspector of the
law’, which enables MPF to express its opinion on matters in
the case. The court to date has not opened up the term for
the AGU to reply to the defences presented. On 19 February
2021, the Associação de Controle do Tabagismo, Promoção da
Saúde (ACT) filed a petition seeking to intervene in the case as
amicus curiae, which petition remains pending. On 25 March
2021 and 26 March 2021, respectively, Souza Cruz and PMB filed
petitions requesting that ACT’s powers be limited should ACT
be admitted as amicus curiae. On 19 May 2021, ACT filed a brief
in further support of its amicus curiae petition. On 8 August
2021, the Company responded to ACT’s request to intervene as
amicus curiae, arguing that ACT’s request should be rejected
or in the alternative that the scope of ACT’s intervention
rights should be limited. On 31 August 2021, ACT responded
to the Company’s submission. A court ruling on ACT’s petition
is pending.
(b) Class Actions
Canada
70.
As noted above, on 1 March 2019 the Quebec Court of Appeal
handed down a judgment which largely upheld and endorsed
the lower court’s previous decision in two Quebec Class
Actions, as further described below. Imperial’s share of the
judgment is approximately CAD $9.2 billion (approximately
£5.4 billion). As a result of this judgment, there were attempts
by the Quebec plaintiffs to obtain payment out of the CAD
$758 million (approximately £443 million) on deposit with
the court. JTI-MacDonald Corp (a co-defendant in the cases)
filed for creditor protection under the CCAA on 8 March 2019.
A court order to stay all tobacco litigation in Canada against
all defendants (including the RJR Companies) until 4 April 2019
was obtained, and the need for a mediation process to resolve
all the outstanding litigation across the country was recognized.
On 12 March 2019 Imperial filed for protection under the CCAA.
In its application Imperial asked the Ontario Superior Court to
stay all pending or contemplated litigation against Imperial,
certain of its subsidiaries and all other Group companies that
were defendants in the Canadian tobacco litigation, including
the UK Companies. On 22 March 2019, Rothmans, Benson &
Hedges Inc. also filed for CCAA protection and obtained a stay
of proceedings (together with the other two stays, the Stays).
The Stays are currently in place until 31 March 2022. While the
Stays are in place, no steps are to be taken in connection
with the Canadian tobacco litigation with respect to any of
the defendants.
71.
The below represents the state of the referenced litigation as at
the advent of the Stays.
72.
There are 11 class actions being brought in Canada against
Group companies.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
265
31 Contingent Liabilities and Financial Commitments
Continued
73.
Knight Class Action
: the Supreme Court of British Columbia
certified a class of all consumers who purchased Imperial
cigarettes in British Columbia bearing ‘light’ or ‘mild’
descriptors since 1974. The plaintiff is seeking compensation for
amounts spent on ‘light and mild’ products and a disgorgement
of profits from Imperial on the basis that the marketing of light
and mild cigarettes was deceptive because it conveyed a false
and misleading message that those cigarettes are less harmful
than regular cigarettes.
74.
On appeal, the appellate court confirmed the certification of the
class, but limited any financial liability, if proven, to 1997 onward.
Imperial’s third-party claim against the federal government
was dismissed by the Supreme Court of Canada. The federal
government is seeking a cost order of CAD$5 million
(approximately £2.9 million) from Imperial relating to its now
dismissed third-party claim. After being dormant for several
years, the plaintiff delivered a Notice of Intention to Proceed,
and Imperial delivered an application to dismiss the action
for delay. The application was heard on 23 June 2017 and was
dismissed on 23 August 2017. Notice to class members of
certification was provided on 14 February 2018. As at the date of
the Stays, the next steps were expected to include discovery-
related ones.
75.
Growers’ Class Action
: in December 2009, Imperial was served
with a proposed class action filed by Ontario tobacco farmers
and the Ontario Flue-Cured Tobacco Growers’ Marketing
Board. The plaintiffs allege that Imperial and the Canadian
subsidiaries of Philip Morris International and JTI failed to
pay the agreed domestic contract price to the growers used
in products manufactured for the export market and which
were ultimately smuggled back into Canada. JTI has sought
indemnification pursuant to the JTI Indemnities (discussed
below at paragraphs 137-138). The plaintiffs seek damages in
the amount of CAD$50 million (approximately £29.2 million).
Various preliminary challenges have been heard, the last
being a motion for summary judgment on a limitation period.
The motion was dismissed and ultimately, leave to appeal
to the Ontario Court of Appeal was dismissed in November
2016. In December 2017, the plaintiffs proposed that the action
proceed by way of individual actions as opposed to a class
action. The defendants did not consent. As at the date of the
Stays, the claim was in abeyance pending further action from
the plaintiffs.
76.
Quebec Class Actions
: there are currently two class actions
in Quebec. On 21 February 2005, the Quebec Superior Court
granted certification in two class actions against Imperial and
two other domestic manufacturers. The court certified two
classes, with the class definitions being revised in the judgment
rendered 27 May 2015. One class consists of residents of
Quebec who (a) smoked before 20 November 1998 at least 12
pack years of cigarettes manufactured by the defendants; and
(b) were diagnosed before 12 March 2012 with: lung cancer, or
cancer (squamous cell carcinoma) of the throat, or emphysema.
The group also includes the heirs of persons deceased after
20 November 1998 who meet the criteria described above.
The second consists of residents of Quebec who, as of
30 September 1998, were addicted to nicotine contained in
cigarettes and who in addition meet the following three criteria:
(a) they started smoking before 30 September 1994 by smoking
cigarettes manufactured by the defendants; (b) between
1 September and 30 September 1998 they smoked on average
at least 15 cigarettes manufactured by the defendants on a
daily basis; and (c) they still smoked an average of at least 15
cigarettes manufactured by the defendants as of 21 February
2005, or until their death if it occurred before that date.
The group also includes the heirs of members who meet
the criteria described above. Pursuant to the judgment, the
plaintiffs were awarded damages and interest against Imperial
and the Canadian subsidiaries of Philip Morris International
and JTI in the amount of CAD$15.6 billion (approximately
£9.1 billion), most of which was on a joint and several basis, of
which Imperial’s share was CAD$10.4 billion (approximately
£6.1 billion). An appeal of the judgment was filed on 26 June
2015. The court also awarded provisional execution pending
appeal of CAD$1,131 million (approximately £661.1 million), of
which Imperial’s share was approximately CAD$742 million
(approximately £433.7 million). This order was subsequently
overturned by the Court of Appeal. Following the cancellation
of the order for provisional execution, the plaintiffs filed a
motion against Imperial and one other manufacturer seeking
security in the amount of CAD $5 billion (approximately
£2.9 billion) to guarantee, in whole or in part, the payment of
costs of the appeal and the judgment. On 27 October 2015,
the Court of Appeal ordered the parties to post security in the
amount of CAD$984 million (approximately £575.1 million), of
which Imperial’s share was CAD$758 million (approximately
£443 million). The security was paid in seven equal quarterly
instalments of just over CAD$108 million (approximately
£63.1 million) between 31 December 2015 and 30 June 2017.
The appeal was heard in November 2016. On 1 March 2019,
the trial judgment was upheld by a unanimous decision of the
five-member panel of the Court of Appeal, with one exception
being an amendment to the original interest calculation applied
to certain portions of the judgment. The interest adjustment
has resulted in the reduction of the total maximum award in
the two cases to CAD $13.7 billion (approximately £8 billion)
as of 1 March 2019, with Imperial’s share being reduced to
approximately CAD $9.2 billion (approximately £5.4 billion).
The Court of Appeal also upheld the payment of the initial
deposits into the defendants’ solicitors’ trusts account within
60 days, totalling approximately CAD $1.13 billion (approximately
£660.5 million), of which Imperial’s share was recalculated
by the Court of Appeal as CAD $759 million (approximately
£443.6 million). Imperial has already paid CAD $758 million
(approximately £443 million) into court as security for
the judgment.
77.
Other Canadian Smoking and Health Class Actions
: seven
putative class actions, described below, have been filed against
various Canadian and non-Canadian tobacco-related entities,
including the UK Companies, Imperial and the RJR Companies,
in various Canadian provinces. In these cases, none of which
have quantified their asserted damages, the plaintiffs allege
claims based on fraud, fraudulent concealment, breach of
warranty of merchantability, and of fitness for a particular
purpose, failure to warn, design defects, negligence, breach
of a ‘special duty’ to children and adolescents, conspiracy,
concert of action, unjust enrichment, market share liability and
violations of various trade practices and competition statutes.
Pursuant to the terms of the 1999 sale of RJRT’s international
tobacco business, and subject to a reservation of rights, JTI has
assumed the defence of the RJR Companies in these seven
actions (Semple, Kunka, Adams, Dorion, Bourassa, McDermid
and Jacklin, discussed below).
BAT Annual Report and Form 20-F 2021
266
31 Contingent Liabilities and Financial Commitments
Continued
78.
In June 2009, four smoking and health class actions were filed
in Nova Scotia (Semple), Manitoba (Kunka), Saskatchewan
(Adams) and Alberta (Dorion) against various Canadian and
non-Canadian tobacco-related entities, including the UK
Companies, Imperial and the RJR Companies. In Saskatchewan,
the Company, Carreras Rothmans Limited and Ryesekks p.l.c.
have been released from Adams, and the RJR Companies have
brought a motion challenging the jurisdiction of the court.
There are service issues in relation to Imperial and the UK
Companies in Alberta and in relation to the UK Companies in
Manitoba. The plaintiffs did not serve their certification motion
materials and no dates for certification motions were set.
79.
In June 2010, two further smoking and health class actions
were filed in British Columbia against various Canadian and
non-Canadian tobacco-related entities, including Imperial, the
UK Companies and the RJR Companies. The Bourassa claim is
allegedly on behalf of all individuals who have suffered chronic
respiratory disease and the McDermid claim proposes a class
based on heart disease. Both claims state that they have been
brought on behalf of those who have ‘smoked a minimum
of 25,000 cigarettes’. The UK Companies, Imperial, the RJR
Companies and other defendants objected to jurisdiction.
Subsequently, the Company, Carreras Rothmans Limited and
Ryesekks p.l.c. were released from Bourassa and McDermid.
Imperial, Industries, Investments and the RJR Companies
remain as defendants in both actions. The plaintiffs did not
serve their certification motion materials and no dates for
certification motions were set.
80.
In June 2012, a smoking and health class action was filed in
Ontario (Jacklin) against various Canadian and non-Canadian
tobacco-related entities, including the UK Companies, Imperial
and the RJR Companies. The claim has been in abeyance.
Venezuela
81.
In April 2008, the Venezuelan Federation of Associations of
Users and Consumers (FEVACU) and Wolfang Cardozo Espinel
and Giorgio Di Muro Di Nunno, acting as individuals, filed a
class action against the Venezuelan government. The class
action seeks regulatory controls on tobacco and recovery of
medical expenses for future expenses of treating smoking-
related illnesses in Venezuela. Both C.A Cigarrera Bigott Sucs.
(Cigarrera Bigott), a Group subsidiary, and ASUELECTRIC,
represented by its president Giorgio Di Muro Di Nunno (who
had previously filed as an individual), have been admitted as
third parties by the Constitutional Chamber of the Supreme
Court of Justice. A hearing date for the action is yet to be
scheduled. On 25 April 2017 and on 23 January 2018, Cigarrera
Bigott requested the court to declare the lapsing of the class
action due to no proceedings taking place in the case in over a
year. A ruling on the matter is yet to be issued.
(c) Individual Tobacco-Related Personal Injury Claims
82.
As at 31 December 2021, the jurisdictions with the most active
individual cases against Group companies were, in descending
order: Brazil (23), Italy (11), Canada (5), Argentina (5), Chile (4)
and Ireland (2). There were a further two jurisdictions with one
active case only. Out of the 52 active individual tobacco related
personal injury claims, one case in Argentina (Baldassare)
received an unfavourable verdict as at 31 December 2021.
In that case, a first instance judgment, issued on 28 December
2020, awarded damages to the plaintiff in the amount of ARS
685,976 (approximately £5,000) in compensatory damages and
ARS 2,500,000 (approximately £18,000) in punitive damages
(plus interest). BAT Argentina filed a notice of appeal of the
judgment on 3 February 2021.
Non-Tobacco-Related Litigation
VUSE Litigation
83.
On 22 July 2020, Nicholas Bernston filed a personal injury
action in the Northern District of Oklahoma against JUUL Labs
Inc. (JUUL), Altria Client Services, LLC, RJR Vapor, Reynolds
American, and others. The complaint seeks damages for
personal injuries (including pneumonia and acute respiratory
failure) allegedly resulting from vaping on several theories,
including strict liability, negligence, and breach of implied
warranty of merchantability. On 24 July 2020, JUUL notified the
JPML that this case could be a potential tag-along in the JUUL
MDL. On 5 August 2020, the Judicial Panel on Multidistrict
Litigation entered a conditional transfer order transferring the
case to the Northern District of California. That order became
effective on 12 August 2020, and this case now is a member
case in the JUUL multidistrict litigation (MDL). On 13 October
2020, RJR Vapor and Reynolds American moved to dismiss the
complaint or, in the alternative, for a stay or a suggestion of
remand to the Northern District of Oklahoma. On 16 October
2020, the MDL court issued an order staying those motions
to dismiss. The case will remain pending against Reynolds
American and RJR Vapor, but they will not be subject to
discovery or other pretrial obligations absent further order from
the court.
Croatian Distributor Dispute
84.
BAT Hrvatska d.o.o u likvidaciji and British American Tobacco
Investments (Central and Eastern Europe) Limited are named
as defendants in a claim by Mr Perica received on 22 August
2017 and brought before the commercial court of Zagreb,
Croatia. Mr Perica seeks damages of HRK 408,000,000
(approximately £45.6 million) relating to a BAT Standard
Distribution Agreement dating from 2005. BAT Hrvatska
d.o.o and British American Tobacco Investments (Central and
Eastern Europe) Ltd filed a reply to the statement of claim on
6 October 2017. A hearing had been scheduled to take place on
10 May 2018, but it was postponed due to a change of the judge
hearing the case. The Commercial Court in Zagreb declared
they do not have jurisdiction and that the competent court
to hear this case is the Municipal Court in Zagreb. TDR d.o.o.
is also named as the defendant in a claim by Mr Perica received
on 30 April 2018 and brought before the commercial court of
Zagreb, Croatia. Mr. Perica seeks payment in the amount of
HRK 408,000,000 (approximately £45.6 million) claiming that
BAT Hrvatska d.o.o. transferred a business unit to TDR d.o.o,
thus giving rise to a liability of TDR d.o.o. for the debts incurred
by BAT Hrvatska d.o.o, on the basis of the provisions of Croatian
civil obligations law. A response to the statement of claim
was filed on 30 May 2018. The Commercial Court in Zagreb
declared they do not have jurisdiction and that the competent
court to hear this case is the Municipal Court in Pula. Mr Perica
filed an appeal against this decision which was rejected by the
High Commercial Court of The Republic of Croatia confirming
therewith that the competent court to hear this case is the
Municipal Court in Pula. The Municipal Court in Zagreb has
decided that the claims by Mr Perica initiated on 22 August
2017 and 30 April 2018 shall be heard as one case in front of the
Municipal Court of Zagreb. After the two hearings have been
held, the Municipal Court of Zagreb has appointed the court
financial and auditing appraisal to determine the value of Mr
Perica’s claim.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
267
31 Contingent Liabilities and Financial Commitments
Continued
BAT/Reynolds American Inc. Shareholder Litigation
85.
Following the Company’s acquisition of the remaining 57.8%
of Reynolds American in July 2017, pursuant to North Carolina
law, under which Reynolds American was incorporated, a
number of Reynolds American shareholders dissented and
asserted their rights to a judicial appraisal of the value of their
Reynolds American stock. On 29 November 2017, Reynolds
American filed a Complaint for Judicial Appraisal in state court
in North Carolina against 20 dissenting shareholders holding an
aggregate of approximately 9.65 million shares. The complaint
asked the court to determine the fair value of the dissenting
shareholders’ shares in Reynolds American and any accrued
interest. A trial was held in June 2019, at which the dissenters
sought US$92.17 per share plus interest. On 27 April 2020, the
court issued its final judgment upholding Reynolds American’s
proposed valuation of $59.64 per share and concluding that
no further payment is due to the dissenters for their shares.
Dissenting shareholders holding an aggregate of approximately
6.52 million shares filed a notice of appeal to the North Carolina
Supreme Court. On 17 December 2021, the North Carolina
Supreme Court issued an opinion affirming the Business
Court’s determination, and on 21 January 2022 the dissenters’
deadline to seek further review expired, meaning that this
matter is now concluded.
Patents Litigation
86.
Certain Group companies are party to a number of patent
litigation cases and procedural challenges concerning the
validity of patents owned by or licensed to them and/or the
alleged infringement of third-parties’ patents.
87.
On 22 June 2018, an affiliate of Philip Morris International (PMI)
commenced proceedings against British American Tobacco
Japan, Ltd. (BAT Japan) in the Japanese courts challenging the
import, export, sale and offer of sale of the glo device and of
the NeoStiks consumable in Japan at the time the claim was
brought (and earlier models of the glo device), alleging that the
glo devices directly infringe certain claims of two Japanese
patents that have been issued to the PMI affiliate and that the
NeoStiks indirectly infringe certain claims of those patents.
On 17 January 2019, the PMI affiliate introduced new grounds
of infringement, alleging that the glo device also infringes
some other claims in the two PMI affiliate’s Japanese patents.
Damages for the glo device and NeoStik are claimed in the
court filing, to the amount of 100 million Yen (approximately
£641,000). The PMI affiliate has also filed a request for
injunction with respect to the glo device. BAT Japan denies
infringement and is challenging the validity of the two PMI
affiliate’s Japanese patents.
88.
Fuma International LLC (Fuma) filed two separate patent
infringement complaints in the U.S. District Court for the
Middle District of North Carolina against RJR Vapor on 6 March
2019 and 2 July 2019, each alleging that Vuse Solo and Vuse
Ciro products infringe a patent. The two complaints were
consolidated into a single proceeding involving both asserted
Fuma patents. The parties resolved this matter pursuant to
a Confidential Settlement and License Agreement effective
29 November 2021.
89.
On 9 April 2020, Nicoventures Trading Limited (Nicoventures)
commenced an action in the England and Wales High Court
(Patents Court) against Philip Morris Products S.A. (PMP)
for revocation against three divisional patents in the same
family, of which PMP is the proprietor (a further divisional
patent inthesame family was added into the revocation
action on 9 July 2020). On 12 May 2020 PMP filed its defence
together with a counterclaim for patent infringement against
Nicoventures and Investments concerning prototype examples
or production samples of certain ‘glo’ tobacco heating
devices. PMP are seeking an injunction, an order for delivery
up or a destruction upon oath of all infringing articles, and
either an account of profits or damages on commercial sales
(and interest thereon). On 12 June 2020, Nicoventures and
Investments filed their defence to the counterclaim. The trial
of this action took place between 18-25 May 2021. On 14 July
2021 the England and Wales High Court (Patents Court) handed
down its judgment finding that all four divisional patents were
invalid for lack of an inventive step and consequently, that
PMP’s counterclaim failed. On 2 November 2021, PMP filed a
request for permission to appeal.
90.
On 28 May 2020 Altria Client Services LLC and U.S.
Smokeless Tobacco Company LLC commenced proceedings
against RJR Vapor before the U.S. District Court for the Middle
District of North Carolina against the vapour products Vuse
Vibe and Vuse Alto, and the tin used in the modern oral product
Velo. Nine patents in total were asserted: two against Vibe,
four against Alto and three against Velo. On 5 January 2021,
Altria filed an Amended Complaint adding Modoral Brands
Inc. as a defendant with respect to the Velo product claims.
The plaintiffs have sought damages but have not to date
sought preliminary or permanent injunctions. RJR Vapor has
responded to the complaint. The parties conducted a one-day
mediation session in August 2021, but were unable to resolve
the dispute. A claim construction hearing was held on 28 April
2021, and the court issued its claim construction ruling on
12 May 2021. Fact discovery, expert discovery, and summary
judgment briefings are completed. No date has been set for a
summary judgment hearing, and no trial date has been set.
91.
On 9 April 2020, RAI Strategic Holdings, Inc. and RJR Vapor
commenced an action in the U.S. District Court for the Eastern
District of Virginia against Altria Client Services LLC, Philip
Morris USA, Inc., Altria Group, Inc., Philip Morris International,
Inc., and Philip Morris Products S.A. (collectively, Philip Morris)
for infringement of six patents based on the importation and
commercialization within the United States of IQOS. On 8 May
2020 and 12 June 2020, Philip Morris filed Inter Partes Review
(IPR) petitions in the U.S. Patent Office challenging the validity
of each of the six patents asserted. On 29 June 2020, Philip
Morris asserted counterclaims alleging that RJR Vapor infringes
five patents. On 24 November 2020, the court issued a claim
construction order that determined that each disputed term
would have its plain and ordinary meaning. On 4 December
2020, the magistrate judge issued an order staying RJR Vapor
and Philip Morris’s patent claims pending a decision by the U.S.
Patent Office regarding whether to proceed with the IPRs. At the
time of the stay, fact and expert discovery was ongoing and
was scheduled to conclude 26 January 2021. The court lifted the
stay, and the parties have substantially completed discovery.
On 6 August 2021, the court denied all summary judgment
motions. Trial on the Altria and Philip Morris patents was
scheduled to have begun on 4 April 2022, but the court postponed
the trial and set a new trial date of 6 June 2022; the RJR Vapor
offensive patent case remains stayed pending (i) an appeal
by Philip Morris to the Federal Circuit in relation an exclusion
order granted against Philip Morris by the International Trade
Commission based on the relevant patents, and (ii) the decisions
in IPRs commenced by Philip Morris against the relevant patents
at the U.S. Patent Office.
BAT Annual Report and Form 20-F 2021
268
31 Contingent Liabilities and Financial Commitments
Continued
92.
On 27 November 2020 Philip Morris filed a complaint before the
Regional Court Mannheim in Germany against British American
Tobacco (Germany) GmbH (BAT Germany) alleging that the sale,
offer for sale and importation of Vype ePod products infringes a
patent. Philip Morris is seeking an injunction, a recall of product
from commercial customers and a declaratory judgment for
damages. The trials of this action took place on 15 June 2021 and
9 November 2021. A decision on the matter was promulgated on
30 November 2021. The decision dismissed the complaint in its
entirety. On 28 December 2021, Philip Morris lodged an appeal
against this decision before the Higher Regional Court Karlsruhe.
93.
On 11 December 2020 Philip Morris filed a complaint before the
Regional Court Dusseldorf in Germany against BAT Germany
alleging that the sale, offer for sale and importation of the glo
TABAK HEATER and neo STICK products infringe a patent.
Philip Morris is seeking an injunction, a recall of product
from commercial customers and a declaratory judgment for
damages. The trial of this action took place on 30 November
2021. The court promulgated its decision on 21 December
2021 and decided that the above-mentioned products infringe
the patent. The decision is not final and was appealed by BAT
Germany on 21 December 2021 to the Higher Regional Court
Dusseldorf. On 31 December 2021, BAT Germany also lodged a
formal request with the appeal court to suspend the injunction
order against the neo STICK products. On 24 January 2022,
the appeal court granted this request, subject to providing a
security and indicating that the neo STICK products are only
suitable for new glo TABAK HEATER devices. BAT Germany is
no longer marketing the glo TABAK HEATER, but rather a new
glo TABAK HEATER marketed as glo Hyper + New Heating
Technology, which is not subject to the patent infringement
proceedings. Because the trial court decision only contains
a declaratory obligation for BAT Germany to pay damages,
Philip Morris would have to file a new separate action for the
actual payment of damages, stating the precise amount that is
being claimed.
94.
On 14 December 2020, Modoral Brands Inc. (Modoral) filed a
complaint in the U.S. District Court for the District of Delaware
against Pinkerton Tobacco Co., LP, Swedish Match North
America LLC, and NYZ AB (collectively Swedish Match) seeking
a declaratory judgment that the importation, manufacture,
use, and/or sale of Modoral’s Velo product does not infringe
U.S. Patent No. 9,161,908 (the ‘908 Patent) or any of Swedish
Match’s trade secrets. On 3 June 2021, the case was transferred
to the U.S. District Court for the Central District of California.
On 13 July 2021, Swedish Match and Helix Innovations GmbH
filed counterclaims against Modoral for infringement of the
’908 patent and misappropriation of trade secrets arising
out of the manufacture, use, and sale of Modoral’s Velo
product. On 15 December 2021, the court entered a Markman
Order finding that the ’908 patent distinguishes a nicotine
complex from the claimed ‘nicotine salt,’ and more specifically,
affirmatively excluding the nicotine polacrilex complex used
in the accused Velo product from the claimed invention
because it is “not a nicotine salt”. Swedish Match agreed to
a joint stipulation and request for entry of judgment of non-
infringement for all of the asserted claims of the ’908 patent,
which the Court granted on 19 January 2022. Modoral filed
a motion to stay Swedish Match’s remaining trade secret
misappropriation claims in light of Swedish Match’s intent to
appeal the Markman Order to the Federal Circuit. Modoral also
filed a Rule 54(b) motion for partial final judgment of the
infringement claims. Both motions are scheduled for argument
on 4 March 2022.
Mozambican IP Litigation
95.
On 19 April 2017, Sociedade Agrícola de Tabacos, Limitada (SAT)
(a BAT Group company in Mozambique) filed a complaint to
the National Inspectorate for Economic Activities (INAE), the
government body under the Ministry of Industry and Trade,
regarding alleged infringements of its registered trademark (GT)
by GS Tobacco SA (GST). INAE subsequently seized the allegedly
infringing products (GS cigarettes) and fined and ordered GST
to discontinue manufacturing products that could infringe
SAT’s intellectual property rights. Following INAE’s decision, in
July 2017 and March 2018, SAT sought damages via the Judicial
Court of Nampula, from GST in the amount of and equivalent to
£573,000 as well as a permanent restraint order in connection
with the manufacturing and selling of the allegedly infringing
products. The Judicial Court of Nampula (Tribunal Judicial de
Nampula) granted the order on an interim basis on 7 August 2017.
After hearing the parties, on 5 September 2017, the court found
that no alleged infringement by GST had occurred and removed
the interim restraint order, this decision was appealed by SAT and
is currently pending a decision. GST filed an application for review
against INAE’s initial decision directly to the Minister of Trade and
Industry, which reversed the decision of INAE. On 31 December
2018, SAT was notified of GST’s counterclaim against SAT at
the Judicial Court of Nampula for damages allegedly sustained
as a result of SAT’s complaint to INAE (and INAE’s decision).
GST is seeking damages in the amount equivalent to £190 million.
On 31 January 2019 SAT filed a formal response to the counterclaim.
GST was notified on 28 February 2019 to file a response to our
formal response to the counterclaim and the judge scheduled the
preliminary hearing for 14 March 2019. This hearing was adjourned
and was held on 2 April 2019, when the court heard arguments
on the validity of SAT’s counterclaim. On 2 September 2019, SAT
received notification of an order which provided that (i) SAT’s claim
had been dismissed by the court; and (ii) the GST counterclaim
would proceed to trial. On 9 September 2019 SAT responded to the
order by appealing the dismissal of the SAT claim. Additionally, SAT
made an interlocutory application in the counterclaim proceedings
to challenge certain questions posed by the judge, on the basis that
the responses may be used as evidence at trial. SAT was notified
in December 2021 that the trial of the counterclaim is to take place
on 24 February 2022. SAT subsequently submitted a complaint
related to that trial to the court, on the basis that prior to any
further step being taken in relation to the trial the process should
be submitted to the superior court for analysis, as per the appeals
previously submitted in the proceedings. SAT’s complaint has not
yet been determined.
Malawi Group Action
96.
In December 2020, the Company and British American Tobacco
(GLP) Limited (GLP) were named as defendants in a claim made in
the English High Court by around 7,500 Malawian tobacco farmers
and their family members. The claim also names Imperial Brands
plc and five affiliates as defendants. The claimants allege they
were subjected to unlawful and exploitative working conditions
on tobacco farms from which it is alleged that the defendants
indirectly acquire tobacco. They seek unquantified damages
(including aggravated and exemplary damages) for the torts
of negligence and conversion and unquantified personal and
proprietary remedies for restitution of unjust enrichment. They also
seek an injunction to restrain the commission of further torts of
conversion or negligence by the defendants. The defendants had
an application to strike out the claims dismissed in a judgment
dated 25 June 2021. In January 2022, the Company and GLP were
served with a similar claim by around a further 3,500 claimants.
The Company and GLP intend vigorously to defend the claims.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
269
31 Contingent Liabilities and Financial Commitments
Continued
Qatar Customs Authority Claims
97.
On 12 November 2020, British American Tobacco Middle
East W.L.L (formerly British American Tobacco Middle East
SPC) (BAT ME), along with its distributor in Qatar, Ali Bin Ali
Establishment (ABA), filed a case before the Qatar Court of
First Instance which challenges a decision of Qatar General
Authority of Customs dated 16 August 2020 ordering ABA to
pay two amounts arising from unrelated circumstances, one of
which totalled QAR 160,531,588 (approximately £32.6 million) in
customs duties and penalties in relation to 27 consignments of
cigarettes imported into Qatar by ABA. On 14 February 2021, the
General Authority of Customs issued a new order that repeated
(and addressed only) its demand that ABA pay QAR 160,531,588
in customs duties and penalties in relation to the same 27
consignments of cigarettes imported into Qatar by ABA.
On 19 May 2021, BAT ME and ABA filed a second case before
the Qatar Court of First Instance which challenges the decision
of Qatar’s General Authority of Customs dated 14 February
2021. On 28 October 2021, the Court of First Instance dismissed
both cases filed by BAT ME and ABA on the grounds the cases
were not timely filed. In December 2021, BAT ME and ABA
appealed the decisions of the Court of First Instance in both
cases. It is possible that the two appeals filed by BAT ME and
ABA will be consolidated into a single case. In any event, ABA
can only have liability under one case not both, so its maximum
liability is QAR 160,531,588, not twice that amount. BAT ME’s
potential liability in respect of the foregoing amount arises from
certain contractual arrangements with ABA. BAT ME and ABA
strongly assert that the additional customs duty and penalties
imposed by the Qatar Customs Authority are inconsistent with
applicable law.
Saudi Arabia Customs Claim
98.
On 25 January 2021, Walid Ahmed Mohammed Al Naghi for
Trading Establishment (Al Naghi), a former distributor for the
Group’s operating companies in the Middle East, filed a claim
in the Commercial Court in Jeddah, Saudi Arabia, seeking SAR
2,105,356,121 (approximately £414 million) for reimbursement
of funds allegedly due under contract. Al Naghi did not
formally name any Group entity as a defendant in the claim.
The claim was dismissed orally by the Court on 9 February
2021. On 20 April 2021, Al Naghi filed a new claim in the Jeddah
Commercial Court against BAT UKE demanding that BAT UKE
reimburse Al Naghi in the amount of SAR 2,105,356,121 allegedly
paid by Al Naghi to the customs authorities in customs dues.
BAT UKE submitted a response on 27 May 2021 requesting
dismissal of the claim on the ground that BAT UKE lacks
legal capacity to be sued as it was not a party to any relevant
agreement with Al Naghi. On 16 June 2021, the Court of First
Instance issued a judgment dismissing the claim against
BAT UKE and ruling that BAT UKE lacks legal standing to be
named defendant in the proceedings. On 22 August 2021,
Al Naghi filed an appeal against the Court of First Instance
judgement. BAT UKE was not given an opportunity to respond
to Al Naghi’s allegations on appeal. On 15 November 2021, the
Appellate Court issued an oral ruling cancelling the Court First
Instance judgement and remanding the case to the lower
court for further deliberation. In its written judgement dated
12 December 2021, the Appellate Court stated that it was
remanding the case in order for the Court of First Instance
to join to the proceedings BAT entities in Bahrain and UAE,
which Al Naghi had wrongly claimed on appeal to be branches
of BAT UKE. The Court of First Instance held a hearing on
19 January 2022 to re-consider the case in light of the Appellate
Court judgement.
At that hearing, the Court of First Instance set a timetable
for the parties to file written submissions setting out their
arguments with regard to the legal status of the BAT entities
in Bahrain and UAE. A further hearing was held on 2 February
2022. The court is seeking further information from the BAT
entities in Bahrain and UAE ahead of a further hearing on
23 February 2022.
Asbestos Litigation
99.
On 15 January 2021, plaintiffs in an individual asbestos personal
injury action (Rentko), originally filed 5 October 2020 in the
New York City Asbestos Litigation court, filed an amended
complaint, which named as defendants the Company, BATUS
Holdings, Inc., British American Tobacco (Brands) Inc., and RJRT,
along with various other defendants. The amended complaint
was served 20 January 2021 on BATUS Holdings, Inc. and British
American Tobacco (Brands) Inc., and served 22 January 2021 on
RJRT. The amended complaint alleges that one of the plaintiffs
was exposed to the defendants’ asbestos and asbestos-
contaminated talcum powder products, which allegedly caused
her to develop mesothelioma, and asserts claims under state
law, including for negligence, breach of warranty, product
liability, negligent misrepresentation, fraudulent concealment,
and civil conspiracy. A further amended complaint was filed
on 27 January 2021, which named Reynolds American as a
defendant as an alleged successor in interest to the Company,
and which was served on Reynolds American on 5 February
2021. Plaintiffs seek unspecified compensatory and punitive
damages jointly and severally against the defendants.
Reynolds American and RJRT moved to dismiss the amended
complaint on 26 March 2021. A notice of discontinuance was
filed on 31 March 2021 discontinuing the litigation without
prejudice as against the Company, BATUS Holdings, Inc.
and British American Tobacco (Brands) Inc. A stipulation of
discontinuance was filed on 6 April 2021 discontinuing the
litigation without prejudice as against Reynolds American
and RJRT.
100.
On 23 April 2021, plaintiff in an asbestos personal injury action
(Smoltino), originally filed 25 August 2020 in the New York City
Asbestos Litigation court, filed an amended complaint, which
named as defendants the Company, BATUS Holdings, Inc.,
British American Tobacco (Brands) Inc., Reynolds American
and RJRT, along with various other defendants. The amended
complaint was served on BATUS Holdings, Inc., British
American Tobacco (Brands) Inc. and RJRT on 23 April 2021 and
served on Reynolds American on 26 April 2021. The amended
complaint alleged that plaintiff’s decedent was exposed to
the defendants’ asbestos and asbestos-contaminated talcum
powder products, which allegedly caused her to develop
mesothelioma, and asserted claims under state law, including
for negligence, breach of warranty, product liability, negligent
misrepresentation, fraudulent concealment, wrongful death
and civil conspiracy. Plaintiff seeks unspecified compensatory
and punitive damages jointly and severally against the
defendants. A notice of discontinuance was filed on 19 May
2021 discontinuing the litigation without prejudice as against
the Company, BATUS Holdings, Inc. and British American
Tobacco (Brands) Inc. Reynolds American and RJRT moved to
dismiss the amended complaint on 10 May 2021. A stipulation
of discontinuance was filed on 24 May 2021 discontinuing the
litigation without prejudice as against Reynolds American
and RJRT.
BAT Annual Report and Form 20-F 2021
270
31 Contingent Liabilities and Financial Commitments
Continued
101.
On11 May 2021, plaintiff in an asbestos personal injury action
(Gilbride) filed a complaint in theSuperior Court of New
Jersey Law Division – Middlesex County, which named as
defendantsR. J. Reynolds Tobacco Company, individually and
as successor-by-merger to British American Cosmetics, along
with various other defendants. The complaint was served on
RJRT on26 May 2021. The complaint alleged that plaintiff was
exposed toasbestos-containing cosmetic talcum powder
productssold and supplied by the Defendants (and/or their
predecessors in interest), which allegedly caused her to
develop mesothelioma, and asserted claims under state law,
including for negligence, breach of warranty,strict liability in
tort, marketing an ultra-hazardous product,failure to warn,
product liability, negligent misrepresentation, fraudulent
concealment, and civil conspiracy. Plaintiff seeks unspecified
compensatory and punitive damages jointly and severally
against the defendants. A stipulation for voluntary dismissal
was filed with the court on 7 July 2021.
Fox River
Background to environmental liabilities arising out of
contamination of the Fox River:
102.
In Wisconsin, the authorities have identified potentially
responsible parties (PRPs) to fund the clean-up of river
sediments in the lower Fox River. The pollution was caused by
discharges of Polychlorinated Biphenyls (PCBs) from paper
mills and other facilities operating close to the river. Among the
PRPs is NCR Corporation (NCR).
103.
In NCR’s Form 10-K Annual Report for the year ended
31 December 2014, the total clean-up costs for the Fox
River were estimated at US$825 million (approximately
£609.1 million). This estimate is subject to uncertainties and
does not include natural resource damages (NRDs). Total NRDs
may range from US$0 to US$246 million (approximately £0 to
£181.6 million).
104.
Industries’ involvement with the environmental liabilities
arises out of indemnity arrangements which it became party
to due to a series of transactions that took place from the
late-1970s onwards and subsequent litigation brought by
NCR against Industries and Appvion Inc. (Appvion) (a former
Group subsidiary) in relation to those arrangements which
was ultimately settled. U.S. authorities have never identified
Industries as a PRP.
105.
There has been a substantial amount of litigation in the
United States involving NCR and Appvion regarding the
responsibility for the costs of the clean-up operations. The U.S.
Government also brought enforcement proceedings against
NCR and Appvion to ensure compliance with regulatory orders
made in relation to the Fox River clean-up. This litigation has
been settled through agreements with other PRPs and a
form of settlement known as a Consent Decree with the U.S.
Government, approved by the District Court of Wisconsin on
23 August 2017.
106.
The principal terms of that Consent Decree, in summary, are
as follows:
a.
NCR is obliged to perform and fund all of the remaining Fox
River remediation work by itself.
b.
The U.S. Government enforcement proceedings were settled,
with NCR having no liability to meet the U.S. Government’s
claim for costs it had incurred in relation to the clean-up to
date, a secondary responsibility to meet certain future costs,
and no liability to the U.S. Government for NRDs.
c.
NCR ceased to pursue its contribution claims against the
other PRPs and in return received contribution protection
preventing other PRPs from pursuing their contribution
claims against NCR and existing claims for contribution
being dismissed by order of the Court. NCR does, however,
have the right to reinstate its contribution claims if the
other PRPs decide to continue to pursue certain contractual
claims against NCR.
d.
Appvion also agreed to cease pursuance of claims against
the other PRPs, subject to retention of the right to reinstate
its claims if the other PRPs decide to continue to pursue
certain claims against Appvion.
107.
A Consent Decree between the U.S. Government, P.H.
Glatfelter and Georgia Pacific settling the allocation of costs
on the Fox River was approved by the District Court in the
Eastern District of Wisconsin on 14 March 2019. This Consent
Decree concludes all existing litigation on the Fox River,
following P.H. Glatfelter’s withdrawal of its appeal against the
issuance of the Consent Decree as a term of the settlement.
108.
In NCR’s Form 10-K Annual Report for the year ended
31 December 2020 NCR disclosed that, in November 2019,
an arbitral tribunal had awarded approximately US$10 million
(approximately £7.4 million) to a remediation general
contractor engaged by the LLC formed by NCR and Appvion to
perform the clean-up operation of the Fox River. NCR further
stated that its indemnitors and co-obligors were responsible
for the majority of the award, with its own share being
approximately 25% of the award.
Industries’ involvement with environmental liabilities arising
out of the contamination of the Fox River:
109.
NCR has taken the position that, under the terms of a 1998
Settlement Agreement between it, Appvion and Industries,
and a 2005 arbitration award, Industries and Appvion generally
had a joint and several obligation to bear 60% of the Fox River
environmental remediation costs imposed on NCR and of any
amounts NCR has to pay in respect of other PRPs’ contribution
claims. BAT has not acknowledged any such liability to NCR
and has defences to such claims. Further, under the terms
of the Funding Agreement (described below), any dispute
between Industries and NCR as to the final amount of any
NCR claim against Industries in respect of the Fox River (if
any) can only be determined at the later of (i) the completion
of Fox River remediation works or (ii) the final resolution and
exhaustion of all possible appeals in proceedings brought
against Sequana, PricewaterhouseCoopers LLP (PwC) and
other former advisers.
110.
Until May 2012, Appvion and Windward Prospects Limited
(Windward) (another former Group subsidiary) had paid a 60%
share of the clean-up costs incurred by NCR. Industries was
never required to contribute. Around that time, Appvion
refused to continue to pay clean-up costs, leading to NCR
demanding that Industries pay a 60% share of those costs.
111. Industries commenced proceedings against Windward and
Appvion in December 2011 seeking indemnification in respect
of any liability it might have to NCR (the English Indemnity
Proceedings) pursuant to a 1990 de-merger agreement
between those parties.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
271
31 Contingent Liabilities and Financial Commitments
Continued
Funding Agreement of 30 September 2014
112.
On 30 September 2014, Industries entered into a Funding
Agreement with Windward, Appvion, NCR and BTI 2014 LLC
(BTI) (a wholly owned subsidiary of Industries). Pursuant to the
Funding Agreement, the English Indemnity Proceedings and
a counterclaim Appvion had brought in those proceedings,
as well as an NCR-Appvion arbitration concerning Appvion’s
indemnity to NCR, were discontinued as part of an overall
agreement between the parties providing a framework
through which they would together fund the ongoing costs of
the Fox River clean-up. Under the agreement, NCR has agreed
to accept funding by Industries at the lower level of 50% of the
ongoing clean-up related costs of the Fox River (rather than
the 60% referenced above). This remains subject to an ability
to litigate at a later stage the extent of Industries’ liability (if
any) in relation to Fox River clean-up related costs (including
in respect of the 50% of costs that Industries has paid under
the Funding Agreement to date). In addition, Windward
has contributed US$10 million (approximately £7.4 million)
of funding and Appvion has contributed US$25 million
(approximately £18.5 million) for Fox River and agreed to
contribute US$25 million (approximately £18.5 million) for the
Kalamazoo River (see further below). Appvion entered Chapter
11 bankruptcy protection on 1 October 2017.
113.
The parties also agreed to cooperate in order to maximise
recoveries from certain claims made against third parties,
including (i) a claim commenced by Windward in the High
Court of England & Wales (the High Court) against Sequana
and the former Windward directors (the Windward Dividend
Claim). That claim was assigned to BTI under the Funding
Agreement, and relates to dividend payments made by
Windward to Sequana of around €443 million (approximately
£372 million) in 2008 and €135 million (approximately
£113.4 million) in 2009 (the Dividend Payments) and (ii) a claim
commenced by Industries directly against Sequana to recover
the value of the Dividend Payments alleging that the dividends
were paid for the purpose of putting assets beyond the reach
of Windward’s creditors (including Industries) (the BAT section
423 Claim) (together, the Sequana Proceedings).
114.
The Windward Dividend Claim and BAT section 423 Claim were
heard together in the High Court, with judgment handed down
on 11 July 2016. The court upheld the BAT section 423 Claim
and, by way of a consequentials judgment dated 10 February
2017, ordered that Sequana pay to BTI an amount up to the
full value of the 2009 Dividend plus interest, which equates
to around US$185 million (approximately £136.6 million).
The Court dismissed the Windward Dividend Claim.
115.
The parties pursued cross appeals on the judgment, during
which time Sequana was granted a stay in respect of the
above payments. That stay was lifted in May 2017, three
months after Sequana had entered into an insolvency process
in France seeking court protection (the Sauvegarde). On 15 May
2019, the Nanterre Commercial Court made an order placing
Sequana into formal liquidation proceedings (liquidation
judiciaire). To date, Industries has not received any payments
from Sequana.
116.
On 6 February 2019 the Court of Appeal gave judgment
upholding the High Court’s findings, with one immaterial
change to the method of calculating the damages awarded.
Sequana therefore remains liable to pay approximately
US$185 million (approximately £136.6 million). Because of
Sequana’s ongoing insolvency process, execution of that
judgment is stayed. The Court of Appeal dismissed BTI’s
appeal in relation to the Windward Dividend Claim. The Court
of Appeal also dismissed Sequana’s application for permission
to appeal the High Court’s costs order in favour of Industries.
Sequana therefore remains liable to pay around £10 million in
costs to Industries.
117.
All parties to the appeal sought permission from the Court
of Appeal for a further appeal to the UK Supreme Court.
On 31 July 2019, BTI was granted permission to appeal to the
Supreme Court. On the same day, the Supreme Court refused
Sequana permission to appeal. The hearing of BTI’s appeal took
place before the UK Supreme Court on 4 and 5 May 2021 and
the judgment is awaited.
118.
BTI has brought claims against certain of Windward’s former
advisers, including Windward’s auditors at the time of the
dividend payments, PricewaterhouseCoopers LLP (PwC)
(which claims were also assigned to BTI under the Funding
Agreement). The claim had been stayed pending the outcome
of the Sequana Proceedings. Once that stay was lifted, PwC
applied to strike-out BTI’s claim. A hearing of this application
took place in October 2019. On 15 November 2019, the
court dismissed PwC’s application. The court granted PwC
permission to appeal in respect of part of its dismissal of the
application and the hearing of that appeal was heard by the
Court of Appeal on 27 and 28 October 2020. On 11 January 2021,
the Court of Appeal handed down judgment dismissing PwC’s
appeal. The Court of Appeal also refused PwC’s application
for permission to appeal to the Supreme Court and made an
order requiring PwC to file its Defence within two months of
11 January 2021. This deadline was subsequently extended.
PwC subsequently applied directly to the Supreme Court for
permission to appeal the Court of Appeal’s decision. PwC’s
application for permission to appeal to the Supreme Court
has yet to be determined. In the meantime, BTI’s claim against
PwC is progressing in the High Court. PwC served its Defence
on 22 April 2021 and filed it with the Court on 26 April 2021.
A Case Management Conference has been listed in a window
between 2 March 2022 and 4 March 2022 (inclusive).
119.
An agreed stay is in place in respect of BTI’s separate assigned
claim against Freshfields Bruckhaus Deringer.
120.
The sums Industries has paid under the Funding Agreement
are subject to the reservation as set out in paragraph 112
above and ongoing adjustment. Clean-up costs can only
be estimated in advance of the work being carried out and
certain sums payable are the subject of ongoing U.S. litigation.
In 2019, Industries paid £32 million in respect of clean-up costs.
In 2020, Industries paid £2 million in respect of clean-up costs.
In 2021, Industries paid a further £1.8 million in respect of
clean-up costs. Industries is potentially liable for further costs
associated with the clean-up. Industries has a provision of
£62.3 million which represents the current best estimate of its
exposure – see note 24.
BAT Annual Report and Form 20-F 2021
272
31 Contingent Liabilities and Financial Commitments
Continued
Kalamazoo
121.
NCR is also being pursued by Georgia-Pacific, a designated
PRP in respect of the Kalamazoo River in Michigan, in relation
to remediation costs caused by PCBs released into that river.
122.
On 26 September 2013, the Michigan Court held that NCR
was liable as a PRP on the basis that it had arranged for
the disposal of hazardous material for the purposes of the
Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA).
123.
The second phase of the Kalamazoo trial to determine the
apportionment of liability amongst PRPs took place between
September and December 2015. On 29 March 2018, Judge
Jonker ordered that NCR pay 40% of Georgia-Pacific past
costs (around US$22 million (approximately £16.2 million)).
The question of future remediation costs was not determined.
124.
The parties commenced appeal proceedings against the
judgment in July 2018. NCR also agreed an appeal bond with
Georgia-Pacific to prevent enforcement of the judgment while
it remained subject to appeal.
125.
On 11 December 2019, NCR announced that it had entered into
a Consent Decree with the U.S. Government and the State of
Michigan, pursuant to which it assumed liability for certain
remediation work at the Kalamazoo River. This Consent Decree
was approved by the District Court for the Western District of
Michigan on 2 December 2020. The payments to be made on
the face of the Consent Decree in respect of such work total
approximately US$245 million (approximately £181 million).
The Consent Decree also provides for the withdrawal of
NCR’s appeal against Georgia-Pacific, and payment by NCR
of the outstanding judgment against it of approximately
US$20 million (approximately £14.8 million) to Georgia-Pacific.
126.
The quantum of the clean-up costs for the Kalamazoo River is
presently unclear. It may well exceed the amounts which are
payable on the face of the Consent Decree.
127.
It is anticipated that NCR will look to Industries to pay 60% of
any sums NCR becomes liable to pay pursuant to the Consent
Decree on the basis, it would be asserted, that the river
constitutes a ‘Future Site’ for the purposes of the Settlement
Agreement. The Funding Agreement described above does
not resolve any such claims, but does provide an agreed
mechanism pursuant to which any surplus from the valuable
recoveries of any third-party claims that remains after all Fox
River-related clean-up costs have been paid and Industries
and NCR have been made whole may be applied towards
Kalamazoo clean-up costs, in the event that NCR were to be
successful in any claim for a portion of them from Industries
or Appvion (subject to Appvion’s cap, described below).
Industries has defences to any claims made by NCR in relation
to the Kalamazoo River.No such claims have been made
against Industries.
128.
Industries also anticipates that NCR may seek to recover from
Appvion (subject to a cap of US$25 million (approximately
£18.5 million)) for ‘Future Sites’ under the Funding Agreement.
The basis of the recovery would be the same as any demand
NCR may make on Industries. Appvion entered Chapter 11
bankruptcy protection on 1 October 2017. The effect of the
Chapter 11 proceedings on Appvion’s liability for Future Sites
payments under the Funding Agreement is currently uncertain.
129.
As detailed above, Industries is taking active steps to protect
its interests, including seeking to procure the repayment of the
Windward dividends, pursuing the other valuable claims that
are now within its control, and working with the other parties
to the Funding Agreement to maximise recoveries from third
parties with a view to ensuring that amounts funded towards
clean-up related costs are later recouped under the agreed
repayment mechanisms under the Funding Agreement.
Other environmental matters
130.
Reynolds American and its subsidiaries are subject to federal,
state and local environmental laws and regulations concerning
the discharge, storage, handling and disposal of hazardous
or toxic substances. Such laws and regulations provide for
significant fines, penalties and liabilities, sometimes without
regard to whether the owner or operator of the property or
facility knew of, or was responsible for, the release or presence
of hazardous or toxic substances. In addition, third parties
may make claims against owners or operators of properties
for personal injuries and property damage associated with
releases of hazardous or toxic substances. In the past, RJRT
has been named a PRP with third parties under CERCLA with
respect to several superfund sites. Reynolds American and
its subsidiaries are not aware of any current environmental
matters that are expected to have a material adverse effect
on the business, results of operations or financial position of
Reynolds American or its subsidiaries.
Criminal investigations
131.
From time to time, the Group investigates, and becomes aware
of governmental authorities’ investigations into, allegations of
misconduct against Group companies. The Group cooperates
with the authorities’ investigations, where appropriate,
including with the DOJ and OFAC in the United States, which
are conducting an investigation into suspicions of breach
of sanctions.
132.
Potential fines, penalties or other consequences cannot
currently be assessed. As the investigations are ongoing, it is
not possible to identify the timescale in which these matters
might be resolved.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
273
31 Contingent Liabilities and Financial Commitments
Continued
Closed litigation matters
133.
The following matters on which the Company reported in the contingent liabilities and financial commitments note 27 to the
Company’s 2020 financial statements have been dismissed, concluded or resolved as noted below:
Matter
Jurisdiction
Companies named as Defendants
Description
Disposition
Vuse Litigation (Illinois School Districts)
U.S.
Reynolds American, RJR Vapor,
the Company, Lorillard LLC and
LOEC Inc.
Public Nuisance
Voluntary dismissal
by plaintiff
Brazil Associação de Defesa da Saúde do
Fumante class action
Brazil
Souza Cruz
Class action
Superior Court of
Justice certified
decision in favour
of defendants
UK Serious Fraud Office (SFO)
investigation
UK
The Company, its subsidiaries,
and associated persons
Investigation
SFO’s announcement
that the investigation
had been closed
Perry
U.S.
Investments
Individual case
Dormant/closed
Antimonopoly Committee of Ukraine
Ukraine
British American Tobacco Sales
& Marketing Ukraine Limited
Liability Company
Competition
investigation
Judgment of Supreme
Court of Ukraine
General Litigation Conclusion
134.
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.
135.
As indicated above, on 1 March 2019 the Quebec Court of Appeal released its appeal judgment. The trial judgment was largely upheld
by a unanimous decision of the five-member panel including the requirement that the defendants deposit the initial deposits in
their solicitors’ trust accounts within 60 days. This is the only executory aspect of the judgment. In these circumstances we are of
the view that it is more likely than not that there will be an outlay and it is reasonably estimable at CAD $758 million (approximately
£443 million), the amount of the initial deposit paid into court. If further adverse judgments are entered against any of the Group’s
companies in any case, 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 which could in some cases equal or exceed the amount of the
judgment. 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 any particular period could be materially adversely affected by the impact of a significant
increase in litigation, difficulties in obtaining the bonding required to stay execution of judgments on appeal, or any final outcome of
any particular litigation.
136.
Having regard to all these matters, with the exception of the Quebec Class Actions, Fox River and certain
Engle
progeny cases
identified above, the Group does not consider it appropriate to make any provision in respect of any pending litigation because the
likelihood of any resulting material loss, on an individual case basis, is not considered probable and/or the amount of any such loss
cannot be reasonably estimated. Notwithstanding the negative decision in the Quebec Class Actions, the Group does not believe
that the ultimate outcome of this litigation will significantly impair the Group’s financial condition. If the facts and circumstances
change and result in further unfavourable outcomes in the pending litigation, then there could be a material impact on the financial
statements of the Group.
Other contingencies
137.
JTI Indemnities.
By a purchase agreement dated 9 March 1999, amended and restated as of 11 May 1999, referred to as the 1999
Purchase Agreement, R.J. Reynolds Tobacco Holdings, Inc. (RJR) and RJRT sold their international tobacco business to JTI. Under the
1999 Purchase Agreement, RJR and RJRT retained certain liabilities relating to the international tobacco business sold to JTI, and
agreed to indemnify JTI against: (i) any liabilities, costs and expenses arising out of the imposition or assessment of any tax with
respect to the international tobacco business arising prior to the sale, other than as reflected on the closing balance sheet; (ii) any
liabilities, costs and expenses that JTI or any of its affiliates, including the acquired entities, may incur after the sale with respect
to any of RJR’s or RJRT’s employee benefit and welfare plans; and (iii) any liabilities, costs and expenses incurred by JTI or any of its
affiliates arising out of certain activities of Northern Brands.
138.
RJRT has received claims for indemnification from JTI, and several of these have been resolved. Although RJR and RJRT recognise
that, under certain circumstances, they may have other unresolved indemnification obligations to JTI under the 1999 Purchase
Agreement, RJR and RJRT disagree what circumstances described in such claims give rise to any indemnification obligations by RJR
and RJRT and the nature and extent of any such obligation. RJR and RJRT have conveyed their position to JTI, and the parties have
agreed to resolve their differences at a later date.
BAT Annual Report and Form 20-F 2021
274
31 Contingent Liabilities and Financial Commitments
Continued
139.
ITG Indemnity
. In the Divestiture, Reynolds American agreed
to defend and indemnify, subject to certain conditions and
limitations, ITG in connection with claims relating to the
purchase or use of one or more of the Winston, Kool, Salem or
Maverick cigarette brands on or before 12 June 2015, as well as
in actions filed before 13 June 2023, relating to the purchase
or use of one or more of the Winston, Kool, Salem or Maverick
cigarette brands. In the purchase agreement relating to the
Divestiture, ITG agreed to defend and indemnify, subject to
certain conditions and limitations, Reynolds American and its
affiliates in connection with claims relating to the purchase
or use of ‘blu’ brand e-cigarettes. ITG also agreed to defend
and indemnify, subject to certain conditions and limitations,
Reynolds American and its affiliates in actions filed after
12 June 2023, relating to the purchase or use of one or more
of the Winston, Kool, Salem or Maverick cigarette brands
after 12 June 2015. ITG has tendered a number of actions to
Reynolds American under the terms of this indemnity, and
Reynolds American has, subject to a reservation of rights,
agreed to defend and indemnify ITG pursuant to the terms of
the indemnity. Reynolds American has tendered an action to
ITG under the terms of this indemnity, and ITG has, subject
to a reservation of rights, agreed to defend and indemnify
Reynolds American and its affiliates pursuant to the terms
of the indemnity. These claims are substantially similar in
nature and extent to claims asserted directly against RJRT in
similar actions.
140.
Loews Indemnity
. In 2008, Loews Corporation (Loews), entered
into an agreement with Lorillard Inc., Lorillard Tobacco, and
certain of their affiliates, which agreement is referred to as
the ‘Separation Agreement’. In the Separation Agreement,
Lorillard agreed to indemnify Loews and its officers, directors,
employees and agents against all costs and expenses arising
out of third-party claims (including, without limitation,
attorneys’ fees, interest, penalties and costs of investigation
or preparation of defence), judgments, fines, losses, claims,
damages, liabilities, taxes, demands, assessments, and
amounts paid in settlement based on, arising out of or
resulting from, among other things, Loews’ ownership of or
the operation of Lorillard and its assets and properties, and its
operation or conduct of its businesses at any time prior to or
following the separation of Lorillard and Loews (including with
respect to any product liability claims). Loews is a defendant
in three pending product liability actions, each of which is a
putative class action. Pursuant to the Separation Agreement,
Lorillard is required to indemnify Loews for the amount of any
losses and any legal or other fees with respect to such cases.
Following the closing of the Lorillard merger, RJRT assumed
Lorillard’s obligations under the Separation Agreement as was
required under the Separation Agreement.
141.
SFRTI Indemnity.
In connection with the 13 January 2016 sale
by Reynolds American of the international rights to the Natural
American Spirit brand name and associated trademarks,
along with SFR Tobacco International GmbH (SFRTI) and other
international companies that distributed and marketed the
brand outside the United States, to JT International Holding BV
(JTI Holding), each of SFNTC, R. J. Reynolds Global Products,
Inc., and R. J. Reynolds Tobacco B.V. agreed to indemnify JTI
Holding against, among other things, any liabilities, costs,
and expenses relating to actions (i) commenced on or
before (a) 13 January 2019, to the extent relating to alleged
personal injuries, and (b) in all other cases, 13 January 2021;
(ii) brought by (a) a governmental authority to enforce
legislation implementing European Union Directive 2001/37/
EC or European Directive 2014/40/EU or (b) consumers or a
consumer association; and (iii) arising out of any statement
or claim (a) made on or before 13 January 2016, (b) by any
company sold to JTI Holding in the transaction, (c) concerning
Natural American Spirit brand products consumed or intended
to be consumed outside of the United States and (d) that the
Natural American Spirit brand product is natural, organic,
or additive-free. Under the terms of this indemnity, JTI has
requested indemnification from Santa Fe Natural Tobacco
Company Germany GmbH (SFNTCG) in connection with an
audit of SFNTCG relating to transfer pricing for the tax years
2007 to 2010 and 2012 to 2015.SFNTCG contests the audit
results. The amount in dispute is approximately €21 million plus
interest (approximately £17.6 million).
142.
Indemnification of Distributors and Retailers. RJRT, Lorillard
Tobacco, SFNTC, American Snuff Co. and RJR Vapor have
entered into agreements to indemnify certain distributors and
retailers from liability and related defence costs arising out of
the sale or distribution of their products. Additionally, SFNTC
has entered into an agreement to indemnify a supplier from
liability and related defence costs arising out of the sale or use
of SFNTC’s products. The cost has been, and is expected to be,
insignificant. RJRT, SFNTC, American Snuff Co. and RJR Vapor
believe that the indemnified claims are substantially similar in
nature and extent to the claims that they are already exposed
to by virtue of their having manufactured those products.
143.
Except as otherwise noted above, Reynolds American is not
able to estimate the maximum potential of future payments, if
any, related to these indemnification obligations.
144.
Competition Investigations. There are instances where
Group companies are cooperating with relevant national
competition authorities in relation to ongoing competition
law investigations and/or engaged in legal proceedings at the
appellate level, including (amongst others) in the Netherlands.
Tax disputes
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, amongst 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 the 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.
While the amounts that may be payable or receivable in relation to
tax disputes 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.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
275
31 Contingent Liabilities and Financial Commitments
Continued
The following matters are in or may proceed to litigation:
Corporate taxes
Brazil
The Brazilian Federal Tax Authority has filed claims against
Souza Cruz seeking to reassess the profits of overseas
subsidiaries to corporate income tax and social contribution tax.
The reassessments are for the years 2004 until and including 2012
for a total amount of BRL1,813 million (£240 million) to cover tax,
interest and penalties.
Souza Cruz appealed all reassessments. Regarding the first
assessments (2004-2006), Souza Cruz’s appeals were rejected
by the ultimate Administrative Court after which Souza Cruz filed
two lawsuits with the Judicial Court to appeal the reassessments.
The judgment in respect of the reassessment of corporate income
tax has been decided in favour of Souza Cruz by the first level of
the Judicial Court and Souza Cruz is waiting to see whether the
Brazilian Tax Authorities will appeal the judgment. The lawsuit
appealing the social contribution tax is pending judgment in the
first level of the Judicial Court. The appeal against the second
assessments (2007 and 2008) was upheld at the second tier
tribunal and was closed. In 2015, a further reassessment for the
same period (2007 and 2008) was raised after the five-year statute
of limitation which has been appealed against.
Souza Cruz received further reassessments in 2014 for the 2009
calendar year and in 2015 an assessment for the 2010 calendar year.
Souza Cruz appealed both the reassessments in full. In December
2016, assessments were received for the calendar years 2011 and
2012 which have also been appealed.
Netherlands
The Dutch tax authority has issued a number of assessments
on various issues across the years 2003-2016 in relation to
various intra-group transactions. The assessments amount to
an aggregate net liability across these periods of £1,146 million
covering tax, interest and penalties. The Group has appealed
against the assessments in full.
The Group believes that its companies have meritorious defences
in law and fact in each of the above matters and intends to pursue
each dispute through the judicial system as necessary. The Group
does not consider it appropriate to make provision for these
amounts nor for any potential further amounts which may be
assessed in relation to these matters in subsequent years.
Indirect and other taxes
Bangladesh
On 25 July 2018, the Appellate Division of the Supreme Court of
Bangladesh has reversed the decision of the High Court Division
against British American Tobacco Bangladesh Company Limited
(BATB) in respect of the retrospective demands for VAT and
Supplementary Duty amounting to approximately £154 million.
On 3 February 2020, the certified Court Order was received.
The Government filed a Review Petition on 25 March 2020 in the
Appellate Division of the Supreme Court of Bangladesh against the
judgment. On 9 December 2021, the review petitions were heard
and the Appellate Division of the Supreme Court of Bangladesh
dismissed the review petitions filed by the National Board of
Revenue (NBR) which resulted in BATB wining the cases against
the NBR.
In addition, in 2017, NBR passed a discriminatory special order fixing
BDT 27 for local brands and BDT 35 for foreign brand cigarettes.
After NBR passed the special order, it was highlighted to the
Government that it was against the principles of foreign direct
investment and against WTO practice. Subsequently, the Finance
Minister directed that no action should be taken in this regard until
the different issues raised were finalised. Later in 2018, the special
order itself was repealed. AKTC (a local Bangladeshi tobacco
manufacturer) filed a case against NBR to get a direction from the
Court to implement the special order and reserve low segment for
local industries. The judgment in the AKTC case was passed by the
High Court Division verbally on 21 September 2020. The judgment
revived the discriminatory regime of VAT and Supplementary Duty
(SD) between local and international/imported brands for the fiscal
year 2017 – 2018. In light of the judgment, the Large Taxpayers’
Unit (LTU) of National Board of Revenue by a notice asked BATB
to show cause as to why BATB believed it should not be liable to
pay £210 million as unpaid VAT and SD. Challenging the judgment,
BATB filed and moved an appeal (known as the Civil Miscellaneous
Petition for Leave to Appeal) before the Appellate Division of
the Supreme Court of Bangladesh. On a preliminary hearing on
4 October 2020, the Appellate Division Judge in Chamber stayed
operation of the judgment for eight weeks as an interim measure.
Since the judgment has been stayed, the operation of the show
cause notice shall also be deemed to have been stayed. BATB has
formally notified LTU of this on 12 October 2020. In the meantime,
the judgment will remain stayed.
On 20 December 2020, BATB filed a Civil Petition for Leave to
Appeal as directed by the Appellate Division Judge in Chamber.
The judgment passed by the High Court Division will continue to
remain stayed while the appeal remains pending at the Appellate
Division of the Supreme Court of Bangladesh. So far, the appeal has
not been listed for hearing.
Egypt
British American Tobacco Egypt LLC (BAT Egypt) is subject to
two ongoing civil cases concerning the imposition of sales tax on
low-price category brands brought by the Egyptian tax authority
for £88 million. Management believes that the tax claims are
unfounded and has appealed the tax claims. These cases are under
review by the Council of State. During hearings in August 2020,
the courts decided, in both cases, to transfer the files to court
appointed experts. One case (pertaining to the period from May
2008 to February 2009) was referred to a court-appointed expert
who filed a report in January 2022. A hearing date has not yet been
set. In the other case (pertaining to the period from March 2009
to June 2010), the expert has concluded his report and filed it with
the court. In May 2021, a judgment was issued which acquitted
BAT Egypt from all amounts related only to the period from March
2009 to October 2009. An appeal has been submitted to the
Supreme Administrative Court to extend the acquittal to the rest
of the disputed period. The appeal process is expected to take
approximately two years.
BAT Annual Report and Form 20-F 2021
276
31 Contingent Liabilities and Financial Commitments
Continued
South Korea
In 2016, the Board of Audit and Inspection of Korea (BAI) concluded its tax assessment in relation to the 2014 year-end tobacco inventory,
and imposed additional national excise, local excise, VAT taxes and penalties. This resulted in the recognition of a KRW 80.7 billion
(approximately £50 million) charge by Group subsidiaries, BAT Korea Ltd., Rothmans Far East B.V. Korea Branch Office and BAT Korea
Manufacturing Ltd. Management deems the tax and penalties to be unfounded and has appealed to the tax tribunal against the
assessment. On grounds of materiality and the likelihood of the tax and penalties being reversed in future, the Group classified the tax and
penalties charge as an adjusting item in 2016.
On 23 August 2019, the trial court ruled in favour of Rothmans Far East B.V. Korea Branch Office on KRW 6.7 billion (approximately
£4 million), the VAT portion of the assessment; appeals on the other elements of the assessment are still pending at Appeals Court.
The Korean government appealed the ruling on 16 September 2019. On 16 April 2021 the Court of Appeals affirmed the ruling of the Trial
Court. The government immediately appealed to the Supreme Court and the Supreme Court also affirmed the ruling of the Appeals Court
on 26 August 2021. On 16 September 2021, Rothmans Far East B.V. Korea Branch Office duly received the amount litigated (VAT portion)
including statutory interests (note 6).
Turkey
In Turkey, British American Tobacco Tutun Mamulleri Sanayi ve Ticaret Anonim Sirketi (BAT Tutun) was subject to a series of tax audits
mainly on inventory movements for the years 2015, 2016 and 2019. The final audit reports sought retrospective payment of additional
tax with interest and penalties mostly based on alleged illegitimate intra-group forestalling relating to finished goods giving rise to
further excise tax. In 2020 and 2021, BAT Tutun received a total tax assessment amounting to TRY 2.7 billion (approximately £151 million),
of which, TRY 2.1 billion (approximately £120 million) related to tax and penalties and TRY 0.6 billion (approximately £31 million) related to
late payment interest. In August 2021, BAT Tutun applied under the relevant tax amnesty law to settle its retrospective tax assessments.
Based on the settlement through the tax amnesty procedure, BAT Tutun agreed to pay £47 million in 18 instalments from 1 November 2021
until 31 July 2024.
Brazil
On 15 March 2017, the Brazilian Supreme Court ruled that for all taxpayers VAT (ICMS) should not be included in the calculation of social
contribution taxes (PIS/Cofins) which are levied based on revenue. On 13 May 2021, the Supreme Court modulated the effects of the first
decision handed down in 2017, stating that the taxpayers who filed a lawsuit by 15 March 2017 will be able to recover credits from the past
five years.
The Group’s Brazilian subsidiary, Souza Cruz, had filed an individual lawsuit to establish that it had overpaid taxes to the government.
Based on favourable court decisions in 2020 and 2019 the Group has recognised £5 million in 2021 (2020: £58 million; 2019: £86 million) in
other income representing management’s best estimate of the amounts likely to be recovered at this time with the potential for further
amounts in future periods.
If the ruling were to be enacted retrospectively for a period of five years, the potential asset is estimated to be around £480 million.
During 2021, £130 million of the unrecognised contingent asset was sold to financial institutions for £45 million.
Commitments in relation to service contracts, non-capitalised leases
The total future minimum payments under non-cancellable service contracts based on when payments fall due:
2021
£m
2020
£m
Service contracts
Within one year
41
63
Between one and five years
81
17
Beyond five years
5
6
127
86
Financial commitments arising from short-term leases and leases of low-value assets that are not capitalised under IFRS 16
Leases
are
£7 million (2020: £6 million) for property and £19 million (2020: £3 million) for plant, equipment and other assets.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
277
32 Interests in Subsidiaries
Subsidiaries with material non-controlling interests
Until 2020, non-controlling interests principally arise from the Group’s listed investment in Malaysia (British American Tobacco (Malaysia)
Berhad). But due to difficult trading conditions, as mentioned in note 12, the non-controlling interest in Malaysia is no longer material to the
Group and is not disclosed anymore.
In 2021, non-controlling interests principally arise from the Group’s listed investment in Bangladesh (British American Tobacco Bangladesh
Company Limited) where the Group held 72.91% in 2021, 2020 and 2019. Summarised financial information for Bangladesh is shown below
as required by IFRS 12
Disclosure of interest in other entities
. No adjustments have been made to the information below for the elimination of intercompany transactions and balances with the rest of the Group.
Summarised financial information
2021
£m
2020
£m
2019
£m
Revenue
640
553
527
Profit for the year
127
101
86
– Attributable to non-controlling interests
34
27
23
Total comprehensive income
127
91
70
– Attributable to non-controlling interests
34
25
19
Dividends paid to non-controlling interests
(28)
(31)
(8)
Summary net assets:
Non-current assets
303
271
287
Current assets
345
271
241
Non-current liabilities
70
58
65
Current liabilities
262
190
144
Total equity at the end of the year
316
294
319
– Attributable to non-controlling interests
86
80 86
Net cash generated from operating activities
52
137
140
Net cash used in investing activities
(26)
(11)
(51)
Net cash used in financing activities
(55)
(111)
(75)
Differences on exchange
–
(1) (1)
(Decrease)/increase in net cash and cash equivalents
(29)
14 13
Net cash and cash equivalents at 1 January
30
16
3
Net cash and cash equivalents at 31 December
1
30
16
Subsidiaries subject to restrictions:
As a result of the Group’s Canadian subsidiary, Imperial Tobacco Canada (ITCAN), entering CCAA protection, the assets of ITCAN are
subject to restrictions. The table below summarises the assets and liabilities of ITCAN:
Summarised financial information
2021
£m
2020
£m
Non-current assets
2,403
2,354
Current assets
1,630
1,251
Non-current liabilities
(109)
(132)
Current liabilities
(479)
(528)
3,445
2,945
Under the terms of CCAA, the court has appointed FTI Consulting Canada Inc. to act as a monitor. This monitor has no operational input
and is not involved in the management of the business. The Group considers that ITCAN continues to meet the requirements of IFRS 10
Consolidated Financial Statements
, and, until such requirements are not met, the Group will continue to consolidate the results of ITCAN.
BAT Annual Report and Form 20-F 2021
278
32 Interests in Subsidiaries
Continued
Whilst the Group continues to control the operations of its Canadian subsidiary, there are restrictions over the ability to access or use
certain assets including the ability to remit dividends. Included in non-current assets for 2021 and 2020 is goodwill of £2.3 billion subject to
impairment reviews (note 12). Included in current liabilities are trade and other payables of £341 million (2020: £284 million), the majority of
which are amounts payable in respect of duties and excise. A breakdown of current assets has been provided below.
2021
£m
2020
£m
Cash and cash equivalents *
1,114
992
Inventory
126
114
Investments held at fair value
351
115
Other
39
30
1,630
1,251
* Cash and cash equivalents above include £1,024 million (2020: £878 million) of restricted cash and cash equivalents. The Group defines restricted cash and cash equivalents as where there are
significant restrictions on its ability to access or use the assets and settle the liabilities of the Group, but excludes cash and cash equivalents where there are also outstanding local currency
borrowings or where there is an outstanding excise liability. In addition, dividends payable would also be excluded from restricted cash and cash equivalents if the dividend has been approved
by the necessary regulatory channels.
Refer to note 31 for information on the Quebec Class Actions.
Other shareholdings
At 31 December 2021, the Group holds almost 100% (2020: 92%) of the equity shares of PT Bentoel Internasional Investama Tbk (Bentoel).
In 2011, the Group sold 984 million shares, representing approximately 14% of Bentoel’s share capital, for the purposes of fulfilling certain
obligations pursuant to Bapepam LK (Indonesia) takeover regulations. The Group simultaneously entered into a total return swap on
971 million of the shares. In June 2016, the Group and other investors participated in a rights issue by Bentoel, with the Group increasing
its stake in Bentoel to 92%. Simultaneously, the Group amended the total return swap to take account of an additional 1,684 million
shares with the shares subject to the total return swap representing 7% of Bentoel’s issued capital. While the Group did not have legal
ownership of these shares, it retained the risks and rewards associated with them which resulted in the Group continuing to recognise an
effective interest in 99% of Bentoel’s net assets and results. As explained in note 30, on 5 October 2021, Bentoel announced its intention
to delist from the Indonesia Stock Exchange and go private by conducting a Voluntary Tender Offer (VTO). As part of this process, the
Group terminated the total return swap, with legal ownership of the shares being reacquired by the Group. The process is on-going and is
expected to conclude in the early part of 2022, with no material impact to the Group.
Refer to note 14 for information on the Group’s 42% investment in Tisak d.d.
33 Summarised Financial Information
The following summarised financial information is required by the rules of the Securities and Exchange Commission and has been
prepared as a requirement of the Regulation S-X 3-10 in respect of the guarantees of:
The financial information relates to the guarantees of:
–
US$12.35 billion of outstanding bonds issued by B.A.T Capital Corporation (BATCAP) in connection with the acquisition of Reynolds
American Inc. (Reynolds American), including registered bonds issued in exchange for the initially issued bonds (the 2017 Bonds);
–
US$10.65 billion of outstanding bonds issued by BATCAP pursuant to the Shelf Registration Statement on Form F-3 filed on July 17, 2019,
pursuant to which BATCAP or BATIF may issue an indefinite amount of debt securities; and
–
US$1.50 billion of outstanding bonds issued by BATIF pursuant to the Shelf Registration Statement on Form F-3 filed on July 17, 2019,
pursuant to which BATCAP or BATIF may issue an indefinite amount of debt securities.
As of July 28, 2020, all relevant Group entities suspended their reporting obligations with respect to the US$7.7 billion (2020: US$7.7 billion)
of Reynolds American unsecured notes and US$40.9 million (2020: US$40.9 million) of Lorillard unsecured notes. As such, no summarised
financial information is provided with respect to these securities.
As described below, Reynolds American is a subsidiary guarantor of all outstanding series of BATCAP and BATIF bonds. Under the
terms of the indentures governing such notes, any subsidiary guarantor (including Reynolds American) other than BATCAP or BATIF, as
applicable, BATNF and BATHTN, will automatically and unconditionally be released from all obligations under its guarantee, and such
guarantee shall thereupon terminate and be discharged and of no further force or effect, in the event that (1) its guarantee of all then
outstanding notes issued under the Group’s EMTN Programme is released or (2) at substantially the same time its guarantee of the debt
securities is terminated, such subsidiary guarantor is released from all obligations in respect of indebtedness for borrowed money for
which such subsidiary guarantor is an obligor (as a guarantor or borrower). Under the EMTN Programme, Reynolds American’s guarantee
is released if at any time the aggregate amount of indebtedness for borrowed money, subject to certain exceptions, for which Reynolds
American is an obligor does not exceed 10% of the outstanding long-term debt of BAT as reflected in the balance sheet included in BAT’s
most recent publicly released interim or annual consolidated financial statements.
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
279
33 Summarised Financial Information
Continued
Reynolds American’s guarantee may be released notwithstanding Reynolds American guaranteeing other indebtedness, provided
Reynolds American’s guarantee of outstanding notes issued under the EMTN Programme is released. If Reynolds American’s guarantee
is released, BAT is not required to replace such guarantee, and the debt securities will have the benefit of fewer subsidiary guarantees for
the remaining maturity of the debt securities.
Note: The following summarised financial information report the unconsolidated contribution of each applicable company to the Group’s
consolidated results and not the separate financial statements for each applicable company as local financial statements are prepared
in accordance with local legislative requirements and may differ from the financial information provided below. In particular, in respect of
the U.S. region, all financial statements and financial information provided by or with respect to the U.S. business or RAI (and/or RAI and
its subsidiaries (collectively, the Reynolds Group)) are prepared on the basis of US GAAP and constitute the primary financial statements
or financial information of the U.S. business or RAI (and/or the Reynolds Group). Solely for the purpose of consolidation within the results
of BAT p.l.c. and the BAT Group, this financial information is then converted to IFRS. To the extent any such financial information provided
in these financial statements relates to the U.S. business or RAI (and/or the Reynolds Group), it is provided as an explanation of the U.S.
business’s or RAI’s (and/or the Reynolds Group’s) primary US GAAP based financial statements and information.
The subsidiaries disclosed below are wholly-owned and the guarantees provided are full and unconditional, and joint and several:
a.
British American Tobacco p.l.c. (as the parent guarantor), referred to as ‘BAT p.l.c.’ in the financials below;
b.
B.A.T Capital Corporation (as an issuer or a subsidiary guarantor, as the case may be), referred to as ‘BATCAP’ in the
financials below;
c.
B.A.T. International Finance p.l.c. (as an issuer or a subsidiary guarantor, as the case may be), referred to as ‘BATIF’ in the
financials below;
d.
B.A.T. Netherlands Finance B.V. (as a subsidiary guarantor), referred to as ‘BATNF’ in the financials below;
e.
Reynolds American Inc. (as a subsidiary guarantor), referred to as ‘RAI’ in the financials below; and
f.
British American Tobacco Holdings (The Netherlands) B.V. (as a subsidiary guarantor of the 2017 Bonds only), referred to as
‘BATHTN’ in the financials below.
In accordance with Regulation S-X 13-01, information in respect of investments in subsidiaries that are not issuers or guarantors has
been excluded from non-current assets as shown in the balance sheet table below. The ‘BATHTN’ column in the summarised financial
information is only applicable in the context of the 2017 Bonds. British American Tobacco Holdings (The Netherlands) B.V. (BATHTN) is
not an issuer nor guarantor of any of the other securities referenced in this note. None of the issuers or other guarantors has material
balances with or an investment in BATHTN. Investments in subsidiaries represents share capital acquired in relation to or issued by
subsidiary undertakings.
Summarised Financial Information
Year ended 31 December 2021
BAT p.l.c.
£m
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Income Statement
Revenue
– – – – – –
(Loss)/profit from operations
(111)
(1)
(2)
– 3 –
Dividend income
6,200
– – –
4,827
164
Net finance income/(costs)
170
(43)
63
(421)1
–
Profit/(loss) before taxation
6,259
(44)
61
1
4,409
164
Taxation on ordinary activities
5 –
19
197
–Profit/(loss) for the year
6,264
(25)
62
1
4,506164
Intercompany Transactions – Income Statement
Transactions with non-issuer/non-guarantor subsidiaries
(expense)/income
(111)
(1)
(2)
–
36
–Transactions with non-issuer/non-guarantor subsidiaries net
finance (cost)/income
(2)
709 370
–
28
–Dividend income from non-issuer/non-guarantor subsidiaries
6,200
– – –
4,827
164
BAT Annual Report and Form 20-F 2021
280
33 Summarised Financial Information
Continued
Summarised Financial Information
Year ended 31 December 2020
BAT p.l.c.
£m
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Income Statement
Revenue
– – – – – –
Loss from operations
(112)
(1)
(2)–
(5)
–Dividend income
5,050
– – –
4,845
224
Net finance income/(costs)
131
417
174
–
(758)
1Profit before taxation
5,069
416
172
–
4,082
225
Taxation on ordinary activities
(14)
(101)
4 –
170
–Profit for the year
5,055
315
176
–
4,252
225
Intercompany Transactions – Income Statement
Transactions with non-issuer/non-guarantor subsidiaries
(expense)/income
(118)
(1)
4 –
22
–Transactions with non-issuer/non-guarantor subsidiaries net
finance income
5
996
–747
32
–Dividend income from non-issuer/non-guarantor subsidiaries
5,050
– – –
4,845
224
Summarised Financial Information
As at 31 December 2021
BAT p.l.c.
£m
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Balance Sheet
Non-current assets
1,916
18,192
4,986
1,417
357
75
Current assets
8,443
3,583
35,772
21 1,033
19
Non-current liabilities
9
17,024 13,667
1,417
8,778
19
Non-current borrowings
–
16,965 13,560
–1,417
8,719
Other non-current liabilities
9
59
–107
59 19
Current liabilities
1,607
4,633
25,451
20 882
10
Current borrowings
1,580
4,602
25,081
20 263
10
Other current liabilities
27
31
370
–
619
–Intercompany Transactions – Balance Sheet
Amounts due from non-issuer/non-guarantor subsidiaries
8,405 14,999
38,539
1,360–
19
Amounts due to non-issuer/non-guarantor subsidiaries
– 48 9
3,006
–20,422
Investment in subsidiaries (that are not issuers or guarantors)
27,234
–
718
–23,643
1,488
Summarised Financial Information
As at 31 December 2020
BAT p.l.c
£m.
BATCAP
£m
BATIF
£m
BATNF
£m
RAI
£m
BATHTN
£m
Balance Sheet
Non-current assets
236 18,991 10,332
1,509
402
26
Current assets
7,070
3,404
30,601
22
268
15Non-current liabilities
1,580
17,867
15,326
1,509
8,885
6
Non-current borrowings
1,571
17,867
15,243
1,509
8,823
–
Other non-current liabilities
9 –
83
–62
6Current liabilities
52
4,444
24,038
22
972
2
Current borrowings
9
4,329
23,478
22
200
1
Other current liabilities
43
115
560
–
772
1Intercompany Transactions – Balance Sheet
Amounts due from non-issuer/non-guarantor subsidiaries
7,031 16,088
38,761
–
620
15
Amounts due to non-issuer/non-guarantor subsidiaries
3
3,139
–19,550
62
1Investment in subsidiaries (that are not issuers or guarantors)
27,234
–
718
–23,820
1,580
Financial Statements
Notes on Accounts
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
281
33 Summarised Financial Information
Continued
Perpetual hybrid bonds
BAT p.l.c. has issued two €1 billion of perpetual hybrid bonds which have been classified as equity as there is no contractual obligation
toeither repay the principal or make payments of interest (note 22(d)).
BAT p.l.c.’s unconsolidated contribution to the Group’s consolidated equity results is shown below:
BAT p.l.c.
As at 31 December
2021
£m
2020
£m
Total equity
35,977
32,908
Share capital
614
614
Share premium
107
103
Perpetual hybrid bonds
1,685
–
Other equity
33,571
32,191
BAT Annual Report and Form 20-F 2021
282
Group Companies and Undertakings
This disclosure is made in accordance with Section 409 of the Companies Act 2006 and The Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008, as amended by The Companies, Partnerships and Groups (Accounts and Reports)
Regulations 2015. A full list of subsidiary undertakings, associates and joint ventures and joint operations as defined by IFRS (showing
the country of incorporation, effective percentage of equity shares held and full registered office addresses) as at 31 December 2021 is
disclosed below.
The subsidiary undertakings that are held directly by British American Tobacco p.l.c. (the ultimate Parent Company) are indicated thus*;
allothers are held by sub-holding companies.
Unless otherwise stated, the equity shares held are in the form of ordinary shares or common stock, except for those indicated thus
#
,
which include preference shares. The effective percentage of equity shares held in subsidiary undertakings is 100% unless otherwise
stated. Further, where the effective percentage of equity shares held by the sub-holding company is different from that held by British
American Tobacco p.l.c., the percentage of equity shares held by British American Tobacco p.l.c. is indicated thus^ and is shown after the
percentage interest held by the sub-holding company.
The results of a number of these subsidiary undertakings principally affect the financial statements of the Group. These principal
subsidiary undertakings are highlighted in grey and are considered to be the main corporate entities in those countries which, in
aggregate, contributed 89% of the Group revenue and 100% of profit from operations.
Subsidiary Undertakings
Albania
Rruga e Kavajes, Ish Kombinati Ushqimor, Tirana, Albania
British American Tobacco – Albania SH.P.K.
Algeria
Zone d’activité El Omran, Route de Ouled Fayet, Ilot 789- Lot 04,
Cheraga, Alger, Algerié
British American Tobacco (Algérie) S.P.A. (51%)
Angola
Viana Park, Polo Industrial, Viana, Luanda, Angola
British American Tobacco – B.A.T. Angola, Limitada
1
Sociedade Geral de Distribuição e Comércio, Limitada
Sociedade Industrial Tabacos Angola LDA (77.60%)
Sociedade Unificada Tabacos Angola LDA (76.39%)
Argentina
San Martín 140, Floor 14, City of Buenos Aires, Argentina
BAT Operaciones S.A.U.
British American Tobacco Argentina S.A.I.C.y F. (99.98%)
Australia
166 William Street, Woolloomooloo, NSW 2011, Australia
British American Tobacco South East Asia Pty Limited
British American Tobacco Australasia Limited
British American Tobacco Australia Limited
British American Tobacco Australia Overseas Pty Limited
British American Tobacco Australia Services Limited
Rothmans Asia Pacific Limited
#
The Benson & Hedges Company Pty. Limited
W.D. & H.O. Wills Holdings Limited
Austria
Dr. Karl Lueger Platz 5, 1010, Wien, Austria
British American Tobacco (Austria) GmbH
Bahrain
Flat 2115, Building 2504, Road 2832, Block 428 Al Seef Area,
Kingdom of Bahrain
British American Tobacco Middle East W.L.L
Bangladesh
New DOHS Road, Mohakhali, Dhaka 1206, Bangladesh
British American Tobacco Bangladesh Company Limited (72.91%)
Barbados
Chancery Chambers, Chancery House, High Street, Bridgetown,
Barbados
Southward Insurance Ltd.
Belarus
7th Floor, 3 Kuprevicha Str., Minsk, 220141, Belarus
British-American Tobacco Trading Company Foreign Trade
Unitary Enterprise
Belgium
Globe House, 4 Temple Place, London, WC2R 2PG, United Kingdom
British American Tobacco Holdings Belgium N.V.
Nieuwe Gentsesteenweg 21, 1702 Groot-Bijgaarden, Belgium
British American Tobacco Belgium N.V.
Benin
Cotonou, Lot Numbero H19, Quartiers Les Cocotiers, 01 BP 2520,
Benin
British American Tobacco Benin SA
Bolivia
Av. Ballivian entre calles 11 y 12 No. 555, Edificio El Dorial, Piso 19,
Oficina E, Zona de Calacoto, La Paz, Bolivia
BAT Bolivia S.R.L.
Financial Statements
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
283
Bosnia and Herzegovina
Fra Dominka Mandica 24 A, 88220 Široki Brijeg, Bosnia
and Herzegovina
IPRESS d.o.o.
ul. Azize Ša´cirbegovi´c 1, 71000 Sarajevo-Novo Sarajevo, Bosnia
andHerzegovina
TDR d.o.o. Sarajevo
ul. Kolodvorska 12, 71000 Sarajevo-Novo Sarajevo, Bosnia
and Herzegovina
iNovine BH d.o.o.
Botswana
Plot 20774 Broadhurst Industrial Estate, Gaborone, Botswana
British American Tobacco Botswana (Pty) Limited
Business Venture Investments Botswana 6773 (Pty) Ltd.
Brazil
Avenida República do Chile, nº 330, Bloco 1, Torre Leste, 30º andar,
Centro, Rio de Janeiro/RJ - CEP 20.031-170, Brazil
Souza Cruz LTDA
Yolanda Participacoes S.A.
Brunei Darussalam
6th Floor, Bang Hj Ahmad Laksamana Othman, 38-39, Jalan Sultan,
Bandar Seri Begawan BS8811, Brunei Darussalam
Commercial Marketers and Distributors Sdn. Bhd. (100%) (50%)^
(In Liquidation)
Bulgaria
115 M, Tsarigradsko Shose Blvd., Building D, Floor 5, Sofia, Mladost
Municipality, 1784, Bulgaria
British American Tobacco Trading EOOD
Burkina Faso
Ouagadougou, Avenue Yennega, BP: 882, Ouagadougou,
Burkina Faso
Tobacco Marketing Consultant Burkina Faso SARL
Burundi
Avenue de L’Uprina a Bujumbura, BP 345, Burundi
Tabarundi SARL
Cambodia
1121 National Road 2, Prek Tanou Village, Sangkat Chak Ang Re Leu,
Khan Mean Chey, Phnom Penh, Kingdom of Cambodia
British American Tobacco (Cambodia) Limited (71%)
British American Tobacco (Cambodge) International Limited
Cameroon
Rue Njo Njo, Bonapriso – B.P. 259, Douala, Cameroon
British American Tobacco Cameroun S.A. (99.76%)
Canada
30 Pedigree Court, Brampton, Ontario, L6T 5T8, Canada
Imperial Tobacco Canada Limited
Imperial Tobacco Company Limited
3711 St-Antoine West, Montreal, Quebec, H4C 3P6, Canada
Allan Ramsay and Company Limited
Cameo Inc.
Genstar Corporation
2
Imperial Brands Limited
Imperial Tobacco Products Limited
Imperial Tobacco Services Inc.
John Player & Sons Ltd
Liggett & Myers Tobacco Company of Canada Limited (70%)
(50%)^
3
Marlboro Canada Limited
Medaillon Inc.
45 O’Connor Street, Suite 1500, Ottawa, Ontario, K1P 1A4, Canada
2004969 Ontario Inc.
Cayman Islands
Trident Trust Company (Cayman) Ltd., One Capital Place, POBox
847, Grand Cayman KY1-1103, Cayman Islands
R.J. Reynolds Tobacco (CI), Co.
Chile
Isidora Goyenechea 3000, Piso 15, of 1501, Las Condes, Santiago,
Chile
BAT Chile S.A.
British American Tobacco Chile Operaciones S.A. (99.51%)
Inversiones Casablanca S.A.
China (People’s Republic of)
607, Floor 6, China Resources Tower, No. 2666 South Keyuan Road,
Zhuhai Community, Yuehai Street, Nanshan District, Shenzhen,
People’s Republic of China
Nicoventures Business Consulting (Shenzhen) Co., Ltd
Room 436, No. 1000, Zenchen Road, Baoshan District, Shanghai,
People’s Republic of China
British American (Shanghai) Enterprise Development Co., Ltd
British American Nico Business Consulting (Shanghai) Co., Ltd
Unit 1001 in 901, 9/F, Building 3, No.8 Guanghuadongli, Chaoyang
District, Beijing, People’s Republic of China
British American Consulting (Beijing) Co., Ltd
Colombia
Av. Cra. 72 # 80-94 Piso 10. Bogotá, Colombia
British American Tobacco Colombia S.A.S.
Vype Colombia S.A.S.
Congo (Democratic Republic of)
1er étage, Immeuble du Centenaire, Gombe, Kinshasa, Democratic
Republic of Congo
British American Tobacco Congo SARL (In Liquidation)
BAT Distribution SARL (In Liquidation)
1st floor Immeuble L’horizon sis avenue Colonel Lukusa n.50,
Gombe, Kinshasa, Democratic Republic of Congo
British American Tobacco Services Congo SARL
British American Tobacco Import SARL
Costa Rica
325 Metros este del Puente de la Firestone, Llorente, Flores,
Heredia, Costa Rica
BASS Americas S.A.
BATCCA Park Inversiones Immobiliarias, S.A.
BATCCA Servicios S.A.
BAT Annual Report and Form 20-F 2021
284
Croatia
Draškovi´ceva 27, 10000 Zagreb, Croatia
Inovine d.d. (93.42%)
Ivana Lu˘ci´ca 2/a, 10000 Zagreb, Croatia
BAT HRVATSKA d.o.o. u likvidaciji
Obala V. Nazora 1, 52210 Rovinj, Croatia
TDR d.o.o.
Osje˘cka 2, 33000 Virovitica, Croatia
Hrvatski Duhani d.d. Tobacco Leaf Processing (89.55%) (95.25%)^
Cuba
Parcela nº 2 a noroeste do terminal de contêineres de Mariel, a 2,2
km do vértice nº 4, Município de Mariel, Província de Artemisa, na
República de Cuba.
Brascuba Cigarrillos S.A. (50%)
Cyprus
Photiades Business Centre, 5th Floor, 8 Stasinou Avenue, Nicosia,
CY-1060, Cyprus
B.A.T (Cyprus) Limited
Rothmans (Middle East) Limited
Czech Republic
Karolinská 654/2, Prague 8 – Karlín, 186 00, Czech Republic
British American Tobacco (Czech Republic), s.r.o.
Denmark
Bernstorffsgade 50, 1577 Copenhagen, Denmark
British American Tobacco Denmark A/S (House of Prince A/S)
Precis (1789) Denmark A/S
Djibouti
Rue de Magadiscio, Lot No. 133, Djibouti City, Djibouti
British American Tobacco Djibouti SARL
Egypt
Administrative unit no.1, 5th Floor, Building S2B, Sector A,
Downtown Mall Katameya, 5th settlement, New Cairo, Egypt
BETCO for General Services and Marketing LLC
BETCO for Trade and Distribution LLC
British American Tobacco Egypt LLC
British American Tobacco North Africa LLC
English American Company for Importation and Trade LLC
(In Liquidation)
Eritrea
P.O. Box 749, 62 Fel Ket Street, Asmara, Eritrea
British American Tobacco (Eritrea) Share Company
#
Estonia
Tornimäe 7-10, 10145 Tallinn, Estonia
British American Tobacco Estonia AS
Fiji
Lady Maria Road, Nabua, Suva, Fiji
British American Tobacco (Fiji) Marketing Pte Limited
Central Manufacturing Company Pte Limited
Rothmans of Pall Mall (Fiji) Pte Limited
Finland
c/o Retail 24, Olarinluoma 7, 02200 Espoo, Finland
British American Tobacco Finland Oy
France
111 Avenue Victor Hugo, Paris, 75016, France
Carreras France SAS
Tour Légende, 20 place de la Défense, CS 80289, 92050 Paris La
Défense Cedex, France
British American Tobacco France SAS
Germany
Alsterufer 4, 20354 Hamburg, Germany
BATIG Gesellschaft fur Beteiligungen m.b.H.
British American Tobacco (Germany) GmbH
British American Tobacco (Industrie) GmbH
Schutterwalder Straße. 23, 01458 Ottendorf-Okrilla, Germany
Quantus Beteiligungs – und Beratungsgesellschaft mbH
Ghana
4th Floor, Volta Place, Airport Residence Area, Patrice Lumumba
Street, Accra, Ghana
British American Tobacco Ghana Limited (97.09%)
Greece
27, Ag. Thoma Street, Maroussi, 151 24, Greece
British American Tobacco Hellas S.A.
Guernsey
St. Martin’s House, Le Bordage, St. Peter’s Port, GY1 4AU, Guernsey
Belaire Insurance Company Limited
Guyana
Lot 122 Parade Street, Kingston, Georgetown, Guyana
Demerara Tobacco Company Limited (70.25%)
Honduras
Boulevard del Sur, Zona El Cacao, San Pedro Sula, Depart.
de Cortés, Honduras
Tabacalera Hondureña S.A. (83.64%)
Hong Kong
11/F, One Pacific Place, 88 Queensway, Hong Kong
British American Tobacco China Investments Limited
LEHMAN, LEE & XU CORPORATE SERVICES, Suite 3313, Tower One,
Times Square, 1 Matheson Street, Causeway Bay, Hong Kong
Reynolds Asia-Pacific Limited
Level 30, Three Pacific Place, 1 Queen’s Road East, Wanchai,
Hong Kong
British American Tobacco Asia-Pacific Region Limited
British-American Tobacco Company (Hong Kong) Limited
Level 24, Suites 2407 - 09, 3 Pacific Place, 1 Queen’s Road East,
Wanchai, Hong Kong
BAT Global Travel Retail Limited
Hungary
H-1124, Budapest, Csörsz utca 49-51. 3. em., Hungary
BAT Pécsi Dohánygyár Korlátolt Felelosségu Társaság
Financial Statements
Group Companies and Undertakings
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
285
Indonesia
Capital Place Office Tower, 6th Floor, Jl. Gatot Subroto Kav. 18,
Jakarta 12710 Indonesia
PT Bentoel Internasional Investama, Tbk (99.96%)
Jl. Raya Karanglo, 1 Desa Banjararum, Kecamatan Singosari, Jawa
Timur 65153 Indonesia
PT Bentoel Prima
4
(100%) (99.99%)^
Jl. Susanto No. 2B, Ciptomulyo, Sukun, Malang, Jawa Timur
65148 Indonesia
PT Bentoel Distribusi Utama (100%) (99.8%)^
Iraq
Empire Business Tower, Building C5, 2nd Floor, Erbil, Kurdistan
Region of Iraq
B.A.T. Iraqia Company for Tobacco Trading Limited
Ireland
Suite D, 2nd Floor, The Apex Building, Blackthorn Road, Sandyford
Industrial Estate, Dublin 18, Republic of Ireland
Carroll Group Distributors Limited
P.J. Carroll & Company Limited
Rothmans of Pall Mall (Ireland) Limited
5
Isle of Man
2nd Floor, St Mary’s Court, 20 Hill Street, Douglas, IM1 1EU,
IsleofMan
Abbey Investment Company Limited
The Raleigh Investment Company Limited
Tobacco Manufacturers (India) Limited
Italy
Via Amsterdam 147, 00144 Rome, Italy
British American Tobacco Italia S.p.A.
Ivory Coast
Rue des Jardins -Immeuble Sayegh-Mezzanine, Abidjan, Cocody 2
plateaux, Côte d’Ivoire
British American Tobacco RCI SARL
Jamaica
13A Ripon Road, Kingston 5, Jamaica
Carreras Limited (50.40%)
9
Sans Souci Development Limited (100%) (50.40%) ^
9
Sans Souci Limited (100%) (50.40%) ^
9
Japan
Midtown Tower 20F, 9-7-1 Akasaka, Minato-ku, Tokyo, Japan
British American Tobacco Japan, Ltd.
Jersey
22 Grenville Street, St Helier, JE4 8PX, Jersey
Pathway 5 (Jersey) Limited
Jordan
Airport Road, Al Qastal Industrial Area, Air Cargo Road, Amman,
Jordan
British American Tobacco – Jordan Private Shareholding
Company Limited
Kazakhstan
240G, Nursultan Nazarbayev avenue, A26F8D4 Almaty, Republic
of Kazakhstan
British American Tobacco Kazakhstan Trading LLP
Kenya
8 Likoni Road, Industrial Area, P.O. Box 30000-00100, Nairobi, Kenya
BAT Kenya Tobacco Company Limited (100%) (60%)^
British American Tobacco Area Limited
British American Tobacco Kenya plc (60%)
East African Tobacco Company (Kenya) Limited (100%) (60%)^
(In Liquidation)
Korea, Republic of
141, Gongdan1-ro, Sanam-Myun, Sacheon City, Kyungsangnamdo,
Korea (the Republic of)
British American Tobacco Korea Manufacturing Limited
42FI Gangnam Finance Center, 152 Teheran-ro, Gangnam-gu, Seoul,
Korea (the Republic of)
British American Tobacco Korea Limited
Kosovo, Republic of
Llapllaselle p.n., 10500 Gracanicë, Republic of Kosovo
British American Tobacco Kosovo SH.P.K.
Latvia
Mukusalas iela 101, Riga LV-1004, Latvia
British American Tobacco Latvia SIA
Lithuania
J. Galvydžio g. 11-7, LT-08236 Vilnius, Lithuania
UAB British American Tobacco Lietuva
Luxembourg
1, Rue Jean Piret, 2350 Luxembourg, Grand Duchy ofLuxembourg
British American Tobacco Brands (Switzerland) Limited
Malawi
Northgate Arcade Complex, Masauko Chipembere Highway,
Blantyre, Malawi
British American Tobacco (Malawi) Limited
Malaysia
12th Floor, Menara Symphony, No. 5, Jalan Prof Khoo Kay Kim,
Seksyen 13, 46200, Petaling Jaya, Selangor Darul Ehsan, Malaysia
British American Tobacco GSD (Kuala Lumpur) Sdn Bhd
Level 11, Sunway Geo Tower, Jalan Lagoon Selatan, Sunway South
Quay, Bandar Sunway, 47500 Subang Jaya, Selangor Darul Ehsan,
Malaysia
BAT Aspac Service Centre Sdn Bhd
Level 19, Guoco Tower, Damansara City, No. 6 Jalan Damanlela,
Bukit Damansara, 50490 Kuala Lumpur, Malaysia
British American Tobacco Malaysia Foundation
8
British American Tobacco (Malaysia) Berhad (50%)
Commercial Marketers and Distributors Sdn. Bhd. (100%) (50%)^
Rothmans Brands Sdn. Bhd. (100%) (50%)^ (In Liquidation)
Tobacco Importers and Manufacturers Sdn. Bhd. (100%) (50%)^
BAT Annual Report and Form 20-F 2021
286
Mali
DJELIBOUGOU-Immeuble BASSARO- BP 2065, Bamako -Mali
British American Tobacco (Mali) Sarl
Malta
PM Building, Level 2, Bone Street, Zone 1, Central Business District,
Birkirkara, CBD 1060, Malta
British American Tobacco (Malta) Limited
Central Cigarette Company Limited
Rothmans of Pall Mall (Malta) Limited
Mexico
Francisco I Madero 2750 Poniente, Colonia Centro, Monterrey,
NuevoLeón, C.P. 64000, Mexico
BAT DBS Mexico S.A. de C.V.
4
British American Tobacco Mexico Comercial, S.A. de C.V.
British American Tobacco Mexico, S.A. de C.V.
4
British American Tobacco Servicios S.A. de C.V.
Cigarrera La Moderna, S.A. de C.V.
Predio Los Sauces Sin número, Colonia Los Sauces, C.P. 63197,
Tepic, Nayarit, Mexico
Procesadora de Tabacos de Mexico, S.A. de C.V. (93%)
Moldova, Republic of
65, Stephan cel Mare Str., off. 416, Chisinau, MD2001,
Republicof Moldova
British American Tobacco – Moldova S.R.L.
Mozambique
2289 Avenida de Angola, Maputo, Mozambique
British American Tobacco Mozambique Limitada (95%)
Myanmar
Min Aye Yar Street, Plot No. (55, 56), Survey Ward No. (14) Shwe
Than Lwin Industrial Zone, Hlaing Tharyar Township Yangon Region,
Myanmar
British American Tobacco Myanmar Limited (95%)
9
British American Tobacco Myanmar Services Limited
9
Namibia
24 Orban Street, Klein Windhoek, Namibia
Twisp (Pty) Limited
Shop 48, Second Floor Old Power Station Complex, Armstrong
Street, Windhoek, Namibia
British American Tobacco Namibia (Pty) Limited
Netherlands
Handelsweg 53 A, 1181 ZA, Amstelveen, Netherlands
Aruba Properties B.V.
B.A.T. Netherlands Finance B.V.
British American Tobacco European Operations Centre B.V.
British American Tobacco Exports B.V.
British American Tobacco Holdings (Australia) B.V.
British American Tobacco Holdings (Malaysia) B.V.
British American Tobacco Holdings (South Africa) B.V.
British American Tobacco Holdings (The Netherlands) B.V.
British American Tobacco Holdings (Venezuela) B.V.
British American Tobacco Holdings (Vietnam) B.V.
British American Tobacco International (Holdings) B.V.
Molensteegh Invest B.V.
Precis (1790) B.V.
Rothmans Far East B.V.
Rothmans International Holdings B.V.
Rothmans Tobacco Investments B.V.
Rothmans UK Holdings B.V.
New Zealand
2 Watt Street, Parnell, Auckland, 1052, New Zealand
BAT (New Zealand) Limited
BAT Holdings (New Zealand) Limited
Mint Advisory Limited, Suite 6, 8 Turua Street, St Heliers, Auckland,
1071, New Zealand
New Zealand (UK Finance) Limited
#
Nigeria
1, Tobacco Road, Oluyole Local Government Area, Ibadan, Oyo
State, Nigeria
British American Tobacco (Nigeria) Limited
2 Olumegbon Road, Ikoyi, Lagos, Nigeria
British American Tobacco Marketing Nigeria Limited
Financial Statements
Group Companies and Undertakings
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
287
North Macedonia, Republic of
Blvd. 8-mi SEPTEMVRI No. 18, 1000 Skopje, Republic of Macedonia
TDR SKOPJE DOOEL Skopje
Norway
Dronning Eufemias Gate 42. 0191 Oslo, Norway
British American Tobacco Norway AS
Pakistan
Serena Business Complex. Khayaban-e-Suhrwardy, Islamabad,
Pakistan
British American Tobacco SAA Services (Private) Ltd
Pakistan Tobacco Company Limited (94.65%)
Bun Khurma Chichian Road, Mirpur Azad Jammu & Kashmir,
Pakistan
Phoenix (Private) Limited (100%) (94.65%)^
Panama
Calle 54, Obarrio, PH Twist Tower, Piso 22, Oficina E-22,
Corregimiento Bella Vista, Ciudad de Panama, Panama
British American Tobacco Central America S.A. (87.65%)
British American Tobacco Panama S.A.
Tabacalera Istmeña S.A.
Via Fernandez de Cordoba, Corregimiento of Pueblo Nuevo,
Panama City, Panama
BAT Caribbean, S.A.
Papua New Guinea
Ashurst Png, Level 11 Mrdc Haus, Cnr Of Musgrave Street and
Champion Parade, Port Moresby, National Capital District, Papua
New Guinea
British American Tobacco (PNG) Limited
Papua New Guinea Tobacco Co. Ltd
Paradise Tobacco Co. Limited
Rothmans of Pall Mall (P.N.G) Limited
Paraguay
Roque Centurion Miranda 1635, AYMAC II, Piso 2, Asunción,
Paraguay
British American Tobacco Productora de Cigarrillos S.A.
Peru
Av. El Derby No 055, Torre 3, Oficinas 405-406-407-408, Urb.
Lima Polo and Hunt Club, Santiago de Surco, Lima, Perú
British American Tobacco del Peru Holdings S.A. (98.55%)
6
British American Tobacco del Peru, S.A.C.
Philippines
31 Tayuman Street, Tondo, Manila, Philippines
Alhambra Industries Inc.
#
Poland
Aleja Wojska Polskiego 23c, 63-500, Ostrzeszow, Poland
CHIC sp.zo.o
Chic Holding sp.zo.o (In Liquidation)
ESMOKING LIQUIDS SP. Z O.O
Krakowiakow 48, 02-255, Warszawa, Poland
British American Tobacco Polska Trading sp. zo.o.
Rubiez 46, 61-612, Poznan, Poland
eSMOKING INSITUTE sp.zo
ul. IŁZECKA 26E, 02-135, Warszawa, Poland
Nicoventures Poland sp. Z.o.o.
Ul. Tytoniowa 16, 16-300, Augustow, Poland
British-American Tobacco Polska S.A.
Portugal
Edificio Amoreiras Square, Rua Carlos Alberto da Mota Pinto 17, 3e
A, 1070-313, Amoreiras, Lisboa, Portugal
COTAPO Empreendimentos Commerciais e Industriais S.A.
Sociedade Unificada de Tabacos Limitada (76.4%)
Qatar
P.O. Box 6689, 41 Floor, Tornado Tower, West Bay, Doha, Qatar
British American Tobacco Q LLC
Réunion
5, Immeuble Cap, Avenue Théodore Drouhet, ZAC Horizon 2000,
LePort, 97420, IIe de la Réunion
B.A.T. La Reunion SAS
Romania
319 Splaiul Independentei, Sema Parc ‘City Building’, 1st Floor,
6thSector, Bucharest, Romania
British American Shared Services (Europe) S.R.L.
319 Splaiul Independentei, Sema Parc ‘City Building’, 6th Floor,
6thSector, Bucharest, Romania
BRITISH American GBS Recruitment S.R.L.
Ploiesti, 17-19 Laboratorului Street, Prahova County, Romania
British-American Tobacco (Romania) Investment S.R.L.
Bucharest Business Park, Building A (3rd floor) and Building B2
(floors 3-4), 1A Bucuresti – Ploiesti (DN1) Road, Sector 1, Bucharest
013681, Romania
British American Tobacco (Romania) Trading SRL
Russia
38, 3rd Konnaya lakhta, Saint Petersburg, 197229 Russia
JSC ‘British American Tobacco-SPb’
#
Building 2, 17 Krylatskaya Street, Moscow, 121614 Russia
JSC ‘International Tobacco Marketing Services’
Rwanda
SORAS Building, Boulevard de la Revolution P.O Box 650 Kigali,
Rwanda
British American Tobacco Rwanda Limited
Saint Lucia
c/o ADCO Incorporated, 10 Manoel Street, Castries, Saint Lucia
Carisma Marketing Services Ltd
Pointe Seraphine, Castries, Saint Lucia
Rothmans Holdings (Caricom) Limited
Samoa
Vaitele Estate, Vaitele, Samoa
British American Tobacco Company (Samoa) Limited
Saudi Arabia, Kingdom Of
7051 Al Amir Sultan-Al Salamah District, Unit 1302. Jeddah 23525 -
2661, Saudi Arabia
BAT Saudia for Trading
BAT Arabia for Trading
Senegal
Almadies, Route Hôtel Méridien en Face Club Med, Dakar, Senegal
BP 3174
Tobacco Marketing Consultant TMC S.A.R.L. (In Liquidation)
BAT Annual Report and Form 20-F 2021
288
Serbia
Bulevar Milutina Milankovica 1ž, Belgrade, 11070, Serbia
British American Tobacco South – East Europe d.o.o. Beograd
Kralja Stefana Provencanog 209, Vranje, 17500, Serbia
British American Tobacco Vranje a.d. Vranja
Singapore
15 Senoko Loop, Singapore, 758168
British-American Tobacco (Singapore) Private Limited
British-American Tobacco Marketing (Singapore) Private Limited
18 Ah Hood Road #12-51, Hiap Hoe Bldg at Zhongshan Park,
Singapore, 329983
British American Tobacco Sales & Marketing Singapore Pte. Ltd.
Shenton Way, #33-00 OUE Downtown, Singapore 068809
RHL Investments Pte Limited
#
(In Liquidation)
Slovenia
Bravni˘carjeva ulica 13, 1000 Ljubljana, Slovenia
British American Tobacco d.o.o.
Solomon Islands
Kukum Highway, Ranadi, Honiara, Honiara, Solomon Islands
Solomon Islands Tobacco Company Limited
South Africa
Waterway House South, 3 Dock Road, V&A Waterfront, Cape Town,
Western Cape 8002, South Africa
Agrega EEMEA (Pty) Ltd
Amalgamated Tobacco Corporation (South Africa) (Pty) Ltd
American Cigarette Company (Overseas) (Pty) Ltd
Benson and Hedges (Pty) Ltd
British American Shared Services Africa Middle East (Pty) Ltd
British American Tobacco GSD (South Africa) (Pty) Ltd
British American Tobacco Holdings South Africa (Pty) Ltd
#
British American Tobacco Properties South Africa (Pty) Ltd.
British American Tobacco Services South Africa (Pty) Ltd
British American Tobacco South Africa (Pty) Ltd
British American Tobacco East and Southern Africa (Pty) Ltd
Brown & Williamson Tobacco Corporation (Pty) Ltd
Business Venture Investments No 216 (Pty) Ltd
Carlton Cigarette Company (Pty) Ltd
John Chapman (Pty) Ltd
John Player & Sons (Pty) Ltd
Kentucky Tobacco Corporation (Pty) Ltd
Martins of London (Pty) Ltd
Rembrandt Tobacco Corporation (Overseas) (Pty) Ltd
Riggio Tobacco Corporation of New York (Pty) Ltd
Rothmans of Pall Mall London (Pty) Ltd
St Regis Tobacco Corporation (Pty) Ltd
Thomas Bear’s Son and Company (Pty) Ltd
Tobacco Research and Development Institute (Pty) Ltd
Twisp (Pty) Ltd
WD and HO Wills (Pty) Ltd
Westminster Tobacco Company (Cape Town and London) (Pty) Ltd
Winfield Tobacco Corporation (Pty) Ltd
Winston Tobacco Company (Pty) Ltd
Spain
Torreo Espacio, Paseo de la Castellana, 259D, 28046 Madrid, Spain
British American Tobacco España, S.A.
Sri Lanka
178 Srimath Ramanathan Mawatha, Colombo, 15, Sri Lanka
Ceylon Tobacco Company Plc (84.13%)
Sudan
Byblos Tower, Al-Muk Nemer Street, Postal Code 11111, P.O. Box 1381,
Khartoum, Sudan
Blue Nile Cigarette Company Limited
Swaziland
213 King Mswati III Avenue West, Matsapha Industrial Site,
Mutsapha, eSwatini
British American Tobacco Swaziland (Pty) Limited
Sweden
Hyllie Boulevard 32, 215 32 Malmö, Sweden
Niconovum AB
Stenåldersgatan 23, 213 76 Malmö, Sweden
Fiedler & Lundgren AB
Winnington AB
Västra Trädgårdsgatan 15, 11153 Stockholm, Sweden
British American Tobacco Sweden AB
Switzerland
c/o British American Tobacco Switzerland S.A., Route de France 17,
2926 Boncourt, Switzerland
American-Cigarette Company (Overseas) Limited
British American Tobacco Switzerland SA
BAT Switzerland Vending SA
Rothmans of Pall Mall Limited
Route de France 17, 2926 Boncourt, Switzerland
Nicoventures Communications (Switzerland) SA
c/o NBA Fiduciaire S.A., Route de la Glâne 107, c/o NBA Fiduciaire
S.A. 1752 Villars-sur-Glâne, Switzerland
Intertab S.A. (50%)
c/o Bright Law AG, Bundesplatz, 6302 Zug, Switzerland
British American Tobacco International Limited (In Liquidation)
Tanzania
Acacia Estate Building, Kinondoni Road, P.O Box 288, Dar es
Salaam, Tanzania
BAT Distribution Tanzania Limited
British American Tobacco (Tanzania) Limited (In Liquidation)
International Cigarette Distributors Limited (99%) (In Liquidation)
Zanzibar Distribution Company Limited (99%) (In Liquidation)
Trinidad and Tobago
Corner Eastern Main Road and Mt. D’or Road, Champs Fleurs,
Trinidad and Tobago
The West Indian Tobacco Company Limited (50.13%)
Turkey
Orjin Maslak İş Merkezi, Eski Büyükdere Caddesi, Kat 9-10, Maslak,
Sarıyer, İstanbul
British American Tobacco Tütün Mamulleri Sanayi ve Ticaret
Anonim Sirketi
Financial Statements
Group Companies and Undertakings
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
289
Uganda
10th Floor, Lotis Towers, Plot 16 Mackinnon Road, Nakasero,
Kampala, Uganda
British American Tobacco Uganda Limited (90%)
Ukraine
13-15 Bolsunovska Str, Kyiv, 01014 Ukraine
LLC ‘British American Tobacco Sales and Marketing Ukraine’
21 Nezalezhnosti Str, Chernihiv Oblast, Prylucky, 17502, Ukraine
PJSC ‘A/T B.A.T. – Prilucky Tobacco Company’
United Arab Emirates
Jumeriah Business Centre 3, 37th Floor, Jumeirah Lake Towers,
Dubai, P.O. Box 337222, United Arab Emirates
British American Tobacco GCC DMCC
British American Tobacco ME DMCC
Unit # 2680, DMCC Business Center- Level # 1, Jewellery &
Gemplex 3 Dubai, United Arab Emirates
British American Tobacco International DMCC
United Kingdom
212-218 Upper Newtownards Road, Belfast, BT4 3ET,
Northern Ireland
Murray, Sons & Company, Limited
7 More London, Riverside, London, SE1 2RT, United Kingdom
Ryesekks P.L.C. (50%) (In Liquidation)
Building 7, Chiswick Business Park, 566 Chiswick High Road,
London, W4 5YG, United Kingdom
British American Tobacco UK Limited
Ten Motives Limited
10 Motives Limited
Globe House, 1 Water Street, London, WC2R 3LA, United Kingdom
Advanced Technologies (Cambridge) Limited
Allen & Ginter (UK) Limited
B.A.T (U.K. and Export) Limited
B.A.T Cambodia (Investments) Limited
B.A.T Far East Holding Limited
B.A.T Far East Leaf Limited
B.A.T Services Limited
B.A.T Uzbekistan (Investments) Limited
B.A.T Vietnam Limited
B.A.T. (Westminster House) Limited
B.A.T. China Limited
BAT Finance COP Limited
BATIF Dollar Limited
BATUS Limited
Big Ben Tobacco Company Limited
British American Shared Services (GSD) Limited
British American Shared Services Limited
British American Tobacco (AIT) Limited
British American Tobacco (GLP) Limited
British American Tobacco (Investments) Limited
British American Tobacco (Philippines) Limited
British American Tobacco (Serbia) Limited
British American Tobacco (South America) Limited
British American Tobacco China Holdings Limited
British American Tobacco Exports Limited
British American Tobacco Georgia Limited
British American Tobacco Global Travel Retail Limited
British American Tobacco International Holdings (UK) Limited
British American Tobacco Investments (Central & Eastern Europe)
Limited
British American Tobacco Italy Investments Limited
British American Tobacco Italy Limited
British American Tobacco Korea (Investments) Limited
British American Tobacco Malaysia (Investments) Limited
British American Tobacco Peru Holdings Limited
British American Tobacco UK Pension Fund Trustee Limited
9
British-American Tobacco (Mauritius) p.l.c.
Carreras Rothmans Limited
#
Chelwood Trading & Investment Company Limited
East African Tobacco Company (U.K.) Limited
Kbio Holdings Limited
Lord Extra Limited
Myddleton Investment Company Limited
Nicovations Limited
Nicoventures Holdings Limited
Nicoventures Retail (UK) Limited
Nicoventures Trading Limited
Powhattan Limited
Precis (2396) Limited
Ridirectors Limited
Rothmans Exports Limited
Rothmans International Limited
Rothmans International Services Limited
Rothmans International Tobacco (UK) Limited
Rothmans of Pall Mall (Overseas) Limited
Rothmans Trading Limited
Ryservs (1995) Limited
Ryservs (No.3) Limited
Tobacco Exporters International Limited
Tobacco Marketing Consultants Limited
Venezuela Property Company Limited
Westanley Trading & Investment Company Limited
Westminster Tobacco Company Limited
Globe House, 2 Milford Lane, London, WC2R 3LN, United Kingdom
World Investment Company Limited
BAT Annual Report and Form 20-F 2021
290
Amalgamated Tobacco Company Limited
American Cigarette Company (Overseas) Limited
Ardath Tobacco Company Limited
B.A.T Additional Retirement Benefit Scheme Trustee Limited
B.A.T Industries p.l.c.
B.A.T. International Finance p.l.c.*
B.A.T. Operating Finance Limited
BATLaw Limited
BATMark Limited*
Benson & Hedges (Overseas) Limited
British American Global Shared Services Limited
British American Tobacco (1998) Limited*
British American Tobacco (2009) Limited
British American Tobacco (2009 PCA) Limited
British American Tobacco (2012) Limited
British American Tobacco (Brands) Limited
British American Tobacco (Corby) Limited
British American Tobacco (NGP) Limited
British American Tobacco Healthcare Trustee Limited
British American Tobacco Taiwan Logistics Limited
British-American Tobacco (Holdings) Limited
Brown & Williamson Tobacco Corporation (Export) Limited
BTomorrow Ventures Limited
Carreras Limited
Courtleigh of London Limited
Dunhill Tobacco of London Limited
John Sinclair Limited
Louisville Securities Limited
Moorgate Tobacco Co. Limited
Peter Jackson (Overseas) Limited
Precis (1789) Limited
Precis (1814) Limited
Rothmans International Enterprises Limited
Rothmans of Pall Mall Limited
Senior Service (Overseas) Limited
South Western Nominees Limited
The London Tobacco Company Limited
Tobacco Insurance Company Limited
Weston (2009) Limited
Weston Investment Company Limited
United States
CSC-Lawyers Incorporating Service, 2710 Gateway Oaks Drive,
Suite 150N, Sacramento CA 95833-3505, United States
Genstar Pacific Corporation
251 Little Falls Drive, Wilmington, DE 19808, United States
B.A.T Capital Corporation
BATUS Holdings Inc.
BATUS Japan, Inc.
BATUS Retail Services, Inc.
British American Tobacco (Brands), Inc.
Brown & Williamson Holdings, Inc.
BT DE Investments Inc.
Btomorrow Innovation Hub Inc.
BTI 2014 LLC
Imasco Holdings Group, Inc.
Imasco Holdings, Inc.
ITL (USA) Limited
Louisville Corporate Services, Inc.
Nicoventures U.S. Limited
Farmers Bank Building, Suite 1402, 301 N. Market Street,
Wilmington, DE 19801, United States
Reynolds Finance Company
3700 Airpark Drive, Owensboro, KY 42301, United States
KBio, Inc.
401 N. Main Street, Winston-Salem, NC 27101, United States
Conwood Holdings, Inc.
EXP Homes, LLC
Lorillard Licensing Company LLC
Lorillard, LLC
Modoral Brands Inc.
Northern Brands International, Inc.
R.J. Reynolds Global Products, Inc.
R.J. Reynolds Tobacco Company
R.J. Reynolds Tobacco International, Inc
R.J. Reynolds Vapor Company
R.J. Reynolds Tobacco Co.
R.J. Reynolds Tobacco Holdings, Inc.
RAI Innovations Company
RAI International, Inc.
RAI Services Company
RAI Strategic Holdings, Inc.
Reynolds American Inc.
Reynolds Brands Inc.
Reynolds Marketing Services Company
Reynolds Technologies, Inc.
RJR Realty Relocation Services, Inc.
RJR Vapor Co., LLC
Rosswil LLC
S.F. Imports, Inc.
Spot You More, Inc.
Vuse Stores LLC
Financial Statements
Group Companies and Undertakings
Continued
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
291
3220 Knotts Grove Road, Oxford, NC 27565, United States
Santa Fe Natural Tobacco Company, Inc.
5106, Tradeport Dr., Memphis, TN 38141, United States
American Snuff Company, LLC
Uruguay
Juncal 1392, Montevideo, Uruguay
Kellian S.A.
Uzbekistan
77 Minor Passage, Tashkent, 100084, Uzbekistan
JSC JV “UZBAT A.O.” (97.38%)
Venezuela
Registro Mecantil Primero de la Circunscripción, Judical des
Distrito, Capital y Estado, Miranda, Venezuela
Agrega de Venezuela, Agreven, C.A. (50%) (In Liquidation)
Avenida Francisco de Miranda, Edificio Bigott, Los Ruices, Caracas
– Estado Miranda, 1010, Venezuela
Agrobigott, C.A.
Compania Anonima Cigarrera Bigott Sucesores
Distribuidora Bigott, C.A.
Avenida Francisco de Miranda, Torre Regelfall, Municipio Chacao,
Estado, Miranda, Caracas, Venezuela
Proyectos de Inversion BAT 1902 C.A.
Vietnam
20/F Mplaza Saigon, 39 Le Duan Street, Ben Nghe Ward, District1,
Ho Chi Minh City, Vietnam
East Asia Area Services Company Limited
7
Area 8, Long Binh Ward, Bien Hoa City, Dong Nai Province, Vietnam
British American Tobacco – Vinataba (JV) (70%)
7
Lot 45C/I, Road #7, Vinh Loc Industrial Park, Binh Chanh District,
HoChi Minh City, Vietnam
VINA-BAT Joint Venture Company Limited (49%)
7
Zambia
Plot No. PH1 IND & 53 & 54, LS-MFEZ, Chifwema Road, Lusaka,
Zambia
British American Tobacco (Zambia) plc (78.08%)
Zimbabwe
Manchester Road 1, Southerton, Harare, Zimbabwe
American-Cigarette Company (Overseas) (Private) Ltd
British American Tobacco Zimbabwe (Holdings) Limited (63.74%)
House of Raleigh Limited
Rothmans Limited
Associated Undertakings and Joint Ventures
Canada
35 English Drive, Moncton, New Brunswick, E1E 3X3, Canada
Organigram Holdings Inc. (18.8%)
France
88 Avenue des Ternes, 75017, Paris, France
Alcome SAS (24%)
Hungary
H-6800 Hódmezóvásárhely, Erzsébeti út 5/b, Hungary
Országos Dohányboltellátó Korlátolt Felelosségu Társaság (49%)
India
Virginia House, 37, J.L. Nehru Road, Kolkata, 700071, India
ITC Limited (29.37%)
9
Azamabad, Andhra Pradesh, Hyderabad, 500 020, India
VST Industries Limited (32.16%)
9
United Kingdom
4a Station Parade, Uxbridge Road, London, W5 3LD,
United Kingdom
AYR LTD (13.14%)
10
Uzbekistan
Gulobod Village, Samarkand Region, 140100, Uzbekistan
FE “Samfruit” JSC (42.61%)
Yemen
P.O. Box 14, Sanna, Yemen
Kamaran Industry and Investment Company (31%)
P.O. Box 5302, Hoban, Taiz, Yemen
United Industries Company Limited (32%)
Joint Operations
Hong Kong
29/F, Oxford House, 979 King’s Road, Taikoo Place, Quarry Bay,
Hong Kong
CTBAT International Co. Limited (50%)
Notes
:
1. Ownership held in the class of US Dollar 100 (100%) (76.30%)^ and US Dollar 49,900 (100%).
2. Ownership held in the class of Series F and 2nd Preferred shares.
3. Ownership held in the class of A shares (50%) and class of B shares (100%).
4. Ownership held in class of A shares and B shares.
5. Ownership held solely in class of preference shares.
6. Ownership held in class of Investment stock (98.98%) and Ordinary shares (98.35%).
7. Ownership held in the class of Charter Capital Contribution Units.
8. Company limited by guarantee.
9. 31 March year-end.
10. 31 May year-end.
BAT Annual Report and Form 20-F 2021
292
Balance Sheet
@
British American Tobacco p.l.c. – at 31 December
Note
2021
£m
2020
£m
Assets
Fixed assets
Investments in Group undertakings
2
27,809
27,995
Current assets
Debtors
3
11,329
8,373
Cash at bank and in hand
4
5
Total current assets
11,333
8,378
Total assets
39,142
36,373
Equity
Capital and reserves
Called up share capital
4a
614
614
Share premium account, capital redemption and merger reserves
4b
23,325
23,321
Other reserves
4c
90
90
Profit and loss account
4d
10,597
9, 263
Total shareholders’ funds
34,626
33,288
Perpetual hybrid bonds
4e
1,685
–
Total equity
4
36,311
33,288
Liabilities
Creditors
5
2,831
3,085
Total liabilities
2,831
3,085
Total equity and liabilities
39,142
36,373
The accompanying Notes on the Accounts are an integral part of the Parent Company financial statements.
On behalf of the Board
Luc Jobin
Chairman
10 February 2022
Financial Statements
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
293
Statement of Changes in Equity
@
British American Tobacco p.l.c. – for the year ended 31 December
Called up
share capital
£m
Share
premium
account,
Capital
redemption
and Merger
Reserve
£m
Other
Reserves
£m
Profit
and
loss
account
£m
Total
Shareholders’
funds
£m
Perpetual
hybrid bonds
£m
Total
Equity
£m
1 January 2021
614
23,321
90
9,263
33,288
–
33,288Increase in share capital
– 4 – – 4
–
4Profit for the financial year
– – –
6,250 6,250
–
6,250
Dividends – on equity shares
– – –
(4,904) (4,904)
–
(4,904)
Consideration paid for purchase of own shares
heldinEmployee Share Ownership Trusts
– – –
(66) (66)
–
(66)
Perpetual hybrid bonds
Proceeds net of issuance costs and tax
– – – – –
1,685 1,685
Coupons paid (net of tax)
– – –
(5) (5)
–
(5)
Other movements*
– – –
59 59
–59
31 December 2021
614
23,325
90
34,62610,597
1,685
36,311
Called up
share capital
£m
Share
premium
account,
Capital
redemption
and Merger
Reserve
£m
Other
Reserves
£m
Profit
and
loss
account
£m
Total
Shareholders’
funds
£m
Perpetual
hybrid bonds
£m
Total
Equity
£m
1 January 2020
614
23,312
90
8,529
32,545
–
32,545Increase in share capital
– 9 – – 9 – 9
Profit for the financial year
– – –
5,304 5,304
–5,304
Dividends – on equity shares
– – –
( 4,747) (4,747)
–(4,747)
Consideration paid for purchase of own shares
heldinEmployee Share Ownership Trusts
– – –
(14) (14)
–(14)
Other movements*
– – –
1 91 191
–191
31 December 2020
614
23,321
90
9,263
33,288
–
33,288* Other movements includes share-based payments.
There was no difference between profit and loss for the period and total comprehensive income for the period.
The profit and loss account is stated after deducting the cost of treasury shares which was £5,113 million at 31 December 2021
(31 December 2020: £5,138 million).
@ denotes section, including accompanying text and tables, that does not
form part of BAT’s Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2021
294
@
Annual Report on Form 20-F as filed with the SEC.
1 Accounting Policies
Basis of accounting
The financial statements of the Company have been prepared in
accordance with the Companies Act 2006 (‘the Act’) and in accordance
with Financial Reporting Standard 101
Reduced Disclosure Framework
(’FRS 101’).
In preparing these financial statements, the Company applies
the recognition, measurement and disclosure requirements
of UK-adopted international accounting standards, but makes
amendments where necessary in order to comply with the Act
and has set out below where advantage of the FRS 101 disclosure
exemptions has been taken, including those relating to:
–
a cash flow statement and related notes;
–
comparative period reconciliations;
–
disclosures in respect of transactions with wholly
owned subsidiaries;
–
disclosures in respect of capital management;
–
the effects of new but not yet effective IFRSs; and
–
disclosures in respect of the compensation of key
management personnel.
As the consolidated financial statements of the Group include
equivalent disclosures, the Company has also taken the exemptions
under FRS 101 available in respect of disclosures under IFRS 2
related to group settled share-based payments.
The financial statements have been prepared on a going
concern basis under the historical cost convention except
as described in the accounting policy below on financial
instruments. After reviewing the annual budget, plans and
financing arrangements, the Directors consider that the Company
has adequate resources to continue in operational existence
for a period of at least 12 months from the date of signing the
financial statements, and that it is therefore appropriate to
continue to adopt the going concern basis in preparing the
financial statements.
The preparation of the financial statements requires the Directors
to make estimates and assumptions that affect the reported
amounts of revenues, expenses, assets and liabilities, and the
disclosure of contingent liabilities at the date of the financial
statements. The key estimates and assumptions are set out in
the accounting policies below, together with the related Notes on
the Accounts.
The critical accounting judgements include determination as to
whether the issue of perpetual hybrid bonds should be classified
as equity instead of borrowings (see note 4) and the determination
as to whether to recognise provisions and the exposures to
contingent liabilities (see note 7). Judgement is necessary to assess
the likelihood that a pending claim is probable (more likely than not
to succeed), possible or remote.
There are no critical accounting estimates which would have
a significant risk of a material adjustment within the next
financial year.
As permitted by Section 408 of the Act, the profit and loss of the
Company has not been presented in these financial statements.
The Company is a public limited company which is listed on the
London Stock Exchange and the Johannesburg Stock Exchange and
is incorporated and domiciled in the UK. In addition, the Company’s
shares are traded on the New York Stock Exchange in the form of
American Depository Shares (ADSs).
Foreign currencies
The functional currency of the Company is sterling. Transactions arising
in currencies other than sterling are translated at the rate of
exchange ruling on the date of the transaction.
Monetary assets and liabilities expressed in currencies other than
sterling are translated at rates of exchange ruling at the end of
the financial year. All exchange differences are taken to the profit
and loss account in the year. Amounts recognised in equity are
not retranslated.
Income
Income consists of dividend income from Group undertakings, fee
income from financial guarantees and interest income. These are
included in the profit and loss account when all contractual
or other applicable conditions for recognition have been met.
Dividend income is recognised at the same time as the paying
company recognises the liability to pay a dividend.
Taxation
Taxation is that chargeable on the profits for the period, together
with deferred taxation. Income tax charges, where applicable,
are calculated on the basis of tax laws enacted or substantively
enacted at the balance sheet date. A deferred tax asset is
recognised only to the extent that it is probable that future taxable
profits will be available against which the asset can be utilised.
Deferred tax is determined using the tax rates that have been
enacted or substantively enacted by the balance sheet date and
are expected to apply when the related deferred tax asset is
realised or deferred tax liability is settled. As required under IAS 12
Income Taxes, deferred tax assets and liabilities are not discounted.
Investments in Group companies
Investments in Group companies are stated at cost, together
with subsequent net capital contributions, less provisions for any
impairment in value, where appropriate.
Dividends
The Company recognises the interim dividend as an appropriation of
reserves in the period in which it is paid.
Repurchase of share capital
When share capital is repurchased, the amount of consideration
paid, including directly attributable costs, is recognised as
a deduction from equity. Repurchased shares which are not
cancelled, or shares purchased for the employee share ownership
trusts, are classified as treasury shares and presented as a
deduction from total equity.
Related parties
The Company has taken advantage of the exemption under FRS 101
from disclosing transactions with related parties that are wholly-
owned subsidiaries of British American Tobacco p.l.c. Group.
Equity instruments
Instruments are classified as either financial liabilities or as
equity in accordance with the substance of the contractual
arrangements. Instruments that cannot be settled in the
Company’s own equity instruments and that include no contractual
obligation to deliver cash or another financial asset are classified as
equity. Equity instruments issued by the Company are recognised
at the proceeds received, net of issuance costs.
Notes to the Accounts
@
Financial Statements
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
295
1 Accounting Policies
Continued
On 27 September 2021, the Company issued two €1 billion
perpetual hybrid bonds. As the Company has the unconditional
right to avoid transferring cash or another financial asset in relation
to these bonds, they are classified as equity instruments in the
financial statements.
Financial instruments
Financial assets and financial liabilities are recognised when the
Company becomes a party to the contractual provisions of the
relevant instrument and derecognised when it ceases to be a
party to such provisions. Such assets and liabilities are classified
as current if they are expected to be realised or settled within
12 months after the balance sheet date. If not, they are classified as
non-current.
Financial instruments are initially recognised at fair value.
The Company’s non-derivative financial assets, including debtors,
are held in order to collect contractual cash flows and are
subsequently carried at amortised cost. Non-derivative financial
liabilities, including creditors, are subsequently carried at amortised
cost using the effective interest method. Financial guarantees
are initially recorded at fair value, and subsequently carried at this
fair value less accumulated amortisation within other creditors.
Fees receivable in respect of these guarantees are carried at
discounted present value.
Derivative financial assets and liabilities are initially recognised,
and subsequently measured, at fair value, which includes accrued
interest receivable and payable where relevant. Changes in their
fair values are recognised in profit and loss.
The Company has accounted for the application of replacement
benchmark rates in accordance with the Amendments to IFRS 9
Financial Instruments published in 2019 (phase 1) and 2020 (phase 2) .
Impairment of financial assets held at amortised cost
Loss allowances for expected credit losses on financial assets
which are held at amortised cost are recognised on the initial
recognition of the underlying asset. Allowances in respect of
loans and other receivables (debtors) are initially recognised at
an amount equal to 12-month expected credit losses. Where the
credit risk on the receivables has increased significantly since initial
recognition, allowances are measured at an amount equal to the
lifetime expected credit loss.
Share-based payments
The Company has equity-settled share-based compensation plans
in respect of Group employees.
Equity-settled share-based payments are measured at fair value
at the date of grant. The fair value determined at the grant date
of the equity-settled share-based payments is expensed over the
vesting period, based on the Group’s estimate of awards that will
eventually vest. For plans where vesting conditions are based on
total shareholder returns, the fair value at date of grant reflects
these conditions, whereas earnings per share vesting conditions
are reflected in the calculation of awards that will eventually vest
over the vesting period.
Fair value is measured by the use of the Black-Scholes option
pricing model, except where vesting is dependent on market
conditions when the Monte-Carlo option pricing model is used.
The expected life used in the models has been adjusted, based on
management’s best estimate, for the effects of non-transferability,
exercise restrictions and behavioural considerations.
The cost of these awards, less any direct recharges made to Group
companies, are recognised as capital contributions to investments
in subsidiaries.
Historically, the Company has used the British American Tobacco
Group Employee Trust (BATGET), which operates as an extension
of the Company, as the vehicle to obtain shares on market and
hold them in trust to satisfy outstanding awards. In addition, from
March 2020 the Company has utilised treasury shares acquired in
the share buy-back programme to satisfy shared-based payment
awards made to certain employees.
2 Investments in Group Companies
The Company’s directly-owned subsidiaries are British American Tobacco (1998) Limited, B.A.T. International Finance p.l.c. and BATMark
Limited. A full list of indirect subsidiaries and other undertakings as required by Section 409 of the Companies Act 2006 is shown on
pages 282 to 291 of the Group’s financial statements.
Movements in investments relate to Group share-scheme costs net of recharges to subsidiaries as well as amounts recognised in relation
to financial guarantees issued by the Company on behalf of Group subsidiaries.
The Directors are of the opinion that the individual investments in the subsidiary undertakings have a value not less than the amount at
which they are shown in the Balance Sheet.
Shareholdings at cost less provisions and other fixed asset investments
2021
£m
2020
£m
1 January
27,995
27, 908
Movements
(186)
87
31 December
27,809
27,995
@
Annual Report on Form 20-F as filed with the SEC.
BAT Annual Report and Form 20-F 2021
296
3 Debtors
2021
£m
2020
£m
Amounts due from Group undertakings
11,329
8,373
Current
8,591
7, 214
Non-current
2,789
1,204
Allowance account
(51)
(45)
31 December
11,329
8,373
2021
£m
2020
£m
Allowance account
1 January
45
35
Provided in year
9
11
Released during the year
(3)
–
Foreign exchange
–
(1)
31 December
51
45
Current
3
8
Non-current
48
37
31 December
51
45
Included within amounts due from Group undertakings is an amount of £8,396 million (2020: £7,024 million) which is unsecured, interest-
bearing and repayable on demand. The receivable falls under the standard lending agreements within the Group which were revised to
take account of global benchmark interest rate reform. Prior to 1 August 2021 the applicable rate was based on the London InterBank
Interest Rate (LIBOR) and with effect from this date it is based on the Sterling Overnight Index Average (SONIA). Management consider
the replacement rates in the revised intercompany agreement to be economically equivalent to those used previously. The impact of the
change in rates was not significant to the Company.
Amounts due from Group undertakings include £1,291 million (2020: £1,386 million) representing the discounted value of the fees
receivable from the parental guarantees issued by the Company, of which £183 million (2020: £183 million) is due within one year and
£1,108 million (2020: £1,204 million) is due after more than one year.
Other amounts due from Group undertakings include:
–
a balance of £841 million (2020: £nil) which is unsecured, interest bearing and repayable in 2026, with an interest rate based on SONIA +
1.070%; and
–
a balance of £841 million (2020: £nil) which is unsecured, interest bearing and repayable in 2029, with an interest rate based on SONIA +
1.340%.
All other amounts owed by Group undertakings are unsecured, interest free and repayable on demand.
4 Total Equity
(a) Called up Share Capital
Called up Share Capital
Ordinary Shares of 25p
each Number of shares
£m
Allotted and fully paid
1 January 2021
2,456,591,597
614.14
Changes during the year
–
share option schemes
26,191
0.01
31 December 2021
2,456,617,788
614.15
Called up Share Capital
Ordinary Shares of 25p each
Number of shares
£m
Allotted and fully paid
1 January 2020
2,456,520,738
614.12
Changes during the year
–
share option schemes
70,859
0.02
31 December 2020
2,456,591,597
614.14
@
Annual Report on Form 20-F as filed with the SEC.
Notes to the Accounts
@
Continued
Financial Statements
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
297
4 Total Equity
Continued
The Company’s ordinary shares are fully paid and no further contribution of capital may be required by the Company from the
shareholders. All ordinary shares rank equally with regard to participation in dividends and to share in the proceeds of the Company’s
residual assets upon a winding up of the Company. Shareholders may, by ordinary resolution, declare final dividends, but not in excess of
the amount recommended by the Directors. Holders of ordinary shares have no pre-emptive rights.
On a show of hands every shareholder who is present in person at a general meeting is entitled to one vote regardless of the number of
shares held by the shareholder, unless a poll is demanded. On a poll, every shareholder who is present in person or by proxy has one vote
for every share held by the shareholder. The Company’s Annual General Meeting voting is undertaken by way of a poll. All rights attached
to the Company’s shares held by the Group as Treasury shares are suspended until those shares are reissued.
Please refer to page 373 for further detail of the provisions contained within the Articles of Association.
(b) Share premium account, capital redemption reserves and merger reserves
Share premium
account
£m
Capital
redemption
reserves
£m
Merger
reserves
£m
Total
£m
31 December 2021
108 101
23,116
23,325
31 December 2020
104 101
23,1 16
23,32131 December 2019
95
101
23,116
23,312
Share premium
The share premium increase includes £nil in 2021 (2020: £2 million) in respect of ordinary shares issued under the Company’s share option
schemes. These schemes are described in the Remuneration Report. A further £4 million (2020: £7 million) increase in share premium is
related to shares repurchased and not cancelled that have been transferred from the Company to other Group undertakings, to be granted to
employees on vesting of awards, and represents the excess of transfer price of the shares over the original weighted average cost of shares.
Capital redemption reserve
On the purchase of own shares, as part of the share buy-back programme for shares which are cancelled, a transfer is made from retained
earnings to the capital redemption reserve equivalent to the nominal value of the shares purchased. The Company suspended its previous
share buy-back programme from 30 July 2014. On 10 February 2022 the Board approved a £2 billion share repurchase program for 2022.
Merger reserve
In 2017, the Company announced the completion of the acquisition of the remaining 57.8% of Reynolds American Inc. it did not already
own. Pursuant to the Merger Agreement, the Company, on behalf of its indirect subsidiary BATUS Holdings Inc (’BATUS’), agreed to issue
new shares, represented by American Depositary Shares, for the benefit of Reynolds American Inc. shareholders. In consideration for the
Company issuing new shares, BATUS agreed to issue to the Company an assignable obligation owed by BATUS to issue shares to the
holder of that obligation. As a consequence, the Company issued 429,045,762 new shares with a nominal value of £107,261,441.
In accordance with Section 612 of the Companies Act 2006, the excess of the fair value of the shares issued over the nominal value of the
shares has been treated as a merger reserve.
(c) Other reserves
As part consideration for the acquisition of Rothmans International BV in 1999, convertible redeemable preference shares were issued by
the Company. The discount on these shares was amortised by crediting other reserves and charging retained earnings. The balance of
£90 million in other reserves comprises the accumulated balance in respect of the preference shares converted during 2004.
(d) Profit and loss account
As permitted by Section 408 of the Companies Act 2006, the profit and loss of the Company has not been presented in these Financial
Statements. The profit for the year ended 31 December 2021 was £6,250 million (2020: £5,304 million).
Dividend distributions to the Company’s shareholders are recognised in the period in which these are paid. The Company makes four
interim quarterly dividend payments.
Details of Directors’ remuneration, share options and retirement benefits are given in the Remuneration Report in the Group Annual Report and
Accounts. Details of key management compensation are included in note 30 of the Group financial statements. The Company had two employees at
31 December 2021 (2020: two). These two employees are Jack Bowles and Tadeu Marroco. The details of their remuneration are shown on page 136 of
the Group’s Annual Report and Accounts for the year ended 31 December 2021. The costs of these employees are borne by another Group company.
Shareholders’ funds are stated after deducting the cost of treasury shares which include £4,823 million (2020: £4,836 million) for shares repurchased
and not cancelled and £290 million (2020: £302 million) in respect of the cost of own shares held in Employee Share Ownership Trusts. In 2021,
the value of shares repurchased and not cancelled has decreased by £13 million as compared to the previous year, representing the value of
shares that have been transferred from the Company to other Group undertakings to be granted to employees on vesting of awards.
As at 31 December 2021 treasury shares include 5,995,678 (2020: 5,787,154) of shares held in trust and 161,930,217 (2020:162,347,246) of shares
repurchased and not cancelled as part of the Company’s share buy-back programme (which was suspended in 2014). From March 2020, the
Company has utilised shares acquired in the share buy-back programme to satisfy share-based payment awards made to certain employees.
Other movements in shareholders’ funds relate to the recognition of share-based payments and the release of treasury shares as a result of the
exercise of share options.
BAT Annual Report and Form 20-F 2021
298
4 Total Equity
Continued
(e) Perpetual hybrid bonds
On 27 September 2021, the Company issued two €1 billion perpetual hybrid bonds, which have been classified as equity. Issuance costs
of these bonds, amounting to €26 million (£22 million), have been recognised in equity, net of tax of £4 million. These bonds include
redemption options exercisable at the Company’s discretion from September 2026 to December 2026 (the 3% perpetual hybrid bond) and
June 2029 to September 2029 (the 3.75% perpetual hybrid bond), on specified dates thereafter, or in the event of specific circumstances
(such as a change in IFRS or tax regime) as set out in the individual terms of each issue.
The coupons associated with these perpetual bonds are fixed at 3% until 2026 and 3.75% until 2029, respectively, and would reset to rates
determined by the contractual terms of each instrument on certain dates thereafter. The bonds are perpetual in nature and do not have maturity
dates for the repayment of principal. The contractual terms of the perpetual hybrid bonds allow the Company to defer coupon payments,
however certain contingent events could trigger mandatory payments of such deferred coupons, including the payment of dividends on and
repurchase of ordinary shares, subject to certain exceptions in each case. As the Company has the unconditional right to avoid transferring cash
or another financial asset in relation to these bonds, they are classified as equity instruments in these financial statements. During the year, the
Company did not defer any eligible coupon payments and in December 2021 paid a coupon of £6 million on the 3% December 2026 bond which
has been recognised within equity. The fair value of these bonds at 31 December 2021 was £1,651 million.
5 Creditors
2021
£m
2020
£m
Amounts due to Group undertakings
8
11
Loans due to Group undertakings
1,571
1,571
Other creditors
1,244
1,495
Deferred income
8
8
2,831
3,085
Current
1,746
202
Non-current
1,085
2,883
2,831
3,085
Amounts due to Group undertaking of £8 million (2020: £11 million) are unsecured, interest free and repayable on demand. Loans due to
Group undertakings of £1,571 million (2020: £1,571 million) are unsecured, bear interest at rates based on LIBOR between 1.47% and 1.50%
(2020: 1.51% and 2.19%), and are repayable in 2022. Any new loans drawn down in 2022 are expected to bear interest at rates based on
SONIA. Included in other creditors is a provision of £1,211 million (2020: £1,453 million) in respect of subsidiary undertaking borrowings
guaranteed by the Company. Out of this amount, a total of £134 million (2020: £150 million) represents amounts to be settled within
one year.
6 Audit Fees
2021
2020
Fees payable to KPMG
–
Audit fees (borne by another Group Company)
£30,000
£30,000
7 Contingent Liabilities
British American Tobacco p.l.c. has guaranteed borrowings by subsidiary undertakings of £36.6 billion (2020: £43.1 billion) and total
borrowing facilities of £50.9 billion (2020: £58.4 billion).
The Company has cross-guaranteed the funding commitments in respect of, and the liabilities of, the British American Tobacco UK Pension
Fund (“Fund”). The last full triennial actuarial valuation of this Fund was carried out as at 31 March 2020 by a qualified independent actuary.
The valuation showed that the fund had a surplus of £139 million on a Technical Provisions basis, in accordance with the statutory funding
objective. The Trustee of the Fund also has a Long-Term Funding Target to be fully funded on a Solvency Liabilities basis by 2026, and on this basis the
Fund had a surplus of £7 million at the valuation date. On an IAS 19 basis, the Fund had a surplus at 31 December 2021 of £293 million (2020: £389 million).
Contributions by the principal employer to the Fund in accordance with the agreed schedule of contributions are expected to be £18 million in each of
2022 and 2023. In addition, there are contingent liabilities in respect of litigation in various countries (note 31 in the Notes on the Accounts).
8 Post Balance Sheet Events
On 9 February 2022, the fourth quarterly interim dividend of 53.9p (£1,236 million) declared by the Directors in February 2021, and
reconfirmed to the market prior to 31 December 2021, was paid to shareholders. The impact of this on the Company was to reduce the
level of profit and loss reserve from £10,596 million to £9,360 million.
On 10 February 2022, the Board declared an interim dividend of 217.8p per ordinary share of 25p for the year ended 31 December 2021,
payable in four equal quarterly instalments of 54.45p per ordinary share in May 2022, August 2022, November 2022 and February 2023.
These payments will be recognised as appropriations from reserves in 2022 and 2023. The total amount payable is estimated to be
£5,003 million based on the number of shares outstanding at the date of these accounts. In addition, on 10 February 2022 the Board
approved a £2 billion share repurchase program for 2022 as part of a new longer-term active capital allocation framework.
@
Annual Report on Form 20-F as filed with the SEC.
Notes to the Accounts
@
Continued
Financial Statements
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
299
Additional Disclosures
Other Information
Additional Disclosures
Information on the Group
300
Selected Financial Information
301
Non-Financial Measures
302
Non-GAAP Measures
304
Employees
314
Additional Disclosures on Liquidity and Capital Resources
315
Summary of Group Risk Factors
317
Group Risk Factors
318
Regulation of the Group’s Business
340
Disclosure Pursuant to Section 219 of the Iran Threat Reduction
and Syria Human Rights Act of 2012 (ITRA)
345
Material Contracts
346
Property, Plant and Equipment
348
Raw Materials
348
U.S. Corporate Governance Practices
349
Controls and Procedures
350
Statements Regarding Competitive Position
350
Directors’ Report Information
351
Cautionary Statement
352
Shareholder Information
Share Prices and Listings
353
Dividends
354
Shareholder Taxation Information
356
Share Capital and Security Ownership
360
Articles of Association
373
Purchase of Shares
376
Group Employee Trust
377
American Depositary Shares
378
Shareholding Administration and Services
379
Exhibits
380
Other Information
Glossary
382
Cross-Reference to Form-20F
383
BAT Annual Report and Form 20-F 2021
300
Other Information
Information on the Group
Overview
the Group, a leading consumer-centric, multi-category consumer
internal estimates, the BAT Group is a market leader by volume in
more than 50 countries, producing the cigarette chosen by one in
eight of the world’s one billion smokers.
The Group, excluding the Group’s associated undertakings, is
organised into four regions:
–
the United States (U.S. – Reynolds American Inc.);
–
Asia-Pacific and the Middle East (APME);
–
Americas and Sub-Saharan Africa (AmSSA); and
–
Europe and North Africa (ENA).
The Group’s range of combustible products covers all segments,
from value-for-money to premium with a portfolio of international,
regional and local tobacco brands to meet a broad array of adult
tobacco consumer preferences wherever the Group operates.
The Group is investing in building a portfolio of potentially less
harmful tobacco and nicotine products alongside its traditional
tobacco business – including vapour products, tobacco heating
products (THPs) and Modern Oral products, which are collectively
termed the New Categories, as well as Traditional Oral products.
The Group manages a globally-integrated supply chain and its
products are distributed to retail outlets worldwide.
History and development of BAT
The Group has had a significant global presence in the tobacco
industry for over 100 years. BAT Ltd. was incorporated in 1902,
when the Imperial Tobacco Company and the American Tobacco
Company agreed to form a joint venture company. BAT Ltd.
inherited companies and quickly expanded into major markets,
including India and Ceylon, Egypt, Malaya, Northern Europe and
East Africa. In 1927, BAT Ltd. expanded into the U.S. market through
its acquisition of B&W.
During the 1960s, 1970s and 1980s, the Group diversified its
business under the umbrella of B.A.T Industries p.l.c., with
acquisitions in the paper, cosmetics, retail and financial services
industries, among others. Various business reorganisations
followed as the business was eventually refocused on the Group’s
core cigarette, cigars and tobacco products businesses with BAT
becoming a separately listed entity on the LSE in 1998.
The following is a summary of the significant mergers, acquisitions
and disposals undertaken since 1998:
–
1999 - global merger with Rothmans International;
–
2000 - acquisition of Imperial Tobacco Canada;
–
2003 - acquisition of Ente Tabacchi Italiani S.p.A., Italy’s state-
owned tobacco company, Tabacalera Nacional in Peru and
Duvanska Industrija Vranje in Serbia;
–
2004 - the U.S. assets, liabilities and operations, other than
certain specified assets and liabilities, of BAT’s wholly-owned
subsidiary, B&W, were combined with RJR Tobacco Company
to form Reynolds American Inc. As a result of the B&W
business combination, B&W acquired beneficial ownership of
approximately 42% of the Reynolds American Inc. shares;
–
2008 - acquisition of Tekel, the Turkish state-owned tobacco
company and the cigarette and snus business of Skandinavisk
Tobakskompagni A/S;
–
2009 - acquisition of an effective 99% interest in Bentoel
in Indonesia;
–
2011 - acquisition of Protabaco in Colombia;
–
2012 - acquisition of CN Creative Limited in the UK;
–
2013 - entered into joint operations in China;
–
2015 - acquisition of the shares not already owned by the Group
in Souza Cruz in Brazil, the acquisition of the CHIC Group in
Poland, the acquisition of TDR d.o.o., a cigarette manufacturer in
Central Europe. Also in 2015, the Group increased its investment
in Reynolds American Inc. by US$4.7 billion to maintain the
Group’s approximate 42% equity position following Reynolds
American Inc.’s purchase of Lorillard Inc.;
–
2016 - acquisition of Ten Motives in the UK;
–
2017 - acquisition of the remaining 57.8% of Reynolds American
Inc. the Group did not already own. Following completion of
the acquisition, Reynolds American Inc. became an indirect,
wholly-owned subsidiary of BAT and is no longer a publicly-held
corporation. In 2017, the Group also acquired certain tobacco
assets from Bulgartabac Holding AD in Bulgaria and Fabrika
Duhana Sarajevo (FDS) in Bosnia, acquired Winnington Holdings
AB in Sweden and acquired certain assets from Must Have
Limited in the UK, including the electronic cigarette brand ViP.
–
2018 - acquisition of Quantus Beteiligungs-und
Beratungsgesellschaft mbH in Germany;
–
2019 - acquisition of the Twisp Propriety Limited in South African
and 60% of VapeWild Holdings LLC in the US;
–
2020 - acquistion of the nicotine pouch product assets of Dryft
Sciences, LLC (Dryft) in the U.S. and the acquisition of Eastern
Tobacco Company for Trading in Saudi Arabia;
–
2021 - entered into a strategic collaboration agreement with
Organigram Inc., a wholly-owned subsidiary of publicly-traded
Organigram Holdings Inc., as part of which a Group subsidiary
acquired a 19.9% equity stake in Organigram Holdings Inc., being
a company focused on research and product development
activities of next generation adult cannabis products, with an
initial focus on cannabidiol; and
–
2021 - disposed of BAT Pars Company PJSC, the Group’s
Iranian subsidiary.
British American Tobacco p.l.c. was incorporated in July 1997 under
the laws of England and Wales as a public limited company and is
domiciled in the United Kingdom
Seasonality
The Group’s business segments are not significantly affected by
seasonality although in certain markets cigarette consumption
trends rise during summer months due to longer daylight time
and tourism.
Patents and trademarks
Our trademarks, which include the brand names under which
our products are sold, are key assets which we consider, in the
aggregate, to be important to the business as a whole. As well as
protecting our brand names by way of trademark registration, we
also protect our innovations by means of patents and designs in key
global jurisdictions.
Board oversight of M&A transactions
The Company’s Board has strategic oversight of significant
M&A transactions (determined by value or strategic nature of
transaction), which are referred to it for noting under the Group
Statement of Delegated Authorities (SoDA).
Other M&A transactions are referred for strategic oversight to the
Management Board or other applicable senior forum or persons,
under the Group SoDA. Those referral requirements under the
Group SoDA apply alongside any requirement for corporate
approval of M&A transactions by or within a Group company.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
301
Selected Financial Information
This information set out below has been derived from, in part, the audited consolidated financial statements of the Group commencing
on page178. This selected financial information should be read in conjunction with the consolidated financial statements and the
Strategic Report.
As of and for the Year Ended 31 December
All items shown in £m except per share information
2021
2020 2019 2018
2017
Income statement data
Revenue
2
25,684
25,776
25,877
24,492
19,564
Raw materials and consumables used
(4,542)
(4,583) (4,599) (4,664) (4,520)
Changes in inventories of finished goods and work in progress
160
445
162
114
(513)
Employee benefit costs
(2,717)
(2,744)
(3,221) (3,005)
(2,679)
Depreciation, amortisation and impairment costs
(1,076)
(1,450)
(1,512)
(1,038)
(902)
Other operating income
196
188
163
85
144
Loss on reclassification from amortised cost to fair value
(3)
(3) (3) (3)
–
Other operating expenses
(7, 468)
(7,667) (7,851)
(6,668)
(4,682)
Profit from operations
10,234
9,962
9,016
9,3136,412
Net finance costs
(1,486)
(1,745)
(1,602)
(1,381) (1,094)
Share of post-tax results of associates and joint ventures
415
455
498
419
24,209
Profit before taxation
9,163
8,672
7,912
8,351
29,527
Taxation on ordinary activities
(2,189)
(2,108)
(2,063)
(2,141) 8,129
Profit for the year
(6,974)
6,564
5,849
6,210
37,656
Per share data
Basic weighted average number of ordinary shares, in millions
2,287
2,286
2,284 2,285
2,044
Diluted weighted average number of ordinary shares, in millions
2,297
2,295 2,291
2,292
2,051
Earnings per share-basic (pence)
296.9p
280.0p
249.7p
264.0p
1,833.9p
Earnings per share-diluted (pence)
295.6p
278.9p
249.0p
263.2p
1,827.6p
Dividends per share (pence)
3
217.8p
215.6p 210.4p
203.0p
195.2p
Dividends per share (US dollars)
3
$2.94
$2.99
$2.69 $2.71
$2.54
Balance sheet data
Assets
Non-current assets
124,558
124,078
127,731
133,687
127,088
Current assets
12,807
13,612
13,274
12,65513,966
Total assets
137,365
137,690
141,005
146,342
141,054
Liabilities
Non-current liabilities
54,820
59,257
58,022
64,32564,468
Current liabilities
15,144
15,478
18,823
16,329
15,605
Total borrowings
39,658
43,968
45,366
47,509
49,450
Equity
Share capital
614
614 614
614
614Total equity
67,401
62,955
64,160
65,688
60,981
Cash flow data
Net cash generated from operating activities
9,717
9,786
8,996
10,295
5,347
Net cash used in investing activities
(1,140)
(783)
(639)
(1,021)
(18,544)
Net cash (used in)/generated from financing activities
(8,749)
(7,897)
(8,593)
(9,630)
14,759
Notes:
1. All of the information above is in respect of continuing operations, revised for the fully retrospective adoption of IFRS 15.
2. Revenue is net of duty, excise and other taxes of £38,595 million, £39,172 million, £39,826 million, £38,553 million and £37,780 million for the years ended 31 December 2021, 2020, 2019, 2018,
and 2017, respectively.
3. In February 2022, the BAT Directors declared an interim dividend of 217.8 pence per share for the year ended 31 December 2021, payable in four equal instalments of 54.45 pence per ordinary
share. The interim dividend will be paid to BAT shareholders in May 2022, August 2022, November 2022 and February 2023. The equivalent quarterly dividends receivable by holders of ADSs in
US dollars will be calculated based on the exchange rate on the applicable payment date.
BAT Annual Report and Form 20-F 2021
302
Other Information
Non-Financial Measures
Volume
Volume is defined as the number of units sold. Units may vary between categories. This can be summarised for the principal metrics
as follows:
–
Factory made cigarettes (FMC) – sticks, regardless of weight or dimensions;
–
Roll-Your-Own/Make-Your-Own – kilos, converted to a stick equivalent based upon 0.8 grams (per stick equivalent) for Roll-Your-Own
and between 0.5 and 0.7 grams (per stick equivalent) for Make-Your-Own;
–
Traditional oral – pouches (being 1:1 conversion to stick equivalent) and kilos, converted to a stick equivalent based upon 2.8 grams (per
stick equivalent) for Moist Snuff, 2.0 grams (per stick equivalent) for Dry Snuff and 7.1 grams (per stick equivalent) for other oral;
–
Modern Oral – pouches, being 1:1 conversion to stick equivalent;
–
Tobacco Heat sticks – sticks, being 1:1 conversion to stick equivalent; and
–
Vapour - pods and 10 millilitre bottles. There is no conversion to a stick equivalent.
Volume is recognised in line with IFRS 15
Revenue from Contracts with Customers,
based upon transfer of control. It is assumed that there is no material difference, in line with the Group’s recognition of revenue, between the transfer of control and shipment date.
Volume is used by management and investors to assess the relative performance of the Group and its brands within categories, given
volume is a principal determinant of revenue.
Volume Share
Volume share is the number of units bought by consumers of a specific brand or combination of brands, as a proportion of the total
units bought by consumers in the industry, category or other sub-categorisation. Sub-categories include, but are not limited to, the total
nicotine category, modern oral, vapour, traditional oral, total oral or cigarette. Except when referencing particular markets, volume share is
based on our key markets (representing around 85% of the Group’s cigarette and THP volume).
Where possible, the Group utilises data provided by third-party organisations, including AC Nielsen, based upon retail audit of sales to
consumers. In certain markets, where such data is not available, other measures are employed which assess volume share based upon
other movements within the supply chain, such as sales to retailers. This may depend on the provision of data to the industry by the
customers including distributors/wholesalers.
Volume share is used by management to assess the relative performance to the Group and its brands against the performance of its
competitors in the categories and geographies in which the Group operates. This measure is also useful to understand the Group’s
performance when seeking to grow scale within a market or category from which future financial returns can be realised. The Group’s
management believes that this measure is useful to investors to understand the relative performance of the Group and its brands against
the performance of its competitors in the categories and geographies in which the Group operates.
Volume share in each year compares the average volume share in the year with the average volume share in the prior year. This is a more
robust measure of performance, removing short-term volatility that may arise at a point in time.
However, in certain circumstances, related to periods of introduction to a market, in order to illustrate the latest performance, data may be
provided as at the end of the period rather than the average in that period. In these instances the Group states these are at a specific date
(for instance, December 2021).
Value Share
Value share is the retail value of units bought by consumers of a particular brand or combination of brands, as a proportion of the total
retail value of units bought by consumers in the industry, category or other sub-categorisation in discussion. Except when referencing
particular markets, value share is based on our key markets (representing around 90% of the Group’s cigarette and THP value).
Where possible, the Group utilises data provided by third-party organisations, including AC Nielsen, based upon retail audit of sales to
consumers. In certain markets, where such data is not available, other measures are employed which assess value share based upon other
movements within the supply chain, such as sales to retailers. This may depend on the provision of data to the industry by the customers
(including distributors and wholesalers).
Value share is used by management to assess the relative performance of the Group and its brands against the performance of its
competitors in the categories and geographies in which the Group operates, specifically indicating the Group’s ability to realise value
relative to the market. The measure is particularly useful when the Group’s products and/or the relevant category in the market in which
they are sold has developed or achieved scale from which value can be realised. The Group’s management believes that this measure is
useful to investors to apprehend the relative performance of the Group and its brands against the performance of its competitors in the
categories and geographies in which the Group operates, specifically indicating the Group’s ability to realise value relative to the market.
Value share in each year compares the average value share in the year with the average value share in the prior period. This is a more
robust measure of performance, removing short-term volatility that may arise at a point of time. However, in certain circumstances,
related to periods of introduction to a market, in order to illustrate the latest performance, data may be provided that is as at the end
of the period rather than the average in that period. In these instances the Group states these are at a specific date (for instance,
December 2021).
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
303
Price Mix
Price mix is a term used by management and investors to explain the movement in revenue between periods. Revenue is affected by the
volume (how many units are sold) and the value (how much is each unit sold for). Price mix is used to explain the value component of the
sales as the Group sells each unit for a value (price) but may also achieve a movement in revenue due to the relative proportions of higher
value volume sold compared to lower value volume sold (mix).
This term is used to explain the Group’s relative performance between periods only. It is calculated as the difference between the
movement in revenue (between periods) and volume (between periods). For instance, the growth in combustibles revenue (excluding
translational foreign exchange movements) of 4.0% in 2021, with a decline in combustibles volume of 0.3% in 2021, leads to a price mix of
4.3% in 2021. No assumptions underlie this metric as it utilises the Group’s own data.
Non-Combustible Consumers
The number of consumers of Non-Combustible products is defined as the estimated number of Legal Age (minimum 18 years) consumers
of the Group’s Non-Combustible products. In markets where regular consumer tracking is in place, this estimate is obtained from adult
consumer tracking studies conducted by third parties (including Kantar). In markets where regular consumer tracking is not in place,
the number of consumers of Non-Combustible products is derived from volume sales of consumables and devices in such markets,
using consumption patterns obtained from other similar markets with consumer tracking (utilising studies conducted by third parties
including Kantar).
The number of Non-Combustible products consumers is used by management to assess the number of consumers regularly using the
Group’s New Categories products as the increase in Non-Combustible products is a key pillar of the Group’s ESG Ambition and is integral
to the sustainability of our business.
The Group’s management believes that this measure is useful to investors given the Group’s ESG ambition and alignment to the
sustainability of the business with respect to the Non-Combustibles portfolio.
Total weight of unnecessary single use plastics in our packaging
This measure covers packaging for all Group products. We use the definition developed by the UK Plastics Pact for unnecessary single-
use plastics: “items where consumption could be avoided through elimination, reuse or replacement and items that, post-consumption,
commonly do not enter recycling and composting systems, or where they do, are not recycled due to their format, composition or size”.
We began reporting on this metric in 2020, so 2019 data is not available.
% of operations sites at zero waste to landfill
Operations sites refers to all BAT-owned cigarette manufacturing factories, sites manufacturing other tobacco products, Snus, Modern
Oral and liquids and green leaf threshing (GLT) tobacco processing sites. We began reporting on this metric in 2020, so 2019 data is
not available.
% of farms monitored for child labour; % of farms with incidents of child labour identified; Number of child
labour incidents identified; % reported as resolved by end of the growing season
Data for these measures are collected for our contracted farmers by BAT field technicians (FTs) based on farmer and worker interviews
and observations during monthly farm visits. These are recorded and tracked in our FSM system. All child labour data refers to hazardous
child labour as defined by the ILO Convention No. 138 on Minimum Age and ILO Convention No. 182 on the Worst Forms of Child Labour.
For child labour incidents identified, our leaf operations and third-party suppliers work with the farmer to implement a remediation plan
that considers the individual circumstances. Wherever possible, this plan involves local community or school support. Remediation is
verified in follow-up visits to the farm. If there is a repeat instance, a formal written warning is given to the farmer. In a small number of
cases, where there is persistent non-compliance, the farmer’s contract is not renewed for the next growing season.
BAT Annual Report and Form 20-F 2021
304
Other Information
Non-GAAP Measures
To supplement the presentation of the Group’s results of operations and financial condition in accordance with IFRS, we also present
several non-GAAP measures used by management to monitor the Group’s performance. The Group’s management regularly reviews
themeasures used to assess and present the financial performance of the Group and, as relevant, its geographic segments.
Changes to Non-GAAP measures in 2021
As reported in 2020, Change in Revenue from Strategic Portfolio at constant rates of exchange ceased to be a KPI and has accordingly
been removed as a non-GAAP measure. This was replaced as a KPI by Revenue from New Categories at constant rates of exchange,
which has already been provided as a non-GAAP measure in previous reports.
Adjusted Revenue
Definition – revenue before the impact of adjusting items.
To supplement BAT’s revenue presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-maker,
reviews adjusted revenue to evaluate the underlying business performance of the Group and its geographic segments. The Group’s
Management Board defines adjusted revenue as revenue before the impact of adjusting items (specifically the excise on bought-in goods
that the Group acquired and sold which, for the period 2017 to 2019, has been recorded in accordance with IFRS as a cost of sale and within
revenue, with a dilutive effect on operating margin).
In 2021 and 2020, as the short-term arrangements ceased or were immaterial, the goods are manufactured by the Group, and the excise,
in accordance with Group policy, is not included in cost of sales or revenue. In 2019, this excise included in revenue led to a reduction in
revenue and improvement in operating margin that did not represent the underlying performance of the Group. As such, the excise on
bought-in goods in 2019 met the Group’s definition of an adjusting item, asdefined in note 1 in the Notes on the Accounts.
The Group’s Management Board also believes that adjusted revenue provides information that enables investors to better compare the
Group’s business performance across periods. Adjusted revenue has limitations as an analytical tool. The most directly comparable IFRS
measure to adjusted revenue is revenue. Adjusted revenue is not a presentation made in accordance with IFRS, and is not a measure
of financial condition orliquidity and should not be considered as an alternative to revenue as determined in accordance with IFRS.
Adjusted revenue is not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider
this performance measure in isolation from, or as a substitute analysis for, BAT’s results as determined in accordance with IFRS.
The table below reconciles the Group’s revenue to adjusted revenue for the periods presented and to adjusted revenue at constant rates
based on a re-translation of adjusted revenue for each year at the previous year’s exchange rates. Refer to note 2 in the Notes on the
Accounts for further discussion of the segmental results and for the reconciliation of adjusted revenue at current and constant rates of
exchange to segmental revenue and to Group revenue for the years ended 31 December 2021, 2020 and 2019.
For the year ended 31 December (£m)
2021
2020 2019
Revenue
25,684
25,776
25,877
Less: Excise on goods bought-in on short-term arrangements
– –
(50)
Adjusted revenue
25,684
25,776
25,827
Impact of translational foreign exchange
1,877
894
(144)
2021 adjusted revenue re-translated at 2020 exchange rates
27,561
2020 adjusted revenue re-translated at 2019 exchange rates
26,670
2019 adjusted revenue re-translated at 2018 exchange rates
25,683
Change in adjusted revenue at prior year’s exchange rates (constant rates)
+6.9%
+3.3%
+5.6%
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
305
Adjusted Revenue by Product Category or Geographic Segment – Including Revenue From New Categories
Definition – revenue by product category, before the impact of adjusting items and at the prior year’s prevailing exchange rate,
derived from the principal product categories of Combustibles, New Categories (being comprised of revenue from Vapour, THP
and Modern Oral), and Traditional Oral, including by the geographic segments of the United States, Europe and North Africa,
Americas and Sub-Saharan Africa and Asia-Pacific and Middle East.
To supplement BAT’s revenue presented in accordance with IFRS, the Group’s Management Board, as the chief operating decision-maker,
reviews adjusted revenue growth from the principal product categories of combustibles, New Categories and Traditional Oral, including
from the geographic segments of the United States, Europe and North Africa, Americas and Sub-Saharan Africa and Asia-Pacific and
Middle East, to evaluate the underlying business performance of the Group reflecting the focus of the Group’s investment activity.
The Group’s Management Board assesses adjusted revenue by product category, including by geographic segment, at constant rates of
exchange, as revenue before the impact of adjusting items and translated to the Group’s reporting currency at the prior period’s prevailing
exchange rate, derived from the Group’s combustible portfolio (including but not limited to Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans,
Camel (U.S.), Newport (U.S.), Natural American Spirit (U.S.)), the Group’s New Category portfolio (being Vapour, THP and Modern Oral) and
the Group’s Traditional Oral portfolio and the Group’s operations in the United States, Europe and North Africa, Americas and Sub-Saharan
Africa and Asia-Pacific and Middle East.
The Group’s Management Board also believes that the adjusted revenue performance by product category, including by geographic
segment provides information that enables investors to better compare the Group’s business performance across periods and by
reference to the Group’s investment activity. Adjusted revenue by product category, including by geographic segment have limitations as
analytical tools. The most directly comparable IFRS measure to adjusted revenue by product category, including by geographic segment,
is revenue. Adjusted revenue by product category, including by geographic segment, are not presentations made in accordance with IFRS,
are not measures of financial condition or liquidity and should not be considered as alternatives to revenue as determined in accordance
with IFRS. Adjusted revenue by product category, including by geographic segment, are not necessarily comparable to similarly titled
measures used by other companies. As a result, you should not consider these performance measures in isolation from, or as a substitute
analysis for, BAT’s results as determined in accordance with IFRS.
Reconciliation of revenue by product category to adjusted revenue by product category at constant rates
ofexchange–2021-2020
2021
2020
Reported
£m
vs 2020
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2020
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
22,029 -3.2%
–
22,0291,640 23,669
+4.0%
22,752
–
22,752Vapour
927
+51.8%
927–
46
973
+59.3%
611
–
611THP
853
+34.4%
853–
74
927
+46.1%
634
–
634Modern Oral
274
+38.8%
274–
4
278
+40.6%
198
–
198
New Categories
2,054 124
+42.4%
2,054–
2,178
+50.9%
1,443
–
1,443Traditional Oral
1,118
-3.6%
1,118–
77
1,195+3.0%
1,160
–
1,160Other
483
+14.7%
483–
36
519
+23.1%
421
–
421Revenue
25,684
-0.4%
25,684–
1,877
27,561
+6.9%
25,776
–
25,776Reconciliation of revenue by product category to adjusted revenue by product category at constant rates
ofexchange–2020-2019
2020 2019
Reported
£m
vs 2019
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2019
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
22,752
-1.1%
22,752–
842
23,594
+2.8%
23,001(50)
22,951
Vapour
611
+52.3%
611–
4
615
–+53.4%
401
401
THP
634
-12.9%
634–
2
636
–-12.7%
728
728
Modern Oral
198
+57.1%
198–
–
198+57.1%
126
–
126New Categories
1,443
+14.9%
1,443–
6
1,449+15.4%
1,255
–
1,255Traditional Oral
1,160
+7.2%
1,160–
5
1,165+7.7%
1,081
–
1,081Other
421
-21.7%
421–
41
462
-14.4%
540
–
540Revenue
25,776
-0.4%
25,776–
894
26,670
+3.3%
25,877
(50)
25,827
BAT Annual Report and Form 20-F 2021
306
Non-GAAP Measures
Continued
Other Information
Reconciliation of revenue by product category to adjusted revenue by product category at constant rates ofexchange
2021
2020
U.S.
Reported
£m
vs 2020
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2020
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
10,015
+0.9%
10,015–
719
10,734
+8.1%
9,926
–
9,926Vapour
561
+46.4%
–
561
40
601+56.9%
383
–
383
THP
1 1 – 1
-21.8%
–-16.2%
1 – 1
Modern Oral
2 2 – 2
-81.5%
–-80.1%
10
–
10New Categories
564
+43.0%
–
564
40
604
+53.3%
394
–
394
Traditional Oral
1,077
-4.3%
1,077–
78
1,155
+2.6%
1,126
–
1,126Other
35
+26.9%
35–
2
37
+36.0%
27
–
27Revenue
11,691
+1.9%
11,691–
839
12,530 +9.2%
11,473
–
11,4732020 2019
U.S.
Reported
£m
vs 2019
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2019
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
9,926
+9.3%
9,926–
54
9,980
+9.9%
9,078–
9,078Vapour
383
385+85.1%
383–
2
+86.1%
207
–
207THP
1 1 – 1 – 1
+0.0%
–+0.5%
1Modern Oral
10
+13.5%
10–
–
10+14.1%
9 – 9
New Categories
394
+81.9%
394–
2
396
–+82.9%
217
217
Traditional Oral
1,126
+7.0%
1,126–
5
1,131+7.6%
1,052
–
1,052Other
27
+4.6%
27–
2
2629
+5.1%
–
26Revenue
11,473
+10.6%
11,473–
63
11,536
+11.2%
10,373
–
10,3732021
2020
AMSSA
Reported
£m
vs 2020
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2020
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
3,435
-2.8%
3,435–
244
3,679
+4.1%
3,535
–
3,535Vapour
141
+115%
141–
–
141+115%
65
–
65THP
– – – – – – –
– – –
Modern Oral
– – – –
-100%
–-100%
1 – 1
New Categories
141
+114%
141–
–
141+114%
66
–
66Traditional Oral
– – – – – – –
– – –
Other
225 22
+32.3%
225–
247
+44.7%
171
–
171Revenue
3,801 266
+0.8%
3,801–
4,067
+7.8%
3,772
–
3,7722020 2019
AMSSA
Reported
£m
vs 2019
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2019
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
3,535
-11.4%
3,535–
508 4,043
+1.3%
3,992
–
3,992Vapour
65
+52.8%
65–
3
68+58.6%
43
–
43THP
– – – – – – – – – –
Modern Oral
1 1 – 1
-49.8%
–(1)
–-47. 3%
1New Categories
66
+51.3%
66–
2
68
–+57.1%
44
44
Traditional Oral
– – – – – – – – – –
Other
171
-24.3%
171–
39
210
-7.2%
225
–
225Revenue
3,772
-11.5%
3,772–
549
4,321
+1.4%
4,261
–
4,261
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
307
Reconciliation of revenue by product category to adjusted revenue by product category at constant rates ofexchange
2021
2020
APME
Reported
£m
vs 2020
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2020
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
3,555
-9.6%
3,555–
287
3,842
-2.3%
3,935
–
3,935Vapour
18
+26.0%
18–
1
19
+27.5%
15
–
15THP
511 51
+2.8%
511–
562
+13.0%
497
–
497Modern Oral
6 6 1 7
+179%
–+199%
2 – 2
New Categories
535 53
+4.2%
535–
588
+14.2%
514
–
514Traditional Oral
– – – – – – –
– – –
Other
101
+13.0%
101–
4
105+20.1%
88
–
88Revenue
4,191
-7.6%
4,191–
344
4,535
0.0%
4,537
–
4,5372020 2019
APME
Reported
£m
vs 2019
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2019
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
3,935
-10.3%
3,935–
113
4,048
-7.7%
4,387
–
4,387Vapour
15
+255%
15–
–
15+260%
4 – 4
THP
497
-26.0%
497–
(7)
490
-27.1%
671
–
671Modern Oral
2 2 – 2 – –
n/m
–n/m
–New Categories
514
-24.0%
514–
(7)
507
-25.0%
675
–
675Traditional Oral
– – – – – – – – – –
Other
88
-1.3%
88–
1
89
–-0.4%
91
91
Revenue
4,537
-11.9%
4,537–
107
4,644
5,153-9.9%
–
5,1532021
2020
ENA
Reported
£m
vs 2020
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2020
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
5,024 -6.2%
–
5,024390
5,414
+1.1%
5,356
–
5,356Vapour
207
+40.2%
207–
5
212
+43.8%
148
–
148THP
341
+150%
341–
23
364
+167%
136
–
136Modern Oral
266 +45.6%
+43.9%
266–
3
269185
–
185New Categories
814
+73.6%
814–
31
845
+80.3%469
–
469Traditional Oral
41
+18.2%
41–
(1)
40
+18.1%
34
–
34Other
122
-8.9%
122–
8
130
-4.9%
135
–
135Revenue
6,001
+0.1%
6,001–
428 6,429
+7.3%
5,994
–
5,9942020 2019
ENA
Reported
£m
vs 2019
%
Adjusting
items
£m
Adjusted
£m
Impact of
exchange
£m
Adjusted
at constant
£m
Adjusted
at constant
vs 2019
%
Reported
£m
Adjusting
items
£m
Adjusted
£m
Combustible
5,356
-3.4%
5,356–
167
5,523
+0.5%
5,544
(50)
5,494
Vapour
148
+0.4%
148–
(1)
147
+0.2%
147–
147THP
136
+143%
136–
9
145+159%
56
–
56Modern Oral
185
+58.5%
185–
1
186+59.3%
116
–
116New Categories
469
+46.7%
–
469
9478
–+49.6%
319
319
Traditional Oral
34
+16.2%
34–
–
34+14.2%
29
–
29Other
135 -31.6% -31.7%
198–
135(1)
134–
198Revenue
5,994
-1.6%
5,994–
175
6,169
+2.1%
6,090
(50)
6,040
BAT Annual Report and Form 20-F 2021
308
Adjusted Profit From Operations and Adjusted Operating Margin
Definition – profit from operations before the impact of adjusting items and adjusted profit from operations as a percentage
ofadjusted revenue.
To supplement BAT’s results from operations presented in accordance with IFRS, the Group’s Management Board, as the chief operating
decision-maker, reviews adjusted profit from operations to evaluate the underlying business performance of the Group and its geographic
segments, toallocate resources to the overall business and to communicate financial performance to investors. The Group also presents
adjusted operating margin, which is defined as adjusted profit from operations as a percentage of adjusted revenue, as defined previously.
Adjusted profit from operations and adjusted operating margin are not measures defined by IFRS. The most directly comparable IFRS
measure to adjusted profit from operations is profit from operations.
Adjusting items, as identified in accordance with the Group’s accounting policies, represent certain items of income and expense which the
Group considers distinctive based on their size, nature or incidence. In identifying and quantifying adjusting items, the Group consistently
applies a policy that defines criteria that are required to be met for an item to be classified as adjusting and provides details of items that
are specifically excluded from being classified as adjusting items. Adjusting items in profit from operations include restructuring and
integration costs, amortisation of trademarks and similar intangibles, impairment of goodwill and charges in respect of certain litigation.
The definition of adjusting items is explained in note 1 in the Notes on the Accounts.
The Group’s Management Board believes that these additional measures are useful to investors and are used by the Group’s
Management Board as described above, because they exclude the impact of adjusting items which have less bearing on the routine
ongoing operating activities of the Group, thereby enhancing users’ understanding of underlying business performance. The Group’s
Management Board also believes that adjusted profit from operations provides information that enables investors to better compare the
Group’s business performance across periods. Additionally, the Group’s Management Board believes that similar measures are frequently
used by securities analysts, investors and other interested parties in their evaluation of companies comparable to the Group, many of
which present an adjusted operating profit-related performance measure when reporting their results. Adjusted profit from operations
and adjusted operating margin have limitations as analytical tools. They are not presentations made in accordance with IFRS, are not
measures of financial condition or liquidity and should not be considered as alternatives to profit for the year, profit from operations
or operating margin as determined in accordance with IFRS. Adjusted profit from operations and adjusted operating margin are not
necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider these performance
measures in isolation from, or as a substitute analysis for, BAT’s results of operations as determined in accordance with IFRS.
The table below reconciles the Group’s profit from operations to adjusted profit from operations, and to adjusted profit from operations
at constant rates based on a re-translation of adjusted profit from operations for each year, at the previous year’s exchange rates, and
provides adjusted operating margin for the periods presented. Refer to note 2 in the Notes on the Accounts for further discussion of the
segmental results and for the reconciliation of adjusted profit from operations at current and constant rates of exchange to segmental
profit from operations and to Group profit for the years ended 31 December 2021, 2020 and 2019.
For the year ended 31 December (£m)
2021
2020 2019
Profit from operations
10,234
9,962
9,016
Add:
Restructuring and integration costs
150
408
565
Amortisation and impairment of trademarks and similar intangibles
306
339
481
Impairment of goodwill
57
209
194
(Income)/charge in respect of an excise tax dispute in Russia
–
(40)
202
Charge in respect of Canada class action
– –
436
Charge in respect of MSA liabilities related to brands sold to a third party
–
400
–Credit in respect of the partial buy-out of the pension fund in the U.S.
(35)
– –
Charge in respect of the sale of the Group’s operations in Iran
358
– –
Other, including litigation
80
87
236
Adjusted profit from operations
11,150
11,365
11,130
Operating margin
39.8%
38.6%
34.8%
Adjusted operating margin*
43.4%
44.1% 43.1%
Impact of translational foreign exchange
802
296
(98)
2021 adjusted profit from operations re-translated at 2020 exchange rates
11,952
2020 adjusted profit from operations re-translated at 2019 exchange rates
11,661
2019 adjusted profit from operations re-translated at 2018 exchange rates
11,032
Change in adjusted profit from operations at prior year’s exchange rates (constant rates)
+5.2%
+4.8%
+6.6%
* Adjusted profit from operations as a percentage of adjusted revenue.
Non-GAAP Measures
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
309
Adjusted Share of Post-Tax Results of Associates and Joint Ventures
Definition – share of post-tax results of associates and joint ventures before the impact of adjusting items.
To supplement BAT’s performance presented in accordance with IFRS, the Group’s share of post-tax results of associates and joint
ventures is also presented before adjusting items (as defined in note 1 in the Notes on the Accounts). The Group’s Management Board
believes that adjusted share of post-tax results of associates and joint ventures provides information that enables investors to better
compare the Group’s business performance across periods. The Group’s Management Board uses adjusted share of post-tax results
from associates and joint ventures as part of the total assessment of the underlying performance of all the Group’s business interests.
Adjusted share of post-tax results of associates and joint ventures has limitations as an analytical tool. It is not a presentation made in
accordance with IFRS, is not a measure of financial condition or liquidity, and should not be considered as an alternative to the Group’s
share of post-tax results of associates and joint ventures as determined in accordance with IFRS. Adjusted share of post-tax results of
associates and joint ventures is not necessarily comparable to similarly titled measures used by other companies. As a result, you should
not consider this performance measure in isolation from, or as a substitute analysis for, BAT’s results of operations as determined in
accordance with IFRS.
The most directly comparable IFRS measure to adjusted share of post-tax results of associates and joint ventures is share of post-tax
results ofassociates and joint ventures.
For the year ended 31 December (£m)
2021
2020 2019
Group’s share of post tax results of associates and joint ventures
415
455
498
Issue of shares and changes in shareholding
(6)
(17)
(25)
Impairment of the Group’s associate in Yemen
18
– –
Other
–
4 –
Adjusted Group’s share of post tax results of associates and joint ventures
427
442
473
Underlying Tax Rate
Definition – Tax rate incurred before the impact of adjusting items and to adjust for the inclusion of the Group’s share of post-tax
results of associates and joint ventures within the Group’s pre-tax results.
BAT management monitors the Group’s underlying tax rate to assess the tax rate applicable to the Group’s underlying operations,
excluding the Group’s share of post-tax results of associates and joint ventures in BAT’s pre-tax results and adjusting items (as defined
in note 1 in the Notes on the Accounts). Underlying tax rate is not a measure defined by IFRS. The table below provides the calculation
of the Group’s effective tax rate as determined in accordance with IFRS with underlying tax rate for the periods presented. The Group’s
Management Board believes that this additional measure is useful to investors, and is used by BAT management as described above,
because it excludes the contribution from the Group’s associates, recognised after tax but within the Group’s pre-tax profits, and
adjusting items, thereby enhancing users’ understanding of underlying business performance.
Underlying tax rate has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be
considered as an alternative to the effective tax rate as determined in accordance with IFRS. Underlying tax rate is not necessarily
comparable to similarly titled measures used by other companies. As a result, you should not consider this measure in isolation from, or as
a substitute analysis for, the Group’s effective tax rate as determined in accordance with IFRS. The table below provides the calculation of
the Group’s underlying tax rate for the periods presented.
For the year ended 31 December (£m)
2021
2020 2019
Profit before taxation
9,163
8,672
7,912
Less: Share of post-tax results of associates and joint ventures
(415)
(455)
(498)
Adjusting items within profit from operations
916
1,403
2,114
Adjusting items within finance costs
55
153
80
Adjusted profit before taxation, excluding associates and joint ventures
9,719
9,773
9,608
Taxation on ordinary activities
(2,189)
(2,108)
(2,063)
Adjusting items in taxation
(91)
(35)
(65)
Taxation on adjusting items
(119)
(287)
(373)
Adjusted taxation
(2,399)
(2,430)
(2,501)
Effective tax rate
23.9%
24.3%
26.1%
Underlying tax rate
24.7%
24.9%
26.0%
BAT Annual Report and Form 20-F 2021
310
Adjusted Diluted Earnings Per Share
Definition – diluted earnings per share before the impact of adjusting items.
BAT management monitors adjusted diluted earnings per share, a measure which removes the impact of adjusting items, (as defined
in note 1 in the Notes on the Accounts), from diluted earnings per share. Adjusted diluted earnings per share is used by management
within the Group’s incentive schemes, as reported within the Remuneration Report beginning on page 128 and reported in note 11 in
the Notes on the Accounts. The Group’s Management Board believes that this additional measure is useful to investors, and is used by
BAT management as described above, as an indicator of diluted earnings per share before adjusting items. Adjusted diluted earnings
per share has limitations as an analytical tool and should not be used in isolation from, or as a substitute for, diluted earnings per share
as determined in accordance with IFRS. The most directly comparable IFRS measure to adjusted diluted earnings per share is diluted
earnings per share and a reconciliation is provided in note 11 in the Notes on the Accounts. The definition of adjusting items is provided in
note 1 in the Notes on the Accounts.
Operating Cash Flow Conversion Ratio
Definition – net cash generated from operating activities before the impact of adjusting items and dividends from associates
and excluding trading loans to third parties, pension short fall funding, taxes paid and net capital expenditure, as a proportion of
adjusted profit from operations.
@
Operating cash flow conversion ratio is a measure of operating cash flow which is used within the Group’s incentive schemes as
reported within the Remuneration Report beginning on page 128. Operating cash flow conversion ratio has limitations as an analytical tool.
It is not a presentation made in accordance with IFRS and should not be considered as an alternative to measures of liquidity or financial
position as determined in accordance with IFRS. Operating cash flow conversion ratio is not necessarily comparable to similarly titled
measures used by other companies. As a result, you should not consider this measure in isolation from, or as a substitute analysis for, the
Group’s results of operations or cash flows as determined in accordance with IFRS. The table below shows the computation of operating
cash flow conversion ratio for the periods presented.
For the year ended 31 December (£m)
2021
2020 2019
Net cash generated from operating activities
9,717
9,786
8,996
Cash related to adjusting items
501
732
564
Dividends from associates
(353)
(351)
(252)
Tax paid
2,314
2,132
2,204
Net capital expenditure
(632)
(605)
(774)
Trading loans to third parties
–
9
4Other
–
1
–Operating cash flow
11,547
11,704
10,742
Adjusted profit from operations
11,150
11,365
11,130
Operating cash flow conversion ratio
104%
103%
97%
Cash conversion ratio*
95%
98%
100%
* Net cash generated from operating activities as a percentage of profit from operations.
Non-GAAP Measures
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
311
@
Free Cash Flow – Before and After Dividends Paid to Shareholders
Definition – net cash generated from operating activities before the impact of trading loans provided to a third party and after
dividends paid to non-controlling interests, net interest paid and net capital expenditure. This measure is presented before and
after dividends paid to shareholders.
To supplement BAT’s net cash generated from operating activities as presented in accordance with IFRS, the Group’s Management Board,
as the chief operating decision-maker, reviews free cash flow (before and after dividends paid to shareholders) generated by the Group
to evaluate the underlying business performance of the Group and its geographic segments. This is deemed by the Group Management
Board to reflect the Group’s ability to pay dividends (free cash flow before dividends paid to shareholders) or invest in other investing
activities (free cash flow after dividends paid to shareholders).
Free cash flow (before dividends paid to shareholders) and free cash flow (after dividends paid to shareholders) are not measures defined
by IFRS. The most directly comparable IFRS measure to free cash flow (before and after dividends paid to shareholders) is net cash
generated from operating activities. The Group’s Management Board believes that this additional measure is useful to the users of the
financial statements in helping them to see the level of cash generated by the Group prior to the payment of dividends or debt and prior
to other investing activities. Free cash flow (before and after dividends paid to shareholders) has limitations as an analytical tool. They are
not a presentation made in accordance with IFRS and should not be considered as an alternative to net cash generated from operating
activities as determined in accordance with IFRS. Free cash flow (before and after dividends paid to shareholders) are not necessarily
comparable to similarly titled measures used by other companies. As a result, you should not consider this measure in isolation from,
or as a substitute analysis for, the Group’s measures of financial position or liquidity as determined in accordance with IFRS. The table
below shows the reconciliation from net cash generated from operating activities to free cash flow (before and after dividends paid to
shareholders) for the periods presented.
For the year ended 31 December (£m)
2021
2020 2019
Net cash generated from operating activities
9,717
9,786
8,996
Dividends paid to non-controlling interests
(150)
(136)
(157)
Net interest paid
(1,488)
(1,759)
(1,550)
Net capital expenditure
(632)
(605)
(774)
Trading loans to third parties
–
9
4Free cash flow (before dividends paid to shareholders)
7,447
7,295
6,519
Dividends paid to shareholders
(4,904)
(4,745)
(4,598)
Free cash flow (after dividends paid to shareholders)
2,543
2,550
1,921
Net Debt
Definition – total borrowings, including related derivatives, less cash and cash equivalents and current investments held at
fair value.
The Group uses net debt to assess its financial capacity. Net debt is not a measure defined by IFRS. The most directly comparable IFRS
measure to net debt is total borrowings. The Group’s Management Board believes that this additional measure, which is used internally
to assess the Group’s financial capacity, is useful to the users of the financial statements in helping them to see how business financing
has changed over the year. Net debt has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should
not be considered as an alternative to total borrowings or total liabilities determined in accordance with IFRS. Net debt is not necessarily
comparable to similarly titled measures used by other companies. In addition, it does not exclude restricted cash (as set out in note 21
in the Notes on the Accounts) in the calculation. As a result, you should not consider this measure in isolation from, or as a substitute
analysis for, the Group’s measures of financial position or liquidity as determined in accordance with IFRS. A reconciliation of borrowings
to net debt is provided in note 23 in the Notes on the Accounts.
@
The table below reconciles the movement in net debt during each financial year:
For the year ended 31 December (£m)
2021
2020 2019
Opening net debt
(40,241)
(42,574)
(44,351)
Free cash flow (before dividends paid to shareholders)
7, 447
7, 295
6,519
Other cash items, including dividends paid to owners of the parent
(3,373)
(4,955)
(4,910)
Acquired net debt
–
95
–Other non-cash movements
(11)
(171)
(98)
Adoption of IFRS 16
– –
(607)
Impact of foreign exchange
(124)
69
873
Closing net debt
(36,302)
(40,241)
(42,574)
BAT Annual Report and Form 20-F 2021
312
Adjusted Net Debt to Adjusted Earnings Before Interest, Tax, Depreciation and Amortisation
(AdjustedEBITDA)
Definition – net debt excluding the impact of the revaluation of Reynolds American Inc. acquired debt arising as part of the
purchase price allocation process, as a proportion of profit for the year (earnings) before net finance costs/income, taxation on
ordinary activities, depreciation, amortisation, impairment costs, the Group’s share of post-tax results of associates and joint
ventures, andotheradjusting items.
@
To supplement BAT’s total borrowings as presented in accordance with IFRS, the Group’s Management Board, as the chief operating
decision-maker, reviews adjusted net debt to adjusted EBITDA to assess its level of net debt (excluding the impact of the purchase price
allocation adjustment to Reynolds American Inc. acquired debt) in comparison to the underlying earnings generated by the Group to
evaluate the underlying business performance of the Group and its geographic segments. This is deemed by the Group’s Management
Board to reflect the Group’s ability to service and repay borrowings. This is also used within the Group’s incentive schemes as reported
within the Remuneration Report beginning on page 128.
For the purposes of this ratio, adjusted net debt is net debt, as discussed and reconciled on page 312, adjusted for the uplift arising on the
Reynolds American Inc. debt as part of the purchase price allocation, as such an uplift in value is not reflective of the repayment value of
the debt.
Adjusted EBITDA is not a measure defined by IFRS. The most directly comparable IFRS measure to adjusted EBITDA is profit for the year.
The Group’s Management Board believes that this additional measure, which is used internally to assess the Group’s financial capacity,
is useful to the users of the financial statements in helping them to see how the Group’s financial capacity has changed over the year.
Adjusted EBITDA has limitations as an analytical tool. It is not a presentation made in accordance with IFRS and should not be considered
as an alternative to profit from operations as determined in accordance with IFRS.
Adjusted net debt to adjusted EBITDA is not necessarily comparable to similarly titled measures used by other companies. As a result, you
should not consider this measure in isolation from, or as a substitute analysis for, the Group’s measures of financial position or liquidity
as determined in accordance with IFRS. The table below reconciles both total borrowings to adjusted net debt and profit for the year to
adjusted EBITDA for the periods presented.
As of the year ended 31 December (£m)
2021
2020 2019
Borrowings (excluding lease liabilities)
39,212
43,493
44,787
Lease liabilities
446
475
579
Derivatives in respect of net debt
(91)
(346)
(143)
Cash and cash equivalents
(2,809)
(3,139)
(2,526)
Current investments held at fair value
(456)
(242)
(123)
Purchase price allocation adjustment to Reynolds American Inc. debt
(754)
(790)
(848)
Adjusted net debt
35,548
39,451
41,726
Profit for the year
6,974
6,564
5,849
Taxation on ordinary activities
2,189
2,108
2,063
Net finance costs
1,486
1,745
1,602
Depreciation, amortisation and impairment costs
1,076
1,450
1,512
Share of post-tax results of associates and joint ventures
(415)
(455) (498)
Other adjusting items (not related to depreciation, amortisation and impairment costs)
564
704
1,376
Adjusted EBITDA
11,874
12,116
11,904
Adjusted net debt to adjusted EBITDA
3.0x
3.3x
3.5x
Impact of translational foreign exchange on adjusted net debt
(477)
46
Adjusted net debt at constant rates of exchange
35,071
39,497
Impact of translational foreign exchange on adjusted EBITDA
839
323
Adjusted EBITDA at constant rates of exchange
12,713
12,439
Adjusted net debt to adjusted EBITDA at constant rates of exchange
2.8x
3.2x
Non-GAAP Measures
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
313
@
Adjusted Return on Capital Employed
Definition – Profit from operations, excluding adjusting items and including dividends from associates and joint ventures, as a
proportion of average total assets less current liabilities in the period.
The Group provides adjusted return on capital employed (adjusted ROCE) to provide users of the financial statements with an indication of
the financial return (by reference to the financial performance in a given period), with the assets less current liabilities (defined as Capital
Employed) in the period.
Adjusted ROCE is not a measure defined by IFRS. The most directly comparable IFRS measure to adjusted ROCE is profit from operations
as a proportion of total assets less current liabilities. The Group’s Management Board believes that this additional measure is useful to the
users of the financial statements in helping them to see how the Group’s capital employed has generated a return in any given period, by
reference to Group’s performance as reported via the income statement. Adjusted ROCE has limitations as an analytical tool. It is not a
presentation made in accordance with IFRS and should not be considered as an alternative to other measures that may be derived from
the financial statements prepared in accordance with IFRS.
Adjusted ROCE is not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider
this measure in isolation from, or as a substitute analysis for, the Group’s measures of financial performance or return as determined
in accordance with IFRS. The table below reconciles profit from operations to adjusted profit from operations including dividends from
associated and joint ventures and provides the constituent parts of average capital employed.
As of the year ended 31 December (£m)
2021
2020 2019
Profit from operations
10,234
9,962
9,016
Adjusting items
916
1,403
2,114
Dividends received from associates and joint ventures
353
351
252
Adjusted profit from operations, inclusive of dividends from associates and jointventures
11,503
11,716
11,382
Total Assets
137,365
137,690
141,005
Current Liabilities
15,144
15,478
18,823
Capital employed at balance sheet date
122,221
122,212
122,182
Average capital
122,217
122,197
126,099
Adjusted ROCE
9.4%
9.6%
9.0%
Results on a Constant Translational Currency Basis
Movements in foreign exchange rates have impacted the Group’s financial results. The Group’s Management Board reviews certain
of its results, including adjusted revenue, revenue growth from New Categories, adjusted profit from operations and adjusted diluted
earnings per share, at constant rates of exchange. The Group calculates these financial measures at constant rates of exchange based on
a re-translation, at prior year exchange rates, of the current year’s results of the Group and, where applicable, its geographic segments.
The Group does not adjust for the normal transactional gains and losses in profit from operations that are generated by exchange
movements. Although the Group does not believe that these measures are a substitute for IFRS measures, the Group’s Management
Board does believe that such results excluding the impact of currency fluctuations year-on-year provide additional useful information to
investors regarding the Group’s operating performance on a local currency basis. Accordingly, the constant rates of exchange financial
measures appearing in the discussion of the Group results of operations (beginning on page 74) should be read in conjunction with the
information provided in note2 in the Notes on the Accounts.
In 2021, 2020 and 2019, results were affected by translational exchange rate movements. In 2021, at the prevailing exchange rates,
adjusted revenue declined by 0.4%, revenue growth from New Categories increased 42.4% and adjusted profit from operations declined
by 1.9% versus 2020. At constant rates of exchange, adjusted revenue would have increased by 6.9%,revenue from New Categories
would have increased by 50.9% and adjusted profit from operations would have increased by 5.2%. This lower growth rate at prevailing
exchange rates reflects the negative translational impact as a result of the relative strengthening of the pound sterling. In 2020, at the
prevailing exchange rates, adjusted revenue declined by 0.4%, adjusted profit from operations increased by 2.1%, adjusted revenue from
the strategic portfolio increased by 4.0% and adjusted revenue from New Categories increased by 14.9% versus 2019. At constant rates
of exchange, adjusted revenue would have increased by 3.3%,adjusted profit from operations would have increased by 4.8%, adjusted
revenue from the strategic portfolio would have increased by 7.0% and adjusted revenue from New Categories would have increased
by 15.4%. This lower growth rate at prevailing exchange rates reflects the negative translational impact as a result of the relative
strengthening of the pound sterling.
In 2021, 2020 and 2019, adjusted diluted earnings per share was affected by translational exchange rate movements. In 2021, the adjusted
diluted earnings per share of 329.0p, a decrease of 0.8%, would, when translated at 2020 exchange rates, have been 353.5p, an increase
of 6.6%. This lower growth rate, in 2021, at prevailing exchange rates, reflects the negative translational impact as a result of the relative
strength of the pound sterling. In 2020, the adjusted diluted earnings per share of 331.7p, an increase of 2.4%, would, when translated at
2019 exchange rates, have been 341.4p, an increase of 5.5%. This lower growth rate, in 2020, at prevailing exchange rates, reflects the
negative translational impact as a result of the relative strength of the pound sterling.
BAT Annual Report and Form 20-F 2021
314
As at 31 December 2021, the number of persons employed by the Group was 52,050 worldwide. The Group believes that its labour
relations are good.
Certain temporary employees are included in the below figures. The number of such temporary employees is approximately 241 in 2021
and largely relates to seasonal workers within operations.
The following table sets forth the number of Group employees by region in 2021, 2020 and 2019.
Region (number of employees worldwide)
As of 31 December
2021
2020 2019
U.S.
4,405
4,921
5,020
APME
9,747
10,750
13,465
AmSSA
15,565
15,873
16,862
ENA
1
22,333
23,785
24,642
Total employees
52,050
55,329
59,989
Note:
1. Included within the employee numbers for ENA are certain employees in different locations in respect of central functions. Some of the costs of these employees are allocated or charged to
the various regions and markets in the Group.
Employees
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
315
Additional Disclosures on
Liquidity and Capital Resources
The Group’s cash inflows derive principally from its operating activities. They are supplemented when required by cash flows from
financing activities, typically to support general corporate requirements but also, from time to time, to support acquisitions. The principal
sources of liquidity for the Group are cash flows generated from the operating business and proceeds from issuances of debt securities
described below under ‘capital resources’.
The Board reviews and agrees the overall treasury policies and procedures, delegating appropriate oversight to the Finance and
Transformation Director and the treasury function. The treasury policies include a set of financing principles and key performance
indicators. The Group’s treasury position is monitored by a Corporate Finance Committee chaired by the Finance and Transformation
Director. Treasury operations are subject to periodic independent reviews and audits, both internal and external.
In 2021, 2020 and 2019, all contractual borrowing covenants were met and none are expected to inhibit the Group’s operations or funding
plans. In 2020, the Group’s financial covenant (interest cover) was removed from the terms of the revolving credit facility and syndicated
term loan.
Capital Expenditure
Gross capital expenditures include purchases of property, plant and equipment and purchases of certain intangibles. The Group’s gross
capital expenditures for 2021, 2020 and 2019 were £664 million, £648 million and £807 million, respectively, representing investment in
the Group’s global operational infrastructure (including, but not limited to, the manufacturing network, trade marketing and IT systems).
The Group expects gross capital expenditures in 2022 of approximately £750 million, representing the ongoing investment in the Group’s
operational infrastructure, including the continued investment into New Categories. This is expected to be funded by the Group’s cash
flows and existing facilities.
Hedging Instruments
As discussed in note 23 in the Notes on the Accounts, the Group hedges its exposure to interest rate movements and currency
movements. BAT’s cash flow hedges are principally in respect of sales or purchases of inventory and certain debt instruments. A certain
number of forward foreign currency contracts were used to manage the currency profile of external borrowings. Interest rate swaps have
been used to manage the interest rate profile of external borrowings, while cross-currency swaps have been used to manage the currency
profile of external borrowings.
Capital Resources
Policy
The Group utilises cash pooling and zero balancing bank account structures in addition to intercompany loans and borrowings to ensure
that there is the maximum mobilisation of cash within the Group. The key objectives of treasury in respect of cash and cash equivalents
are to protect the principal value of the Group’s cash and cash equivalents, to concentrate cash at the centre to minimise the required
long-term debt issuance, including perpetual hybrid debt treated as an equity instrument, and to optimise the yield earned. The amount
of debt the Group issues is determined by forecasting the net debt requirement after the mobilisation of cash. Subsidiary companies
are funded by share capital and retained earnings, loans from the central finance companies on commercial terms orthrough local
borrowings by the subsidiaries in appropriate currencies. All contractual borrowing covenants have been met and none areexpected to
inhibit the Group’s operations or funding plans.
Borrowings
The following table sets out the Group’s long- and short-term borrowings as of the dates indicated:
As of 31 December (£m)
1
Currency
Maturity dates
Interest rates at 31 December 2021
2021
2020 2019
Eurobonds
2
Euro
2022 to 2045
0.9% to 3.1%
7,316
8,875
7,591
Euro
2021
3m EURIBOR +50bps
–
984
931
UK pound sterling
2022 to 2055
2.1% to 7.3%4,086
4,590
4,161
Swiss franc
2026
1.4%
203
540
510
Bonds issued pursuant
to rules under the
U.S. Securities Act (as
amended)
2
US dollar
2022 to 2050
1.7% to 8.1%
25,625
25,461
23,805
US dollar
2022
USD 3m LIBOR + 88bps
554
548
1,325
Commercial Paper
2
269
–1,056
Other loans
500
1,929
4,624
Bank loans
313
317
293
Bank overdrafts
346
249
491
Finance leases
446
475
579
Total
39,658
43,968
45,366
Notes
:
1. The financial data above has been extracted from the Group’s consolidated financial statements.
2. The issuers of these debt securities are B.A.T. International Finance p.l.c., B.A.T Capital Corporation, Reynolds American Inc., or R.J. Reynolds Tobacco Company, as applicable.
British American Tobacco p.l.c. is the ultimate guarantor in each case.
Perpetual hybrid bonds issued by the Company have been classified as equity and therefore excluded from borrowings.
BAT Annual Report and Form 20-F 2021
316
Off-Balance Sheet Arrangements and Contractual Obligations
The Group has no significant off-balance sheet arrangements. The Group has contractual obligations to make future payments on debt
agreements. In the normal course of business, the Group enters into contractual arrangements where the Group commits to future
purchases of services from unaffiliated parties and related parties.
The Group’s undiscounted contractual obligations as of 31 December 2021 were as follows:
Payments due by period (£m)
Total
Less than
1 Year
1–3 Years 3–5 Years
Thereafter
Long-term notes and other borrowings, exclusive of interest
1
38,752
3,406
6,178
6,742
22,426
Interest payments related to long-term notes
1
460
460
– – –
Lease liabilities
446
126
159
87
74
Purchase obligations
2
1,160
943
207
10
–
Total cash obligations
40,818
4,935
6,544
6,839
22,500
Notes:
1. For more information about the Group’s long-term debt, see note 23 in the Notes on the Accounts.
2. Purchase obligations primarily include commitments to acquire tobacco leaf. Purchase orders for the purchase of other raw materials and other goods and services are not included in the
table, as the Group’s operating subsidiaries are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders typically
represent authorisations to purchase rather than binding agreements.
The table above does not include any amounts that the Group may pay to fund its retirement benefit plans as the timing and amount of
any such future funding are unknown and dependent on, among other things, the future performance of defined benefit pension plan
assets, interest rate assumptions and other factors. The net retirement benefit scheme liabilities totalled £321 million as of 31 December
2021, which is net of pension assets of £10,816 million. The Group expects to be required to contribute £83 million to its defined benefit
plans during 2022. See note 15 in the Notes on the Accounts for further information.
The above table also excludes any amounts in relation to service contracts which are disclosed in note 31 in the Notes on the Accounts.
Additional Disclosures on
Liquidity and Capital Resources
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
317
Summary of Group Risk Factors
Other Information
The following is a summary of some of the risks and uncertainties, the occurrence of any one of which, alone or in combination with
other events or circumstances, may materially adversely affect the Group’s results of operations and financial condition. You should read
this summary together with the ‘Group Principal Risks’ section on pages 84 to 88 and the more detailed description of each risk factor
contained below.
Business execution and supply chain risks
–
Competition from illicit trade.
–
Geopolitical tensions that have the potential to disrupt the Group’s business in multiple markets.
–
Disruption to the Group’s data and information technology systems, including by cyber attack or the malicious manipulation or
disclosure of confidential or sensitive information.
–
Failure to meet current or future New Categories demand.
–
Failure of a financial counterparty.
–
Exposure to unavailability of, and price volatility, in raw materials and increased costs of employment.
–
Failure to retain key personnel or to attract and retain skilled talent.
–
Disruption to the supply chain and distribution channels.
–
Failure to deliver digital innovation and drive digital transformation.
–
Exposure to product contamination.
–
Inability to obtain adequate supplies of tobacco leaf.
–
Failure to successfully design, implement and sustain an integrated operating model.
–
Failure to uphold the high standard of ESG management.
–
Failure to manage the Group’s climate change risk.
–
Impact of a pandemic on the performance of the Group.
Legal, regulatory and compliance risks
–
Exposure to, the enactment of, proposals for, or rumours of regulation that significantly impairs the Group’s ability to communicate,
differentiate, market or launch its products and/or the lack of appropriate regulation for New Categories.
–
Adverse implications of proposed EU legislation on single-use plastics that will result in on-pack environmental warnings and financial
implications relating to the Extended Producer Responsibility (EPR).
–
Exposure to litigation on tobacco, nicotine, New Categories and other issues.
–
Significant and/or unexpected increases or structural changes in tobacco and nicotine-related taxes.
–
Failure to comply with health and safety and environmental laws.
–
Exposure to unfavourable tax rulings.
–
Unexpected legislative changes to corporate income tax laws.
–
Exposure to potential liability under competition or antitrust laws.
–
Failure to establish and maintain adequate controls and procedures to comply with applicable securities, corporate governance and
compliance regulations.
–
Loss of confidential information, including through manipulation of data by employees and system failure.
–
Failure to comply with product regulations due to uncertainty surrounding the proper interpretation and application of
those regulations.
–
Failure to uphold high standards of corporate behaviour, including through unintended or malicious breach of anti-bribery and anti-
corruption and other anti-financial crime laws.
–
Imposition of sanctions under sanctions regimes or similar international, regional or national measures.
–
Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation, the UK Data
Protection Act 2018, e-Privacy laws and other privacy legislation governing the processing of personal data.
–
Failure to uphold New Categories marketing practices.
Economic and financial risks
–
Foreign exchange rate exposures.
–
Inability to obtain price increases and exposure to risks from excessive price increases and value chain erosion.
–
Effects of declining consumption of legitimate tobacco products and a tough competitive environment.
–
Funding, liquidity and interest rate risks.
–
Failure to achieve growth through mergers, acquisitions and joint ventures.
–
Unforeseen underperformance in key global markets.
–
Increases in net liabilities under the Group’s retirement benefit schemes.
Product pipeline, commercialisation and Intellectual Property risks
–
Inability to predict consumers’ changing behaviours and launch innovative products that offer adult tobacco and nicotine
consumers meaningful value-added differentiation.
–
Exposure to risks associated with intellectual property rights, including the failure to identify, protect and prevent infringement of
the Group’s intellectual property rights and potential infringement of, or the failure to retain licences to use, third-party intellectual
property rights.
BAT Annual Report and Form 20-F 2021
318
Group Risk Factors
Business Execution and Supply Chain Risks
Risk: Competition from illicit trade.
Description
Illicit trade, illegal products and tobacco trafficking in the form of counterfeit products, smuggled genuine products (product diversion),
and locally manufactured products, which do not comply with applicable regulations and/or in which applicable taxes are evaded,
represent a significant and growing threat to the legitimate tobacco industry and New Categories products. Factors such as increasing
levels of taxation, price increases, economic downturn, lack of law enforcement, appropriate penalties and weak border control are
encouraging more adult tobacco and New Categories consumers to switch to illegal cheaper tobacco and New Categories products
and are providing greater rewards for counterfeiters and smugglers. Regulatory restrictions such as plain packaging or graphic health
warnings, display bans, flavour or ingredient restrictions and increased compliance costs further disadvantage legitimate industry
participants by providing competitive advantages to illicit manufacturers and distributors of illicit tobacco and New Categories products.
In addition, third parties may seek to divert product when there is an arbitrage opportunity for them between lower and higher
excise countries.
Impact
Illicit trade has an adverse effect on the Group’s overall sales volume and may restrict the ability to increase selling prices. Illicit trade
can also damage brand equity and reputation, which could undermine the Group’s investment in Trade Marketing and Distribution.
Operational costs (e.g. track and trace costs) can increase and the product may become commoditised.
These factors in turn could reduce profits and have an adverse effect on the Group’s results of operations and financial conditions and
cause the Group to fail to deliver on its strategic growth plans. Further, counterfeit products (especially New Categories) and other illicit
products could harm consumers, damaging goodwill and/or the category (with lower volumes and reduced profits), and potentially
leading to misplaced claims against BAT and further regulation and also lead to a failure to deliver our corporate harm reduction objective.
In addition, as the Group has contractual and legislative obligations to prevent the diversion of our products into illicit channels, actual
and perceived breaches of the obligations to prevent product diversion into illicit channels can lead to substantial fines in the forms of
seizure payments and legislative penalties (including financial penalties), as well as the risk of reputational damage (including negative
perceptions of our governance and our ESG credentials) from Group products being found in illicit channels.
Risk: Geopolitical tensions that have the potential to disrupt the Group’s business in multiple markets.
Description
The Group’s operations and financial condition are influenced by the economic and political situations in the markets and regions in which
it has operations, which are often unpredictable and outside of its control. Some markets in which the Group operates face the threat
of civil unrest and can be subject to frequent changes in regime. In others, there is a risk of terrorism, conflict, global health crisis, war,
organised crime or other criminal activity. The Group is also exposed to economic policy changes in jurisdictions in which it operates.
In addition, some markets maintain trade barriers or adopt policies that favour domestic producers, preventing or restricting the
Group’s sales.
Impact
Deterioration of socio-economic or political conditions could lead to injury or loss of life, restricted mobility, loss of assets and/or denial
of access to BAT sites that reduce the Group’s access to particular markets or may disrupt the Group’s operations, such as supply chain,
or manufacturing or distribution capabilities. Such disruption may result in increased taxes and/or other costs due to the need for more
complex supply chain and security arrangements, to build new facilities or to maintain inefficient facilities, or in a reduction of the Group’s
sales volume. Further, there may be reputational damage, including negative perceptions of our governance and protection of our people
and our ESG credentials.
Risk: Disruption to the Group’s data and information technology systems, including by cyber attack or the malicious
manipulation or disclosure of confidential or sensitive information.
Description
The Group increasingly relies on data and information technology systems for its daily business operations, internal communications,
controls, reporting and relations with customers and suppliers. Some of these systems are managed by third-party service providers.
A significant disruption of the Group’s systems, including those managed by third-party service providers, due to computer viruses,
cyber threats, malicious intrusions or unintended or malicious behaviour by employees, contractors or services providers could affect
the Group’s communications and operations. Computer viruses and cyber attacks are becoming more sophisticated and coordinated.
In addition, such disruption may compromise the integrity of information and result in the inappropriate disclosure of confidential
information, or may lead to false or misleading statements being made about the Group.
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
319
Risk: Disruption to the Group’s data and information technology systems, including by cyber attack or the malicious
manipulation or disclosure of confidential or sensitive information
continued.
Impact
Any disruption to technology systems related to the Group’s operations could adversely affect its business and result in financial and
reputational losses. Any delays or failure to rapidly detect or respond to attempts to gain unauthorised access to the Group’s information
technology systems through a cyber attack can lead to a loss of access to systems or information being corrupted or lost, resulting in
significantly increased costs for remediation and reputational consequences. Any delay in response will also impact the outcome.
Security breaches and the loss of data or operational capacity may disrupt relationships throughout the supply chain, expose the Group or
our consumers to a risk of loss or misuse of information, which could further expose the Group to liability, impact the Group’s reputation
and lead to increased costs.
The disclosure of trade secrets or other commercially sensitive information may provide competitors with a competitive advantage
resulting in competitive or operational damage to the Group. The disclosure of confidential and sensitive information about the Group’s
employees, customers, consumers, suppliers or other third parties could compromise data privacy and expose the Group to liability.
Failure to effectively prevent or respond to a major breach or cyber attack may also subject the Group to significant reputational damage.
Risk: Failure to meet current or future New Categories demand.
Description
The New Categories supply chain is a multi-tiered and complex environment with reliance on multiple factors, such as third-party
suppliers’ ability to upscale production in order to meet demand while maintaining product quality, dependency on single suppliers at
various points in the chain and the Group’s ability to build adequate consumables production capacity in line with product demand.
The geographical spread of suppliers and customers exposes the Group to political and economic conflicts such as Brexit and trade wars
which may compromise the New Categories supply chain. Given the developing nature of the New Categories portfolio, there is also an
enhanced risk that some products may not meet product quality and safety standards or may be subject to regulatory changes, leading to
product recalls, which we have experienced in the past, or bans of certain ingredients or products. In addition, the New Categories supply
chain may be vulnerable to changes in local legislation related to liquid nicotine that could increase import duties. Furthermore, the New
Categories supply chain includes the development of sensitive trade secrets jointly with external design partners, which carries the risk of
exposure of innovations to competitors.
Impact
Vulnerabilities in the New Categories supply chain may impact the Group’s ability to maintain supply and meet the current and future
demand requirements across the New Categories portfolio, potentially resulting in significant reputational harm and financial impact
that may negatively affect the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic
growth plans. Over-forecasting may also lead to write-off and negatively impact working capital. The design of New Categories devices
may also prevent the scaling of commercial manufacturing, which will either restrict supply or increase the costs of production.
Further, there may be loss of investors’ confidence in ESG performance, including failure to deliver our corporate purpose of
harm reduction.
In addition, changes in local legislation related to liquid nicotine import duties may increase New Categories production costs, which
may increase end market pricing and reduce demand. Furthermore, the exposure of sensitive trade secrets can lead to competitive
disadvantages and further negatively impact the Group’s results of operations and financial condition and cause the Group to fail to
deliver on its strategic growth plans.
Risk: Failure of a financial counterparty.
Description
The Group relies on transactions with a variety of financial counterparties to manage the Group’s business and financial risks. In the event
that any of these counterparties fails, payments due from such counterparties, such as under hedging or insurance contracts, may not be
recovered. In addition, failure of a transactional banking party may lead to the loss of cash balances and disruption to payment systems
involving such counterparty.
Impact
The inability to recover payments due from one or more failed financial counterparties or the loss of cash balances may cause significant
financial loss and have an adverse impact on the Group’s results of operations, financial condition and financial risk profile. In addition, the
loss of cash balances or a disruption to payment systems may cause disruption to the Group’s ongoing operations and ability to pay its
creditors and suppliers.
BAT Annual Report and Form 20-F 2021
320
Business Execution and Supply Chain Risks
Continued
Risk: Exposure to unavailability of, and price volatility, in raw materials and increased costs of employment.
Description
The availability and price of various commodities required in the manufacture of the Group’s products fluctuate. Raw materials and other inputs
used in the Group’s business, such as wood pulp and energy, are commodities that are subject to price volatility caused by numerous factors,
including political influence, market fluctuations and natural disasters.
Similarly, the Group is exposed to the risk of an increase above inflation in employment costs, including due to governmental action to
introduce or increase minimum wages. Employment and health care law changes may also increase the cost of provided health care and
other employment benefits expenses.
Impact
Restricted availability and price volatility of commodities may result in supply shortages and unexpected increases in costs for raw materials and
packaging for the Group’s products, which may affect the Group’s results of operations and financial condition.
Similarly, the Group’s profitability may be affected by increases in overall employment costs.
The Group may not be able to increase prices to offset increased costs without suffering reduced sales volume and revenue. In the absence of
compensating for increased costs through pricing, significant increases in raw material, packaging and employment costs above inflation will
impact product margins, leading to lower profits and negatively affecting the Group’s results of operations and financial condition and cause the
Group to fail to deliver on its strategic growth plans. .
Risk: Failure to retain key personnel or to attract and retain skilled talent.
Description
The Group relies on a number of highly experienced employees with detailed knowledge of the tobacco industry, other areas of focus for the
Group (including New Categories and Beyond Nicotine) and the Group’s business. Similarly, the Group is dependent on its ability to identify,
attract, develop and retain such qualified personnel in the future. The Group is also dependent on external hires to ensure that there are the right
new business critical capabilities and knowledge to accelerate transformation. BAT anticipates that this trend will continue and therefore the
ability to continue to build awareness, increase reach and ultimately attract the new target audience remains a primary focus.
The shift in career development expectations from new hires are leading to shorter tenures. Although the Group is increasing its effort on
retaining critical capabilities and knowledge, following any departure of new external hires, there can be no assurance that this effort will be
successful. Furthermore, broader economic and ESG trends may impact the Group’s ability to retain key employees and may increase
competition for highly talented employees, potentially resulting in the loss of experienced employees.
Impact
If the Group is unable to retain its existing key employees or to attract and retain skilled talent in the future, critical positions may be left vacant,
which could adversely impact the delivery of strategic objectives, which could ultimately impact the Group’s results of operations, financial
condition and achieving its ESG related ambitions.
High voluntary employee turnover may also reduce organisational performance and productivity, which may have a further adverse
impact onthe Group’s results of operations and financial condition.
Risk: Disruption to the supply chain and distribution channels.
Description
The Group has an increasingly global approach to managing its supply chain and distribution channels and is exposed to the risk of disruption
to any aspect of the Group’s supply chain, to suppliers’ operations or to distribution channels, and the deterioration in the financial condition of a
trading partner. This is especially so in our New Categories Supply Chain which is a multi-tiered and complex environment.
Such disruption may be caused by a cyber event, global health crisis, major fire, violent weather conditions or other natural disasters that affect
manufacturing or other facilities of the Group’s operating subsidiaries or those of their suppliers and distributors. In certain geographic areas
where the Group operates, insurance coverage may not be obtainable on commercially reasonable terms, if at all. Coverage may be subject to
limitations or the Group may be unable to recover damages from its insurers.
Disruption may also be caused by spread of infectious disease (such as the COVID-19 pandemic) or by a deterioration/shortage in labour or union
relations, disputesor work stoppages or other labour-related developments within the Group or its suppliers and distributors.
In addition, the Group’s operating subsidiaries may not be able to establish or maintain relationships on favourable commercial terms with their
suppliers and distributors. In some markets, distribution of the Group’s products is through third-party monopoly channels, often licensed by
governments. The Group may be unable to renew these third-party supplier and distribution agreements on satisfactory terms fornumerous
reasons, including government regulations or ESG considerations.
Furthermore, there are some product categories for which the Group does not have spare production capacity or where substitution between
different production plants is very difficult. Consolidation of global suppliers and certain distributors that control large geographies may reduce
the Group’s availability of alternatives and negatively impact the Group’s negotiating power with key suppliers and distributors.
These risks are particularly relevant in jurisdictions where the Group’s manufacturing facilities are more concentrated or for certain
product categories where production is more centralised.
Group Risk Factors
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
321
Risk: Disruption to the supply chain and distribution channels
continued
.
Impact
Any disruption to the Group’s supply chain and distribution channels could have an adverse effect on the results of operations and
financial conditions of the Group through failures to meet shipment demand, contract disputes, increased costs, loss of market share
and and inability to reinvest into New Category and support harm reduction agenda and cause the Group to fail to deliver on its strategic
growth plans.
Risk: Failure to deliver digital innovation and drive digital transformation.
Description
The Group’s strategy in areas of further growth and increasing profitability depends to a large extent on digital transformation and
innovation. Digital transformation and innovation are key drivers of the Group’s ethos and Quest, which includes new and modern
categories of products, increased interaction with customers, data-driven decision making and cost optimisation efforts driven by
automated and modernised processes. Examples of the Group’s ambitions that depend on digital transformation include:
–
the ability to leverage our data assets to generate insights and foresights as a key driver of revenue growth;
–
the expansion and flexibility of technology solutions to streamline the market realisation of new products and marketing campaigns;
and
–
the ability to build new solutions and the flexibility to react to market disruptions.
The Group must effectively implement new ways of working and supporting technologies to fully develop the digital agenda defined by
the Board (e.g. digital channels, data and analytics, automation, etc.).
The Group may see stalled progress in the pace of digital transformation and hampered strategy goals realisation if the necessary
information and digital technology is not ready to support the business implementation of global functional transformations (e.g.
direct relationship with consumers, integrated planning, demand forecasting and revenue growth management). The unavailability of the
necessary digital technology may be due to missing technology capabilities, lack of scalability or poor data quality. Shortage of skills and
ineffective ways of working may slow down the pace of the Group’s digital transformation and hamper its value realisation processes.
In addition, sub-optimal design of the global digital platforms implemented by BAT may lead to the fragmentation and under-utilisation of
such platforms and slow down the Group’s digital transformation.
Impact
The Group’s multi-category strategy requires dealing with different consumer needs and behaviours as well as complying with various
regulations, which increasingly require the expansion and flexibility of technology solutions. This may lead to the fragmentation and
under-utilisation of existing and future technology solutions. Similarly, increased control and centralisation of the technology solutions and
delivery mechanisms may slow down the effective delivery of the Group’s digital transformation and innovation.
The Group’s inability to adapt to the ever-changing digital space and fully exploit the value expected from digital transformation may have
an adverse impact on its competitive edge, market share and profitability, and may prevent the Group from reaching its medium and long-
term financial targets.
Risk: Exposure to product contamination.
Description
The Group may experience product contamination, whether by accident or deliberate malicious intent, during supply chain or
manufacturing processes, or may otherwise fail to comply with the Group’s quality standards. The Group may also receive threats of
malicious tampering.
Impact
Product contamination or threats of contamination may expose the Group to significant costs associated with recalling products from
the market or temporarily ceasing production. In addition, adult tobacco consumers may lose confidence in the specific brand affected by
the contamination, resulting in reputational damage and a loss of sales volume and market share. The Group could be subject to liability
and costs associated with civil and criminal actions as well as regulatory sanctions brought in connection with a contamination of the
Group’s products. Each of these results may in turn have an adverse effect on the Group’s results of operations, financial condition and
reputation and cause the Group to fail to deliver on its strategic growth plans.
BAT Annual Report and Form 20-F 2021
322
Business Execution and Supply Chain Risks
Continued
Risk: Inability to obtain adequate supplies of tobacco leaf.
Description
The Group purchases significant volumes of packed leaf each year. Tobacco leaf supplies are impacted by a variety of factors, including
weather conditions, drought, flood and other natural disasters, growing conditions, diseases causing crop failure, climate change and local
planting decisions. Tobacco production in certain countries is also subject to a variety of controls, including regulation affecting farming
and production control programmes, and competition for land use from other agriculture products. Such controls and competition can
further constrain the production of tobacco leaf, raising prices and reducing supply.
Human rights issues may arise in connection with our tobacco leaf supply chain. Due to the large number of casual and temporary
workers, the use of family labour in small-scale farming and high levels of rural poverty, the agricultural sector as a whole is vulnerable to
human rights issues. The Group recognises that child labour is a risk to our tobacco leaf supply chain. The aforementioned issues could
also threaten the next generation of farmers as young people move away from the rural areas to the cities.
Impact
Restricted availability of tobacco leaf may impact the quality of the Group’s products to a level that may prevent the Group accessing
sufficient tobacco leaf that meets volume, quality and the Group’s ESG compliance impacting the Group’s ability to deliver on consumer
needs. Accordingly, the reduction of tobacco leaf supply may impact supply and demand of the Group’s products and have a negative
impact on results of operations. The Group’s commitment to ESG may result in higher tobacco leaf prices. Higher tobacco leaf prices may
also increase the Group’s costs for raw materials and have an adverse effect on its results of operations and financial condition. The Group
may also experience reputation damage from failing to manage human rights issues in our leaf supply chain, which may impact availability
of suppliers willing to do business with us.
Risk: Failure to successfully design, implement and sustain an integrated operating model.
Description
The Group aims to improve profitability and productivity through supply chain improvements and the implementation of an integrated
operating model and organisational structure, including standardisation of processes, centralised back-office services and a common
IT platform. The Group undertakes transformation initiatives periodically which aim to simplify the organisation and facilitate growth.
The Group’s efforts to achieve these goals are driven and enabled through use of our TaO (central SAP ERP system) global template – a
standardised process used by all BAT entities globally with the use of a central SAP instance common for BAT subsidiaries (excluding
Reynolds American Inc. and its subsidiaries). These processes include, among others, core back-office global processes, procurement,
warehouse management, accounting and controlling.
Impact
Failure by the Group to successfully design, implement and sustain the integrated operating model, organisational structure and
transformation initiatives could lead to the failure to realise anticipated benefits, increased costs, disruption to operations, decreased
trading performance, disgruntled employees, loss of institutional knowledge and reduced market share. These results could in turn reduce
profitability and funds available for investment by the Group in long-term growth opportunities. Lack of adherence to the TaO template,
as well as template degradation over time, may result in the failure to maintain achieved productivity gains and capture additional
productivity gains which may in turn have an adverse effect on the Group’s results of operations and financial condition and cause the
Group to fail to deliver on its strategic growth plans.
Risk: Failure to uphold the high standard of ESG management.
Description
Stakeholder expectations of Group’s ESG performance are continually evolving. The Group may fail to have the appropriate internal
standards, strategic plans and governance, monitoring and reporting mechanisms in place to ensure it can identify emerging issues, meet
external expectations and align with recognised international standards.
Impact
Failure to uphold high standards of ESG management or provide transparent and consistent reporting could seriously impact Group
reputation and reduce investor confidence. In addition, poor performance across any aspect of ESG, such as a failure to address climate
change or human rights impacts across the Group’s business and supply chain, could result in increased regulation, difficulty in attracting
and retaining talent, criminal or civil prosecution, or decreases in consumer demand for our products. As well as resulting in our failure to
deliver our ESG targets.
Group Risk Factors
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
323
Risk: Failure to manage the Group’s climate change risk
Description
The Group is currently exposed to violent weather conditions or other natural disasters in locations across the Group, further climate
changes may lead to acute risks such as more frequent and severe weather events or chronic risks such as events relating to longer-
term shifts in climate patterns and higher temperatures, which, among other things, could lead to reductions in the supply and quality of
tobacco leaf and other supplies and cause other disruptions in our supply chains.
The Group will also experience transitional risks associated to low carbon economy. The TCFD was introduced by the Financial
Sustainability Board (FSB) for companies, investors and other financial stakeholders to disclose climate-related financial risk. As climate
change legislation is evolving rapidly, companies are required to adapt quickly to identify, assess, monitor and mitigate climate change
related transitional risks, failure to adapt could lead to BAT scoring lower in sustainability benchmarking indices, such as CDP and DJSI.
As consumer behaviours and expectations evolve, the Group may fail to adapt its product portfolio and marketing strategy in response
to stakeholders’ increasing environmental expectations. Factors such as emerging climate-change, product sustainability and circularity
related aspects of the products may result in the potential rejection of the Group’s products as well as reputational risk in relation to
business performance and sustainability in comparison to peers.
Impact
Any disruption to the Group’s supply chain (including agricultural supply chain) and distribution channels could have an adverse effect on
the results of operations and financial conditions of the Group through failures to meet shipment demand, contract disputes, increased
costs, reduced production capacity and loss of market share.
Consumer behaviours and expectations related to environmental issues and the Group’s sustainability credentials are rapidly starting to
influence their purchasing choices which may lead to consumers seeking alternative sustainable products. The inability to timely develop
and roll out sustainable innovations or products in line with consumer demand, including any failure to predict changes in consumer
and societal behaviour and expectations and to fill gaps in the product portfolio, as well as the risk of poor product quality, could lead to
missed opportunities, under- or over-supply, loss of competitive advantage, loss of market share, unrecoverable costs and/or the erosion
of the Group’s consumer base or brand equity. There are also further financial implications from having to fund Extended Producer
Responsibility schemes.
Lower ESG rating by investors, investor-owned platforms or other commonly used indices (e.g. CDP, DJSI) may impact perceived business
resilience, sustainability and share price. Investors are becoming increasingly interested in the environmental sustainability of listed
companies and their resilience in overall ESG matters is influencing their investment decisions.
Employees are also becoming increasingly aware of the climate change impact and have higher expectations of the effect that the Group
has on the environment which has bearings on employee retention and the Group’s attractiveness to future employees.
Non-compliance with the TCFD could reduce BAT’s ability to attract investors and result in reputational damage and potentially
other sanctions.
BAT Annual Report and Form 20-F 2021
324
Business Execution and Supply Chain Risks
Continued
Risk: Impact of a pandemic on the performance of the Group.
Description
The Group continues to closely monitor the development and disruption of the present coronavirus (the “COVID-19 pandemic”) and
current and further waves seen in some countries across the Group. The consequences of COVID-19 may include significant logistical
challenges for staff and their ability to perform their duties, potential loss of lives or significant level of illness in the workforce, inability to
deliver revenue stream and market share targets impacting profits and cash flows, disruption to supply chain and third parties unable to
deliver contractual goods and services. In addition, some countries in which the Group operates have adopted regulations restricting the
ability to manufacture, distribute, market and sell products.
Impact
The COVID-19 pandemic on the Group’s results of operations and financial condition is uncertain and cannot be predicted as the
pandemic evolves.
The long-term impacts of the COVID-19 pandemic to the Group’s business will depend on a range of factors which we are not able
to accurately predict, including the duration and scope of the pandemic, the geographies impacted, the impact of the pandemic on
economic activity and the nature and severity of measures adopted by governments. These factors include, but are not limited to:
–
Reductions or volatility in consumer demand for one or more of our products due to illness, retail closures, quarantine or other travel
restrictions, health consciousness (quitting use of tobacco and nicotine products), government restrictions, the deterioration of socio-
economic conditions, economic hardship and customer-downtrading (switching to a cheaper brand), which may impact the Group’s
market share.
–
Disruptions to the Group’s operations, such as its supply chain, or manufacturing or distribution capabilities, which may result in
increased costs due to the need for more complex supply chain arrangements, to expand existing facilities or to maintain inefficient
facilities, a reduction of the Group’s sales volumes or an increase in bad debts from customers.
–
Disruption to the Group’s operations resulting from a significant number of the Group’s employees, including employees performing key
functions, working remotely for extended periods of time or becoming ill, which may reduce the employees’ efficiency and productivity
and cause product development delays, hamper new product innovation and have other adverse effects on the Group’s business.
–
Significant volatility in financial markets (including exchange rate volatility) and measures adopted by governments and central banks
that further restrict liquidity, which may limit the Group’s access to funds, lead to shortages of cash and cash equivalents needed to
operate the Group’s business, and impact the Group’s ability to refinance its existing debt.
–
Regulations restricting the ability to manufacture, distribute, market and sell products, and potentially increasing illicit trade.
–
Governments seeking to increase revenues through increased corporate taxes and excise in combustible and/or New Category
products, increasing the cost and prices of our products – which could reduce volumes and margins, and/or increase illicit trade.
All of these factors may have material adverse effects on the Group’s results of operations and financial condition and cause the Group to
fail to deliver on its strategic growth plans.
Group Risk Factors
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
325
Legal, Regulatory and Compliance Risks
Risk: Exposure to, the enactment of, proposals for, or rumours of regulation that significantly impairs the Group’s ability to
communicate, differentiate, market or launch its products and/or the lack of appropriate regulation for New Categories.
Description
Tobacco control measures are in place in nearly all markets in which we operate and specific regulations for non-tobacco nicotine
products and Beyond Nicotine products (including CBD) are gaining momentum. Such restrictions are introduced by legislation,
regulations and/or voluntary agreements. Most tobacco and nicotine control measures can be categorised as follows:
–
Category Bans: including regulations that ban the sale, import, possession, or use of certain product categories, entirely (e.g.
New Categories);
–
Place: including regulations restricting consumption in private and public spaces (e.g. public place smoking or vaping bans, including
restaurants and bars);
–
Product: including regulations on the use of or testing for ingredients, product design and attributes (e.g. tar/ nicotine / carbon
monoxide ceilings) flavours bans (including menthol); product safety (e.g. reduced cigarette ignition propensity standards); product
disclosure (e.g. ingredients and emissions) and environmental impact (e.g. Extended Producer Responsibility (EPR) requirements for
cigarette filters);
–
Packaging and labelling: including regulations on health warnings and other government-mandated messages ; restrictions on the use
of certain descriptors and brand names; requirements on pack shape, size, weight and colour; and mandatory plain packaging;
–
Advertising, promotion and sponsorship: including partial or total bans on advertising , promotions and sponsorship, and online and
direct engagement communication;
–
Purchase: including regulations on where the products are sold, such as type of outlet (e.g. supermarkets and vending machines), radius
or distance restrictions (e.g. 300 meters from a school), online sales bans, regulation regarding how they are sold and displayed (e.g.
above the counter or under the counter) and minimum purchase age and increases thereto; and
–
Price: including regulations that have implications on prices and margins (e.g. excise taxes, minimum prices and import/export duties).
The Group believes that further tobacco control and nicotine regulation is expected over the medium term in many of the Group’s
markets. Irresponsible behaviour or marketing practices of competitors (for example where there is a lack of appropriate regulation)
or actions contrary to the regulations in certain markets, may cause reputational harm to the industry as a whole and may result in
additional regulation or bans. Further, there is pressure on governments from international organisations and agencies, tobacco control
NGOs, vanguard regulators and the private sector (including philanthropists, pharmaceutical and security technology companies and
social justice groups) to pursue regulatory policies and implement tobacco or nicotine product-related regulation which is not science or
evidence based and is aimed at increasing the complexity and cost burden on the tobacco or nicotine industry, limiting the commercial
viability of tobacco and nicotine products or prohibiting the products completely. Regulators may be lacking in understanding of New
Categories products and their role in tobacco harm reduction due to their novelty. These factors can lead to a lack of adequate or existing
regulatory regimes or clear and appropriate product classifications.
In addition, the Group may fail to implement the right level of control measures or to maintain adequate standards of compliance with
regulatory measures. For example, the Group’s marketing activities may fail to comply with the relevant law and regulations or with the
Group’s International Marketing Principles.
Insufficient information, instruction and training in the relevant areas and a lack of knowledge of the existence and/or requirements of
relevant regulations including tobacco and nicotine as well as other relevant regulations, such as battery regulation, or a failure to monitor,
assess and implement the requirements of new or modified regulation, may increase these risks.
There may also be negative and disproportionate societal responses to consumer abuse or misuse of tobacco and/or nicotine products
(e.g. in New Categories) or to certain categories of products.
Traditional Tobacco Products
With respect to tobacco and combustible products, many of the measures outlined in the FCTC have been or are in the process of
being implemented through national legislation in many markets in which the Group operates, including recommendations for plain
packaging and flavour bans (e.g. menthol bans – in effect in the European Union since 20 May 2020). In April 2021, the U.S. Food and Drug
Administration (“FDA”)announced that it will issue proposed product standards to ban menthol as a characterising flavour in cigarettes in
the U.S.. In December 2021, a regulatory agenda released in the U.S. confirmed the FDA’s plans to publish a Notice of Proposed Rulemaking
for a menthol cigarette ban in April 2022. Further, various national or international regulatory regimes may seek to require the reduction of
nicotine levels in tobacco products.
In March 2018, the FDA published its Advanced Notice of Proposed Rulemaking titled “Tobacco Product Standard for Nicotine Level
of Combusted Cigarettes” and invited interested parties to submit comments on, among other issues, maximum nicotine limits and
whether any maximum nicotine level should apply to combustible tobacco products. In October 2019, the FDA withdrew the Advanced
Notice of Proposed Rulemaking without explanation.
In the U.S., manufacturers of all tobacco products deemed to be under the authority of the FDA as of 2016 (which includes vapour and
Modern Oral products that contain or can be used with tobacco-derived nicotine) must submit information to the FDA seeking formal
marketing authorisation of such products.
In 2021, New Zealand published its Smokefree 2025 Action Plan, considering the implementation of drastic measures, such as a ban on
tobacco sales to those born after a certain date and very low nicotine cigarettes.
Finally, the FCTC COP10 and the EU Tobacco Product Directive 2, post-implementation review which is currently ongoing, are likely to
result in calls for further regulation for tobacco products.
BAT Annual Report and Form 20-F 2021
326
Legal, Regulatory and Compliance Risks
Continued
Risk: Exposure to, the enactment of, proposals for, or rumours of regulation that significantly impairs the Group’s ability to
communicate, differentiate, market or launch its products and/or the lack of appropriate regulation for New Categories.
continued
.
New Categories
With respect to New Categories, regulation is still evolving and frameworks for regulation and taxation vary from country to country.
Some regulators have applied or are considering applying combustible tobacco products’ restrictive regulatory framework to New
Categories. Some jurisdictions have banned or are considering banning certain New Category products altogether.
Following reports of individuals experiencing acute respiratory injury in suspected association with vaping certain e-liquids (EVALI) and
reports regarding vaping youth usage in the U.S., stricter regulatory views gained momentum and were publicly supported by the World
Health Organization (WHO) which continues to call on countries to ban or regulate novel nicotine products as tobacco. The U.S., the EU
and Canada are playing a leading role across all identified regulatory risks, including: bans on flavours, sales channel bans, advertising
restrictions and nicotine limits, among others.
The U.S. is expected to issue additional decisions on the marketing authorisation of BAT and competitor vapour products in the near-term,
which could result in further restrictions on our ability to offer flavoured vapour products, including menthol.
The FDA granted marketing authorisation for the Vuse Solo device and its tobacco (“original”) flavour in October 2021, but denied
authorisation for Vuse Solo flavours other than menthol (which were not on the market). That denial is being appealed with the FDA.
The FDA has not issued a decision on the authorisation of the Vuse Solo menthol flavour, which remains on the market pending FDA
decision. There can be no assurance that the Vuse Solo menthol authorisation will be granted, or that the other flavours appeal will
succeed. Additionally, the continued marketing authorisation of Vuse Solo original flavour is contingent on continued compliance with
regulatory requirements ; the marketing authorisation may be suspended or withdrawn if the FDA determines that the continued
marketing of the product is no longer appropriate for the protection of the public health. The FDA has not issued marketing authorisations
for Vuse Alto and its associated flavours, including menthol, with FDA decisions still pending. Although the Vuse Alto menthol and tobacco
flavoured products remain on the market pending FDA decisions there can be no assurance that these authorisations (or the other Vuse
Alto flavours) will be granted. Similarly, the Group’s Velo products remain on the market in the U.S., again pending FDA decisions on their
marketing authorisations, and there can be no assurance these will be granted. If the FDA denies a marketing authorisation then the
relevant product(s) would need to be withdrawn from the market (unless a court intervenes or the FDA).
With respect to Modern Oral and other New Categories, regulatory frameworks currently follow divergent approaches. In certain markets,
where there is an absence of adequate regulation, actions of irresponsible competitors may cause reputational harm to the category and
result in outright bans or adverse regulation, as has been the case with Modern Oral in Russia with allegations regarding youth usage.
In markets where there is a likelihood of tobacco, pharmaceutical or food regulatory classification, the category can be at risk of severe
regulation or total ban.
The Group believes that Tobacco Heated Products are likely to be regulated as traditional tobacco products, driven by the decision of
WHO’s 7th Conference of Parties to the Framework Convention on Tobacco Control, and Reports from the WHO submitted to the COP9
for Noting, to apply tobacco control regulations to these products including recommendations for plain packaging and flavour bans.
Beyond Nicotine
As the Group also looks to Beyond Nicotine products including CBD (in connection with its investment in Organigram), it may be subject to
additional regulation and these products might not be scalable on a global basis given varying degrees of regulation.
Please refer to pages 340 to 344 for details of tobacco and nicotine regulatory regimes under which the Group’s businesses operate.
Group Risk Factors
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
327
Risk: Exposure to, the enactment of, proposals for, or rumours of regulation that significantly impairs the Group’s ability to
communicate, differentiate, market or launch its products and/or the lack of appropriate regulation for New Categories.
continued
.
Impact
Existing and future regulatory measures impacting one or more New Categories and/or Beyond Nicotine traditional tobacco products
could adversely affect volume, revenue and profits, as a result of: restrictions on the Group’s ability to sell and differentiate its products or
brands, leverage price, innovate, make scientific claims, compete in future product categories and make new market entries; regulations
(e.g. pharma or food) or total bans of tobacco and/or New Categories products in certain markets; reduced margins due to increased
operating costs; impediments to building or maintaining brand equity; and restrictions on the Group’s ability to deliver, market and sell
existing or new products responding to consumers’ preferences. In addition, new (and changes to existing) regulation could lead to
greater complexity, as well as higher production and compliance costs.
As an example, through the acquisition of Reynolds American Inc., the Group acquired the Newport brand, the leading menthol cigarette
brand in the U.S., the Group’s largest single market. The sales of Newport, together with the other menthol brands of the Group’s
operating subsidiaries, represent a significant portion of the Group’s total net sales. Any action by the FDA or any other governmental
authority banning or materially restricting the use of menthol in tobacco products could have a significant negative impact on sales
volumes which would, in turn, have an adverse effect on the results of operations and financial position of the Group.
Regulations can also have an adverse impact on the Group’s ability to compete within the legitimate tobacco, nicotine or New Categories
industry and with illicit traders or legal operators exploiting legal and regulatory loop holes. Regulations could also lead to reduced
consumer acceptability of new product specifications, leading to consumers seeking alternatives in illicit markets.
Unclear or inadequate regulations can lead to legal uncertainty, impacting the Group’s position in the marketplace.
In the specific case of New Categories, our corporate harm reduction ambition, including of revenue of £5 billion by 2025 and 50 million
New Categories consumers of non-combustible products by 2030 could be at risk if stricter regulatory views are imposed at a global
scale, or if appropriate regulation is lacking or there is a lack of acceptance of tobacco harm reduction as a tobacco control policy
(preventing a balanced regulatory framework for New Categories). Any action by the FDA or any government authority restricting the use
of New Category products could also have an adverse effect on the operation and financial position of the Group and the possible failure
of the Group’s harm reduction objective and loss of confidence in the Group’s ESG performance.
As a reflection of the real or perceived impact of stricter regulation in our business, the Group’s share price has also experienced, and
could in the future experience, shocks upon the announcement, rumour of or enactment of restrictive regulation. All these effects may
have an adverse effect on the Group’s results of operations and financial conditions and cause the Group to fail to deliver on its strategic
growth plans.
In addition, considering the significant number of regulations that may apply to the Group’s businesses across the world, the Group is
and may in the future be subject to claims for breach of such regulations. Government authorities (such as the FDA), organisations or
even individuals may allege that our marketing activities do not comply with the relevant law s and regulations, or with our International
Marketing Principles. As such, the Group could be subject to liability and costs associated with civil and criminal actions as well as
regulatory sanctions, fines and penalties brought in connection with these allegations. Even when proven untrue, there are often financial
costs and reputational impacts in defending against such claims and allegations (including potential adverse impact on the treatment by
the FDA of the Group ‘s PMTAs in the U.S.). Each of these results may in turn have an adverse effect on the Group’s results of operations
and financial condition and cause the Group to fail to deliver on its strategic growth plans.
BAT Annual Report and Form 20-F 2021
328
Legal, Regulatory and Compliance Risks
Continued
Risk: Adverse implications of EU legislation on single-use plastics that will result in on-pack environmental warnings
andfinancial implications relating to the Extended Producer Responsibility (EPR).
Description
The EU adopted a Directive on single-use plastics in July 2019 which, among other products, targets tobacco products with filters
containing plastic. The Cellulose Acetate in our filters is defined as a single-use plastic under the Directive and, as such, the Directive will
have an impact on the Group’s cigarettes, filters for other tobacco products and consumables for THPs.
Under the Directive, the Group will be subject to (and in some cases already is subject to) Extended Producer Responsibility (“EPR”)
schemes, requiring the Group to cover the costs of collecting, transporting, treating and cleaning-up of filters containing plastic.
The Directive also imposes on tobacco manufacturers the obligation to finance consumer awareness campaigns and to place
environmental markings on packs of products with filters containing plastic.
Prior to the anticipated implementation deadline for EPR schemes on 5 January 2023, the European Commission is expected to
issue guidelines on the criteria for the costs of cleaning up litter in the first half of 2022. In addition, in December 2020 the European
Commission adopted and published an Implementing Act harmonising specifications for required product markings with a compliance
deadline of July 2021. When transposing the Directive into national law, EU member states could decide to expand the scope of EPR
systems under their respective national laws, which may expose the Group to additional regulations and financial obligations. This is the
case in France, where EPR implementation has already occurred with an expansion of the scope to include non-plastic filters for RYO
products. Although Sweden’s government has abandoned plans to extend its national EPR system to Snus and modern oral pouches,
other markets are still at risk of extension, such as in Spain (tobacco manufacturers would be mandated to financially contribute to the
cost of cleaning of parts of the general sewage system), the Czech Republic (tobacco manufacturers would be mandated to contribute
to the cost of managing household waste costs), and Poland and Romania (manufacturers’ financial contribution would also cover paper
filters, although they are not plastic items). Proposed regulations are still being discussed in these countries.
It is noted that there is a growing level of scrutiny on the use of single-use plastic across the world and a number of other markets in which
the Group operates are considering ways to restrict (or ban) the use of filters made of plastic and/or introduce EPR schemes covering
other plastic elements in our products beyond filters for traditional products and/or New Categories products.
Impact
The financial implications of existing and future EPR schemes will increase administrative burdens and operating costs and may have
an adverse effect on the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic
growth plans. If significant space is appropriated on the packaging of some of the Group’s products, this may also be an impediment to
maintaining or building brand equity of the Group’s products which may, in turn, have a negative impact on the Group’s sales volume.
Risk: Exposure to litigation on tobacco, nicotine, New Categories and other issues.
Description
The Group is involved in litigation related to its tobacco and nicotine products, including legal, regulatory and patent actions, proceedings
and claims, brought against it in a number of jurisdictions. Claims brought against the Group may be based on personal injury (both
individual claims and class actions), economic loss arising from the treatment of smoking and health-related diseases (such as medical
recoupment claims brought by local governments), patent infringement (please refer to the risk factor under “Product pipeline,
commercialisation and Intellectual Property risks, Exposure to risks associated with intellectual property rights, including the failure
to identify, protect and prevent infringement of the Group’s intellectual property rights and potential infringement of, or the failure to
retain licences to use, third-party intellectual property rights” below), negligence, strict tort liability, design defect, failure to warn, fraud,
misrepresentation, deceptive/unfair trade practices, conspiracy, medical monitoring and violations of antitrust/racketeering laws.
Certain actions, such as those in the U.S. and Canada, involve claims in the tens or hundreds of billions of pounds sterling. The Group
is also involved in proceedings that are not directly related to its tobacco and nicotine products, including proceedings based on
environmental pollution claims.
Additional legal and regulatory actions, proceedings and claims may be brought against the Group in the future.
Group Risk Factors
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
329
Risk: Exposure to litigation on tobacco, nicotine, New Categories and other issues
continued
.
Impact
The Group’s consolidated results of operations and financial position could be materially affected by any unfavourable outcome of
certain pending or future litigation. The Group could be exposed to substantial liability, which may take the form of ongoing payments.
Whether successful or not, the costs of the Group’s involvement in litigation could materially increase due to costs associated with
bringing proceedings and defending claims, which may also cause operational and strategic disruption by diverting management time
away from business matters. Liabilities and costs in connection with litigation could result in bankruptcy of one or more Group entities,
which, in turn, could cause a material reduction in the Group’s sales volume and profits. Any negative publicity resulting from these claims
may also adversely affect the Group’s reputation.
The occurrence of any of the above effects could in turn have an adverse effect on the Group’s results of operations and financial
condition and cause the Group to fail to deliver on its strategic growth plans.
Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Risk: Significant and/or unexpected increases or structural changes in tobacco and nicotine-related taxes.
Description
Tobacco and nicotine products are subject to high levels of taxation, including excise taxes, sales taxes, import duties and levies in most
markets in which the Group operates. In many of these markets, taxes are generally increasing, but the rate of increase varies between
markets and between different types of tobacco and nicotine products. Increases in, or the introduction of new, tobacco and nicotine-
related taxes may be caused by a number of factors, including fiscal pressures, health policy objectives and increased lobbying pressure
from anti-tobacco advocates.
With respect to New Categories, although a common framework for regulation and taxation has yet to emerge, the manufacture, sale,
packaging and advertising of such products are increasingly being regulated and taxed.
Impact
Significant or unexpected increases in, or the introduction of new, tobacco-related taxes or minimum retail selling prices, changes in
relative tax rates for different tobacco and nicotine products or adjustments to excise have in the past resulted, and may in the future
result in, the need for the Group to absorb such tax increases due to limits in its ability to increase prices, an alteration in the sales mix in
favour of value-for-money brands or products, or growth in illicit trade, each of which could impact pricing, sales volume and profit for the
Group’s products. Significant or unexpected increases of tobacco-related taxes could also impact BAT’s ability to deliver the corporate
purpose of harm reduction.
Risk: Failure to comply with health and safety and environmental laws.
Description
The Group is subject to a variety of laws, regulations and operational standards relating to health and safety and the environment.
The Group may fail to assess certain risks and implement the right level of control measures or to maintain adequate standards of health
and safety or environmental compliance, which could cause injury, ill health , disability or loss of life to employees, contractors or members
of the public, or harm to the natural environment and local communities in which the Group operates. As a result of the outcomes of the
recent COP26, further future regulation is anticipated as governments look to meet their climate change ambitions.
Insufficient information, instruction and training in the relevant areas and a lack of knowledge of the existence and/or requirements
of relevant regulations, or a failure to monitor, assess and implement the requirements of new or modified legislation, may increase
these risks.
Impact
Any failure by the Group to comply with applicable health and safety or environmental laws, or the exposure to the consequences of a
perceived failure, could result in business disruption, reputational damage, difficulties in recruiting and retaining staff, increased insurance
costs, consequential losses, the obligation to install or upgrade costly pollution control equipment, loss of value of the Group’s assets,
remedial costs and damages, fines and penalties as well as civil or criminal liability. Each of these results could in turn adversely impact
the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic growth plans.
BAT Annual Report and Form 20-F 2021
330
Legal, Regulatory and Compliance Risks
Continued
Risk: Exposure to unfavourable tax rulings.
Description
The Group is subject to tax laws in a variety of jurisdictions. The Group‘s interpretation and application of the tax laws could differ from
those of the relevant tax authority, which may subject the Group to claims for breach of such laws, including for late or incorrect filings or for
misinterpretation of rules. Tax authorities in a variety of jurisdictions, such as the Netherlands and Russia, have assessed, and may in the future
assess, the Group for historical tax claims, including interest and penalties, arising from disputed areas of tax law. The Group is currently party to
tax disputes in a number of jurisdictions, some of which involve claims for amounts in the hundreds of millions of pounds sterling.
Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Impact
The Group’s failure to comply with the relevant tax authority’s interpretation and application of the tax laws could result in significant financial
and legal penalties, including the payment of additional taxes, fines and interest in the event of an unfavourable ruling by a tax authority in a
disputed area, as well as the payment of dispute costs. Disruption to the business could occur as a result of management’s time being diverted
away from business matters. Each of these results could negatively affect the Group’s results of operations and financial condition and cause
the Group to fail to deliver on its strategic growth plans.
Risk: Unexpected legislative changes to corporate income tax laws.
Description
The Group is subject to corporate income tax laws in the jurisdictions in which it operates. These laws frequently change on a prospective
or retroactive basis.
Impact
Legislative changes to corporate income tax laws and regulations may have an adverse impact on the Group’s corporate income tax
liabilities and may lead to a material increase of the Group’s overall tax rate. This could, in turn, negatively affect the Group’s results of
operations and financial condition and cause the Group to fail to deliver on its strategic growth plans.
Risk: Exposure to potential liability under competition or antitrust laws.
Description
According to the Group’s internal estimates, the Group is a market leader by volume and/or value in certain categories in a number of
countries in which it operates and/or is one of a small number of tobacco and /or New Categories companies in certain other markets
in which it operates. The Group has had antitrust infringement decisions against it in the past and is subject to ongoing investigations
(please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group). The Group may fail
to comply with competition or antitrust laws and may be subject to investigation and/or litigation for alleged abuse of its position in
markets in which it has significant market share or for alleged collusion/anti-competitive arrangements with other market participants.
Competition / antitrust laws continue to evolve globally with increasingly aggressive enforcement.
Impact
Failure by the Group to comply with competition or antitrust laws and investigations (and/or litigation) for violation of such laws may result
in significant legal liability, fines, penalties and/or damages actions; criminal sanctions against the Group, its officers and employees;
increased costs, prohibitions on conduct of the Group’s business; forced changes in business practices, forced divestment of brands and
businesses (or parts of businesses) to competitors or other buyers; director disqualifications; commercial agreements being held void;
and operational and strategic disruption (including by diverting management time away from business matters). The Group may face
increased public scrutiny and the investigation or imposition of sanctions by antitrust regulation agencies and/or courts for violations of
competition regimes which may subject the Group to reputational damage and loss of goodwill, including negative perceptions of the
Group’s governance and our ESG credentials.
The occurrence of any of the above effects could in turn have an adverse effect on the Group’s results of operations and financial
condition and cause the Group to fail to deliver on its strategic growth plans.
Group Risk Factors
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
331
Risk: Failure to establish and maintain adequate controls and procedures to comply with applicable securities, corporate
governance and compliance regulations.
Description
The Group’s operations are subject to a range of rules and regulations around the world. These include U.S. securities, corporate
governance and compliance laws and regulations such as the Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices Act of
1977, which applies to the Group’s worldwide activities. While the Group continuously seeks to improve its systems of internal controls
and to remedy any weaknesses identified, there can be no assurance that the policies and procedures will be followed at all times or
effectively detect and prevent violations of applicable laws. In addition, the Group is subject to increasingly stringent reporting obligations
under UK corporate reporting regulations.
Impact
The increased scope and complexity of applicable regulations to which the Group is subject may lead to higher costs for compliance.
Failure to comply with laws and regulations may result in significant legal liability, fines, penalties, and/or damages actions, criminal
sanctions against the Group, its officers and employees, and damage to the Group’s reputation. Non-compliance with such regulations
could also lead to a loss of the Group’s listing on one or more stock exchanges or a loss of investor confidence with a subsequent reduction
in share price.
Risk: Loss of confidential information, including through manipulation of data by employees and system failure.
Description
Unintended or inappropriate behaviour by employees, contractors, service providers and others using or managing the Group’s
confidential information especially given the increased use of third parties (including sensitive or confidential information of third parties)
or personal data (including sensitive consumer personal data) may affect the Group’s communications and operations which may result in
the unauthorised disclosure of such information. Increased remote working has and may increase this risk.
In addition, flaws in our IT systems and/or those of our suppliers, a lack of infrastructure or application resilience, slow or insufficient
disaster recovery service levels or the installation of new systems may increase the possibility that data, including confidential, personal
or other sensitive information, stored or communicated by IT systems may be corrupted, lost or disclosed. There may be malicious ‘bad
actor’ activity (e.g. cyberattack) or ‘insider threat’ (e.g. activists or disgruntled employees).
Impact
The loss of confidential information may result in civil or criminal legal liability and prosecution by enforcement bodies and/or claims from
third parties, which may subject the Group to the imposition of material fines, damages and/or penalties and the costs associated with
defending these claims. It could also lead to a competitive disadvantage through the loss of trade secrets. There could also be potential
exposure from extortion attempts and costs from business continuity situations.
Inappropriate disclosure of confidential information or violation of the GDPR or other privacy laws (please refer to the risk factor under
“Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation, the UK Data
Protection Act 2018, e-Privacy Laws and other privacy legislation governing the processing of personal data” below) may also result
in significant reputational harm and public scrutiny which could create negative perceptions of the Group’s governance and our ESG
credentials, a loss of investor confidence (including a possible share price impact) and reduced third-party reliance on the Group’s
information technology systems or other data handling practices. In addition, restoration and remediation of disclosed confidential
information or personal data may be costly, difficult or even impossible.
The occurrence of any of the above effects could in turn have an adverse effect on the Group’s results of operations and financial
condition and cause the Group to fail to deliver on its strategic growth plans.
BAT Annual Report and Form 20-F 2021
332
Legal, Regulatory and Compliance Risks
Continued
Risk: Failure to comply with product regulations due to uncertainty surrounding the proper interpretation and application of
those regulations.
Description
The interpretation and application of regulations concerning the Group’s products, such as the Tobacco and Related Products Directive
(TPD2), may be subject to debate and uncertainty. This includes uncertainty over product classifications and restrictions on advertising.
In particular with respect to the developing category of New Categories, which has grown in size and complexity in a relatively short
period of time, aconsensus framework for the interpretation and application of existing regulation, such as the rules concerning nicotine-
containing liquids used in vapour products, has yet to emerge.
The continuously changing and evolving landscape of regulation concerning the Group’s products contributes to the uncertainty
surrounding interpretation and application and creates a risk that the Group may misinterpret or fail to comply with developing regulations
in the various jurisdictions in which it operates, or becomes subject to enforcement actions from regulators. With the continuous
changing of product cycle plans and expansion to new markets and innovations, there is a risk that such changes and launches fail to
comply with the relevant regulations, including pre-approval and/or pre-registration requirements. For example, some governments have
intentionally banned or are seeking to ban novel tobacco products and products containing nicotine, while others would need to amend
their existing legislation to permit their sale. Even in countries where the sale of such products is currently permitted, some governments
have adopted, or are seeking to adopt, bans on New Categories or restrictions on certain flavours.
Impact
The significant number of emerging regulations and the uncertainty surrounding their interpretation and application may subject the
Group to claims for breach of such regulations. Financial costs of such enforcement actions include financial penalties, product recalls
and litigation costs, and entail a significant risk of adverse publicity and damage to the Group’s reputation and goodwill.
Risk: Failure to uphold high standards of corporate behaviour, including through unintended or malicious breach of anti-bribery
and anti-corruption and other anti-financial crime laws.
Description
The Group is subject to various anti-corruption laws and regulations and other anti-financial crime laws including but not limited to
failure to prevent facilitation of tax evasion, money laundering and terrorist financing (Anti-Corruption Laws). All employees of BAT,
its subsidiaries and joint ventures which it controls are expected to uphold a high standard of corporate behaviour and comply with
the Group Standards of Business Conduct (SoBC) which includes a requirement to comply with Anti-Corruption Laws. Employees,
associates, suppliers, distributors and agents are prohibited from engaging in improper conduct to obtain or retain business or
to improperly influence (directly or indirectly) a person working in an official capacity to decide in the Group’s favour. The Group’s
employees, contractors and service providers may fail to comply with our SoBC and/or may violate applicable Anti-Corruption Laws.
From time-to-time, the Group investigates, and becomes aware of governmental authorities’ investigations into, and allegations of
misconduct against Group companies. The Group cooperates with the authorities’ investigations, where appropriate, including with
the DOJ and OFAC in the United States, which are conducting an investigation into suspicions of breach of sanctions. Potential fines,
penalties or other consequences cannot currently be assessed. As the investigations are ongoing, it is not possible to identify the
timescale in which these matters might be resolved.
Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Impact
Failure of the Group to comply with Anti-Corruption Laws or to deploy and maintain robust internal policies, procedures and controls
could result in significant fines and penalties (reducing the Group’s ability to reinvest in the future), a share price impact, criminal and/
or civil sanctions against the Group and its officers and employees, increased costs, prohibitions or other limitations or requirements
(e.g. compliance requirements) on the conduct of the Group’s business and reputational harm (including negative perceptions of the
Group’s governance and our ESG credentials), it may subject the Group to claims for breach of such regulations and it could in turn
have an adverse effect on the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic
growth plans.
Even when proven untrue, there are often financial costs, time demands and reputational impacts associated with investigating and
defending against such claims.
Group Risk Factors
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
333
Risk: Imposition of sanctions under sanctions regimes or similar international, regional or national measures.
Description
National, international and supra-national sanctions regimes or similar international, regional or national measures are complex and
dynamic and may affect territories in which the Group operates or third parties with which it may have commercial relationships.
There may be unintended or malicious breaches of sanctions due to inappropriate or negligent behaviour by BAT employees,
contractors, customers, suppliers or service providers.
In particular, the Group has operations in a number of territories that are subject to various sanctions, including Cuba and Belarus.
Operations in these territories expose the Group to the risk of significant financial costs and disruption in operations that may be difficult
or impossible to predict or avoid or the activities could become commercially and/or operationally unviable. Sanctions can be imposed
quickly (as happened recently in Belarus) with the possibility of further territories the Group operates in becoming subject to sanctions
at short notice.
National, international and supra-national sanctions regimes may also affect third parties with which the Group has commercial
relationships (including possible risk aversion to being associated with a sanctioned territory) and could lead to supply and payment
chain disruptions.
From time-to-time, the Group investigates, and becomes aware of governmental authorities’ investigations into, allegations of
misconduct against Group companies. The Group cooperates with the authorities’ investigations, where appropriate, including with
the DOJ and OFAC in the United States, which are conducting an investigation into suspicions of breach of sanctions. Potential fines,
penalties or other consequences cannot currently be assessed. As the investigations are ongoing, it is not possible to identify the
timescale in which these matters might be resolved.
Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Impact
As a result of the limitations imposed by sanctions, it may become commercially and/or operationally unviable for the Group and/or
its critical business partners to operate in certain territories or execute transactions related to them and the Group may be required
to exit existing operations in such territories. The Group may also experience difficulty in sourcing materials or importing products,
repatriating currency from a sanctioned country and finding financial institutions willing to transact with it, any of which may expose
the Group to increased costs. In addition, the costs of complying with sanctions may increase as a result of new, or changes to existing,
sanctions regimes.
Any failure to comply with sanctions regimes or similar international, regional, or national or supra-national measures may result in
significant legal liability, fines (reducing the Group’s ability to reinvest in the future) and/or penalties, criminal and/or civil sanctions
against the Group, its officers and employees, damage to commercial or banking relationships and reputational harm. Reputational harm
(including negative perceptions of the Group’s governance and our ESG credentials) may result regardless of whether the Group complies
with imposed sanctions..
The occurrence of any of the above effects could in turn have an adverse effect on the Group’s results of operations and financial
condition and cause the Group to fail to deliver on its strategic growth plans.
BAT Annual Report and Form 20-F 2021
334
Legal, Regulatory and Compliance Risks
Continued
Risk: Loss or misuse of personal data through a failure to comply with the European General Data Protection Regulation, the
UK Data Protection Act 2018, e-Privacy Laws and other privacy legislation governing the processing of personal data.
Description
Personal data is a subset of data (which is likely to be confidential) which attracts different risks and treatment under applicable law.
Breaches of data privacy laws include misuse of information which may not be confidential in nature. These include, for example,
unsolicited marketing calls to a publicly available number, or using an individual’s personal data in a way which was not authorised or in a
way that the individual did not reasonably expect through technologies such as online tracking or monitoring.
Various privacy laws, including the European General Data Protection Regulation (“GDPR”), UK Data Protection Act 2018 (“UKDPA”)
and e-Privacy Directive (“e-Privacy Laws”) / EU Regulatory guidances, govern the way in which organisations (comprising employees,
contractors, service providers and other authorised persons) handle individuals’ personal data including how such organisations, including
the Group, track or monitor their online behaviour.
Unintended or malicious breaches of data privacy laws may occur through inappropriate or negligent behaviour by BAT employees,
contractors, service providers or others. In particular:
–
in the event of:
–
an unauthorised disclosure of personal data as a result of a bad actor (e.g. cyberattack); or
–
flaws in our IT systems, or application resilience, slow or insufficient disaster recovery service levels or the installation failure of a new
system (which result in personal data stored or communicated by IT systems being corrupted, lost or disclosed).
–
Depending on the risk to the individuals concerned, such personal data breaches (including mass personal data unavailability) must be
reported to the local data protection supervisory authority which could subject Group companies to not only regulatory scrutiny but
also individual claims or even class action suits; and
–
ePrivacy Laws state that any misuse of consumer personal data or lack of transparency provided to consumers on how we use their
data or track their online behaviours are subject to regulatory scrutiny.
Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve. Following the entry
into force of the GDPR in May 2018, other jurisdictions in which the Group operates have enacted similar local legislation such as the
California Consumer Privacy Act U.S. and the “LGPD” in Brazil which further increases the risks surrounding the processing of personal
data especially in the consumer space. As part of the Group’s digital transformation initiative, it has an enhanced focus on consumer data,
especially regarding New Categories, which increases these risks.
Impact
Failure to comply with existing or future e-Privacy Laws and privacy legislation governing the processing of personal data may adversely
impact the Group’s results of operations and financial condition.
Loss or misuse of personal data may result in civil or criminal legal liability and prosecution by enforcement bodies, which may subject the
Group to the imposition of material fines (currently up to 4% of Group worldwide turnover in the context of GDPR) and/or penalties and/
or claims and costs associated with defending these claims (which could include class action suits brought by consumers). The Group’s
officers and employees may also be subject to personal criminal sanctions.
Reputational damage could also potentially cause significant harm to the Group, including negative perceptions of the Group’s
governance and our ESG credentials.
Relevant data protection supervisory authority could also order certain Group legal entities to cease processing activities, which
could result in a significant operational disruption. Regulatory interest may also prompt interest from other compliance authorities/
governments, leading to further regulation or proceedings.
The occurrence of any of the above effects could in turn have an adverse effect on the Group’s results of operations and financial
condition and cause the Group to fail to deliver on its strategic growth plans.
Risk: Failure to uphold New Categories marketing practices.
Description
The regulatory landscape is constantly evolving with marketing practices being different in key New Categories markets. The Group’s
marketing activities may be alleged to be non-compliant laws and regulations, or with the International Marketing Principles (“IMPs”) on
the marketing and sale of tobacco products to consumers such as age verification measures with allegations of this in the media. On-
line activities can also be wrongly considered to be aimed at consumers in a country where such activities are not permitted.
Impact
The Group is and may in the future be subject to claims for breach of marketing practices. In particular, national authorities (such as the
FDA), organisations or even individuals may allege that our marketing activities do not comply with the relevant laws and regulations, or
with our IMPs. As such, the Group could be subject to liability and costs as well as regulatory sanctions, fines and penalties brought in
connection with these allegations. Even when proven untrue, there are often financial costs and reputational impacts in defending against
such claims and allegations.
Future breaches may lead to a loss of investor confidence in ESG performance and inability to meet our responsible marketing focus area
if our IMPs are not followed, impacting our corporate purpose of delivering harm reduction.
Group Risk Factors
Continued
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BAT Annual Report and Form 20-F 2021
335
Economic and Financial Risks
Risk: Foreign exchange rate exposures.
Description
The Group’s reporting currency is the pound sterling. The Group is exposed to the risk of fluctuations in exchange rates affecting the
translation of net assets and earned profits of overseas subsidiaries into the Group’s reporting currency. These translational exposures are
not normally hedged.
Exposures also arise from the foreign currency denominated trading transactions undertaken by subsidiaries and dividend flows.
Where not offset by opposing flows, these exposures are generally hedged according to internal policies, but hedging of exposure to
certain currencies might not be possible due to exchange controls, limited currency availability or prohibitive costs, and errors in hedging
may occur. Fiscal policy divergence in relation to interest rates between key markets may also increase these risks.
Impact
During periods of exchange rate volatility, the impact of exchange rates on the Group’s results of operations and financial condition can
be significant. Fluctuations in exchange rates of key currencies against the pound sterling may result in volatility in the Group’s reported
earnings per share, cash flow and balance sheet. Furthermore, the dividend paid by the Group may be impacted if the payout ratio is not
adjusted. Differences in translation between earnings and net debt may also affect key ratios used by credit rating agencies, which may
have an adverse effect on the Group’s credit ratings.
In addition, volatility and/or increased costs in the Group’s business due to transactional foreign exchange rate exposures may adversely affect
operating margins and profitability and attempts to increase prices to offset such increases could adversely impact sales volumes.
Risk: Inability to obtain price increases and exposure to risks from excessive price increases and value chainerosion.
Description
Annual price increases by the Group are among the key drivers in increasing market profitability. However, the Group has in the past
been, and may in the future be, unable to obtain such price increases as a result of increased regulation; increased competition from illicit
trade; stretched consumer affordability arising from deteriorating political and economic conditions and rising prices; sharp increases or
changes in excise structures; and competitors’ pricing.
As the New Category market continues to develop, the Group may face erosion in the value chain for New Categories through lower
market prices, excise taxes, high retail trade margins or high production costs that make New Categories less competitive versus
combustible tobacco products. As an example, excise on Tobacco Heated Products in Japan is increasing and will align closer to FMC
following a five year (2018-2022) phased excise plan.
In addition, the Group faces the risk that price increases it has conducted in the past, and may conduct in the future, may be excessive and
not find adequate adult tobacco consumer acceptance.
Impact
If the Group is unable to obtain price increases or is adversely affected by impacts of excessive price increases, it may be unable to
achieve its strategic growth metrics, have fewer funds to invest in growth opportunities, and, in the case of excessive price increases, be
faced with quicker reductions in sales volumes than anticipated due to accelerated market decline, down-trading (switching to a cheaper
brand) and increased illicit trade. These in turn impact the Group’s market share, results of operations and financial condition and cause
the Group to fail to deliver on its strategic growth plans.
In addition, erosion in the value chain for New Categories could have a negative impact on the Group’s sales volume or pricing for these
products. High excise could dampen demand for New Categories or result in lower profit margins. Lower market prices, high retail trade
margins or increases in production costs could also negatively impact profit margins or lead to uncompetitive pricing.
BAT Annual Report and Form 20-F 2021
336
Economic and Financial Risks
Continued
Risk: Effects of declining consumption of legitimate tobacco products and a tough competitive environment.
Description
Evidence of market contraction and the growth of illicit trade of tobacco products is apparent in several key global markets in which the
Group operates. This decline is due to multiple factors, including increases in excise taxes leading to continuous above-inflation price
rises, changes in the regulatory environment, the continuing difficult economic environment in many countries impacting consumers’
disposable incomes, the increase in the trade of illicit tobacco products, rising health concerns, a decline in the social acceptability of
smoking and an increase in New Category uptake.
The Group competes based on the strength of its strategic brand portfolio, product quality and taste, brand recognition, brand loyalty,
taste, innovation, packaging, service, marketing, advertising and price. The Group is subject to highly competitive environments in all
aspects of its business, and its competitive position can be significantly influenced by the prevailing economic climate, consumers’
disposable income, regulation, competitors’ introduction of lower-price or innovative products, higher tobacco product taxes, higher
absolute prices, governmental action to increase minimum wages, employment costs, interest rates and increase in raw material costs.
Furthermore, the Group is subject to substantial payment obligations under the State Settlement Agreements, which adversely
affect the ability of the Group to compete in the U.S. with manufacturers of deep-discount cigarettes that are not subject to such
substantial obligations.
Impact
Any future decline in the demand for legitimate tobacco products could have an adverse effect on the Group’s results of operations and
financial conditions and cause the Group to fail to deliver on its strategic growth plans.
In a tough competitive environment, factors such as market size reduction, customer down-trading, illicit trade and competitors
aggressively taking market share through price re-positioning or price wars generally reduce the overall profit pool of the market and may
impact delivery of the Group’s profits. This may also lead to a decline in sales volume, loss of market share, impact delivery of the Group’s
ESG agenda, erosion of its portfolio mix and reduction of funds available for investment in growth opportunities.
Risk: Funding, liquidity and interest rate risks.
Description
The Group cannot be certain that it will have access to bank financing or to the debt and equity capital markets at all times and is
therefore subject to funding and liquidity risks. In addition, the Group’s access to funding may be affected by restrictive covenants to
which it is subject under some of its credit facilities. Furthermore, broader ESG trends may impact the Group’s access to funding.
The Group is also exposed to increases in interest rates in connection with both existing floating rate debt and future debt refinancings.
The current economic environment, with historically low interest rates, increases the likelihood of higher interest rates in the future.
The phaseout of LIBOR and uncertainty regarding the appropriate benchmark replacement similarly increases uncertainty with respect to
the interest rates applicable to the Group’s floating rate debt.
Furthermore, the Group operates in several markets closely regulated by governmental bodies that intervene in foreign exchange markets
by imposing limitations on the ability to transfer local currency into foreign currency and introducing other currency controls that expose
cash balances to devaluation risks or that increase costs to obtain hard currency. As a result, the Group’s operational entities in these
markets may be restricted from using end-market cash resources to pay for imported goods, dividend remittances, interest payments
and royalties. The inability to access end-market cash resources in certain markets contributes to the Group’s funding and liquidity risks.
Impact
Adverse developments in the Group’s funding, liquidity and interest rate environment may lead to shortages of cash and cash equivalents
needed to operate the Group’s business and to refinance its existing debt. Inability to fund the business under the Group’s current
capital structure, failure to access funding and foreign exchange or increases in interest rates may also have an adverse effect on the
Group’s credit rating, which would in turn result in further increased funding costs and may require the Group to issue equity or seek new
sources of capital. Non-compliance with the Group’s covenants under certain credit facilities could lead to an acceleration of its debt.
The phaseout of LIBOR may result in the Group being subject to higher or uncertain interest rates with respect to future floating rate debt.
All these factors may have material adverse effects on the Group’s results of operations and financial conditions and cause the Group to
fail to deliver on its strategic growth plans. These conditions could also lead to underperforming bond prices and increased yields.
In the case of funding or liquidity constraints, the Group may also suffer reputational damage due to its perceived failure to manage the
financial risk profile of its business, which may result in an erosion of shareholder value reflected in an underperforming share price, and/
or underperforming bond prices and higher yields. In addition, the Group’s ability to finance strategic opportunities or respond to threats
may beimpacted by limited access to funds.
Group Risk Factors
Continued
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BAT Annual Report and Form 20-F 2021
337
Risk: Failure to achieve growth through mergers, acquisitions and joint ventures.
Description
The Group’s growth strategy includes a combination of organic growth as well as mergers, acquisitions and joint ventures. The Group may
be unable to acquire attractive businesses on favourable terms and may inappropriately value or otherwise fail to identify or capitalise on
growth opportunities. The Group may not be able to deliver strategic objectives and revenue improvements from business combinations,
successfully integrate businesses it acquires or establishes, or obtain appropriate regulatory approvals for business combinations.
Risks from integration of businesses also include the risk that the integration may divert the Group’s focus and resources from its other
strategic goals.
Additionally, the Group could be exposed to financial, legal or reputational risks if it fails to appropriately consider any compliance, antitrust
or ESG aspects of a transaction. Further, the Group has certain uncapped indemnification obligations in connection with divestitures and
could incur similar obligations in the future.
Impact
Any of the foregoing risks could result in increased costs, decreased revenues or a loss of opportunities and have an adverse effect on
the Group’s results of operations and financial condition, and in the case of a breach of compliance or antitrust regulation, could lead to
reputational damage, fines and potentially criminal sanctions.
The Group may become liable for claims arising in respect of conduct prior to any merger or acquisition of businesses if deemed to be a
successor to the liabilities of the acquired company or indemnification claims relating to divestitures, and any resulting adverse judgment
against the Group may adversely affect its results of operations and financial condition and cause the Group to fail to deliver on its
strategic growth plans.
Please refer to note 31 in the Notes on the Accounts for details of contingent liabilities applicable to the Group.
Risk: Unforeseen underperformance in key global markets.
Description
A substantial majority of the Group’s profit from operations is based on its operations in certain key markets, including the US. A number
of these markets are declining for a variety of factors, including price increases, restrictions on advertising and promotions, smoking
prevention campaigns, increased pressure from anti-tobacco groups, migration to smokeless products and private businesses adopting
policies that prohibit or restrict, or are intended to discourage, smoking and tobacco use.
Economic and political factors affecting the Group’s key markets include the prevailing economic climate, governmental austerity
measures, levels of employment, inflation, governmental action to increase minimum wages, employment costs, interest rates, raw
material costs, consumer confidence and consumer pricing.
Impact
Any change to the economic and political factors in any of the key markets in which the Group operates could affect consumer behaviour
and have an impact on the Group’s results of operations and financial condition and cause the Group to fail to deliver on its strategic
growth plans.
Risk: Increases in net liabilities under the Group’s retirement benefit schemes.
Description
The Group currently maintains and contributes to defined benefit pension plans and other post-retirement benefit plans that cover
various categories of employees and retirees worldwide. The Group’s obligations to make contributions under these arrangements may
increase in the case of increases in pension liabilities, decreases in asset returns, salary increases, inflation, decreases in long-term
interest rates, increases in life expectancies, changes in population trends and other actuarial assumptions.
Please refer to the information under the caption ‘Retirement benefit schemes’ on page 215 and to note 15 in the Notes on the Accounts
for details of the Group’s retirement benefit schemes.
Impact
Higher contributions to the Group’s retirement benefit schemes could have an adverse impact on the Group’s results of operations,
financial condition and ability to raise funds and cause the Group to fail to deliver on its strategic growth plans.
BAT Annual Report and Form 20-F 2021
338
Product Pipeline, Commercialisation and Intellectual Property Risks
Risk: Inability to predict consumers’ changing behaviours and launch innovative products that offer adult tobacco and nicotine
consumers meaningful value-added differentiation.
Description
The Group focuses its research and development activities on both creating new products, including New Category and Beyond Nicotine
products, whilst maintaining and improving the quality of its existing products. In a competitive market, the Group believes that innovation
is key to growth. The Group considers that one of its key challenges in the medium and long term is to provide adult tobacco and nicotine
consumers with high-quality products that take into account their changing preferences and expectations, including those in relation to
ESG, while complying with evolving regulation.
The Group continues to develop and roll-out its New Category portfolio which requires significant investment. The Group may be
unsuccessful in developing and launching innovative products or maintaining and improving the quality of existing products across
Combustibles, New Categories and Beyond Nicotine that offer consumers meaningful value-added differentiation. The Group may fail to
keep pace with innovation in its sector or changes in consumer expectations and is also exposed to the risk of an inability to build a strong
enough brand equity through social media and other technological tools to compete with its competitors. There are potential bans and
restrictions in key markets when using social media to advertise and communicate. Competitors may be more successful in predicting
changing consumer behaviour, developing and rolling out consumer-relevant products and may be able to do so more quickly and at
alower cost.
In addition, the Group devotes considerable resources to the research and development of innovative products that may have the
potential to reduce the risks of smoking-related diseases. The complex nature of research and development programmes necessary
to satisfy emerging regulatory and scientific requirements creates a substantial risk that these programmes will fail to demonstrate
health-related claims regarding New Categories and Beyond Nicotine or to achieve adult tobacco consumer, regulatory and
scientific acceptance.
Furthermore, the regulatory environment impacting non-combustible tobacco products, vapour products and other non-tobacco nicotine
products and Beyond Nicotine, including classification of products for regulatory and excise purposes, is still developing and it cannot be
predicted whether regulations will permit the marketing of such products in any given market in the future. Categorisation as medicines,
for example, and restrictions on advertising could stifle innovation, increase complexity and costs and significantly undermine the
commercial viability of these products.
Alternatively, categorisation of any New Categories, as tobacco products for instance, could result in the application of onerous regulation,
which could further stifle uptake.
Impact
The inability to timely develop and roll out innovations or products in line with consumer demand, including any failure to predict changes
in adult tobacco consumer and societal behaviour and expectations and to fill gaps in the product portfolio, as well as the risk of poor
product quality, could lead to missed opportunities, under- or over-supply, loss of competitive advantage, unrecoverable costs and/or the
erosion of the Group’s consumer base or brand equity.
Restrictions on packaging and labelling or on promotion and advertising could impact the Group’s ability to communicate its innovations
and product differences to adult tobacco consumers, leading to unsuccessful product launches. An inability to provide robust scientific
results sufficient to substantiate health-related product claims poses a significant threat to the ability to launch innovative products and
comply with emerging regulatory and legal regimes.
The occurrence of any of the above effects could in turn have an adverse effect on the Group’s results of operations and financial
condition and cause the Group to fail to deliver on its strategic growth plans.
In addition, there may be loss of investors’ confidence in ESG performance, including failure to deliver our corporate purpose of
harm reduction.
Group Risk Factors
Continued
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BAT Annual Report and Form 20-F 2021
339
Risk: Exposure to risks associated with intellectual property rights, including the failure to identify, protect and prevent
infringement of the Group’s intellectual property rights and potential infringement of, or the failure to retain licences to use,
third-party intellectual property rights.
Description
The Group relies on trademarks, patents, registered designs, copyrights, domain names and trade secrets. The brand names under which
the Group’s products are sold are key assets of its business. The protection and maintenance of these brand names and of the reputation
of these brands is important to the Group’s success. Protection of intellectual property rights is also important in connection with the
Group’s innovative products, including New Categories.
The Group is exposed to the risk of infringements of its intellectual property rights by third parties due to limitations in judicial protection,
failure to identify, protect and register its innovations and/or inadequate enforceability of these rights in some markets in which the
Group operates.
The Group currently is involved in various patent infringement litigation proceedings in several countries related to the Group’s New
Category inventions and products. This litigation involves both claims by the Group that competitors are infringing the Group’s patents
and claims by competitors that the Group is infringing competitors’ patents. Please refer to note 31 in the Notes on the Accounts for
details of contingent liabilities relating to patent litigation applicable to the Group.
Some brands and trademarks under which the Group’s products are sold are licensed for a fixed period of time in certain markets. If any of
these licences are terminated or not renewed after the end of the applicable term, the Group would no longer have the right to use, and to
sell products under, those brand(s) and trademark(s).
In addition, as third party rights are not always identifiable, the Group may be subject to claims for infringement of third party intellectual
property rights.
Impact
Any erosion in the value of the Group’s brands or innovations, or failure to obtain or maintain adequate protection of intellectual property
rights for any reason, or the loss of brands, trademarks or other intellectual property rights under licence to Group companies, may have
a material adverse effect on the Group‘s market share, results of operations and financial condition. Any inability to appropriately protect
the Group’s products and key innovations will also limit its growth and affect competitiveness and return on innovation investment.
Any infringement of third-party intellectual property rights could result in interim or final injunctions, product recalls, legal liability and the
payment of damages, any of which may disrupt operations, negatively impact the Group’s reputation and have an adverse effect on its
results of operations and financial condition and cause the Group to fail to deliver on its strategic growth plans.
BAT Annual Report and Form 20-F 2021
340
Regulation of the Group’s Business
Overview
The Group’s businesses operate under increasingly stringent
regulatory regimes worldwide. The tobacco industry is one of the
most highly regulated in the world, with manufacturers required
to comply with a variety of different regulatory regimes across
the globe. The Group continues to respond to these regimes and
engages with governments and other regulatory bodies to find
solutions to changing regulatory landscapes. Restrictions on
the manufacture, sale, marketing and packaging of tobacco and
non-tobacco nicotine products are in place in nearly all countries
and markets.
Regulation can typically be categorised as follows:
Place:
including regulations restricting smoking in private, public and
work places (e.g. public place smoking bans);
Product
: including regulations on the use of ingredients, product
design and attributes (e.g. ceilings regarding tar, nicotine and
carbon monoxide yields, as well as restrictions on flavours); product
safety regulations (e.g. the EU’s General Product Safety Directive
(2001/95/EC), electrical safety regulations and reduced ignition
propensity standards for cigarettes); regulatory product disclosure
requirements (e.g. in relation to ingredients and emissions); and
bans of entire product categories (e.g. bans on the manufacture,
import, export, sale, and advertisement of novel tobacco products
or non-tobacco nicotine products);
Packaging and labelling:
including regulations on health warnings
and other government-mandated messages (e.g. in respect of
content, positioning, size and rotation); restrictions on the use of certain
descriptors and brand names; requirements on pack shape, size, weight
and colour and mandatory plain packaging;
Sponsorship, promotion and advertising:
including partial or
total bans on tobacco and/or non-tobacco nicotine product advertising,
marketing, promotions and sponsorship and restrictions on brand sharing
and stretching (the latter refers to the creation of an association between
a tobacco product and a non-tobacco product by the use of tobacco
branding on the non-tobacco product);
Purchase:
including regulations on the manner in which tobacco
products and non-tobacco nicotine products are sold, such as type of
outlet (e.g. supermarkets and vending machines) and how they are sold
(e.g. above-the-counter versus beneath-the-counter);
Price:
including regulations which have implications for the prices that
manufacturers can charge for their tobacco products and non-tobacco
nicotine products (e.g. excise taxes and minimum prices); and
Responsibility:
including regulations introducing Extended Producer
Responsibility schemes on cigarette manufacturers to cover the cost
to clean up cigarette waste (see Single Use Plastics Directive (EU)
2019/904).
In addition, the Group operates a number of global policies, and
in some cases its businesses have also entered into voluntary
agreements, which may impose more onerous obligations or
standards than those imposed by local legislation.
World Health Organization Framework Convention
onTobacco Control
Much of the recent development in regulation at a global level
has been driven by the World Health Organization Framework
Convention on Tobacco Control (FCTC). The FCTC came into force
in 2005 and contains provisions aimed at, among other things,
reducing tobacco consumption and toxicity. The original treaty is
supplemented by protocols and guidelines. While the guidelines are
not legally binding, they provide a framework of recommendations
for parties to the guidelines.
To date, the FCTC has been ratified by 182 countries, not including
the U.S.. The FCTC has led to increased efforts by tobacco-control
advocates and public health organisations to reduce the supply of,
and demand for, tobacco products, and to encourage governments
to further regulate the tobacco industry. As national regulations
increasingly reflect global influences, the scope of areas regulated
will likely further expand. The guidelines on advertising, promotion
and sponsorship, for example, seek to broaden the definition of
tobacco advertising to include product display, the use of vending
machines as well as the design of the pack itself. Where adopted
by contracting parties, a number of the measures referred to in
the guidelines may result in either additional costs for the tobacco
industry or restrictions on a manufacturer’s ability to differentiate
its products and communicate those differences to adult
smokers. The World Health Organization and other public health
organisations have recently focused their efforts on attempting
to widen the scope of the FCTC to include Reduced Risk Products
(RRPs), mostly indirectly by adopting decisions and working groups
concerning these products. Given that these organisations are
reluctant to acknowledge the harm reduction properties of RRPs,
this approach risks to result in a further push for stricter regulations
of RRPs or the application of existing tobacco regulations to RRPs.
All engagement efforts of the tobacco industry are being closely
monitored by these organisations and often (incorrectly) labelled
as unlawful industry interference. In turn, this has an impact on the
willingness of Parties to engage with the industry, which limits the
opportunity of the industry to mitigate these risks.
The biannual session of the Conference of the Parties to the
FCTC took place in November (COP9). Due to the virtual nature of
the meetings most substantive discussions have however been
postponed to COP10, which will take place in 2023 in Panama.
EU Tobacco and Related Products Directive
(2014/40/EU)
Other developments in regulation have been driven by tobacco
control activities undertaken outside the FCTC process.
For example, the EU Tobacco Products Directive (2001/37/EC),
referred to as TPD1, was adopted by the EU in May 2001 for
transposition into EU member states’ laws by September 2002.
TPD1 included provisions that set maximum tar, nicotine and
carbon monoxide yields, introduced larger health warnings and
banned descriptors such as ‘light’ and ‘mild’.
A revised TPD1, the EU Tobacco and Related Products Directive
(2014/40/EU), referred to as TPD2, was adopted in April 2014
for transposition into EU member states’ law by May 2016.
Provisions of TPD2 include: larger combined pictorial and textual
health warnings covering 65% of the two main pack surfaces
(front and back) for cigarettes; restrictions on pack shape and
size, including minimum pack sizes of 20 sticks for cigarettes and
30g for roll-your-own and make-your-own tobacco; increased
ingredients reporting; ‘tracking and tracing’ requirements; and for
e-cigarettes: nicotine limits, pre-market notification, ingredients
reporting and advertising bans. Among other things, TPD2 bans the
sale of cigarettes and roll-your-own tobacco with a characterising
flavour. Menthol-flavoured cigarettes were exempted from the
ban until May 2020, which has since been applied also to menthol
cigarettes. (See ‘The U.S.’ for information pertaining to the
regulation of menthol in that market).
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BAT Annual Report and Form 20-F 2021
341
TPD2 also purports to leave open to EU Member States the
possibility of further standardising the packaging of tobacco
products and to apply some of its provisions in different ways.
For example, it provides, among other things, that the labelling,
packaging and the tobacco product itself shall not include any
element or feature that suggests that a particular tobacco product
has vitalising, energetic, healing, rejuvenating, natural or organic
properties or has other health or lifestyle benefits. On 26 April 2019,
Belgium adopted a Royal Decree that allows the Minister of Health
to establish a procedure to put brands on a prohibited list and to
draw up such a list. To date, such a procedure has not yet been
established by the Belgian Minister of Health. BAT’s request for
annulment is still pending.
The European Commission published its Article 28 report on the
application of TPD2 on 20 May 2021. The report concluded that TPD2
helped decrease smoking rates and tobacco use but that more efforts
are needed, particularly in relation to enforcement at national level and
new market developments, such as novel tobacco products. Currently,
the preparations of a revised TPD2 are progressing, with estimated
adoption in 2025. TPD2 might be replaced with a directly applicable
regulation instead of a directive, following which transposition in
Member States would no longer be required. It is anticipated that this
new regulation will include the following provisions: plain packaging
for combustibles; more regulation of ingredients, including menthol
ban, for combustibles at EU level; regulation of flavours and nicotine-
free liquids for e-cigarettes at EU level; tightening of advertising
restrictions for e-cigarettes; stricter regulations for THPs; regulation of
modern oral at EU level.
Single-Use Plastics
The Single Use Plastics Directive (EU) 2019/904 (the SUP Directive)
entered into force on 2 July 2019. The Directive requires that EU Member
States introduce Extended Producer Responsibility (EPR) schemes
covering the cost to clean up litter and the application of on-pack marking
requirements for tobacco product filters. Member States must transpose
the SUP Directive into national law by 3 July 2021, with an implementation
deadline of 3 July 2021 for pack marking requirements and of 5 January
2023 for EPR schemes. France was the only Member State to not
await this deadline and already implemented in December 2020 and
February 2021 EPR schemes for, among others, cigarette manufacturers.
These regulations are currently being challenged before the French
Council of State. Other governments have passed or are considering
similar legislation including Canada, Russia, South Korea and various levels
of government in the United States.
Restrictions on Smoking in Private, Public
andWorkplaces
The Group operates in a number of markets which have in place
restrictions on smoking in certain private, public and work places,
including restaurants, bars and nightclubs. While these restrictions
vary in scope and severity, extensive public and work place smoking
bans have been enacted in markets including the U.S., Canada, the UK,
Spain, New Zealand and Australia. Restrictions on smoking in private
have also been adopted or proposed, and typically take the form of
prohibitions on smoking in cars or residential homes when children
are present, or smoking within a certain distance from specified public
places (such as primary schools).
Regulation of Ingredients, Including Flavoured
Tobacco Products
A number of countries have restricted, and others are seeking
to restrict or ban, the use of certain flavours or ingredients in
cigarettes and other tobacco products, on the basis that such
products are alleged to appeal disproportionally to minors, act
as a catalyst for young people taking up smoking and/or increase
the addictiveness or toxicity of the relevant product. To the extent
flavours are permitted, this is often restricted to tobacco and/or
menthol flavours only.
Such restrictions have been enacted in markets including the U.S.,
Canada, Australia, Turkey and Iran. An ingredients ban in Brazil,
which would ban the use of certain ingredients with flavouring or
aromatic properties, including menthol, is not currently in force
due to ongoing legal challenges. TPD2 similarly bans in the EU the
manufacture and sale of cigarettes and roll-your-own tobacco
with a characterising flavour other than tobacco. A number of the
above regulations are subject to ongoing legal challenges (See
‘The U.S.’ for information pertaining to the regulation of menthol in
that market).
Currently, European regulators are increasingly seeking to restrict,
and even ban, the use of flavours or ingredients in vapour products
and other RRPs (see “Reduced Risk Products”). For example,
Hungary, Finland, the Netherlands, Denmark, Sweden and Norway
have adopted, or are considering to adopt, bills banning flavours in
vapour products. This is partially based on a scientific opinion on
e-cigarettes commissioned by the EU (the SCHEER report), which
was published on 16 April 2021 and which alleges that flavours
have a relevant contribution for attractiveness of use of electronic
cigarettes. Legal challenges are expected to be filed against these
new regulations, which will be supported by credible and contrary
scientific evidence.
Further legislation on ingredients, both for FMCs and RRPs,
is to be expected. The Conference of Parties to the FCTC has
tasked a working group to further elaborate the partial guidelines
on the regulation of the contents of tobacco products and
tobacco product disclosures. The substantive discussions by
the Conference of Parties to the FCTC on this report have been
postponed to COP10 (see ‘World Health Organization Framework
Convention on Tobacco Control’). Furthermore, certain industry
players have avoided the menthol characterising flavour ban that
came into force in the EU on 20 May 2020 by introducing several
low menthol/WS3 products. This has resulted in several regulators
in Member States taking action to ban these products from the
market. In Belgium, the regulator has on this basis banned all
cigarettes and other tobacco products that include components
with cooling and/or analgesic effects. This movement is spurred
forward by the EU JATC Report on priority additives that was
published on 3 December 2020. According to this report, even
a small amount of menthol, when added to cigarettes, allegedly
facilitates inhalation or nicotine uptake. Many reputable public and
private scientific agencies, however, have concluded the opposite.
BAT Annual Report and Form 20-F 2021
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Other Information
Regulation of the Group’s Business
Continued
Plain and Standardised Packaging
Plain (or ‘standardised’) packaging generally refers to a ban on the use of
trademarks, logos and colours on packaging other than the use of a single
colour and the presentation of brand name and variant in a specified
font and location(s). The presentation of individual cigarettes may be
similarly restricted. Plain packaging is high on the agenda of tobacco
control groups, and the non-binding FCTC guidelines recommend
that contracting parties consider introducing plain packaging. To date,
22 countries (including Australia, Belgium, Canada, Denmark, France,
Ireland, New Zealand, the Netherlands, Saudi Arabia, Singapore, Turkey,
and the UK) have adopted plain packaging legislation, with the measure
being implemented in 18 of those countries. Countries, territories and
states that are currently considering adopting plain packaging legislation
include, but are not limited to Argentina, India, Ecuador, Panama, Brazil,
Chile, Spain and South Africa. Others, such as South Korea, Ukraine
and Colombia, are considering implementing increased graphic health
warnings. Also RRPs are increasingly facing plain packaging regulations
(see “Reduced Risk Products”), such as in Denmark where a bill was
adopted on 15 December 2020, which introduces plain packaging for
vapour products and THPs.
Product Display Bans at Point of Sale
andLicensingRegimes
Product display bans at point of sale and licensing regimes have
become relatively commonplace and have been implemented for
several years in a number of countries both at national and state
levels, including in Norway, Iceland, Finland, New Zealand, Thailand,
Canada, Australia, the UK. The Danish bill (referenced above) also
introduces a product display ban for RRPs. A large number of
countries, such as Hungary, Finland and Spain, have also sought
to restrict the supply of tobacco products, including through the
adoption of licensing regimes limiting the number of retail outlets
from which it is possible to purchase tobacco products and/or by
prohibiting the sale of tobacco products within a certain distance
of specified public places.
Illicit Trade
The illegal market for tobacco products is an increasingly important
issue for governments and the industry across the world.
Euromonitor International estimates that approximately
400 billion cigarettes per year are smuggled, manufactured
illegally or counterfeited. A number of governments, regulators
and organisations have or are considering adopting regulation
to support anti-illicit trade activities. Among other forms, such
regulation may comprise mandatory ‘tracking and tracing’
requirements, enabling regulators to identify the point at which
any seized product left the legal supply chain, security features
to combat counterfeiting and inspection and authentication
obligations in respect of seized product. The TPD2, for example,
requires that all unit packets of tobacco are marked with a unique
and irremovable identifier, which when scanned provides various
information about that product’s route-to-market.
In November 2012, the FCTC adopted the Protocol to Eliminate
Illicit Trade in Tobacco Products which includes a raft of supply
chain control measures, including the implementation of ‘tracking
and tracing’ technologies. The Protocol entered into force on
25 September 2018 and was considered at the first session of
the Meeting of the Parties to the Protocol in October 2018. As at
1 January 2021, 62 parties have ratified the Protocol. The second
session of the Meeting of the Parties to the Protocol in took place in
November 2021.
Reduced Risk Products (“RRPs”)
More recently, significant debate has been generated regarding the
appropriate regulation of vapour products, including regulation of
the nicotine liquids used in them. As the nascent vapour category
has grown in size and complexity in a relatively short period of time, a
consensus framework for regulation and taxation has yet to emerge.
The TPD2, for example, establishes frameworks for the regulation of
novel tobacco products and e-cigarettes, introducing nicotine limits,
health warnings requirements, advertising bans and pre-market
notification and post-market disclosure obligations. The Conference
of the Parties to the FCTC is also contemplating to redefine the
scope of the FCTC to include novel tobacco products and products
containing nicotine.
In countries where the sale of vapour products is permitted,
governments are seeking to more strictly regulate these products,
including by adopting or seeking to adopt bans on vaping in public
places, bans or restrictions on flavours or other restrictions such as
plain packaging and retail display and advertising bans. Conversely,
some governments have intentionally banned or are seeking to ban
novel tobacco products and products containing nicotine, such
as Hong Kong , while others would need to amend their existing
legislation in order to permit their sale. For example, in Australia
nicotine is currently classified as poison, meaning that the importation
of vaping products or nicotine refill liquids is illegal in every state
and territory, as is the possession and use of these products.
While Australia’s Therapeutic Goods Administration re-classified
nicotine as a prescription-only medication as of 1 October 2021, the
effect will be that a doctor’s prescription will be required to legally
access nicotine vapour products and liquid nicotine. Recent reports in
North America of individuals experiencing acute respiratory injury in
suspected association with vaping certain e-liquids (EVALI) and youth
usage have led to an increase in scrutiny of vapour products, especially
at State and Provincial levels in the United States and Canada.
Also, other RRPs, such as nicotine pouches and THPs, are facing
increasing scrutiny by regulators. In countries such as Belgium,
Germany, the Netherlands, modern oral products have sought
to be classified as food stuff or medicinal products to ban these
products from the market. In Germany and Hungary, THPs have
faced being classified in the same way as traditional tobacco
products, with the potential consequence of facing the same
restrictions or excise categories. These might be temporary
measures until the countries have amended their existing tobacco
legislation to include these products under its scope.
The U.S.
Through the RAI subsidiaries, the Group is subject to U.S. federal, state,
and local laws and regulations. The Family Smoking Prevention and
Tobacco Control Act (FSPTCA), which was enacted in 2009, grants
the U.S. Food & Drug Administration (FDA) broad authority over the
manufacture, sale, marketing and packaging of tobacco products but
at the outset limited the agency’s authority to cigarettes, smokeless
tobacco products, cigarette tobacco and roll-your-own tobacco products.
Key elements of the FSPTCA include: filing of facility registrations, product
listing, constituent testing and ingredient information; obtaining FDA
clearance for all new products and product modifications; banning all
characterising flavours other than tobacco or menthol in cigarettes;
establishing ‘user fees’ to fund the FDA’s regulation of tobacco products;
increasing the health warning size on cigarette packs with the option to
introduce pictorial health warnings; implementing good manufacturing
practices; revising the labelling and advertising requirements for
smokeless tobacco products; and requiring the study of menthol. The U.S.
Congress did limit the FDA’s authority in two areas, prohibiting it from:
–
banning categories of tobacco products; and
–
requiring the reduction of nicotine yields of a tobacco product to zero.
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Other Information
BAT Annual Report and Form 20-F 2021
343
On 10 May 2016, the FDA issued a final regulation, referred to as
the Deeming Rule, deeming all remaining products that are ‘made
or derived from tobacco’ to be subject to the FDA’s regulatory
authority under the FSPTCA. The Final Rule became effective
as of 8 August 2016, though each requirement of the Final Rule
had its own compliance date. Such ‘deemed’ tobacco products
subject to the FSPTCA include, among others, electronic nicotine
delivery systems (including e-cigarettes, e-hookah, e-cigars, vape
pens, advanced refillable personal vapourisers, electronic pipes
and e-liquids mixed in vape shops), certain dissolvable tobacco
products, cigars and pipe tobacco.
The ‘grandfathered’ date under the Final Rule for newly deemed
products remained the same as the ‘grandfathered’ date for those
tobacco products already subject to the FSPTCA – 15 February
2007. Any tobacco product that was not legally marketed as of
15 February 2007 is considered a new tobacco product subject to
premarket review by the FDA. The FDA has recognised that few,
if any, e-cigarettes were on the market as of 15 February 2007,
but thousands of such products (including R. J. Reynolds Vapor
Company’s Vuse products) subsequently have entered into
commerce. To address this issue, the FDA established a
compliance policy regarding the premarket review requirements
for all newly deemed tobacco products that are not grandfathered
products but were on the market as of 8 August 2016. The FDA
allowed such products to remain on the market so long as the
manufacturer filed the appropriate Premarket Tobacco Product
Application (PMTA) by a specific deadline.
The Final Rule established staggered initial compliance periods
based on the expected complexity of the applications to be
submitted. On 28 July 2017, as part of the FDA’s announcement of
a comprehensive regulatory plan for nicotine and tobacco, the FDA
extended the deadline for submission of PMTAs for newly deemed
products by several years (for e-cigarettes, the new deadline was
August 2022). However, as a result of legal action, in July 2019 a
federal court ultimately brought forward the filing deadline for
non-combustible products to 12 May 2020. In October 2019, R. J.
Reynolds Vapour Company filed PMTAs for Vuse Solo. Based upon
requirements of the FSPTCA that must be addressed in PMTAs,
and the FDA’s Guidance regarding the type of evidence required for
such applications, the costs of preparing a PMTA are significant.
In January 2020, the FDA reinforced the filing deadline of 12 May
2020 in its Guidance related to vapour but reversed its previous
compliance policy that allowed products to remain on the market
pending the submission of a PMTA. The Guidance announced
the agency’s intent to enforce (as of February 2020) the PMTA
requirements on certain products as follows: 1) Flavoured,
cartridge-based vapour products except for tobacco- or menthol-
flavoured products; 2) All other vapour products for which the
manufacturer has failed to take (or is failing to take) adequate
measures to prevent minors’ access; 3) Any vapour products that
targets or whose marketing is likely to promote use by minors;
and 4) Any vapour product that is offered for sale in the United
States after 12 May 2020, and for which the manufacturer has not
submitted a premarket application. Flavoured disposable vapour
products and flavoured open systems would remain available
for sale unless 1) the manufacturer has failed to take adequate
measures to prevent minors’ access, 2) product that targets or
whose marketing is likely to promote use by minors, or 3) fails to file
a PMTA by 12 May 2020.
In April 2020, the federal court extended the PMTA deadline by 120
days to 9 September 2020 to address the FDA’s concerns regarding
delays caused by the COVID-19 pandemic. R. J. Reynolds Vapor
Company filed PMTAs for the remaining Vuse products (Vibe,
Ciro, and Alto) and the Velo products (pouch and lozenge) by the
September 2020 deadline. Certain additional data from ongoing
research relevant to the Alto and Velo applications were submitted
as amendments to the PMTAs during the FDA review process.
The FDA granted marketing authorisation for the Vuse Solo device
and its tobacco (‘original’) flavour in October 2021, but denied
authorisation for Vuse Solo flavours other than menthol (which
were not on the market). That denial is being appealed with the
FDA. The FDA has not issued a decision on the authorisation of the
Vuse Solo menthol flavour, which remains on the market pending
FDA decision. There can be no assurance that the Vuse Solo
menthol authorisation will be granted, or that the other flavours
appeal will succeed.
Additionally, the continued marketing authorisation of Vuse
Solo original flavour is contingent on continued compliance
with regulatory requirements; the marketing authorisation may
be suspended or withdrawn if the FDA determines that the
continued marketing of the product is no longer appropriate for the
protection of the public health. The FDA has not issued marketing
authorisations for Vuse Alto and its associated flavours, including
menthol, with FDA decisions still pending. Although the Vuse Alto
menthol and tobacco flavoured products remain on the market pending
FDA decisions there can be no assurance that these authorisations (or
the other Vuse Alto flavours) will be granted. Similarly, the Group’s Velo
products remain on the market in the US, again pending FDA decisions
on their marketing authorisations and there can be no assurance these
will be granted. If the FDA denies a marketing authorisation then the
relevant product(s) would need to be withdrawn from the market (unless
a court intervenes).
Comprehensive plan for tobacco and nicotine
regulation
On 28 July 2017, the FDA announced its intent to develop a
comprehensive plan for tobacco and nicotine regulation that
recognises the continuum of risk for nicotine delivery. As part
of that plan, the FDA planned to publish an Advance Notice of
Proposed Rulemaking (ANPRM) to seek public input regarding the
potential health benefits and possible adverse effects of lowering
the level of nicotine in combustible cigarettes.
The ANPRM would request comments from interested
stakeholders regarding the potential impact of a nicotine product
standard on, among other things:
–
the likelihood that existing users of tobacco products will stop
using cigarettes;
–
the likelihood that those who do not use tobacco products will
start using such products; and
–
the illicit trade of cigarettes containing nicotine at levels higher
than a non-addictive nicotine threshold.
In addition, the Center for Tobacco Products (CTP), which was
established within the FDA in 2009, will coordinate with the FDA
Center for Drug Evaluation and Research regarding medicinal
nicotine and other therapeutic products as part of an agency-wide
nicotine framework. As part of the comprehensive plan, the FDA
also announced its intent to issue ANPRMs requesting public
stakeholder input on the impact of flavours (including menthol)
in increased initiation among youth and young adults as well as
assisting adult smokers to switch to potentially less harmful forms of
nicotine delivery, and the patterns of use and public health impact of
premium cigars.
BAT Annual Report and Form 20-F 2021
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Other Information
Regulation of the Group’s Business
Continued
This follows on from the FDA’s decision to issue its own preliminary
scientific evaluation regarding menthol cigarettes in 2013, which
concluded that menthol cigarettes adversely affect initiation,
addiction and cessation compared to non-menthol cigarettes. In 2018,
the FDA took several steps to further this plan. Firstly, in January 2018,
the FDA held a public hearing to obtain input from a broad group of
stakeholders on ways to streamline the regulatory process for the
issuance of therapeutic claims for nicotine products. Secondly, in
March 2018, the agency issued three ANPRMs, seeking information
on (1) the lowering of nicotine levels to non-addictive or minimally
addictive levels, (2) the impact of flavours (including menthol) in
increased initiation among youth and young adults as well as assisting
adult smokers to switch to potentially less harmful forms of nicotine
delivery, and (3) the patterns of use and public health impact of
premium cigars. In April 2021, the FDA announced that it will issue
proposed product standards to ban menthol as a characterising
flavour in cigarettes in the U.S. In December 2021, a regulatory agenda
released in the U.S. confirmed the FDA’s plans to publish a Notice of
Proposed Rulemaking for a menthol cigarette ban in April 2022.
Additional regulation
In addition to the ANPRMs on reduced nicotine products and flavours,
the FDA, in April 2019, issued a proposed rule on the format and content
of reports to demonstrate substantial equivalence. This follows on the
FDA’s previous statements regarding the development of foundational
rules so as to provide clarity and predictability to the tobacco product
submission process, including not only substantial equivalence
applications but new product applications as well as MRTP applications.
In September 2019, FDA published a proposed rule on the format and
content of PMTAs. The final foundations rules for substantial equivalence
and PMTAs were published on 5 October 2021 and became effective
on 4 November 2021. Notably, in each rule, FDA changed the term
“grandfathered tobacco product” to “Pre-Existing Tobacco Product,”
indicating that the latter term more appropriately describes those
products that were commercially marketed in the United States as of
15 February 2007. The FDA has not yet promulgated its proposed rule for
MRTP applications, though the most recent FDA semi-annual regulatory
agenda — which details the regulatory activities that the FDA expects to
undertake in the foreseeable future — targeted November 2021 for the
issuance of a proposed rule.
Under the FSPTCA, for a manufacturer to launch a new tobacco
product or modify an existing tobacco product after 22 March 2011,
the manufacturer must obtain an order from the FDA allowing the
new or modified product to be marketed. Similarly, a manufacturer
that introduced a cigarette or smokeless tobacco product
between 15 February 2007 and 22 March 2011 was required to file a
substantial equivalence report with the FDA demonstrating either
(1) that the new or modified product had the same characteristics
as a product commercially available as at 15 February 2007, referred
to as a predicate product, or (2) if the new or modified product had
different characteristics than the predicate product, that it did not
raise different questions of public health. A product subject to such
report is referred to as a provisional product. A manufacturer may
continue to market a provisional product unless and until the FDA
issues an order that the provisional product is not substantially
equivalent (NSE), in which case the FDA could then require the
manufacturer to remove the provisional product from the market.
Many of the RAI subsidiaries’ cigarette and smokeless tobacco
products currently on the market are provisional products.
In January 2017, the FDA issued its first proposed product standard
just prior to President Trump’s inauguration whereby the agency
would require the reduction, over a three-year period, of the
levels of N-nitrosonornicotine (NNN) contained in smokeless
tobacco products.
Since issuing this proposal, the agency has simply stated that it is
evaluating submitted comments. The FDA’s semi-annual regulatory
agenda has not listed the NNN proposal since its publication. Thus,
it is not known whether or when this proposed rule will be finalised,
and, if adopted, whether the final rule will be the same as or similar
to the proposed rule. On 18 December 2017, the FDA accepted for
review MRTP applications for six Camel Snus smokeless tobacco
products. In 2018, the FDA began its review of these applications,
which included facility inspections and a public meeting held
13-14 September 2018 before the Tobacco Product Scientific
Advisory Committee to obtain its review and recommendation.
The FDA is completing its independent review of the applications
with no announced deadline for completion.
On 18 March 2020, FDA issued a rule mandating the incorporation
on cigarettes packages of graphic health warnings. The rule
requires eleven new textual warnings, each accompanied by a
specific graphic image, on the top 50% of the front and back of
all cigarette packages, on the left 50% of the front and back of
cigarette cartons, and the top 20% of all cigarette advertising,
beginning June 18, 2021. On 3 April 2020, RAI subsidiaries R. J.
Reynolds Tobacco Company and Santa Fe Natural Tobacco
Company, in conjunction with several cigarette manufacturers
and retailers, filed a lawsuit seeking to permanently enjoin
implementation of the rule. The court has on multiple occasions
entered orders delaying the implementation of the rule, which
currently is delayed until 9 January 2023. All briefing and oral
argument in the case has been completed, and the parties await
a ruling from the court as to whether the final rule will be enjoined
permanently. Irrespective of the court’s decision, once issued
it is expected to be appealed to the federal court of appeals.
If the industry challenge is unsuccessful, the RAI companies are
prepared to implement the rule’s requirements by the January
2023 deadline, having created compliant packaging and obtained
approval from the FDA for the required warning rotation plans.
Cigarettes and other tobacco products are subject to substantial
taxes in the U.S.. All states and the District of Columbia
currently impose cigarette excise taxes. Certain city and county
governments, such as those of New York, Philadelphia and Chicago,
also impose substantial excise taxes on cigarettes sold in those
jurisdictions. Also, all states and the District of Columbia currently
subject smokeless tobacco products to excise taxes. Various states
and the District of Columbia impose a tax on vapour products,
such as e-cigarettes, and many other states have proposed
taxes on vapour products. Currently, there is no federal tax on
vapour products.
State and local governments also consider and implement other
legislation and regulation regarding the sale of tobacco products.
Measures include, among others, limiting or prohibiting the sale of
flavours in tobacco products, restricting where tobacco products
may be sold and increasing the minimum age to purchase tobacco
products. The Group believes that, as a responsible business, it can
contribute through information, ideas and practical steps, to help
regulators address the key issues regarding its products, including
underage access, illicit trade, product information, product design,
involuntary exposure to smoke and the development of potentially
less harmful products, while maintaining a competitive market that
accommodates the significant percentage of adults who choose
to be tobacco consumers. The Group is committed to working with
national governments and multilateral organisations and welcomes
opportunities to participate in good faith to achieve sensible and
balanced regulation of traditional tobacco and potentially reduced-
risk products.
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Other Information
BAT Annual Report and Form 20-F 2021
345
Disclosure Pursuant to Section 219 of the Iran Threat
Reduction and Syria Human Rights Act of 2012 (ITRA)
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r)
requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain
activities, transactions or dealings relating to Iran or with designated natural persons or entities sanctioned under programmes relating
to terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings
are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable
under U.S. law.
As of the date of this report, BAT is not aware of any activity, transaction or dealing by the Group or any of its affiliates during the financial
year ended 31 December 2021 that is disclosable under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 and
Section 13(r) of the Exchange Act, except as set forth below. This information is to the best of BAT’s knowledge.
Until 6 August 2021, BAT had a local operation in Iran, established on 18 October 2003, through its wholly-owned non-U.S. subsidiary,
B.A.T. Pars Company (Private Joint Stock) (BAT Pars). BAT Pars produced its products, which include Kent, Pall Mall and Montana brands,
in its own factory in Eshtehard, which is in the Alborz province of Iran. As at 6 August 2021, BAT Pars distributed its product via 54 sub-
agents with national and provincial distribution licences, who sell products to wholesalers and retailers with the support of BAT Pars’ sales
representatives. BAT Pars had 326 direct employees and an additional 1,192 contract workers supplied by a private company.
On 25 June 2021, the Group agreed to dispose of BAT Pars to DTM ME FZE LLC. Consideration is subject to the completion accounts
process, with payment deferred until September 2022. The transaction was subject to the approval by State Centre of Tobacco Planning
and Supervision of the Ministry of Industry of Iran and was successfully completed on 6 August 2021.
Concerning the business of BAT Pars during its period of ownership within the Group, various elements such as income tax, payroll, social
security, other taxes, excise, monopoly fees, duties and other fees, including for utilities, licences and judicial fees to commence litigation,
were payable to the Government of Iran and affiliated entities regarding BAT Pars’ operation. BAT Pars maintained bank accounts in Iran
with various banks to facilitate its operations in the country and to make any required payments, as described above, to the Government of
Iran and affiliated entities regarding its operations.
During the year ended 31 December 2021, BAT did not have any gross revenues or net profits derived from transactions with the
Government of Iran or affiliated entities.
BAT maintains policies and procedures designed to ensure that its former activities in Iran and elsewhere comply in all material aspects
with the applicable and relevant trade sanctions laws and regulations, including U.S. and other international trade sanctions and/or
embargoes. BAT’s sanctions policies and procedures have been designed to be as robust as possible. However, there can be no absolute
assurance that these policies and procedures will be effective. Were they to be ineffective, penalties or sanctions could be imposed
against BAT, which could be material. Following completion of the disposal of BAT Pars, the above-described activities in Iran have ceased.
BAT Annual Report and Form 20-F 2021
346
Material Contracts
The Master Settlement Agreement & State Settlement Agreements
In 1998, the major U.S. cigarette manufacturers (including R.J. Reynolds Tobacco Company, Lorillard and Brown & Williamson, businesses
which are now part of Reynolds American) entered into the Master Settlement Agreement (“MSA”) with attorneys general representing
most U.S. states and territories. The MSA imposes a perpetual stream of future payment obligations on the major US cigarette
manufacturers. The amounts of money that the participating manufacturers are required to annually contribute are based upon, among
other things, the volume of cigarettes sold and market share (based on cigarette shipments in that year).
During 2012, R.J. Reynolds Tobacco Company, various other tobacco manufacturers, 17 states, the District of Columbia and Puerto
Rico reached a final agreement related to Reynolds American’s 2003 MSA activities, and three more states joined the agreement
in 2013. Under this agreement, R.J. Reynolds Tobacco Company has received credits of more than US$1 billion in respect of its Non-
Participating Manufacturer (“NPM”) Adjustment claims related to the period from 2003 to 2012. These credits have been applied against
the company’s MSA payments over a period of five years from 2013, subject to, and dependent upon, meeting the various ongoing
performance obligations. During 2014, two additional states agreed to settle NPM disputes related to claims for the period 2003 to
2012. R.J. Reynolds Tobacco Company received US$170 million in credits, which have been applied over a five-year period from 2014.
During 2015, another state agreed to settle NPM disputes related to claims for the period 2004 to 2014. R.J. Reynolds Tobacco Company
received US$285 million in credits, which have been applied over a four-year period from 2016. During 2016, no additional states agreed
to settle NPM disputes. During 2017, two more states agreed to settle NPM disputes related to claims for the period 2004 to 2014. It is
estimated that R.J. Reynolds Tobacco Company will receive US$61 million in credits, which will be applied over a five-year period from
2017. During 2018, nine more states agreed to settle NPM disputes related to claims for the period 2004 to 2019, with an option through
2022, subject to certain conditions. It is estimated that R.J. Reynolds Tobacco Company will receive US$182 million in credits for settled
periods through 2017, which will be applied over a five-year period from 2018. Also in 2018, a 10th additional state agreed to settle NPM
disputes related to claims for the period 2004 to 2024, subject to certain conditions. It is estimated that R.J. Reynolds Tobacco Company
will receive US$205 million in credits for settled periods through 2017, which will be applied over a five-year period from 2019. In the first
quarter of 2020, certain conditions set forth in the 2018 agreements were met for those 10 states. In addition, in August 2020, 24 states,
the District of Columbia and Puerto Rico agreed to settle NPM disputes related to claims for the period 2018-2022. Credits in respect of
future years’ payments and the NPM Adjustment claims would be accounted for in the applicable year and will not be treated as adjusting
items. Only credits in respect of prior year payments are included as adjusting items.
The BAT Group is subject to substantial payment obligations under the MSA and the state settlement agreements with the states of
Mississippi, Florida, Texas and Minnesota (such settlement agreements, collectively “State Settlement Agreements”). Reynolds American
Inc.’s operating subsidiaries’ expenses and payments under the MSA and the State Settlement Agreements for 2021 amounted to
US$3,420 million in respect of settlement expenses and US$3,744 million in respect of settlement cash payments. Reynolds American
Inc.’s operating subsidiaries’ expenses and payments under the MSA and the State Settlement Agreements for 2020 amounted to
US$3,572 million in respect of settlement expenses and US$2,848 million in respect of settlement cash payments. Reynolds American
Inc.’s operating subsidiaries’ expenses and payments under the MSA and the State Settlement Agreements for 2019 amounted to
US$2,762 million in respect of settlement expenses and US$2,918 million in respect of settlement cash payments.
R.J. Reynolds Tobacco Company divested certain brands to Imperial Tobacco Group (ITG) in 2015. In 2020, R.J. Reynolds Tobacco Company
recognised additional expenses, included above, under the state settlement agreements in the states of Mississippi, Florida, Texas
and Minnesota related to these divested brands. R.J. Reynolds Tobacco Company recognised US$241 million of expense for payment
obligations to the state of Florida for the ITG acquired brands from the date of divestiture, 12 June 2015, as a result of an unfavourable
judgment. In addition, R.J. Reynolds Tobacco Company recognised US$264 million related to the resolution of claims against it in
the states of Texas, Minnesota and Mississippi for payment obligations to those states for the ITG acquired brands from the date of
divestiture. Finally, R.J. Reynolds Tobacco Company settled certain related claims with Phillip Morris USA under the state settlement
agreements in the states of Mississippi, Texas and Minnesota for US$8 million.
Reynolds American Inc.: Transfer of Pension Obligations
On October 7 2021, Reynolds American Inc. entered into a ‘buy out’ transaction with Metropolitan Tower Life Insurance Company to
transfer $1.9 billion of pension obligations (and eliminating all further legal or constructive obligation to the pension scheme or to the
sponsoring employer) through the purchase of annuities for retirees receiving benefit payments of less than a threshold amount per
month.The transaction was funded with plan assets (see note 15 in the Notes on the Accounts on page 215).
Other Information
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BAT Annual Report and Form 20-F 2021
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Change of Control Provisions as at 31 December 2021
Significant agreements
Nature of agreement
Key provisions
The revolving credit facilities agreement, effective 12 March 2020,
entered into between the Company, B.A.T. International Finance
p.l.c., B.A.T. Netherlands Finance B.V. and B.A.T Capital Corporation
(as borrowers and, in the case of the Company, as a guarantor)
and HSBC Bank plc (as agent) and certain financial institutions (as
lenders), pursuant to which the lenders agreed to make available
to the borrowers £5.85 billion for general corporate purposes
(the Facility).
–
should a borrower (other than the Company) cease to be a direct
or indirect subsidiary of the Company, such borrower shall
immediately repay any outstanding advances made to it and shall
cease to be a borrower under the Facility; and
–
where there is a change of control in respect of the Company,
thelenders can require all amounts outstanding under the Facility
tobe repaid.
In March and December 2021, the Group extended short-term
bilateral facilities with core relationship banks for a total amount
of £2.5 billion. B.A.T. International Finance p.l.c. is the borrower
under these facilities and the Company as the guarantor. As at
31 December 2021, £500 million was drawn on a short-term basis.
–
should the borrower cease to be a direct or indirect subsidiary
of the Company, the borrower shall immediately repay any
outstanding advances made to it under these facilities; and
–
where there is a change of control in respect of the Company, the
lenders can require all amounts outstanding under these facilities
to be repaid.
Packaging Materials Agreement dated 8 April 2015, between Souza
Cruz S.A. and Amcor Group GmbH for the production and supply
ofpackaging for a value of R$1.5 billion.
–
either party may terminate the agreement in the event of any
direct or indirect acquisition of at least 25% of the voting shares
of the supplier and/or its affiliates by directly or indirectly a
competitor of Souza Cruz S.A., importer or distributor.
Global Framework Agreementdated 1 January 2014, between
British American Tobacco (Investments) Limited and Papierfabrik
Wattens GmbH & Co for the supply of direct materials, cigarette
and plug-wrap paper.
–
Either party may terminate the agreement in the event of a change
of control of the other party (or certain of its affiliated companies)
in specified circumstances and which, in relation to British
American Tobacco (Investments) Limited, would trigger a right
for the other party to terminate the agreement on a change of
control of British American Tobacco (Investments) Limited (or any
holding company), where the new controlling entity is a customer
or competitor of the other party.
On 25 July 2017, the Company acceded as a guarantor under
the indenture of its indirect, wholly-owned subsidiary Reynolds
American Inc. The securities issued under the indenture include
approximately US$7.7 billion aggregate principal amount of
unsecured Reynolds American Inc debt securities.
–
with respect to each series of debt securities issued under the
indenture, upon a change of control event, combined with a credit
ratings downgrade of the series to below investment-grade level
(such downgrade occurring on any date from the date of the public
notice of an arrangement that could result in a change of control
event until the end of the 60-day period following public notice of
the occurrence of a change of control event), Reynolds American
Inc. is obligated to make an offer to repurchase all debt securities
from each holder of debt securities. As a guarantor under the
indenture, the Company guarantees such payments.
Rules of the long-term incentive plans 2007 and 2016 (“LTIPs”).
–
in the event of a change of control of the Company as a result
of a takeover, reconstruction or winding-up of the Company
(not being an internal reorganisation), LTIP awards will become
exercisable for alimited period based on the period of time that
has elapsed since the date of the award and the achievement of
the performance conditions at that date, unless the Remuneration
Committee determines this not to be appropriate in the
circumstances; and
–
the rules of the LTIPs allow (as an alternative to early release) that
participants may, if permitted, exchange their LTIP awards for new
awards of shares in the acquiring company on a comparable basis.
BAT Annual Report and Form 20-F 2021
348
The Group uses a combination of in-house and contract manufacturers to manufacture its products.
BAT-owned manufacturing facilities
1
United States
APME
AmSSA
ENA
Total
Fully integrated cigarette manufacturing
2
14
15
11
42
Sites processing tobacco only
1 6 9 2
18
Site manufacturing other tobacco products, Snus, Modern Oral
andLiquids
3 – – 5 8
R&D facilities and Product Centres
1 1 3 2 7
Total
7
21
27
20
75
Note:
1. As of 31 December 2021.
The plants and properties owned or leased and operated by the Group’s subsidiaries are maintained in good condition and are believed to
be suitable and adequate for the Group’s present needs.
The technology employed in the Group’s factories is sophisticated, especially in the area of cigarette-making and packing where
throughputs can reach between 500 and 1,000 packs per minute. The Group can produce many different pack formats (e.g., the number
of cigarettes per packet) and configurations (e.g., bevel edge, round corner, international) to suit marketing and consumer requirements.
New technology machines are sourced from the leading machinery suppliers to the industry. Close cooperation with these organisations
helps the Group support its marketing strategy by driving its product innovations, which are brought to the market on a regular basis.
The Group utilises quality standards, processes and procedures covering the entire end-to-end value chain to help to ensure quality
products are provided to its customers and adult tobacco consumers according to the Group’s requirements and end market
regulatory requirements.
The Group has several improvement initiatives which it is currently managing. For example, the Group is continuing to realise the benefits
of its Integrated Work System Programme launched in 2014, which is centrally led with an aim to improve the performance of the Group’s
factories globally by focusing on manufacturing standards, continuous improvement, assessment and benchmarking, and organisational
development. The Group also utilises a survey process in the factories with an aim to improve factory productivity and reduce costs in the
manufacturing environment. This process, known as ‘Bulls Eye’, has been in existence for a number of years and highlights productivity
opportunities by benchmarking.
In 2021, the Group manufactured cigarettes in 42 cigarette factories in 40countries. These plants and properties are owned or leased and
operated by the Group’s subsidiaries. The Group’s factory outputs and establishments vary significantly in size and production capacity.
Also in 2021, the Group used third-party manufacturers to manufacture the components required, including the devices, related to New
Categories. The Group also used third-party manufacturers to supplement the Group’s own production facilities in the US and Poland to
bottle the liquids used in the vapour products.
For more information on property, plant and equipment, see note 13 in the Notes on the Accounts.
Raw Materials
While the Group does not own tobacco farms or directly employ farmers, it sources tobacco leaf directly from over 75,000 contracted
farmers and through third-party suppliers mainly in developing countries and emerging markets. In respect of farmers we contract,
we continually strive to improve farmer sustainability and viability with a focus on improved quality and resistance of seed, tailored
mechanisation to reduce costs of production and increased yield, with similar expectation on our third-party suppliers in respect of
their farmer contracts. We review our contracts on an annual basis considering Group requirements over the medium term (2-3 years)
to promote the stability of demand and supply on production volumes. The Group also purchases a small amount of tobacco leaf from
India where the tobacco is bought over an auction floor. The price of tobacco in US dollars varies from year-to-year driven by domestic
inflationary pressures, economic and political factors, as well as climatic conditions which impact supply, demand and quality of
tobacco grown.
While COVID-19 impacted tobacco supply chains across most markets and required process enhancements to minimise transmission
risks within communities, prices and availability of tobacco were not significantly impacted. The Group believes there is an adequate
supply of tobacco leaf in the world markets to satisfy its current and anticipated production requirements.
We also source a number of other materials required as part of our production requirements, covering areas that include wrapping
materials and filters for our combustibles business and liquids and batteries for our New Categories products. We work closely with our
suppliers to ensure a robust supply chain, with contingency sourcing in place. Contracts and sourcing agreements are reviewed regularly,
to ensure competitive trading terms while recognising that prices may be impacted by external factors that affect our third-party
supply partners. COVID-19 has led to some short-term disruption in the supply of certain materials (due to local lockdowns and travel
restrictions), yet this has been proactively managed to mitigate the impact.
Property, Plant and Equipment
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
349
Other Information
US Corporate GovernancePractices
Principles
In the U.S., ADSs of the Company are listed on the New York Stock Exchange (NYSE). The significant differences between the Company’s
corporate governance practices as a UK company and those required by NYSE listing standards for U.S. companies are discussed below.
The Company has applied a robust set of board governance principles, which reflect the UK Corporate Governance Code 2018 and its
principles-based approach to corporate governance. NYSE rules require U.S. companies to adopt and disclose on their websites corporate
governance guidelines. The Company complies with UK requirements, including a statement in this report of how the Company has
applied the principles of the UK Corporate Governance Code 2018 and that the Company has complied with the provisions of the UK
Corporate Governance Code 2018.
Independence
The Company’s Board governance principles require that all Non-Executive Directors be determined by the Board to be independent in
character and judgement and free from any business or other relationships that could interfere materially with, or appear to affect, their
judgement. The Board also has formal procedures for managing conflicts of interest. The Board has determined that, in its judgement,
all of the Non-Executive Directors are independent. In doing so, the Board has taken into consideration the independence requirements
outlined in the NYSE’s listing standards and considers these to be met by the Chairman and all of its Non-Executive Directors.
Committees
The Company has a number of Board Committees that are broadly comparable in purpose and composition to those required by NYSE
rules for domestic U.S. companies. For instance, the Company has a Nominations (rather than nominating/corporate governance)
Committee and a Remuneration (rather than compensation) Committee. The Company also has an Audit Committee, which NYSE rules
require for both US companies and foreign private issuers.
These Committees are composed solely of Non-Executive Directors and, in the case of the Nominations Committee, the Chairman whom
the Board has determined to be independent in the manner described above.
Each Board Committee has its own terms of reference, which prescribe the composition, main tasks and requirements of each of the
Committees (see the Board Committee reports on pages 116, 120 and 128).
Under U.S. securities law and the listing standards of the NYSE, the Company is required to have an audit committee that satisfies the
requirements of Rule 10A-3 under the Exchange Act and Section303A.06 of the NYSE Listed Company Manual. The Company’s Audit
Committee complies with these requirements. The Company’s Audit Committee does not have direct responsibility for the appointment,
reappointment or removal of the independent auditors. Instead, it follows the UK Companies Act 2006 by making recommendations to
the Board on these matters for it to put forward for shareholder approval at the AGM.
One of the NYSE’s additional requirements for the audit committee states that at least one member of the audit committee is to have
‘accounting or related financial management expertise’. The Board has determined that Holly Keller Koeppel and Darrell Thomas possess
such expertise and also possess the financial and audit committee experiences set forth in both the UK Corporate Governance Code
2018 and SEC rules (see the Audit Committee report on page 120). Ms Keller Koeppel and Mr Thomas have also each been designated as
an Audit Committee financial expert as defined in Item16.A. of Form 20-F. The Board has also determined that each Audit Committee
member meets the financial literacy requirements applicable under NYSE listing standards.
Shareholder Approval of Equity Compensation Plans
The NYSE rules for U.S. companies require that shareholders must be given the opportunity to vote on all equity-compensation plans and
material revisions to those plans. The Company complies with UK requirements that are similar to the NYSE rules. The Board, however,
does not explicitly take into consideration the NYSE’s detailed definition of what are considered ‘material revisions’.
Codes of Business Conduct and Ethics
The NYSE rules require US companies to adopt and disclose a code of business conduct and ethics for all directors, officers and
employees and promptly disclose any waivers of the code for directors or executive officers. The Group Standards of Business
Conduct (the “SoBC”) described on pages 56 and 57 apply to all staff in the Group, including senior management and the Board, and
satisfy the NYSE requirements. All Group companies have adopted the SoBC (or localised versions). The SoBC also set out the Group’s
whistleblowing policy, enabling staff, in confidence and anonymously, to raise concerns without fear of reprisal, including concerns
regarding questionable accounting or auditing matters. The SoBC is available at bat.com/sobc.
The Company has also adopted a code of ethics for its Chief Executive, Finance and Transformation Director, Group Financial Controller
and Group Chief Accountant as required by the provisions of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules issued by
the SEC. No waivers or exceptions to the Code of Ethics were granted in 2021. The Code of Ethics includes requirements in relation to
confidentiality, conflicts of interest and corporate opportunities, and obligations for those senior financial officers to act with honesty
and integrity in the performance of their duties and to promote full, fair, accurate, timely and understandable disclosures in all reports and
other documents submitted to the SEC, the UK Financial Conduct Authority, and any other regulatory agency.
The Company considers that these codes and policies address the matters specified in the NYSE rules for U.S. companies.
Independent Director Contact
Interested parties may communicate directly with the independent directors, individually or as a group, by sending written
correspondence addressed to the independent director(s) to the attention of the Company Secretary at the following address: c/o Paul
McCrory, Company Secretary, British American Tobacco p.l.c., Globe House, 4 Temple Place, London WC2R 2PG.
BAT Annual Report and Form 20-F 2021
350
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures
The Group maintains ‘disclosure controls and procedures’ (as such term is defined in Exchange Act Rule 13a-15(e)), that are designed to
ensure that information required to be disclosed in reports the Group files or submits under the Exchange Act is recorded, processed,
summarised and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and
communicated to management, including the Chief Executive and Finance and Transformation Director, as appropriate, to allow timely
decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, our management, including the Chief Executive and Finance and
Transformation Director, recognise that any controls and procedures, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within
the Group have been detected. The Group’s disclosure controls and procedures have been designed to meet, and management believes
that they meet, reasonable assurance standards.
Management, with the participation of the Chief Executive and Finance and Transformation Director, has evaluated the effectiveness of
the Group disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this annual
report. Based on that evaluation, the Chief Executive and Finance and Transformation Director have concluded that the Group disclosure
controls and procedures were effective at a reasonable assurance level.
Management’s report on internal control over financial reporting
Management, under the oversight of the Chief Executive and the Finance and Transformation Director, is responsible for establishing and
maintaining adequate internal control over financial reporting for the Group. The Group’s internal control over financial reporting consists
of processes which are designed to: provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
Group’s financial statements for external reporting purposes in accordance with IFRS as issued by the IASB and UK-adopted international
accounting standards; provide reasonable assurance that receipts and expenditure are made only in accordance with the authorisation
of management; and provide reasonable assurance regarding the prevention or timely detection of any unauthorised acquisition, use or
disposal of assets that could have a material effect on the consolidated financial statements.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of the internal control over
financial reporting (as defined in Rules 13(a)-13(f) and 15(d)-15(f) under the US Securities Exchange Act of 1934) based on the updated
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO)
(2013). Based on that assessment, management has determined that the Group’s internal control over financial reporting was effective as
at 31 December 2021.
Any internal control framework, no matter how well designed, has inherent limitations, including the possibility of human error and the
circumvention or overriding of controls and procedures and may not prevent or detect misstatements. Also, projections of any evaluation
ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or
because thedegree of compliance with the policies or procedures may deteriorate.
»KPMG LLP, an independent registered public accounting firm, who also audit the Group’s consolidated financial statements, has audited
the effectiveness of the Group’s internal control over financial reporting as at 31 December 2021, which is included in this document.»
Changes in internal control over financial reporting
During the period covered by this report, there were no changes in the Group’s internal control over financial reporting that have materially
affected or are reasonably likely to materially affect the effectiveness of internal control over financial reporting.
Statements Regarding
Competitive Position
Statements referring to the competitive position of BAT and its subsidiaries are based on the Group’s belief and best estimates. In certain
cases, such statements and figures rely on a range of sources, including investment analyst reports, independent market surveys, and the
Group’s own internal assessments of market share.
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
351
Directors’ Report Information
This Other Information section of the British American Tobacco Annual Report and Form 20-F, which includes Additional Disclosures and
Shareholder Information, forms part of, and includes certain disclosures which are required by law to be included in, the Directors’ Report.
Strategic Report Disclosures
Section 414C(11) of the Companies Act 2006 allows the Board to include in the Strategic Report information that it considers to be of strategic importance that
would otherwise need to be disclosed in the Directors’ Report. The Board has chosen to take advantage of this provision and accordingly, the information set out
below, which would otherwise be required to be contained in the Directors’ Report, has been included in the Strategic Report.
Information required in the Directors’ Report
Section in the Strategic Report
Information on dividends
Financial review
Certain risk information about the use of financial instruments
Financial review
An indication of likely future developments in the business of the Group A strategy for accelerated growth
An indication of the activities of the Group in the field of research and development Accelerating the Enterprise of the Future
Tobacco Harm Reduction Through World-
class Science
A statement describing the Group’s policy regarding the hiring, continuing employment
andtraining, career development and promotion of disabled persons
People and Culture
Details of employee engagement: information, consultation, regard to employee interests,
sharescheme participation and theachievement of a common awareness of the financial
andeconomic factors affecting the performance of the Group
Engaging with our stakeholders
People and Culture
Principles of Remuneration for Our
Wider Workforce
Details of business relationships: Directors’ regard to business relationships with customers,
suppliers and other external stakeholders
Engaging with our stakeholders
Disclosures concerning greenhouse gas emissions and energy consumption Excellence in Environmental Management
Shareholder Information Disclosures
Information required in the Directors’ Report Section in Other Information
Change of control provisions
Material contracts
Information on dividends
Dividends
Share capital – structure and voting rights; restrictions on transfers of shares
Articles of Association
Directors – appointment and retirement
Articles of Association
Amendment of Articles of Association
Articles of Association
Branch outside of the UK - Representative Office in South Africa Inside page of the back cover
Major shareholders Share capital and security ownership
Directors – share issuance and buy-back powers
Share capital and security ownership
Purchases of shares
Listing Rules (LRs) Disclosures
For the purpose of LR 9.8.4C R the applicable information
required to be disclosed by LR 9.8.4 R Section in Other Information
Section (12) – shareholder waivers of dividends
Group Employee Trust
Section (13) – shareholder waivers of future dividends
Group Employee Trust
Directors: Interests and Indemnities
Interests
–
details of Directors’ remuneration and emoluments, and their interests in the Company’s shares (including share options
and deferred shares) asat31 December 2021 are given in the Remuneration Report; and
–
no Director had any material interest in a contract of significance (other than a service contract) with the Company or
any subsidiary company during the year.
Insurance
–
appropriate cover provided in the event of legal action against the Company’s Directors.
Indemnities
–
provision of indemnities to Directors in accordance with the Company’s Articles of Association and to the maximum
extent permitted by law; and
–
as at the date of this report, such indemnities are in force covering any costs, charges, expenses or liabilities that they
may incur in or about the execution of their duties to the Company or to any entity which is an associated company (as
defined in Section 256 of the Companies Act 2006), or as a result of duties performed by them on behalf of the Company
or any such associated company.
Directors’ Report Approval and Signature
The Directors’ Report comprises the information on pages [
98 to 127@ and page 168@ and pages 299 to 377
]. The Directors’ Report was
approved by the Board of Directors on 10 February 2022 and signed on its behalf by Paul McCrory, Company Secretary.
BAT Annual Report and Form 20-F 2021
352
Cautionary Statement
This document contains certain forward-looking statements, including “forward-looking” statements made within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995. 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”, “target” and similar expressions. These include statements regarding our intentions, beliefs or current
expectations concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies
and the economic and business circumstances occurring from time to time in the countries and markets in which the Group operates,
including the projected future financial and operating impacts of the COVID-19 pandemic.
In particular, these forward-looking statements include, among other statements, statements regarding the Group’s future financial
performance, planned product launches and future regulatory developments, as well as: (i) certain statements in the Overview section
(pages 2 to 11, including the Chairman’s Introduction, Chief Executive’s Review and Finance and Transformation Director’s Overview; (ii)
certain statements in the Strategic Management section (pages 12 to 32), including Our Global Business section; (iii) certain statements
in the Financial Review section (pages 75 to 83), including the Treasury and Cash Flow section and going concern discussions; and
(iv) certain statements in the Other Information section (pages 299 to 382), including the Additional Disclosures and Shareholder
Information sections.
All such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors. It is
believed that the expectations reflected in this document 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.
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: the impact of competition from illicit trade; the impact of adverse domestic or international
legislation and regulation; the inability to develop, commercialise and deliver the Group’s New Categories strategy; adverse litigation and
dispute outcomes and the effect of such outcomes on the Group’s financial condition; the impact of significant increases or structural
changes in tobacco, nicotine and New Categories related taxes; translational and transactional foreign exchange rate exposure; changes
or differences in domestic or international economic or political conditions; the ability to maintain credit ratings and to fund the business
under the current capital structure; the impact of serious injury, illness or death in the workplace; adverse decisions by domestic or
international regulatory bodies; and changes in the market position, businesses, financial condition, results of operations or prospects
of the Group. Further details on the principal risks that may affect the Group can be found in the ‘Group Principal Risks’ section of the
Strategic Report on pages 92 to 97 of this document. A summary of all the risk factors (including the principal risks) which are monitored
by the Board through the Group’s risk register is set out in the Additional Disclosures section under the heading ‘Group Risk Factors’ on
pages 317 to 339.
Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.
The forward-looking statements reflect knowledge and information available at the date of preparation of this document and the Group
undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or
otherwise. Readers are cautioned not to place undue reliance on such forward-looking statements.
No statement in this document is intended to be a profit forecast and no statement in this document should be interpreted to mean that
earnings per share of BAT for the current or future financial years would necessarily match or exceed the historical published earnings per
share of BAT.
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
353
Share Prices and Listing
Premium Listing – London Stock Exchange (LSE)
The primary market for BAT’s ordinary shares is the LSE (Share Code: BATS; ISIN: GB0002875804). BAT’s ordinary shares have been listed
on the LSE main market since 8 September 1998 and are a constituent element of the FTSE 100 Index.
Secondary Listing – Johannesburg Stock Exchange (JSE Limited), South Africa
BAT’s ordinary shares have a secondary listing and are traded in South African rand on the Main Board of the JSE in South Africa
(Abbreviated name: BATS; Trading code: BTI). BAT’s ordinary shares have been listed on the JSE since 28 October 2008 and are a
constituent element of the JSETop 40 Index.
American Depositary Shares (ADSs) – New York Stock Exchange (NYSE)
BAT ordinary shares trade in the form of BAT ADSs in the United States under the symbol BTI (CUSIP Number: 110448107). The BAT ADSs
have been listed on the NYSE since 25 July 2017 as a Sponsored Level III ADS programme for which Citibank, N.A. is the depositary (the
‘Depositary’) and transfer agent. Each ADS represents one ordinary share. ADSs are evidenced by American Depositary Receipts (ADRs).
Share Prices
The high and low prices at which the Company’s ordinary shares and ADSs are recorded as having traded during the year on each of the
LSE, JSEand NYSE are as follows:
High
Low
LSE
£29.14
£24.85
JSE
R590.95
R513.00
NYSE
US$40.51
US$33.65
BAT Annual Report and Form 20-F 2021
354
Other Information
Dividends
Policy
The Group’s policy is to pay dividends of 65% of long-term sustainable earnings, calculated with reference to adjusted diluted earnings per
share, as defined on page 308, and reconciled from earnings per share in note 11 in the Notes on the Accounts. Please see page 79 of this
Annual Report and Form 20-F 2021 for further discussion on the Group’s dividend.
Currencies and Exchange Rates
Details of foreign exchange rates are set out in the Financial Review section of the Strategic Report on page 83 of this Annual Report and
Form20-F 2021. There are currently no UK foreign exchange controls or restrictions on remittance of dividends on the ordinary shares
other than restrictions applicable to certain countries and persons subject to UK economic sanctions.
American Depositary Shares – Dividends
The following table shows the dividends paid by British American Tobacco p.l.c. in the years ended 31 December 2019 to 31 December
2021 inclusive.
Announcement
Year
Payment
Dividend Period
Dividend Per BAT Ordinary Share
GBP
Dividend Per BAT ADS
ADS ratio 1:1
USD
1
2019
May
Quarterly Interim 2019
0.5075
0.6596990
August
Quarterly Interim 2019
0.5075
0.6155970
November
Quarterly Interim 2019
0.5075
0.6521370
February 2020 Quarterly Interim 2019
0.5075
0.6571610
Total
2.0300
2.5845940
2020
May
Quarterly Interim 2020
0.526
0.6424030
August
Quarterly Interim 2020
0.526
0.6889020
November
Quarterly Interim 2020
0.526
0.6895860
February 2021 Quarterly Interim 2020
0.526
0.7178320
Total
2.104
2.738723
2021
May
Quarterly Interim 2021
0.539
0.7576180
August
Quarterly Interim 2021
0.539
0.7345300
November
Quarterly Interim 2021
0.539 0.7217210
February 2022 Quarterly Interim 2021
0.539 0.7298860
Total
2.156
2.943755
Note:
1
. Holders of BAT ADSs:
dividends are receivable in US dollars based on the £ sterling/US dollar exchange rate on the applicable ADS payment date, being three business days after the payment
date for the BATordinary shares.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
355
Quarterly Dividends for the Year Ended 31 December 2021
The Group pays quarterly dividends. The Board has declared an interim dividend of 217.8p per ordinary share of 25p which is payable in four
equal quarterly instalments of 54.45p per ordinary share in May 2022, August 2022, November 2022 and February 2023. This represents
an increase of 1.0% on 2020 (2020: 215.6p per share), and a payout ratio, on 2021 adjusted diluted earnings per share, of 66.2%.
The quarterly dividends will be paid to shareholders registered on either the UK main register or the South Africa branch register and to
ADS holders, each on the applicable record dates set out under the heading ‘Key dates’ below.
Holders of American Depositary Shares (ADSs)
For holders of ADSs listed on the NYSE, the record dates and payment dates are set out below. The equivalent quarterly dividends
receivable byholders of ADSs in US dollars will be calculated based on the exchange rate on the applicable payment date.
South Africa branch register
In accordance with the JSE Listing Requirements, the finalisation information relating to shareholders registered on the South Africa
branch register (comprising the amount of the dividend in South African rand, the exchange rate and the associated conversion date) will
be published on the dates stated below, together with South Africa dividends tax information.
The quarterly dividends are regarded as ‘foreign dividends’ for the purposes of the South Africa Dividends Tax. For the purposes of South
Africa Dividends Tax reporting, the source of income for the payment of the quarterly dividends is the United Kingdom.
Key dates
In compliance with the requirements of the LSE, the NYSE and Strate, the electronic settlement and custody system used by the JSE,
thefollowing are the salient dates for the quarterly dividend payments. All dates are 2022 unless otherwise stated.
Event
Payment No. 1 Payment No. 2 Payment No. 3 Payment No. 4
Preliminary announcement (includes
declaration data required for JSE purposes)
11 February
Publication of finalisation information (JSE)
14 March
28 June
20 September
12 December
No removal requests (in either direction)
permitted between the UK main register
and the SouthAfrica branch register
14 March–
28 March
(inclusive)
28 June–
11 July
(inclusive)
20 September–
3 October
(inclusive)
12 December–
27 December
(inclusive)
Last day to trade (LDT) cum-dividend (JSE)
22 March
5 July27 September
20 December
Shares commence trading ex-dividend (JSE)
23 March
6 July
28 September
21 December
No transfers permitted between the UK
main register and the South Africa
branchregister
23 March–
28 March
(inclusive)
6 July–
11 July
(inclusive)
28 September –
3 October
(inclusive)
21 December–
27 December
(inclusive)
No shares to be dematerialised or
rematerialised on the South Africa
branchregister
23 March–
28 March
(inclusive)
6 July–
11 July
(inclusive)
28 September–
3 October
(inclusive)
21 December–
27 December
(inclusive)
Shares commence trading ex-dividend
(LSE)
24 March
7 July
29 September
22 December
Shares commence trading ex-dividend
(NYSE)
24 March
7 July
29 September
22 December
Record date (LSE, JSE and NYSE)
25 March
8 July30 September
23 December
Last date for receipt of Dividend
Reinvestment Plan (DRIP) elections (LSE)
8 April
27 July
20 October
12 January 2023
Payment date (LSE and JSE) 4 May
17 August
10 November 2 February 2023
ADS payment date (NYSE)
9 May
22 August
15 November 6 February 2023
BAT Annual Report and Form 20-F 2021
356
Shareholder Taxation Information
The following discussion summarises material US federal income tax consequences and UK taxation consequences to US holders of
owning and disposing of ordinary shares or ADSs, this information is accurate as at 18 January 2022. This discussion does not address
any tax consequences arising under the laws of any state, local or foreign jurisdiction or under any US federal laws other than those
pertaining to income tax. This discussion is based upon the US Internal Revenue Code of 1986 (the ‘US Tax Code’), the Treasury regulations
promulgated under the US Tax Code and court and administrative rulings and decisions, all as in effect on the date hereof. These laws may
change, possibly retroactively, and any change could affect the accuracy of the statements andconclusions set forth in this discussion.
This discussion addresses only those US holders of ordinary shares or ADSs who hold such equity interests as capital assets within the
meaning of Section 1221 of the US Tax Code. Further, this discussion does not address all aspects of US federal income taxation that
may be relevant toUSholders in light of their particular circumstances or that may be applicable to them if they are subject to special
treatment under the US federal income tax laws, including, without limitation:
–
a bank or other financial institution;
–
a tax-exempt organisation;
–
an S corporation or other pass-through entity and an
investor therein;
–
an insurance company;
–
a mutual fund;
–
a regulated investment company or real estate investment trust;
–
a dealer or broker in stocks and securities, or currencies;
–
a trader in securities that elects mark-to-market treatment;
–
a US holder subject to the alternative minimum tax provisions of
the US Tax Code;
–
a US holder that received ordinary shares or ADSs through the
exercise of an employee stock option, pursuant to a tax qualified
retirement plan or otherwise as compensation;
–
a US holder that is a tax-qualified retirement plan or a participant
orabeneficiary under such a plan;
–
a person that is not a US holder (as defined below);
–
a person that has a functional currency other than the US dollar;
–
a person required to recognise any item of gross income as
a result of such income being recognised on an applicable
financial statement;
–
a US holder of ordinary shares or ADSs that holds such equity
interest as part of a hedge, straddle, constructive sale, conversion
or other integrated transaction;
–
a US holder that owns (directly, indirectly or constructively) 10% or
more of ordinary shares or ADSs by vote or by value; or
–
a US expatriate.
The determination of the actual tax consequences to a US holder will depend on the US holder’s specific situation. US holders of ordinary
shares or ADSs should consult their own tax advisers as to the tax consequences of owning and disposing of ordinary shares or ADSs,
in each case, including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and of
changes in those laws.
For purposes of this discussion, the term US holder means a beneficial owner of ordinary shares or ADSs (as the case may be) that:
–
is for US federal income tax purposes: (i) an individual citizen or resident of the United States; (ii) a corporation, including any entity
treated as a corporation for US federal income tax purposes, created or organised in or under the laws of the United States, any state
thereof or the District of Columbia; (iii) a trust if a US court is able to exercise primary supervision over the trust’s administration and
one or more US persons are authorised to control all substantial decisions of the trust or it has a valid election in effect under applicable
Treasury regulations to be treated as a US person; or (iv) an estate that is subject to US federal income tax on its income regardless of
its source; and
–
is not resident in the UK for UK tax purposes.
The US federal income tax consequences to a partner in an entity or arrangement treated as a partnership for US federal income tax
purposes that holds ordinary shares or ADSs generally will depend on the status of the partner and the activities of the partnership.
Partners in a partnership holding any such equity interest should consult their own tax advisers.
Material US Federal Income Tax Consequences Relating to the Ownership and Disposition of Ordinary
Shares or ADSs
The following is a discussion of the material US federal income tax consequences of the ownership and disposition by US holders of
ordinary shares or ADSs. This discussion assumes that BAT is not, and will not become, a passive foreign investment company for US
federal income tax purposes, as described below.
ADSs
A US holder of ADSs, for US federal income tax purposes, generally will be treated as the owner of the underlying ordinary shares that
are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for or from ADSs will not be subject to US federal
income tax.
Taxation of Dividends
The gross amount of distributions on the ordinary shares or ADSs will be taxable as dividends to the extent paid out of BAT’s current or
accumulated earnings and profits, as determined under US federal income tax principles. Such income will be includable in a US holder’s
gross income as ordinary income on the day actually or constructively received by the US holder. Such dividends will be treated as foreign
source income and will not be eligible for the dividends received deduction allowed to corporations under the US Tax Code.
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
357
With respect to non-corporate US investors, certain dividends received from a qualified foreign corporation may be subject to reduced
rates of taxation. A qualified foreign corporation includes a foreign corporation that is eligible for the benefits of a comprehensive income
tax treaty with the United States that the Treasury determines to be satisfactory for these purposes and that includes an exchange of
information provision. The Treasury has determined that the treaty between the United States and the United Kingdom meets these
requirements, and BAT believes that it is eligible for the benefits of the treaty. However, non-corporate holders that do not meet a
minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income
as ‘investment income’ pursuant to Section 163(d)(4) of the US Tax Code will not be eligible for the reduced rates of taxation. In addition,
the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions
in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. US holders should
consult their own tax advisers regarding the application of these rules to their particular circumstances.
The amount of any dividend paid by BAT in £ sterling (including any such amount in respect of ADSs that is converted into US dollars
by the depositary bank) will equal the US dollar value of the £ sterling actually or constructively received, calculated by reference to the
exchange rate in effect on the date the dividend is so received by the US holder, regardless of whether the £ sterling are converted into
US dollars. If the £ sterling received as a dividend are converted into US dollars on the date received, the US holder generally will not be
required to recognise foreign currency exchange gain or loss in respect of the dividend income. If the £ sterling received as a dividend are
not converted into US dollars on the date of receipt, the US holder will have a basis in £ sterling equal to their US dollar value on the date of
receipt. Any gain or loss realised on a subsequent conversion or other disposition of £ sterling will be treated as US source ordinary income
or loss. US holders of ADSs should consult their own tax advisers regarding the application of these rules to the amount of any dividend
paid by BAT in £ sterling that is converted into US dollars by the depositary bank.
To the extent that the amount of any distribution exceeds BAT’s current and accumulated earnings and profits for a taxable year, as
determined under US federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction
in the US holder’s adjusted basis of the ordinary shares or ADSs, and to the extent the amount of the distribution exceeds the US holder’s
tax basis, the excess will be taxed as capital gain recognised on a sale or exchange, as described below. BAT does not expect to determine
earnings and profits in accordance with US federal income tax principles. Therefore, notwithstanding the foregoing, US holders should
expect that distributions generally will be reported as dividend income for US information reporting purposes.
Distributions by BAT of additional ordinary shares (which may be distributed by the depositary bank to a holder of ADSs in the form of
ADSs) to a US holder that is made as part of a pro rata distribution to all holders of ordinary shares and ADSs in respect of their ordinary
shares or ADSs, and for which there is no option to receive other property (not including ADSs), generally will not be subject to US federal
income tax. The basis of any new ordinary shares (or ADSs representing new ordinary shares) so received will be determined by allocating
the US holder’s basis in the previously held ordinary shares or ADSs between the previously held ordinary shares or ADSs and the new
ordinary shares or ADSs, based on their relative fair market values on the date of distribution.
Passive foreign investment company
A passive foreign investment company (“PFIC”), is any foreign corporation if, after the application of certain ‘look-through’ rules: (1)at
least 75% of its gross income is ‘passive income’ as that term is defined in the relevant provisions of the US Tax Code; or (2) at least 50%
ofthe average value of its assets produce ‘passive income’ or are held for the production of ‘passive income.’ The determination as to PFIC
statusis made annually.
BAT does not believe that it is, for US federal income tax purposes, a PFIC, and BAT expects to operate in such a manner so as not
to become a PFIC. If, however, BAT is or becomes a PFIC, US holders could be subject to additional US federal income taxes on gain
recognised with respect to the ordinary shares or ADSs and on certain distributions, plus an interest charge on certain taxes treated as
having been deferred under the PFIC rules. Non-corporate US holders will not be eligible for reduced rates of taxation on any dividends
received from BAT if it is a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. BAT’s US counsel
expresses no opinion with respect to BAT’s PFIC status.
Taxation of capital gains
Upon a sale, exchange or other taxable disposition of ordinary shares or ADSs, a US holder will generally recognise capital gain or loss
for US federal income tax purposes in an amount equal to the difference between the US dollar value of the amount realised on the
disposition and the US holder’s adjusted tax basis in the ordinary shares or ADSs as determined in US dollars. Such gain or loss generally
will be US source gain or loss, and will be long-term capital gain or loss if the US holder has held the ordinary shares or ADSs for more
than one year. Certain non-corporate US holders may be eligible for preferential rates of US federal income tax in respect of net long-term
capital gains. The deductibility of capital losses issubject to limitations.
The amount realised on a sale, exchange or other taxable disposition of ordinary shares for an amount in foreign currency will be the US
dollar value of that amount on the date of sale or disposition. On the settlement date, the US holder will recognise US source foreign
currency exchange gain or loss (taxable as ordinary income or loss) equal to the difference (if any) between the US dollar value of the
amount received based on the exchange rates in effect on the date of sale, exchange or other disposition and the settlement date.
However, in the case of ordinary shares traded on an established securities market that are sold by a cash-basis US holder (or an accrual-
basis US holder that so elects), the amount realised will be based on the exchange rate in effect on the settlement date for the sale, and no
foreign currency exchange gain or loss will be recognised atthat time.
A US holder’s tax basis in ordinary shares or ADSs will generally equal the US dollar cost of the ordinary shares or ADSs. The US dollar cost
of ordinary shares purchased with foreign currency will generally be the US dollar value of the purchase price on the date of purchase, or
the settlement date for the purchase in the case of ordinary shares traded on an established securities market that are purchased by a
cash-basis USholder (or an accrual-basis US holder that so elects).
BAT Annual Report and Form 20-F 2021
358
Other Information
Shareholder Taxation Information
Continued
Information with respect to foreign financial assets
Individuals and certain entities that own ‘specified foreign financial assets’ with an aggregate value in excess of US$50,000 are generally
required to file information reports with respect to such assets with their US federal income tax returns. Depending on the individual’s
circumstances, higher threshold amounts may apply. Specified foreign financial assets include any financial accounts maintained by
foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions:
(1) stocks and securities issued by non-US persons; (2) financial instruments and contracts held for investment that have non-US issuers
or counterparties; and (3) interests in non-US entities. If a US holder is subject to this information reporting regime, the failure to file
information reports may subject the US holder to penalties. US holders are urged to consult their own tax advisers regarding their
obligations to file information reports with respect to ordinary shares or ADSs.
Medicare net investment tax
Certain persons who are individuals (other than non-resident aliens), estates or trusts are required to pay an additional 3.8% tax on the
lesser of (1) their ‘net investment income’ (in the case of individuals) or ‘undistributed net investment income’ (in the case of estates and
trusts) (which includes dividend income in respect of, and gain recognised on the disposition of, ordinary shares or ADSs) for the relevant
taxable year; and (2)the excess of their modified adjusted gross income (in the case of individuals) or adjusted gross income (in the case
of estates and trusts) for the taxable year over specified dollar amounts. US holders are urged to consult their tax advisers regarding the
applicability of this provision totheir ownership of ordinary shares or ADSs.
Credits or deductions for UK taxes
As indicated under ‘Material UK tax consequences’ below, dividends in respect of, and gains on the disposition of, ordinary shares or
ADSs may be subject to UK taxation in certain circumstances. A US holder may be eligible to claim a credit or deduction in respect of UK
taxes attributable to such income or gain for purposes of computing the US holder’s US federal income tax liability, subject to certain
limitations. The US foreign tax credit rules are complex, and US holders should consult their own tax advisers regarding the availability of
US foreign tax credits and the application of the US foreign tax credit rules to their particular situation.
Information reporting and backup withholding
Information reporting and backup withholding may apply to dividend payments and proceeds from the sale, exchange or other taxable
disposition of ordinary shares or ADSs. Backup withholding will not apply, however, to a US holder that: (1) furnishes a correct taxpayer
identification number (TIN), certifies that such holder is not subject to backup withholding on Internal Revenue Service Form W-9 (or
appropriate successor form) and otherwise complies with all applicable requirements of the backup withholding rules; or (2) provides
proof that such holder is otherwise exempt from backup withholding. Backup withholding is not an additional tax, and any amounts
withheld under the backup withholding rules may be refunded or credited against a holder’s US federal income tax liability, if any, provided
that such holder furnishes the required information to the Internal Revenue Service in a timely manner. The Internal Revenue Service may
impose a penalty upon any taxpayer that fails to provide the correct TIN.
This summary of material US federal income tax consequences is not tax advice. The determination of the actual tax
consequences for a US holder will depend on the US holder’s specific situation. US holders of ordinary shares or ADSs, in each
case, should consult their own tax advisers as to the tax consequences of owning and disposing of ordinary shares or ADSs,
including the applicability and effect of the alternative minimum tax and any state, local, foreign or other tax laws and of changes
in those laws.
Material UK Tax Consequences
The following paragraphs summarise material aspects of the UK tax treatment of US holders of ordinary shares or ADSs and do not
purport to be either a complete analysis of all tax considerations relating to holding ordinary shares or ADSs or an analysis of the tax
position of BAT. They are based on current UK legislation and what is understood to be current HMRC practice, both of which are subject
to change, possibly with retrospective effect.
The comments are intended as a general guide and (otherwise than where expressly stated to the contrary) apply only to US holders
of ordinary shares or ADSs (other than under a personal equity plan or individual savings account) and who are the absolute beneficial
owners of such shares. These comments do not deal with certain types of shareholders such as charities, dealers in securities, persons
holding or acquiring shares in the course of a trade, persons who have or could be treated for tax purposes as having acquired their
ordinary shares or ADSs by reason of their employment, collective investment schemes, persons subject to UK tax on the remittance
basis and insurance companies. You are encouraged toconsult an appropriate independent professional tax adviser with respect to your
tax position.
Tax on chargeable gains as a result of disposals of ordinary shares or ADSs
Subject to the below, US holders will not generally be subject to UK tax on chargeable gains on a disposal of ordinary shares or ADSs
provided that they do not carry on a trade, profession or vocation in the United Kingdom through a branch, agency or permanent
establishment in connection with which the ordinary shares or ADSs are held.
A US holder who is an individual, who has ceased to be resident for tax purposes in the United Kingdom for a period of less than five years
and who disposes of ordinary shares or ADSs during that period may be liable for UK tax on capital gains (in the absence of any available
exemptions or reliefs). If applicable, the tax charge will arise in the tax year that the individual returns to the United Kingdom.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
359
Tax on dividends
BAT is not required to withhold UK tax at source from dividends paid on ordinary shares or ADSs.
US holders will not generally be subject to UK tax on dividends received from BAT provided that they do not carry on a trade, profession or
vocation in the United Kingdom through a branch, agency or permanent establishment in connection with which the ordinary shares or
ADSs are held.
Stamp duty and stamp duty reserve tax (SDRT)
Based on current published HMRC practice and recent case law, transfers of ADSs should not be subject to SDRT or stamp duty.
The transfer of an underlying ordinary share to the ADS holder in exchange for the cancellation of an ADS should also not give rise to a
stamp duty or SDRT charge.
Transfers of ordinary shares outside of the depositary bank, including the repurchase of ordinary shares by BAT, will generally be subject
to stamp duty or SDRT at the rate of 0.5% of the amount or value of the consideration given, except as described above in connection
with the cancellation of an ADS. If ordinary shares are redeposited into a clearance service or depositary system, the redeposit will attract
stamp duty orSDRT at the higher rate of 1.5%.
The purchaser or the transferee of the ordinary shares or ADSs will generally be responsible for paying any stamp duty or SDRT payable.
Where stamp duty or SDRT is payable, it is payable regardless of the residence position of the purchaser.
Inheritance tax
A gift or settlement of ordinary shares or ADSs by, or on the death of, an individual shareholder may give rise to a liability to UK inheritance
tax even if the shareholder is not a resident of, or domiciled in, the United Kingdom.
A charge to inheritance tax may arise in certain circumstances where ordinary shares or ADSs are held by close companies and trustees
of settlements.
However, pursuant to the Estate and Gift Tax Treaty 1980 (the “Treaty”) entered into between the United Kingdom and the United States,
a gift or settlement of ordinary shares or ADSs by shareholders who are domiciled in the United States for the purposes of the Treaty may
be exempt from any liability to UK inheritance tax.
BAT Annual Report and Form 20-F 2021
360
Share Capital
Share capital
Ordinary shares of 25p each
31 December 2021
Issued ordinary shares
(excluding treasury shares)
2,294,687,571
Treasury shares
161,930,217
Total allotted and fully paid
ordinary shares
1
2,456,617,788
Aggregate nominal value £m
614.2
Note:
1. Includes treasury shares and shares owned by employee share trusts.
Authority to allot shares
This authority (granted at the 2021 AGM) will expire at the 2022 AGM
and provides the Company authority to allot relevant securities up to
the amount representing two-thirds of the Company’s then issued
ordinary share capital (excluding treasury shares), of which approximately
one-third can only be allotted pursuant to a rights issue. Although the
Directors have no present intention of exercising this authority, it provides
them with an appropriate level of authority for on-going purposes and
the Directors consider it appropriate to maintain the flexibility that this
authority provides.
Analyses of Shareholders
Ordinary Shares
At 31 December 2021, there was a total of 2,456,617,788 ordinary
shares in issue held by 108,467 shareholders. These shareholdings
areanalysed as follows:
(a) by listing as at 31 December 2021:
Register
Total number
of shares
Number of
holders
% of issued
share capital
UK
2,201,910,356
35,134
89.63
South Africa
254,707,432
69,124
10.37
Total
2,456,617,788
104,258
100.00
(b) by size of shareholding as at 31 December 2021:
UK Register
Number of
holders
% of
UK ordinary
share capital
1–1,999
30,072
0.58
2,000–9,999
3,650
0.63
10,000–199,999
1,011
2.38
200,000–499,999
138
2.04
500,000 and over
262
87.01
Treasury shares (UK)
1
7.36
Total
35,134
100.00
South Africa Register
Number of
holders
% of
SA ordinary
share capital
1–1,999
63,837
6.44
2,000–9,999
3,557
5.69
10,000–199,999
1,592
25.43
200,000–499,999
78
9.89
500,000 and over
60
52.55
Total
69,124
100.00
Combined registers
Number of
holders
% of issued
ordinary
share capital
1–1,999
93,909
1.19
2,000–9,999
7,207
1.15
10,000–199,999
2,603
4.77
200,000–499,999
216
2.85
500,000 and over
322
83.43
Treasury shares (UK)
1
6.61
Total
104,258
100.00
American Depositary Shares (ADSs)
At 31 December 2021, there was a total of 247,266,515 ADSs
outstanding held by 8,909 registered holders. The ADS register is
analysed by size of shareholding as at 31 December 2021 as follows:
Number of
holders
% of
total ADSs
1–1,999
8,721 0.69
2,000–9,999
166 0.22
10,000–199,999
20
0.16
200,000–499,999
1
0.09
500,000 and over
1
1
98.84
Total
8,909
100.00
Note:
1. One registered holder of ADSs represents 513,342 underlying shareholders.
Security Ownership of Ordinary Shares
As at 8 February 2022, there were 35,086 record holders of ordinary
shares listed on the LSE (including Citibank as the depositary bank for the
ADSs) and 2,196,967,436 of such ordinary shares outstanding. As at that
date, to BAT’s knowledge, 299 record holders, representing 0.01% of the
ordinary shares listed on the LSE, had a registered address in the US. As at
8 February 2022, there were 723 record holders of ordinary shares listed
on the JSE (including PLC Nominees (Proprietary) Limited as the nominee
for the dematerialised ordinary shares listed on the JSE) and 259,652,752
of such ordinary shares outstanding. As at such date, to BAT’s knowledge,
no record holders of the ordinary shares listed on the JSE had a registered
address in the US. As at 8 February 2022, based on information received
from Citibank, there were 8,883 record holders of ADSs and 259,359,198
ADSs outstanding. As at that date, based on information received from
Citibank, 8,820 record holders, representing 99.94% of ADSs representing
ordinary shares, hadaregistered address in the US.
Security Ownership – Major Shareholders
At 31 December 2021, the following substantial interests (3% or
more) in the Company’s ordinary share capital (voting securities)
had been notified to the Company in accordance with Section
5.1.2 of the Disclosure Guidance and Transparency Rules (DTRs).
Name
Number of
ordinary shares
% of issued
share capital
1
The Capital Group Companies, Inc.
2
251,653,679
10.96
Spring Mountain Investments Ltd.
3
187,023,731
8.15
BlackRock, Inc.
132,891,526
5.79
Notes:
1. The latest percentage of issued share capital excludes treasury shares.
2. Includes 18,902,551 ordinary shares represented by ADRs.
3. Includes 5,807,274 ordinary shares represented by ADRs.
Share Capital and SecurityOwnership
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
361
On 25 January 2022, The Capital Group Companies, Inc. notified the Company that, on 24 January 2022, its interest in ordinary shares had decreased
to 249,908,259 (10.89% of issued share capital), including 14,025,662 ordinary shares represented by ADRs. Its total voting rights interest increased
to a total of 253,881,130 voting rights consisting of 249,908,259 ordinary shares and 3,972,871 of equivalent financial instrruments (rights to recall lent
shares of Common Stock and rights to recall ADRs which represents 11.06% of the Company’s outstanding shares).
On 26 January 2022, The Capital Group Companies, Inc. notified the Company that, on 25 January 2022, its interest in ordinary shares had
increased to 253,762,060 (11.06% of issued share capital) including 13,652,301 ordinary shares represented by ADRs. Its total voting rights interest
increased to a total of 258,127,131 voting rights consisting of 253,762,060 ordinary shares and 4,365,071 of equivalent financial instruments (rights
to recall lent shares of Common Stock and rights to recall ADRs which represents 11.25% of the Company’s outstanding shares).
All shares held by the significant shareholders represent the Company’s ordinary shares. These significant shareholders have no special
voting rights compared with other holders of the Company’s ordinary shares.
Additional Significant Shareholding Disclosure
Portfolio Services Ltd filed with the SEC a statement on Schedule 13G under the Exchange Act on 22 January 2021 disclosing that as of
31 December 2020 Kenneth B. Dart, who is the beneficial owner of all the outstanding shares of Portfolio Services Ltd., beneficially owned
114,819,555 ordinary shares representing 5.0% of the Company’s ordinary shares outstanding as of 31 December 2020.
BlackRock, Inc. filed with the SEC an amendment to Schedule 13G under the Exchange Act on 3 February 2022 disclosing that as of
31 December 2021 it beneficially owned 184,921,039 ordinary shares representing 8.1% of the Company’s ordinary shares outstanding
as of 31 December 2021. BlackRock, Inc. filed with the SEC a statement on Schedule 13G under the Exchange Act on 29 January 2021
disclosing that as of 31 December 2020 it beneficially owned 178,392,857 ordinary shares representing 7.8% of the Company’s ordinary
shares outstanding as of 31 December 2020. BlackRock, Inc. filed with the SEC an amendment to Schedule 13G under the Exchange Act
on 7 February 2020 disclosing that as of 31 December 2019 it beneficially owned 170,313,722 ordinary shares representing 7.4% of the
Company’s ordinary shares outstanding as of 31 December 2019.
Capital Research Global Investors, a division of Capital Research and Management Company, filed with the SEC an amendment to
Schedule 13G under the Exchange Act on 16 February 2021 disclosing that as of 31 December 2020 it beneficially owned 42,749,672
ordinary shares representing 1.9% of the Company’s ordinary shares outstanding as of 31 December 2020. Capital International Investors,
a division of Capital Research and Management Company, filed with the SEC a statement on Schedule 13G under the Exchange Act
on 16 February 2021, disclosing that as of 31 December 2020 it beneficially owned 122,341,746 ordinary shares representing 5.3% of the
Company’s ordinary shares outstanding as of 31 December 2020. Capital Research Global Investors, a division of Capital Research and
Management Company, filed with the SEC an amendment to Schedule 13G under the Exchange Act on 14 February 2020 disclosing that
as of 31 December 2019 it beneficially owned 120,959,021 ordinary shares representing 5.2% of the Company’s ordinary shares outstanding
as of 31 December 2019. The notifications regarding the holdings by The Capital Group Companies, Inc., listed below, indicate that Capital
Research and Management Company is part of a chain of controlled undertakings with The Capital Group Companies, Inc.
In accordance with the DTRs, shareholders must notify the Company if their shareholding reaches, exceeds or falls below 3% of total
voting rights and each 1% threshold thereafter. The notifications received by the Company during the past three years to the best of the
Company’s knowledge are set out below.
The Capital Group Companies, Inc. notified the Company on: 8 March 2019 that its interest had increased above 11% to 253,390,697 ordinary
shares on 7 March 2019; 11 April 2019 that its interest had decreased below 11% to 252,158,534 ordinary shares on 10 April 2019; 15 April 2019
that its interest had increased above 11% to 252,776,216 ordinary shares on 11 April 2019; 16 April 2019 that its interest had decreased below 11%
to 251,780,072 ordinary shares on 15 April 2019; 19 November 2019 that its interest had increased above 11% to 253,543,406 ordinary shares on
18 November 2019; 6 January 2020 that its interest had increased above 12% to 275,376,579 ordinary shares on 3 January 2020; 26 March 2020
that its interest had decreased below 12% to 274,639,101 ordinary shares on 25 March 2020; 8 April that its interest had increased above 12% to
276,394,237 ordinary shares on 7 April 2020; 22 July 2020 that its interest had decreased below 12% to 243,800,405 ordinary shares on 20 July
2020; 6 August 2020 that its interest had decreased below 11% to 246,222,696 ordinary shares on 4 August 2020; 1 October 2020 that its interest
had increased above 11% to 256,821,004 ordinary shares on 29 September 2020; 29 March 2021 that its interest had decreased to 252,372,180
ordinary shares on 26 March 2021; 20 April 2021 that its interest had increased above 11% to 253,881,408 ordinary shares on 19 April 2021; and
15 October 2021 that its interest had decreased below 11% to 251,829,230 ordinary shares on 14 October 2021.
Spring Mountain Investments Ltd notified the Company on: 22 October 2020 that its interest had increased above the notifiable threshold of 3%
to 69,295,724 ordinary shares on 20 October 2020; 11 December 2020 that its interest had increased above 4% to 92,462,558 ordinary shares on
9 December 2020; 14 January 2021 that its interest had increased above 5% to 115,596,737 ordinary shares on 12 January 2021; 19 February 2021
that its interest had increased above 6% to 138,342,092 ordinary shares on 23 February 2021; 22 April 2021 that its interest had increased above
7% to 161,977,731 ordinary shares on 20 April 2021; 17 August 2021 that its interest had increased above 8% to 184,360,731 ordinary shares on
16 August 2021; and 12 November 2021 that its interest had increased to 187,023,731 ordinary shares on 11 November 2021.
To the extent known by BAT, BAT is not directly or indirectly owned or controlled by another corporation, any foreign government or by any
other natural or legal person, severally or jointly. BAT is not aware of any arrangements, the operation of which may at a subsequent date
result ina change of control of the Group.
Security Ownership of the Board of Directors and the Management Board
The following table presents information regarding the total amount of ordinary shares beneficially owned (outright, by their family or by
connected persons) by each current Director of BAT, each member of the Management Board and all Directors and the Management
Board as a group, as of 9 February 2022. Unless otherwise indicated, the address for each Director and member of the Management
Board listed is: c/oBritish American Tobacco p.l.c., Globe House, 4 Temple Place, London, WC2R 2PG, United Kingdom. The address for
Michael Dijanosic is Level30, Three Pacific Place, 1Queen’s Road East, Hong Kong. The address for Guy Meldrum is 401 North Main Street,
Winston-Salem, NC27101, United States of America.
BAT Annual Report and Form 20-F 2021
362
Share Capital and SecurityOwnership
Continued
Other Information
Number of Ordinary Shares
Percentage of Class
10
Directors
Luc Jobin
1
90,236
0.0039
Jack Bowles
2,3
239,214
0.0104
Tadeu Marroco
2,3,4
78,136
0.0034
Sue Farr
– –
Karen Guerra
5,000
0.0002
Dr Marion Helmes
4,500
0.0002
Holly Keller Koeppel
5
– –
Savio Kwan
8,238 0.0004
Dimitri Panayotopoulos
3,300
0.0001
Darrell Thomas
1
2,600
0.0001
Management Board
Jerome Abelman
6,7, 8
102,664
0.0045
Marina Bellini
6
2,551
0.0001
Luciano Comin
6,7, 8
30,523
0.0013
Michael Dijanosic
6,7, 8
28,876
0.0013
Zafar Khan
6,7, 8
415
0.0000
Hae In Kim
6,7, 8]
18,294 0.0008
Paul Lageweg
6,7,8,9
150,447
0.0066
Guy Meldrum
6,7, 8
25,299
0.0011
David O’Reilly
6,7, 8
77,822
0.0034
Johan Vandermeulen
6,7, 8
77,506
0.0034
Kingsley Wheaton
6,7, 8
61,992
0.0027
All Directors and Management Board as a group (21 persons)
1,007,613
0.0260
Notes:
1. The ordinary shares beneficially owned by Mr Jobin and Mr Thomas are represented by ADSs, each of which represents one ordinary share.
2. The number of ordinary shares beneficially owned by the Executive Directors include ordinary shares awarded and required to be held for a period of at least three years in a UK-based trust under
the SIP. Ordinary shares cannot be sold or transferred out of the trust until the end of the three-year holding period. The amounts next to the corresponding Executive Director include the following
ordinary shares held in the trust under the SIP: (a) 822 ordinary shares for Mr Bowles, of which 451 have been held for less than three years; (b) 1,347 ordinary shares for Mr Marroco, of which 529 have
been held for less than three years. In all cases, the beneficial owner of ordinary shares under the SIP may direct the trust to exercise its voting rights in accordance with his instructions. See footnote
(5) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of Directors and the Management Board’ for additional details regarding the SIP
and the ordinary shares held thereunder.
3. The number of ordinary shares beneficially owned by the Executive Directors include the following number of awards of restricted ordinary shares granted under the DSBS that are scheduled to vest
within 60 days of 9 February 2022: (a) 26,192 ordinary shares for Mr Bowles; (b) 13,233 ordinary shares for Mr Marroco. Until awards of ordinary shares under the DSBS vest, they are held in trust and
the recipient of such award does not have the ability to transfer, sell or direct the voting of the applicable ordinary shares. See footnote (4) to the table below under the heading ‘Outstanding Share-
based Awards and Options-based Awards of the Board of Directors and the Management Board’ for additional details regarding the DSBS.
4. The number of ordinary shares beneficially owned by Mr Marroco includes 36,057 options granted under the LTIP that are scheduled to vest and may be exercised within 60 days of 9 February 2022.
Each option is convertible into one ordinary share upon exercise. See footnote (1) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of
Directors and the Management Board’ for additional details regarding the LTIP.
5. Ms Koeppel, being a former director of Reynolds American Inc. and a participant in the Deferred Compensation Plan for Directors of Reynolds American Inc. (DCP), holds DSUs which were granted
prior to becoming a Director of BAT. Each DSU entitles the holder to receive a cash payment upon ceasing to be a Director equal to the value of one BAT ADS. The number of DSUs increases on each
dividend date by reference to the value of dividends declared on the ADSs underlying the DSUs. Ms Koeppel currently holds 26,660.09 DSUs.
6. The number of ordinary shares beneficially owned by the members of the Management Board include ordinary shares awarded and required to be held for a period of at least three years in a UK-based
trust under the SIP. Ordinary shares cannot be sold or transferred out of the trust until the end of the three-year holding period. The amounts next to the corresponding Management Board member
include the following ordinary shares held in the trust under the SIP: (a) 1,159 ordinary shares for Mr Abelman, of which 498 have been held for less than three years; (b) 551 ordinary shares for Ms Bellini,
of which 371 have been held for less than three years; (c) 1,199 ordinary shares for Mr Comin, of which 502 have been held for less than three years; (d)30ordinary shares for Mr Dijanosic, all of which 30
have been held for less than three years; (e) 359ordinary shares for Mr Khan, all of which 207 have been held for less than three years; (f) 460 ordinary shares for Ms Kim, all of which 387 have been held
for less than three years; (g) 601 ordinary shares for Mr Lageweg, 382 of which have been held for less than three years; (h) 400 ordinary shares for Mr Meldrum, 329 of which have been held for less
than three years; (i) 2,517 ordinary shares for Dr O’Reilly, of which 760 have been held for less than three years; (j) 1,162 ordinary shares for Mr Vandermeulen, of which 492 have been held for less than
three years; and (k) 1,278 ordinary shares for Mr Wheaton, of which 535 have been held for less than three years. In all cases, the beneficial owner of ordinary shares under the SIP may direct the trust
to exercise its voting rights in accordance with their instructions. See footnote (5) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of
Directors and the Management Board’ for additional details regarding the SIP and the ordinary shares held thereunder.
7. The number of ordinary shares beneficially owned by the members of the Management Board include the following number of options granted under the LTIP that are scheduled to vest and may be
exercised within 60 days of 9 February 2022: (a) 37,560 options under the LTIP for Mr Abelman; (b) 29,296 options under the LTIP for Ms Bellini; (c) 31,550 options under the LTIP for Mr Comin; (d) 8,862
options under the LTIP for Mr Khan; (e) 30,048 options under the LTIP for Ms Kim; (f) 29,296 options under the LTIP for Mr Lageweg; (g) 31,550 options under the LTIP for Mr Meldrum; (h) 30,048 options
under the LTIP for Dr O’Reilly; (i) 8,299 options under the LTIP for Mr Dijanosic; (j) 39,438 options under the LTIP for Mr Vandermeulen; (k) 43,194 options under the LTIP for Mr Wheaton. Each option is
convertible into one ordinary share upon exercise. See footnote (1) to the table below under the heading ‘Outstanding Share-based Awards and Options-based Awards of the Board of Directors and
the Management Board’ for additional details regarding the LTIP.
8. The number of ordinary shares beneficially owned by the members of the Management Board include the following number of awards of restricted ordinary shares granted under the DSBS that are
scheduled to vest within 60 days of 9 February 2022: (a) 13,785 ordinary shares for Mr Abelman; (b) 5,084 ordinary shares for Mr Comin; (c) 2,981 ordinary shares for Mr Khan; (d) 3,798 ordinary shares
for Ms Kim; (e) 5,265 ordinary shares for Mr Lageweg; (f) 5,651 ordinary shares for Mr Meldrum; (g) 11,028 ordinary shares for Dr O’Reilly; (h) 2,827 ordinary shares for Mr Dijanosic; (i) 13,785 ordinary
shares for Mr Vandermeulen; (j) 13,785 ordinary shares for Mr Wheaton; and (k) 5,525 ordinary shares for Ms Bellini. Until awards of ordinary shares under the DSBS vest, they are held in trust and the
recipient of such award does not have the ability to transfer, sell or direct the voting of the applicable ordinary shares. See footnote (4) to the table below under the heading ‘Outstanding Share-based
Awards and Options-based Awards of the Board of Directors and the Management Board’ for additional details regarding the DSBS.
9. The number of ordinary shares beneficially owned by Mr Lageweg includes 109,558 ADSs, each of which represents one ordinary share.
10. The information in this column is based on 2,294,690,625 ordinary shares outstanding (excluding treasury shares) as of 9 February 2022. Any securities not outstanding subject to options, warrants,
rights or conversion privileges that give the beneficial owner the right to acquire the securities within 60 days are deemed to be outstanding for the purpose of computing the percentage of
outstanding securities of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class by any other person.
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
363
Outstanding Share-Based Awards and Options-Based Awards of the Board of Directors and
the Management Board
The following table presents information regarding the options and the restricted share awards held by the Directors and the
Management Board as of 9 February 2022. The following Directors (being the Chairman and the Non-Executive Directors) have not been
granted share-based Awards or Options-based Awards over ordinary shares: Mr Jobin, Ms Farr, Ms Guerra, Dr Helmes, Ms Koeppel,
MrKwan, MrPanayotopoulos and Mr Thomas.
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Directors
Jack Bowles
LTIP
1
176,532
28 Mar 2019
0.00
33.28
–
28 Mar 2024 – 27 Mar 2029223,129
30 Mar 2020
0.0026.33
–
30 Mar 2025 – 29 Mar 2030
230,314
29 Mar 2021
0.00
27.94
–
29 Mar 2026 – 28 Mar 2031Total Options
3
629,975
DSBS
4
– –
28 Mar 2019
–26,192
28 Mar 2022
– –
30 Mar 2020
–53,618
30 Mar 2023
– –
29 Mar 2021
–40,052
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– – 6
8 May 2019
–8 May 2022
– – 8
8 Aug 2019
–8 Aug 2022
– – 9
14 Nov 2019
–14 Nov 2022
– – 7
6 Feb 2020
–6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– – 9
13 May 2020
–13 May 2023
– –
19 Aug 2020
–13
19 Aug 2023
– –
12 Nov 2020
–12
12 Nov 2023
– –
5 Feb 2021
–13
5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– –
12 May 2021
–13
12 May 2024
– –
20 Aug 2021
–16
20 Aug 2024
– –
11 Nov 2021
–16
11 Nov 2024
Total Restricted Share Awards
6
120,313
BAT Annual Report and Form 20-F 2021
364
Share Capital and SecurityOwnership
Continued
Other Information
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Tadeu Marroco
LTIP
1
36,057
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 2029113,938
30 Mar 2020
0.00
26.33
–
30 Mar 2025 – 29 Mar 2030
115,017
29 Mar 2021
0.00
27.94
–
29 Mar 2026 – 28 Mar 2031Sharesave
2
624
30 Mar 2020
24.0126.35
–
1 May 2025 – 31 Oct 2025
Total Options
3
265,636
DSBS
4
– –
28 Mar 2019
–13,233
28 Mar 2022
– –
30 Mar 2020
–24,388
30 Mar 2023
– –
29 Mar 2021
–18,727
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– –
8 May 2019
–11
8 May 2022
– –
8 Aug 2019
–13
8 Aug 2022
– –
14 Nov 2019
–14
14 Nov 2022
– –
6 Feb 2020
–12
6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– –
13 May 2020
–14
13 May 2023
– –
19 Aug 2020
–21
19 Aug 2023
– –
12 Nov 2020
–20
12 Nov 2023
– –
5 Feb 2021
–21
5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– –
14 May 2021
–22
14 May 2024
– –
20 Aug 2021
–25
20 Aug 2024
– –
11 Nov 2021
–27
11 Nov 2024
Total Restricted Share Awards
6
56,877
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
365
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Management Board
Jerome Abelman
LTIP
1
37,560
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 202940,676
30 Mar 2020
0.00
26.33
–
30 Mar 2023 – 29 Mar 2030
38,715
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
10,653
30 Mar 2020
0.00
26.33
–
30 Mar 2023
10,139
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
137,743
DSBS
4
– –
28 Mar 2019
–13,785
28 Mar 2022
– –
30 Mar 2020
–15,824
30 Mar 2023
– –
29 Mar 2021
–11,114
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– – 9
8 May 2019
–8 May 2022
– –
8 Aug 2019
–10
8 Aug 2022
– –
14 Nov 2019
–11
14 Nov 2022
– –
6 Feb 2020
–10
6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– –
13 May 2020
–12
13 May 2023
– –
19 Aug 2020
–18
19 Aug 2023
– –
12 Nov 2020
–17
12 Nov 2023
– –
5 Feb 2021
–18
5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– –
12 May2021
–18
12 May 2024
– –
20 Aug 2021
–22
20 Aug 2024
– –
11 Nov 2021
–24
11 Nov 2024
Total Restricted Share Awards
6
41,221
BAT Annual Report and Form 20-F 2021
366
Share Capital and SecurityOwnership
Continued
Other Information
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Marina Bellini
LTIP
1
29,296
28 Mar 2019
0.0033.28
–
28 Mar 2022 – 27 Mar 2029
31,105
30 Mar 2020
0.00
26.33
–
30 Mar 2023 – 29 Mar 2030
39,835
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
8,146
30 Mar 2020
0.00
26.33
–
30 Mar 2023
10,433
29 Mar 2021
0.00
27.94
–
29 Mar 2024Sharesave
2
785
28 Mar 2019
22.91
28.63
–
1 May 2022 – 31 Oct 2022Total Options
3
119,600
DSBS
4
– –
28 Mar 2019
–5,525
28 Mar 2022
– –
30 Mar 2020
–12,101
30 Mar 2023
– –
29 Mar 2021
–10,711
29 Mar 2024
SIP
5
– –
1 Apr 2019
–99
1 Apr 2022
– – 1
8 Aug 2019
–8 Aug 2022
– – 3
14 Nov 2019
–14 Nov 2022
– – 2
6 Feb 2020
–6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– – 2
13 May 2020
–13 May 2023
– – 7
19 Aug 2020
–19 Aug 2023
– – 6
12 Nov 2020
–12 Nov 2023
– – 7
5 Feb 2021
–5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– – 7
12 May 2021
–14 May 2024
– –
20 Aug 2021
–10
20 Aug 2024
– –
11 Nov2021
–10
11 Nov 2024
Total Restricted Share Awards
6
28,708
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
367
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Luciano Comin
LTIP
1
31,550
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 20295,299
30 Mar 2020
0.0025.52
–
30 Mar 2023 – 29 Mar 2030
36,077
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
8,773
30 Mar 2020
0.00
26.33
–
30 Mar 2023
9,448
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
91,147
DSBS
4
– –
28 Mar 2019
–5,084
28 Mar 2022
– –
30 Mar 2020
–13,032
30 Mar 2023
– –
29 Mar 2021
–10,059
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– – 9
8 May 2019
–8 May 2022
– –
8 Aug 2019
–11
8 Aug 2022
– –
14 Nov 2019
–12
14 Nov 2022
– –
6 Feb 2020
–10
6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– –
13 May 2020
–13
13 May 2023
– –
19 Aug 2020
–18
19 Aug 2023
– –
12 Nov 2020
–17
12 Nov 2023
– –
5 Feb 2021
–18
5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– –
12 May 2021
–19
14 May 2024
– –
20 Aug 2021
–22
20 Aug 2024
– –
11 Nov2021
–24
11 Nov 2024
Total Restricted Share Awards
6
28,677
Michael Dijanosic
LTIP
1
8,299
28 Mar 2019
0.0033.28
–
28 Mar 2022 – 27 Mar 2029
7,739
30 Mar 2020
0.00
26.33
–
30 Mar 2023 – 29 Mar 2030
31,567
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
2,149
30 Mar 2020
0.00
26.33
–
30 Mar 2023
8,267
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
58,021
DSBS
4
– –
28 Mar 2019
–2,827
28 Mar 2022
– –
30 Mar 2020
– 2,746
30 Mar 2023
– –
29 Mar 2021
–4,873
29 Mar 2024
SIP
5
– –
1 Apr 2021
–30
1 Apr 2024
Total Restricted Share Awards
6
10,476
BAT Annual Report and Form 20-F 2021
368
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Zafar Khan
LTIP
1
8,862
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 20298,855
30 Mar 2020
0.00
25.52
–
30 Mar 2023 – 29 Mar 2030
31,567
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
2,459
30 Mar 2020
0.00
26.33
–
30 Mar 2023
8,043
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
59,786
DSBS
4
– –
28 Mar 2019
–2,981
28 Mar 2022
– –
30 Mar 2020
–3,062
30 Mar 2023
– –
29 Mar 2021
–2,992
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– –
1 Apr 2021
–92
1 Apr 2024
– – 1
20 Aug 2021
–20 Aug 2024
– – 2
11 Nov 2021
–11 Nov 2024
Total Restricted Share Awards
6
9,242
Hae In Kim
LTIP
1
30,048
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 20292,802
6 Apr 2020
0.00
29.50
–
6 Apr 2023 – 5 Apr 2030
35,325
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
8,355
30 Mar 2020
0.00
26.33
–
30 Mar 2023
9,251
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
85,781
DSBS
4
– –
28 Mar 2019
–3,798
28 Mar 2022
– –
30 Mar 2020
–12,411
30 Mar 2023
– –
29 Mar 2021
–9,789
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– – 1
8 May 2019
–8 May 2022
– – 3
8 Aug 2019
–8 Aug 2022
– – 4
14 Nov 2019
–14 Nov 2022
– – 3
6 Feb 2020
–6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– – 3
13 May 2020
–13 May 2023
– – 7
19 Aug 2020
–19 Aug 2023
– – 6
12 Nov 2020
–12 Nov 2023
– – 6
5 Feb 2021
–5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– – 7
12 May 2021
–14 May 2024
– – 9
20 Aug 2021
–20 Aug 2024
– – 9
11 Nov2021
–11 Nov 2024
Total Restricted Share Awards
6
26,385
Share Capital and SecurityOwnership
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
369
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Paul Lageweg
LTIP
1
29,296
28 Mar 2019
0.0033.28
–
28 Mar 2022 – 27 Mar 2029
31,105
30 Mar 2020
0.00
26.33
–
30 Mar 2023 – 29 Mar 2030
36,159
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
8,146
30 Mar 2020
0.00
26.33
–
30 Mar 2023
9,470
29 Mar 2021
0.00
27.94
–
29 Mar 2024Sharesave
2
1,309
28 Mar 2019
22.91
28.63
–
1 May 2024 – 31 Oct 2024Total Options
3
115,485
DSBS
4
– –
28 Mar 2019
–5,265
28 Mar 2022
– –
30 Mar 2020
–12,101
30 Mar 2023
– –
29 Mar 2021
–9,580
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– – 1
8 May 2019
–8 May 2022
– – 2
8 Aug 2019
–8 Aug 2022
– – 3
14 Nov 2019
–14 Nov 2022
– – 2
6 Feb 2020
–6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– – 3
13 May 2020
–13 May 2023
– – 6
19 Aug 2020
–19 Aug 2023
– – 5
12 Nov 2020
–12 Nov 2023
– – 6
5 Feb 2021
–5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– – 6
12 May 2021
–14 May 2024
– – 9
20 Aug 2021
–20 Aug 2024
– –
11 Nov2021
–10
11 Nov 2024
Total Restricted Share Awards
6
27,328
Guy Meldrum
LTIP
1
31,550
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 20295,633
12 Aug 2020
0.00
26.36
–
12 Aug 2023 – 11 Aug 2030
43,593
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
8,773
30 Mar 2020
0.00
26.33
–
30 Mar 2023
11,417
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
100,966
DSBS
4
– –
28 Mar 2019
–5,651
28 Mar 2022
– –
30 Mar 2020
–13,032
30 Mar 2023
– –
29 Mar 2021
–10,780
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– –
1 Apr 2020
–125
1 Apr 2023
– –
1 Apr 2021
–92
1 Apr 2024
Total Restricted Share Awards
6
29,792
BAT Annual Report and Form 20-F 2021
370
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Dr David O’Reilly
LTIP
1
30,048
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 202912,354
2 Apr 2020
0.00
25.52
–
2 Apr 2023 – 1 Apr 2030
31,282
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
8,522
30 Mar 2020
0.00
26.33
–
30 Mar 2023
8,192
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
90,398
DSBS
4
– –
28 Mar 2019
–11,028
28 Mar 2022
– –
30 Mar 2020
–12,659
30 Mar 2023
– –
29 Mar 2021
–8,958
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– –
8 May 2019
–31
8 May 2022
– –
8 Aug 2019
–32
8 Aug 2022
– –
14 Nov 2019
–33
14 Nov 2022
– –
6 Feb 2020
–29
6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– –
13 May 2020
–34
13 May 2023
– –
19 Aug 2020
–44
19 Aug 2023
– –
12 Nov 2020
–42
12 Nov 2023
– –
5 Feb 2021
–43
5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– –
12 May 2021
–44
14 May 2024
– –
20 Aug 2021
–48
20 Aug 2024
– –
11 Nov2021
–51
11 Nov 2024
Total Restricted Share Awards
6
33,405
Share Capital and SecurityOwnership
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
371
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Johan Vandermeulen
LTIP
1
39,438
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 202941,872
30 Mar 2020
0.00
26.33
–
30 Mar 2023 – 29 Mar 2030
40,662
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
10,966
30 Mar 2020
0.00
26.33
–
30 Mar 2023
10,649
29 Mar 2021
0.00
27.94
–
29 Mar 2024Total Options
3
143,587
DSBS
4
– –
28 Mar 2019
–13,785
28 Mar 2022
– –
30 Mar 2020
–16,290
30 Mar 2023
– –
29 Mar 2021
–11,615
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– – 8
8 May 2019
–8 May 2022
– –
8 Aug 2019
–10
8 Aug 2022
– –
14 Nov 2019
–11
14 Nov 2022
– –
6 Feb 2020
–10
6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– –
13 May 2020
–11
13 May 2023
– –
19 Aug 2020
–18
19 Aug 2023
– –
12 Nov 2020
–16
12 Nov 2023
– –
5 Feb 2021
–17
5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– –
12 May 2021
–18
14 May 2024
– –
20 Aug 2021
–21
20 Aug 2024
– –
11 Nov2021
–23
11 Nov 2024
Total Restricted Share Awards
6
42,182
BAT Annual Report and Form 20-F 2021
372
Number of
Options Held
Date of
Grant/Award
Options
Exercise Price
£
Market Price
at Date of Grant
of Option
£
Number of
Shares
Awarded
Exercisable (LTIP/Sharesave)
Vesting (DSBS/SIP)
Kingsley Wheaton
LTIP
1
43,194
28 Mar 2019
0.00
33.28
–
28 Mar 2022 – 27 Mar 202946,777
30 Mar 2020
0.00
26.33
–
30 Mar 2023 – 29 Mar 2030
48,578
29 Mar 2021
0.00
27.94
–
29 Mar 2024 – 28 Mar 2031Restricted Share Plan
7
12,251
30 Mar 2020
0.00
26.33
–
30 Mar 2023
12,722
29 Mar 2021
0.00
27.94
–
29 Mar 2024Sharesave
2
1,309
28 Mar 2019
22.91
28.63
–
1 May 2024 – 31 Oct 2024Total Options
3
164,831
DSBS
4
– –
28 Mar 2019
–13,785
28 Mar 2022
– –
30 Mar 2020
–18,198
30 Mar 2023
– –
29 Mar 2021
–13,454
29 Mar 2024
SIP
5
– –
1 Apr 2019
–112
1 Apr 2022
– –
8 May 2019
–13
8 May 2022
– –
8 Aug 2019
–14
8 Aug 2022
– –
14 Nov 2019
–16
14 Nov 2022
– –
6 Feb 2020
–13
6 Feb 2023
– –
1 Apr 2020
–125
1 Apr 2023
– –
13 May 2020
–15
13 May 2023
– –
19 Aug 2020
–22
19 Aug 2023
– –
12 Nov 2020
–20
12 Nov 2023
– –
5 Feb 2021
–22
5 Feb 2024
– –
1 Apr 2021
–92
1 Apr 2024
– –
12 May 2021
–21
14 May 2024
– –
20 Aug 2021
–24
20 Aug 2024
– –
11 Nov2021
–26
11 Nov 2024
Total Restricted Share Awards
6
45,972
Notes:
Options
1. LTIP: grants or awards of ordinary shares under the LTIP are for nil consideration. The number of options shown is the maximum that may be exercised subject to the completion of the
applicable performance period and conditions under the rules of the LTIP. The number of options which may vest and become exercisable may be less than the number of ordinary shares
shown in the table.
2. Sharesave Scheme: grants of options under the Sharesave Scheme are: (a) normally granted at a discount of 20% to the market price of ordinary shares at the time of invitation, as permitted
by the rulesofthe Sharesave Scheme; and (b) are exercisable at the end of a three-year or five-year savings contract up to a monthly limit of £500.
3. Each of the LTIP and Sharesave Scheme contains provisions which permit the Board of Directors or a duly authorised committee of the Board of Directors to establish further plans for
the benefit of overseas employees based on the relevant share plan but modified as necessary or desirable to take account of overseas tax, exchange control or applicable securities laws.
Any new ordinary shares issued under such plans would not count towards any applicable plan limits under the LTIP or the Sharesave Scheme.
Restricted Share Awards
4. DSBS: a portion of annual bonus is deferred into a grant of ordinary shares which vests after a three year period. No further performance conditions apply in that period. Participants have no
ownership over the shares until vesting and the shares carry no rights to vote in that period. Dividend equivalent payments are paid quarterly during the vesting period.
5. SIP: the SIP is an all-employee plan which includes the SRS under which eligible employees receive an award of ordinary shares (Free Shares) in April of each year in which the plan operates
in respect of performance in the previous financial year. The Free Shares are held in a UK-based trust from the date of the award for a minimum period of three years. During that time the
SIP participant is entitled to receive dividends on those ordinary shares which are re-invested by such trust to buy further ordinary shares (Dividend Shares) on behalf of the SIP participant.
The Dividend Shares are also held in the trust from the date of acquisition for a minimum period of three years. During the three-year holding periods, the SIP participant may not remove the
Free Shares or the Dividend Shares from the trust, but may direct the trust to exercise its voting rights in accordance with his or her instructions. In addition to the Free Shares and Dividend
Shares, participants in the SIP are also eligible to purchase additional ordinary shares from their pre-tax salary up to an annual statutory limit (Partnership Shares). The SIP also provides
that BAT has the right to offer additional ordinary shares to a participant at no cost for each Partnership Share the participant purchases, at a ratio of two such ordinary shares for each
Partnership Share purchased (Matching Shares). BAT does not currently provide any Matching Shares.
6. BAT has established similar plans to the SIP for non-UK employees and specific plans for employees in Germany, Belgium and the Netherlands. Each of these plans has been modified to take
account ofoverseas tax, exchange control and applicable securities laws.
7. Restricted Share Plan: grant of ordinary shares which vests after a three year period. No performance conditions apply in that period. Participants have no ownership over the shares until
vesting and the shares carry no rights to vote in that period. Dividend equivalent payments are paid on shares vesting.
Share Capital and SecurityOwnership
Continued
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
373
The Company is incorporated under the name of British American Tobacco p.l.c. and is registered in England and Wales under registered
number 3407696. Under the Companies Act 2006 (the “Companies Act”), the Company’s objects are unrestricted. The following
descriptions summarise certain provisions of the Company’s current Articles of Association (the “Articles”) (as adopted by special
resolution at the AGM on 28April 2010), applicable English and Welsh law and the Companies Act. This summary is qualified in its
entirety by reference to the Companies Act and the Articles, available on bat.com. The Articles may be altered or added to, or completely
new articles may be adopted, by a special resolution of the shareholders of the Company, subject to the provisions of the Companies Act.
Share capital – structure
Ordinary shares
–
all of the Company’s ordinary shares are fully paid
–
no further contribution of capital may be required by the Company from the holders of such shares
Alteration of share capital – the Company by ordinary resolution may:
–
consolidate and divide all or any of its shares into shares of a larger amount than its existing shares
–
divide or sub-divide any of its shares into shares of smaller amount than its existing shares
–
determine that, as between the shares resulting from such a sub-division, any of them may have any preference or advantage as
compared with the others
Alteration of share capital – the Company, subject to the provisions of the Companies Act, may:
–
reduce its share capital, its capital redemption reserve and any share premium account in any way
–
purchase its own shares, including redeemable shares, and may hold such shares as treasury shares or cancel them
Dividend rights
–
shareholders may, by ordinary resolution, declare dividends but not in excess of the amount recommended by the Directors
–
the Directors may pay interim dividends out of distributable profits
–
no dividend shall be paid otherwise than out of the profits available for distribution as specified under the provisions of the
Companies Act
–
the Directors may, with the authority of an ordinary resolution of the shareholders, pay scrip dividends or satisfy the payment of a
dividend bythe distribution of specific assets
–
unclaimed dividends for a period of 12 years may be forfeited and cease to be owed by the Company
–
specific provisions enable the Directors to elect to pay dividends by bank or electronic transfer only
Share capital – voting rights
Voting at general meetings
–
by a show of hands, unless a poll is demanded, and on a show of hands, every shareholder who is present in person at a general meeting has one
vote regardless of the number of shares held by that shareholder
–
every proxy appointed by a shareholder and present at a general meeting has one vote except that if the proxy has been duly appointed by more
than one shareholder entitled to vote on the resolution and is instructed by one or more of those shareholders to vote for the resolution and by
one or more others to vote against it, or is instructed by one or more of those shareholders to vote in one way and is given discretion as to how to
vote by one or more others (and wishes to use that discretion to vote in the other way), he has one vote for and one vote against the resolution
–
on a poll, every shareholder who is present in person or by proxy has one vote for every share held by the shareholder
–
a shareholder (or his duly appointed proxy) entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way
–
a poll may be demanded by any of the following:
(1) the Chairman of the meeting;
(2) the Directors;
(3) not less than five shareholders having the right to vote at the meeting;
(4) a shareholder or shareholders representing not less than one-tenth of the total voting rights of all shareholders having the right to vote atthe
meeting (excluding any voting rights attached to treasury shares); or
(5) a shareholder or shareholders holding shares which confer a right to vote on the resolution at the meeting being shares on which an
aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right (excluding any
voting rights attached to treasury shares)
Matters transacted at general meetings
–
ordinary resolutions can include resolutions for the appointment, reappointment and removal of Directors, the receiving of the Annual Report,
the declaration of final dividends, the appointment and reappointment of the external auditor, the authority for the Company topurchase its own
shares and the grant of authority to allot shares
–
an ordinary resolution is passed when a simple majority of the votes cast at a meeting at which there is a quorum vote in favour of the resolution
–
special resolutions can include resolutions amending the Company’s Articles and resolutions relating to certain matters concerning
awinding-up of the Company
–
a special resolution is passed when not less than three-quarters of the votes cast at a meeting at which there is a quorum vote in favour
ofthe resolution
–
quorum for a meeting of the Company is a minimum of two shareholders present in person or by proxy or by a duly authorised representative(s)
of a corporation which is a shareholder and entitled to vote
–
convening a meeting: the Company may specify a time not more than 48 hours before the time of the meeting (excluding any part of a day that
isnot a working day) by which a person must be entered on the register of members in order to have the right to attend or vote atthe meeting
Articles of Association
BAT Annual Report and Form 20-F 2021
374
Other Information
Articles of Association
Continued
Share capital – pre-emptive rights and new issues of shares
–
holders of ordinary shares have no pre-emptive rights under the Articles – the ability of the Directors to cause the Company to issue
shares, securities convertible into shares or rights to shares, otherwise than pursuant to an employee share scheme, is restricted
–
under the Companies Act, the directors of a company are, with certain exceptions, unable to allot any equity securities without express
authorisation, which may be contained in a company’s articles of association or given by its shareholders in a general meeting, but
which ineither event cannot last for more than five years
–
under the Companies Act, a company may also not allot shares for cash (otherwise than pursuant to an employee share scheme)
without first making an offer to existing shareholders to allot such shares to them on the same or more favourable terms in proportion
to their respective shareholdings, unless this requirement is waived by a special resolution of the shareholders
Restrictions on transfers of shares
–
Directors can, in their absolute discretion, refuse to register the transfer of a share in certificated form which is not fully paid, provided
that such a refusal would not prevent dealings in shares in certificated form which are not fully paid from taking place on a proper basis
–
the Directors may also refuse to register a transfer of a share in certificated form (whether fully paid or not) unless the instrument of
transfer: (1) is lodged, duly stamped, and is deposited at the registered office of the Company or such other place as the Directors may
appoint and isaccompanied by a certificate for the shares to which it relates and such other evidence as the Directors may reasonably
require to show the right of the transferor to make the transfer; (2) is in respect of only one class of share; and (3) is in favour of not
more than four transferees
–
for uncertificated shares, transfers shall be registered only in accordance with the terms of the Uncertificated Securities Regulations
2001 sothat Directors may refuse to register a transfer which would require shares to be held jointly by more than four persons
–
if the Directors refuse to register a share transfer, they must give the transferee notice of this refusal as soon as practicable and in any
event within two months of the instrument of transfer being lodged with the Company
Repurchase of shares
–
subject to authorisation by shareholder resolution, the Company may purchase its own shares in accordance with the Companies Act
–
any shares which have been bought back may be held as treasury shares or, if not so held, must be cancelled immediately upon
completion ofthe purchase, thereby reducing the amount of the Company’s issued share capital
Directors
Appointment and retirement
–
a Board of Directors of not fewer than five Directors and not subject to any maximum (unless otherwise determined by ordinary
resolution of shareholders)
–
Directors and the Company (by ordinary resolution) may appoint a person who is willing to act as a Director
–
the Articles govern the minimum number of Directors who must be subject to retirement at each AGM and who may seek re-election
–
notwithstanding the Articles, all of the Directors of the Company will be subject to re-election at the forthcoming AGM to be held
on28April2022 in accordance with the UK Corporate Governance Code
–
fees for Non-Executive Directors and the Chairman are determined by the Directors but cannot currently exceed in aggregate an
annual sumof £2,500,000, unless determined otherwise by ordinary resolution of the shareholders
–
the remuneration of the Executive Directors is determined by the Remuneration Committee, which comprises independent
Non-ExecutiveDirectors
Disclosure of interests
–
the Articles require disclosure, subject to certain limited exceptions, of Directors’ interests in transactions that may result in a conflict
of interest, including those which may arise as a result of the Director’s office or employment or persons connected with such Director,
and identify procedures to resolve such conflicts of interest
Meetings and voting
–
the quorum for a meeting of Directors is two Directors
–
the Directors may delegate any of their powers to a person or a committee
–
the Articles place a general prohibition on a Director voting at a Board meeting on any matter in which he has an interest other than
byvirtueof his interest in shares in the Company
–
the Articles restrict a Director’s ability to vote on any resolution concerning a matter in which such Director has a material interest,
unless such Director’s interest arises only because the resolution relates to the giving of guarantees; the provision of indemnities;
insurance proposals; retirement benefits; and other specified transactions or arrangements with a company in which the Director may
have an indirect interest
Borrowing powers
–
the Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property,
assets (present and future) and uncalled capital
–
the Directors may also issue debentures, debenture stock and other securities
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
375
Additional disclosures
Disclosure of ownership of shares
–
there are no provisions in the Articles whereby persons acquiring, holding or disposing of a certain percentage of the Company’s
ordinary shares are required to make disclosure of their ownership percentage, although there are such requirements under statute
and regulation
Director retirement
–
there is no requirement for a Director to retire on reaching any age
Sinking funds
–
there is no sinking fund provision in the Articles applicable to the Company’s ordinary shares
Limitations on voting and shareholding
–
there are no limitations under the Articles restricting the right of non-resident or foreign owners to hold or vote ordinary shares in
the Company
Distribution of assets on a winding up
–
if the Company is wound up, the liquidator may, with the sanction of a special resolution and any other sanction required by law, divide
among the members in specie the whole or any part of the assets of the Company and may, for that purpose, value any assets and
determine how the division shall be carried out as between the members or different classes of members
–
the liquidator may, with the like sanction, vest the whole or any part of the assets in trustees upon such trusts for the benefit of the
members as he may with the like sanction determine, but no member shall be compelled to accept any assets upon which there is
a liability
Anti-takeover devices and change of control
–
there are no provisions in the Articles that would have the effect of delaying, deferring or preventing a takeover, or change of control, of
the Company
–
under English law, the Company’s Directors have a fiduciary duty to take only those actions that are in the interests of the Company
and any anti-takeover devices employed by the Directors in the future, if any, must accordingly be in the interests of the Company
–
the Company is also subject to the City Code on Takeovers and Mergers (the “City Code”), which governs the conduct of mergers and
takeovers in the UK. Any takeover of the Company would have to be in accordance with the City Code
BAT Annual Report and Form 20-F 2021
376
Purchase of Shares
Renewal of Authority for Company to Purchase Own Shares
Current authority
to purchase shares
–
this authority (granted at the 2021 AGM) will expire at the 2022 AGM; and
–
renewed authority to purchase the Company’s ordinary shares in order that the appropriate mechanisms
areinplace to enable the share buy-back programme to be reinstated at any time and authority would be
exercised when, in the opinion of the Directors, the exercise of the authority would result in an increase in the
Company’s earnings per share and would be in the interest ofitsshareholders generally.
Proposed authority
topurchase shares
–
the minimum price that may be paid for such shares is 25p, and the maximum price is the higher of: (i) an amount equal
to 105% of the average of the middle-market prices shown in the quotation for an ordinary share as derived from the LSE
Daily Official List for the five business days immediately preceding the day on which the ordinary share is contracted tobe
purchased; and (ii) the higher of the price of the last independent trade and the highest current independent bid for an
ordinary share in the Company on the trading venues where the market purchases by the Company will be carried out;
–
in the absence of the necessary practical arrangements, the proposed authority has not been extended to enable BAT to
purchase its own ordinary shares on the JSE in South Africa or the NYSE in the form of ADSs; and
–
further details are set out in the Notice of Annual General Meeting 2022 which is made available toallshareholders and is
published on bat.com.
Treasury shares
–
in accordance with the Company’s policy, any repurchased shares are expected to be held astreasury shares;
at 31 December 2021, the number of treasury shares was 161,930,217 (2020: 162,347,246); no dividends are
paidontreasury shares; treasury shares have no voting rights; and treasury shares may be resold at a later date.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
At the AGM on 28April 2021, authorisation was given to the Company to repurchase up to 229.4million ordinary shares forthe period until the next
AGM in 2022. This authorisation is renewed annually at the AGM. No ordinary shares were repurchased by the Company during 2021. The following
table provides details of ordinary share purchases made by the trustees ofemployee share ownership plans (“ESOPs”) and other purchases of ordinary
shares and ADSs made to satisfy the commitments to deliver shares under certain employee share-based payment plans.
Total number of
ordinary
shares purchased
by ESOPs or certain
employee share-
based plans
Average price
paid per
ordinary share
£
Total number of
ADSs purchased
by ESOPs or certain
employee share-
based plans
Average price
paid per
ADS
US$
Total number of
ordinary shares
purchased as
part of a publicly
announced plan
1
Maximum number of
shares that may
yet be purchased as
part of a publicly
announced plan
1
2021
7 January
3,046
28.118500
– – – –
3 February
3,187
27.188100
– – – –
3 February
21,151
27.127600
– – – –
3 March
3,407
25.498700
– – – –
31 March
1,783,215
27.709844
– – – –
1 April
322,326
27.239586
– – – –
1 April
177,289
27.320552
– – – –
1 April
7,041
27.290000
– – – –
1 April
8,292
27. 320552
– – – –
7 April
3,270
27.772500
– – – –
7 April
7,487
27.982000
– – – –
7 April
2,770
27.605000
– – – –
28 April
80,120
27.046770
– – – –
5 May
3,440
27.176900
– – – –
12 May
20,286
28.130600
– – – –
3 June
3,482
27.226300
– – – –
7 July
3,221 28.091500
– – – –
4 August
3,208
27.060000
– – – –
20 August
23,208
27.142953
– – – –
1 September
177,690
27.286770
– – – –
1 September
2,752
27.151700
– – – –
6 October
3,925
25.149800
– – – –
4 November
3,415
25.202000
– – – –
11 November
23,881
25.912700
– – – –
1 December
3,255 25.643500
– – – –
2,694,364
27.055777
– – – –
Notes:
1. There was no publicly announced plan for BAT to purchase its own ordinary shares or ADSs during the year ended 31 December 2021.
2. All the purchases of ordinary shares were made on open market transactions.
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
377
The British American Tobacco Group Employee Trust (BATGET)
Function
–
used to satisfy the vesting and exercise of awards of ordinary shares under the BAT Deferred Share Bonus
Scheme andLong-Term Incentive Plans; and
–
a committee of senior management reporting to the Board’s Share Schemes Committee monitors the number
ofordinary shares held in BATGET to satisfy outstanding awards.
Funding
–
funded by interest-free loan facilities from the Company totalling £1 billion;
–
this enables BATGET to facilitate the purchase of ordinary shares to satisfy the future vesting or exercise
ofoptions and awards;
–
loan to BATGET: £300.00 million at 31 December 2021 (2020: £795.02 million);
–
the loan is either repaid from the proceeds of the exercise of options or, in the case of ordinary shares acquired
by BATGET to satisfy the vesting and exercise of awards, the Company will subsequently waive the loan
provided over the life of the awards; and
–
if any options lapse, ordinary shares may be sold by BATGET to cover the loan repayment.
1 Jan 2021
31 Dec 2021
Ordinary shares
heldinBATGET
Number of ordinary shares
5,787,154
5,995,678
Market value of ordinary shares
£156.7m
£163.9m
% of issued share capital of Company
0.24 0.24
Dividends paid
in 2021
–
BATGET currently waives dividends on the ordinary shares held by it; and
–
quarterly interim dividends 2021: £12.63 million across 2021.
Voting rights
–
the trustee does not exercise any voting rights while ordinary shares are held in BATGET; and
–
share scheme participants may exercise the voting rights attaching to those ordinary shares once the ordinary
shares have been transferred out of BATGET.
Notes:
1.
Company share – based payment arrangements:
details of the material equity share-based and cash-settled share-based arrangements are set out in note 28 in the Notes on
the Accounts.
2. The values of ordinary shares shown are based on the closing mid-market share price on 31 December 2021: 2,733p (31 December 2020: 2,708p).
3. In addition to the ordinary shares held in BATGET, the trust held the following American Depositary Shares (ADSs) which relate to the vesting and exercise of certain employee stock awards
formerly granted by Reynolds American Inc. over Reynolds American Inc. common stock and which were assumed by BAT to be satisfied by the delivery of ADSs following the merger with
Reynolds American Inc. on 25 July 2017.
1 Jan 2021
31 Dec 2021
Number of ADSs
15,197
15,197
Market value of ADSs
(a)
US$0.6m US$0.6m
% of issued share capital
0.0006 0.0006
Note:
Group Employee Trust
BAT Annual Report and Form 20-F 2021
378
American Depositary Shares
Fees and Charges Payable by ADS Holders
Citibank, N.A. (Citibank) was appointed as the depositary bank (the “Depositary”) for BAT’s ADS programme pursuant to the Amended and
Restated Deposit Agreement dated 1 December 2008 and amended as of 14 February 2017 and 14 June 2017 between BAT, the Depositary
and the owners and holders of ADSs (the “Deposit Agreement”). Citibank was reappointed as the Depositary pursuant to the Second
Amended and Restated Deposit Agreement dated 26 November 2018 (the “Restated Deposit Agreement”).
The Restated Deposit Agreement provides that ADS holders may be required to pay various fees to the Depositary, and the Depositary
may refuse to provide any service for which a fee is assessed until the applicable fee has been paid.
Service
Fees
Issuance of ADSs upon deposit of ordinary shares (excluding
issuances as a result of distributions of shares described below)
Up to US$0.05 per ADS issued
1
Cancellation of ADSs
Up to US$0.05 per ADS surrendered
1
Distribution of cash dividends or other cash distributions (i.e., sale
of rights and other entitlements)
Up to US$0.05 per ADS held
2
Distribution of ADSs pursuant to: (1) stock dividends or other free
stock distributions; or (2) exercise of rights to purchase additional
BAT ADSs
Up to US$0.05 per ADS held
Distribution of securities other than ADSs or rights to purchase
additional ADSs (i.e., spinoff shares)
Up to US$0.05 per ADS held
Depositary bank services
Up to US$0.05 per ADS held
Notes:
1. Under the terms of a separate agreement between BAT and the Depositary, the Depositary has agreed to waive the fees that would otherwise be payable in connection with the issuance
of ADSs upon deposit of ordinary shares and the cancellation of ADSs and corresponding withdrawal of ordinary shares, in each case by BAT or any of its affiliates, officers, directors or
employees. The terms of this separate agreement may be amended at any time by BAT and the Depositary.
2. While under the Restated Deposit Agreement cash dividends paid in respect of ADSs are subject to a fee of up to US$0.05 per ADS payable to the Depositary, under the terms of the separate
agreement between BAT and the Depositary referred to above, such dividends are instead subject to a fee of up to US$0.02 per ADS per year (a fee of US$0.005 per dividend based on the
distribution of four quarterly cash dividends per year). Under the separate agreement, this dividend fee may not be varied by the Depositary without the consent of BAT.
Contact details for Citibank Shareholder Services are on page 377.
In addition, ADS holders may be required under the Restated Deposit Agreement to pay the Depositary: (a) taxes (including applicable
interest and penalties) and other governmental charges; (b) registration fees; (c) certain cable, telex and facsimile transmission and
delivery expenses; (d)theexpenses and charges incurred by the Depositary in the conversion of foreign currency; (e) such fees and
expenses as are incurred by the Depositary in connection with compliance with applicable exchange control regulations and other
regulatory requirements; and (f) the fees and expenses incurred by the Depositary, the custodian or any nominee in connection with the
servicing or delivery of deposited securities. The Depositary may: (a) withhold dividends or other distributions or sell for the account of any
ADS holder any or all of the shares underlying the ADSs in order to satisfy any tax or governmental charge; and (b) deduct from any cash
distribution the applicable fees and charges of, andexpenses incurred by, the Depositary and any taxes, duties or other governmental
charges on account.
Fees and Payments Made by the Depositary to BAT
Under the terms of the contractual arrangements set out in the separate agreement between BAT and the Depositary referred to
above, BATreceived a total of approximately US$6.1 million from the Depositary, comprising fees charged in respect of dividends and a
contribution to BAT’s ADS programme administration costs for the year ended 31 December 2021.
In 2021, these programme administration costs principally included those associated with AGM proxy mailings, exchange listing and
regulatory fees, foreign private issuer analysis, legal fees, share registration fees and other expenses incurred by BAT in relation to the
ADS programme.
Under these contractual arrangements, the Depositary has also agreed to waive certain standard fees associated with the administration
of the ADS programme.
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
379
Ordinary Shareholder Enquiries
United Kingdom Registrar
Computershare Investor Services PLC
The Pavilions, Bridgwater Road, Bristol BS99 6ZZ
tel: 0800 408 0094 or +44 370 889 3159
online: www.investorcentre.co.uk/contactus
South African Registrar
Computershare Investor Services Proprietary Limited
Private Bag X9000, Saxonwold, 2132, South Africa
tel: 0861 100 634; +27 11 870 8216
email: web.queries@computershare.co.za
American Depositary Shares Enquiries
All enquiries regarding ADS holder accounts and payment of
dividends should be addressed to:
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: citibank@shareholders-online.com
website: www.citi.com/dr
Manage Your Shareholding Online
Computershare Investor Services PLC (Computershare) operates
an online service, Investor Centre, for holders of shares on the
Company’s UK share register. Investor Centre allows shareholders
to manage their shareholding online, enabling shareholders to:
–
update personal details and provide address changes;
–
update dividend bank mandate instructions and review dividend
payment history;
–
register for the Dividend Reinvestment Plan (“DRIP”); and
–
register to receive Company communications electronically.
To register for Investor Centre, go to www.computershare.com/uk/
investor/bri.
Shareholders with any queries regarding their holding should
contact Computershare using the above contact details.
Share dealing
Computershare also offers a share dealing service to existing
shareholders. For full details on how to trade British American
Tobacco shares traded on the London Stock Exchange, go to
www.computershare.com/dealing/uk. Please note that this service
is only available in certain countries.
Dividends
Comprehensive information on dividend payments is available on
pages 352 and 353.
DRIP
We offer a DRIP to our UK shareholders. The DRIP allows eligible
shareholders to use their cash dividends to acquire additional shares
in the Company. The DRIP shares are purchased by Computershare
through a low-cost dealing arrangement. Contact Computershare in
the UK for details and exclusions of this service.
Taxation of dividends
See pages 354 and 357 for details on dividend taxation.
A fact sheet detailing historical UK capital gains tax information is
available at bat.com/cgt. Alternatively, contact the British American
Tobacco Company Secretarial Department on +44 20 7845 1000.
Share Fraud
The practice of share fraud (also known as ‘boiler room’ scams)
unfortunately continues with many companies’ shareholders
receiving unsolicited phone calls or mail from people offering to sell
them what often turn out to be worthless or high risk shares in US
or UK investments, or to buy shares at an inflated price in return for
an upfront payment.
If you suspect that you have been approached by fraudsters,
please tell the FCA using the share fraud reporting form at
www.fca.org.uk/scams, where you can find out more about
investment scams. You can also call the FCA Consumer Helpline
on 0800 111 6768. If you have lost money to investment fraud, you
should report it to Action Fraud on 0300 123 2040 or online at
www.actionfraud.police.uk.
Documents on Display and Publications
This Annual Report and Form 20-F 2021 is available online at bat.com/
annualreport. Copies of current and past Annual Reports are available
on request from:
British American Tobacco Publications
Unit 80, London Industrial Park, Roding Road, London E6 6LS
tel: +44 20 7511 7797 email: bat@team365.co.uk
Holders of shares held on the South Africa register can contact the
Company’s Representative office in South Africa using the contact
details shown at the end of this Annual Report and Form 20-F 2021.
ADS holders can contact Citibank Shareholder Services in the United
States using the contact details shown opposite.
Highlights from the current and past Annual Reports can be produced
in alternative formats such as Braille, audio tape and large print.
Documents referred to in this Annual Report and Form 20-F 2021 do
not form part of this Annual Report unless specifically incorporated
by reference.
The Company is subject to the information requirements of the US
Securities Exchange Act of 1934 applicable to foreign private issuers.
In accordance with these requirements, the Company files its Annual
Report on Form 20-F and other documents with the SEC. BAT’s SEC
filings are available to the public, together with the public filings of
other issuers, at the SEC’s website, www.sec.gov or by calling the SEC
on +1 800-SEC-0330.
The Company’s agent for service in the United States for the purposes
of the registration statement on Form F-3 (333-232691) is Brian T.
Harrison, Secretary, B.A.T Capital Corporation, C/O Corporation
Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808
U.S.A.
Our Website
Comprehensive information about British American Tobacco is
available from our website: bat.com. Within the Investors section
you will find valuation and charting tools, dividend and share price
data and you can download shareholder publications and subscribe
for email alert services. You can also download our Investor
Relations app to access all the latest financial information on your
iPad, iPhone or Android device.
Calendar 2022
Thur
28 April
at
11:30am
Annual General Meeting
Details of the venue and business to be proposed at
the meeting are set out in the Notice of Annual General
Meeting, which is made available to all shareholders and
is published on bat.com.
BAT provides for the vote on each resolution to be
by poll rather than by a show of hands. This provides
for greater transparency and allows the votes of all
shareholders to be counted, including those cast by
proxy. The voting results will be released on the same
day in accordance with regulatory requirements and
made available on bat.com.
Wed
27 July
Half-Year Report
Shareholding Administration
andServices
BAT Annual Report and Form 20-F 2021
380
Exhibits
The following documents are filed in the SEC EDGAR system, as part of this Annual Report on Form 20-F, and can be viewed on the SEC’s
website, www.sec.gov:
Exhibit
Number
Description
1
Articles of Association of British American Tobacco p.l.c.
1
2.1
Second Amended and Restated Deposit Agreement, dated as of 26 November 2018, by and among British American Tobacco p.l.c., Citibank, N.A., as
depositary bank, and all holders and beneficial owners of American Depositary Shares issued thereunder.
2
2.2
Indenture, dated as of 15 August 2017, among British American Tobacco p.l.c. and certain of its subsidiaries as guarantors, andWilmington Trust, National
Association, as Trustee.
3
2.3
Supplemental Indenture No. 1, dated as of 28 September 2018, among British American Tobacco p.l.c. and certain of its subsidiaries as guarantors, and
Wilmington Trust, National Association, as Trustee.
4
2.4
Indenture, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party thereto and Citibank, N.A., as trustee,
authentication agent, transfer agent, registrar, calculation agent and initial paying agent.
5
2.5
Supplemental Indenture No. 1, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.
6
2.6
Supplemental Indenture No. 2, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.
7
2.7
Supplemental Indenture No. 3, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.
8
2.8
Supplemental Indenture No. 4, dated as of 6 September 2019, by and among B.A.T Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.
9
2.9
Supplemental Indenture No. 5, dated as of 2 April 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.
10
2.10
Supplemental Indenture No. 6, dated as of 2 April 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.
11
2.11
Supplemental Indenture No. 7, dated as of 2 April 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A., as
Trustee.
12
2.12
Supplemental Indenture No. 8, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.
13
2.13
Supplemental Indenture No. 9, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.
14
2.14
Supplemental Indenture No. 10, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.
15
2.15
Supplemental Indenture No. 11, dated as of 25 September 2020, by and among B.A.T. Capital Corporation, the Guarantors party thereto and Citibank, N.A.,
as Trustee.
16
2.16
Indenture, dated as of 25 September 2020, by and among B.A.T. International Finance p.l.c., the Guarantors party thereto and Citibank, N.A., as trustee,
authentication agent, transfer agent, registrar, calculation agent and initial paying agent.
17
2.17
Supplemental Indenture No. 1, dated as of 25 September 2020, by and among B.A.T. International Finance p.l.c., the Guarantors party thereto and Citibank,
N.A., as Trustee.
18
2.18
Thirty-third Supplemental Trust Deed, dated 18 March 2021, by and among B.A.T. International Finance p.l.c., B.A.T Capital Corporation, B.A.T.
Netherlands Finance B.V., British American Tobacco p.l.c. and the Law Debenture Trust Corporation p.l.c., further modifying the Trust Deed, dated as of
6 July 1998 (as previously modified and restated) relating to the US$3,000,000,000 (now £25,000,000,000) Euro Medium Term Note Programme.
2.19
Description of Securities registered under Section 12 of the Exchange Act.
4.1
Rules of the British American Tobacco 2007 Long-Term Incentive Plan.
19
4.2
Rules of the British American Tobacco 2016 Long-Term Incentive Plan (Amended and Restated as of 9 February 2022).
4.3
British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.
20
4.4
Annex to British American Tobacco p.l.c. Deferred Annual Share Bonus Scheme.
21
4.5
British American Tobacco p.l.c. 2019 Deferred Annual Share Bonus Scheme (Amended and Restated as of 9 February 2022).
4.6
Rules of the British American Tobacco Restricted Share Plan (Amended and Restated as of 9 February 2022).
4.7
Deferred Compensation Plan for Directors of Reynolds American Inc. (Amended and Restated Effective 30 November 2007).
22
4.8
Service Contract between British American Tobacco p.l.c. and Jack Bowles, dated as of 11 December 2018.
23
4.9
Service Contract between British American Tobacco p.l.c. and Tadeu Marroco, dated as of 27 February 2019.
24
4.10
Master Settlement Agreement, referred to as the MSA, dated 23 November 1998, between the Settling States named in the MSA and the Participating
Manufacturers also named therein.
25
4.11
Settlement Agreement dated 25 August 1997, between the State of Florida and settling defendants in The State of Florida v. American Tobacco Co.
26
4.12
Comprehensive Settlement Agreement and Release dated 16 January 1998, between the State of Texas and settling defendants inThe State of Texas v.
American Tobacco Co.
27
4.13
Settlement Agreement and Release in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of Minnesota, Blue Cross and Blue Shield of
Minnesota and the various tobacco company defendants named therein, dated as of 8 May 1998.
28
4.14
Settlement Agreement and Stipulation for Entry of Consent Judgment in re: The State of Minnesota v. Philip Morris, Inc., by and among the State of
Minnesota, Blue Cross and Blue Shield of Minnesota and the various tobacco company defendants named therein, dated as of 8 May 1998.
29
4.15
Form of Consent Judgment by Judge Kenneth J. Fitzpatrick, Judge of District Court in re: The State of Minnesota v. Philip Morris, Inc.
30
4.16
Stipulation of Amendment to Settlement Agreement and for Entry of Agreed Order dated 2 July 1998, by and among the Mississippi Defendants,
Mississippi and the Mississippi Counsel in connection with the Mississippi Action.
31
4.17
Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated 24 July 1998, by and among the Texas Defendants, Texas and
the Texas Counsel in connection with the Texas Action.
32
4.18
Stipulation of Amendment to Settlement Agreement and for Entry of Consent Decree dated 11 September 1998, by and among the State of Florida and the
tobacco companies named therein.
33
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
381
Exhibit
Number
Description
4.19
Term Sheet agreed to by R. J. Reynolds Tobacco Company, an indirect subsidiary of Reynolds American Inc., certain other Participating Manufacturers, 17
states, the District of Columbia and Puerto Rico.
34
4.20
Revolving credit facilities agreement, dated as of 12 March 2020, among British American Tobacco p.l.c., B.A.T. International Finance p.l.c., B.A.T.
Netherlands Finance B.V. and B.A.T Capital Corporation, as borrowers, British American Tobacco p.l.c., as guarantor, HSBC Bank plc, as agent and euro
swingline agent, HSBC Bank USA, National Association, as US agent and US$ swingline agent, and the banks and financial institutions party thereto.
35
8
List of Subsidiaries included on pages 280 to 289 in this report.
11
Code of Ethics.
12
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13
Certification under Section 906 of the Sarbanes-Oxley Act of 2002.
36
15
Consent of KPMG LLP, independent registered public accounting firm.
17
Guarantor Subsidiaries of the Registrant (included as part of Exhibit 2.19)
101
Interactive Data Files (formatted in XBRL (Extensible Business Reporting Language) and furnished electronically).
Notes:
1. Incorporated by reference to Exhibit 3.1 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
2. Incorporated by reference to Exhibit 4.1 to BAT’s Registration Statement on Form S-8 (Reg. No. 333-237186) filed on 16 March 2020.
3. Incorporated by reference to Exhibit 2.4 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2017 filed on 15 March 2018.
4. Incorporated by reference to Exhibit 4.2 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-227658) filed on 2 October 2018.
5. Incorporated by reference to Exhibit 4.1 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
6. Incorporated by reference to Exhibit 4.2 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
7. Incorporated by reference to Exhibit 4.3 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
8. Incorporated by reference to Exhibit 4.4 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
9. Incorporated by reference to Exhibit 4.5 to British American Tobacco p.l.c.’s Form 6-K filed on 6 September 2019.
10. Incorporated by reference to Exhibit 4.6 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.
11. Incorporated by reference to Exhibit 4.7 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.
12. Incorporated by reference to Exhibit 4.8 to British American Tobacco p.l.c.’s Form 6-K filed on 2 April 2020.
13. Incorporated by reference to Exhibit 4.9 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
14. Incorporated by reference to Exhibit 4.10 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
15. Incorporated by reference to Exhibit 4.11 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
16. Incorporated by reference to Exhibit 4.12 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
17. Incorporated by reference to Exhibit 4.13 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
18. Incorporated by reference to Exhibit 4.14 to British American Tobacco p.l.c.’s Form 6-K filed on 25 September 2020.
19. Incorporated by reference to Exhibit 10.6 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
20. Incorporated by reference to Exhibit 10.8 to BAT’s Registration Statement on Form F-4 (Reg. No. 333-217939) filed on 12 May 2017.
21. Incorporated by reference to Exhibit 4.6 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2018 filed on 15 March 2019.
22. Incorporated by reference to Exhibit 10.43 to Reynolds American Inc.’s Annual Report on Form 10-K for the fiscal year ended 31 December 2007 filed on 27 February 2008.
23. Incorporated by reference to Exhibit 4.11 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2018 filed on 15 March 2019.
24. Incorporated by reference to Exhibit 4.14 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2019 filed on 26 March 2020.
25. Incorporated by reference to Exhibit 4 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 24 November 1998.
26. Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 5 September 1997.
27. Incorporated by reference to Exhibit 2 to R.J. Reynolds Tobacco Holdings, Inc.’s Form 8-K dated 27 January 1998.
28. Incorporated by reference to Exhibit 99.1 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.
29. Incorporated by reference to Exhibit 99.2 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.
30. Incorporated by reference to Exhibit 99.3 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 March 1998 filed on 15 May 1998.
31. Incorporated by reference to Exhibit 99.2 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 June 1998 filed on 14 August 1998.
32. Incorporated by reference to Exhibit 99.4 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 June 1998 filed on 14 August 1998.
33. Incorporated by reference to Exhibit 99.1 to R.J. Reynolds Tobacco Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended 30 September 1998 filed on 12 November 1998.
34. Incorporated by reference to Exhibit 10.1 to Reynolds American Inc.’s Form 8-K dated 12 March 2013.
35. Incorporated by reference to Exhibit 4.25 to BAT’s Annual Report on Form 20-F for the year ended 31 December 2019 filed on 26 March 2020.
36. These certifications are furnished only and are not filed as part of BAT’s Annual Report on Form 20-F for the year ended 31 December 2021.
Certain instruments which define the rights of holders of long-term debt issued by BAT and its subsidiaries are not being filed because
the total amount of securities authorised under each such instrument does not exceed 10% of the total consolidated assets of BAT and its
subsidiaries. BAT agrees to furnish copies of any or all such instruments to the SEC on request.
BAT Annual Report and Form 20-F 2021
382
Glossary
ADR
American Depositary Receipt
ADS
American Depositary Share – 1 ADS is
equivalent to1 BAT ordinary share
AGM
Annual General Meeting
AmSSA
Americas (excluding US) and Sub-
Saharan Africa
APFO
Adjusted profit from operations
APME
Asia-Pacific and Middle East
BATGET
British American Tobacco Group
Employee Trust
bps
Basis points
CC
Constant currency
CGFO
Cash generated from operations
CO
2
e
Carbon dioxide equivalent
Code
UK Corporate Governance Code,
July 2018 version
CSR
Corporate Social Responsibility
DSBS
Deferred share bonus scheme
EMTN
European Medium Term Notes
ENA
Europe and North Africa
EPS
Earnings per share
ESG
Environmental, Social and Governance
EU
European Union
FII GLO
Franked Investment Income Group
Litigation Order
FCTC
Framework Convention on Tobacco Control
FMCG
Fast Moving Consumer Goods
GAAP
Generally Accepted Accounting Practice
GDB
Global Drive Brands, being Kent, Dunhill, Pall
Mall, Lucky Strike and Rothmans
GDPR
EU General Data Protection Regulation
GDSB
Global Drive and Key Strategic Brands,
being the GDBs, plus Shuang Xi and State
Express 555
GJ
Gigajoules (of energy use)
IASB
International Accounting Standards Board
IEIS
International Executive Incentive Scheme
IFRS
International Financial Reporting Standards
as issued by the IASB and as adopted by
the EU
ISA
International Standards on Auditing
JSE
Johannesburg Stock Exchange
KPI
Key performance indicator
LIBOR
London Interbank Offered Rate
LSE
London Stock Exchange
LR
Listing Rules
LTIP
Long-Term Incentive Plan
MCE
Million cigarettes equivalent
MSA
Master Settlement Agreement
NGP
Next Generation Product
NRT
Nicotine Replacement Therapy
NTO
Net turnover or revenue
NYSE
New York Stock Exchange
OCF
Operating cash flow
OECD
Organisation for Economic Co-operation
andDevelopment
OTP
Other tobacco products, including but not
limited to roll-your-own, make-your-own
and cigars
Parker Report
The Parker Review Committee’s final report
onethnic diversity in UK boards published
on12October 2017
PCAOB
Public Company Accounting Oversight Board
Reynolds American Reynolds American Inc.
Reynolds American
Companies
Reynolds American Inc. and its
subsidary companies
@
ROCE
Return on capital employed
@
SAFL
Sustainable Agriculture and
Farmer Livelihoods
SEC
United States Securities and
Exchange Commission
SIP
Share incentive plan
SoBC
Group Standards of Business Conduct
SOx
United States Sarbanes-Oxley Act of 2002
SRS
Share reward scheme
TaO
Programme to implement the new operating
model, including one instance of SAP
TCFD
Taskforce on Climate-related
Financial Disclosures
TDR
TDR d.o.o
THP
Tobacco Heating Products (i.e.
the devices) or Tobacco Heated Products (i.e.
the consumables used by such devices)
TPD1
European Tobacco Products Directive
(directive 2001/37/EC)
TPD2
European Tobacco and Related
Products Directive
(directive 2014/40/EU)
TSR
Total shareholder return
US
United States of America
UURBS
Unfunded unapproved retirement
benefit scheme
WHO
World Health Organization
Other Information
Strategic Report
Governance Report
Financial Statements
Other Information
BAT Annual Report and Form 20-F 2021
383
Cross-Reference to Form 20-F
Item
Form 20-F caption Location in this document
1
Identity of Directors, Senior Management and Advisers
N/A
2
Offer Statistics and Expected Timetable
N/A
3
Key Information
A
N/A
B
Capitalisation and indebtedness
N/A
C
Reasons for the offer and use of proceeds
N/A
D
Risk factors
92-97, 317-339
4
Information on the Company
A
History and development of the Company 3, 77, 81, 211-214, 245-246, 300, 315, 379
B
Business overview
2-73, 76, 84-91, 106-109, 190, 192-193, 300, 302, 320, 322, 340-
344, 347-348, 350
C
Organisational structure
280-289, 298
D
Property, plants and equipment
211-212, 348
4a
Unresolved staff comments
N/A
5
Operating and Financial Review and Prospects
A
Operating results
3, 7-9, 22-23, 36, 38, 40-43, 75, 83, 85, 87-89, 91, 97, 225-227,
240-241, 313, 315, 325-329, 340-344
B
Liquidity and capital resources
80-81, 183, 228, 239-244, 315-316, 336
C
Research and development, patent and licences
3-5, 11-13, 16-19, 31, 50-51, 76, 196, 300
D
Trend information
2-73, 75-97, 340-344
E
Critical Accounting Estimates
N/A
6
Directors, Senior Management and Employees
A
Directors and senior management
100-102, 113
B
Compensation
128-165, 214-220, 250, 360-372
C
Board practices
100-102, 116-128, 133-134, 149-151, 250, 351, 374-375
D
Employees
249, 314
E
Share ownership
73, 163-165, 246-248, 361-372, 377
7
Major Shareholders and Related Party Transactions
A
Major shareholders
360-361
B
Related party transactions
249-250
C
Interests of experts and counsel
N/A
8
Financial Information
A
Consolidated statements and other financial information
79, 95, 122, 178-281, 318-339, 354-355
B
Significant changes
N/A
9
The Offer and Listing
A
Offer and listing details
353
B
Plan of distribution
N/A
C
Markets
353
D
Selling shareholders
N/A
E
Dilution
N/A
F
Expenses of the issue
N/A
10
Additional Information
A
Share capital
N/A
B
Memorandum and Articles of Association
146, 373-375
C
Material contracts
215, 276, 346-347
D
Exchange controls
354
E
Taxation
356-359
F
Dividends and paying agents
N/A
G
Statements by experts
N/A
H
Documents on display
379
I
Subsidiary information
N/A
11
Quantitative and Qualitative Disclosures about Market Risk
239-244
BAT Annual Report and Form 20-F 2021
384
Item
Form 20-F caption Location in this document
12
Description of Securities Other Than Equity Securities
A
Debt securities
N/A
B
Warrants and rights
N/A
C
Other securities
N/A
D
American Depositary Shares
378
13
Defaults, Dividend Arrearages and Delinquencies
N/A
14
Material Modifications to the Rights of Security Holders
and Use of Proceeds
N/A
15
Controls and Procedures
350
16A
Audit Committee Financial Expert
120, 349
16B
Code of Ethics
127, 349
16C
Principal Accountant Fees and Services
123-124, 197
16D
Exemptions from the Listing Standards for
Audit Committees
N/A
16E
Purchases of Equity Securities by the Issuer and
AffiliatedPurchasers
376
16F
Change in Registrant’s Certifying Accountant
N/A
16G
Corporate Governance
349
16H
Mine Safety Disclosure
N/A
17
Financial Statements
N/A
18
Financial Statements
176-281
19
Exhibits
380-381
Cross-Reference to Form 20-F
Continued
Registered office
Globe House, 4 Temple Place, London WC2R 2PG
tel: +44 20 7845 1000, facsimile: +44 20 7240 0555
Incorporated in England and Wales No. 3407696
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 6712
Secretary
Paul McCrory
Investor relations
Enquiries should be directed to Mike Nightingale, Victoria Buxton,
William Houston orJohn Harney
tel: +44 20 7845 1180
Press office
Enquiries should be directed to Anna Vickerstaff
tel: +44 20 7845 2888
email: press_office@bat.com
Auditors
KPMG LLP
15 Canada Square, Canary Wharf, London E14 5GL
References in this publication to ‘British American Tobacco’, ‘BAT’, ‘we’, ‘us’,
and ‘our’ when denoting opinion refer to British American Tobacco p.l.c.
(the Company) (No. 3407696) and when denoting tobacco business activity
refer toBritish American Tobacco Group operating companies, collectively
orindividually as the case may be.
Design and production: Radley Yeldar www.ry.com
Printed in the UK by Pureprint Group on Revive 100% recycled papers, made
entirely from post-consumer waste. All pulps used are Elemental Chlorine Free.
The manufacturing mills hold the ISO14001 and EU Ecolabel (EMAS)
certificatesfor environmental management.
Annual Report and Form 20-F 2021
Annual Report and Form 20-F 2021
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