UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16

under the Securities and Exchange Act of 1934

February 17, 2021

Commission File Number: 001-38159

 

 

BRITISH AMERICAN TOBACCO P.L.C.

(Translation of registrant’s name into English)

 

 

Globe House

4 Temple Place

London WC2R 2PG

United Kingdom

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☒            Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):   ☐

 

 

 

This report includes materials as exhibits that have been published and made available by British American Tobacco p.l.c. (the “Company”) as of February 17, 2021.

The information contained in this Form 6-K is incorporated by reference into the Company’s Form S-8 Registration Statements File Nos. 333-219440, 333-223678 and 333-237186 and Form F-3 Registration Statement File No. 333-232691, and related Prospectuses, as such Registration Statements and Prospectuses may be amended from time to time

EXHIBIT INDEX

 

Exhibit		Description
Exhibit 1		British American Tobacco p.l.c. Preliminary Announcement – year ended 31 December 2020.
Exhibit 23.1		Consent of KPMG LLP, independent registered public accounting firm.
Exhibit 99.1		British American Tobacco p.l.c.’s consolidated financial statements as of 31 December 2020 and 31 December 2019 and for the years ended 31 December 2020, 2019 and 2018.
Exhibit 99.2		British American Tobacco p.l.c.’s Management’s report on internal control over financial reporting as at 31 December 2020.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: February 17, 2021

Exhibit 1

For the forward-looking non-GAAP information contained in this announcement, no comparable GAAP or IFRS information is available on a forward-looking basis, as other components of the Group’s results, including the revenue generated from combustibles, cannot be estimated with reasonable certainty due to, among other things, the impact of foreign exchange, pricing and volume, which could be significant. As such, no reconciliations for this forward-looking non-GAAP information are available and we are unable to present revenue before presenting New Category revenue.

 

17 February 2021 – PRESS RELEASE / PRELIMINARY RESULTS
BRITISH AMERICAN TOBACCO p.l.c. YEAR ENDED 31 DECEMBER 2020   ‘ACCELERATING TRANSFORMATION’   GROWTH IN NEW CATEGORIES AND GROUP EARNINGS DESPITE COVID-19

 

PERFORMANCE HIGHLIGHTS

REPORTED

ADJUSTED

Current rates

Vs 2019

Current Rates

Vs 2019 (constant)

Cigarette and THP volume share

+30 bps

Cigarette and THP value share

+20 bps

Non-Combustibles consumers1

13.5m

+3.0m

Revenue (£m)

£

25,776m

-0.4%

£

25,776m

+3.3%

Profit from operations (£m)

£

9,962m

+10.5%

£

11,365m

+4.8%

Operating margin (%)

+38.6%

+380 bps

+44.1%

+100 bps

2

Diluted EPS (pence)

278.9p

+12.0%

331.7p

+5.5%

Net cash generated from operating activities (£m)

£

9,786m

+8.8%

Borrowings3 (£m)

£

43,968m

-3.1%

Dividend per share (pence)

215.6p

+2.5%

The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on pages 48 to 53, with reconciliations from the most comparable IFRS measure provided. Note – 1. Internal estimate. 2. Movement in adjusted operating margin is provided at current rates. 3. Borrowings includes lease liabilities.

Jack Bowles, Chief Executive: “As the largest, and only truly global company in our industry, we take seriously our role to transform ourselves and demonstrate thought leadership. We have a clear purpose to reduce the harm footprint of our business. We are uniquely positioned to encourage the switch to reduced risk products.**

We operate worldwide, including the US, which represents 40% of the global industry’s value. Our well-embedded consumer-centric, multi-category strategy is activated on a global scale, leveraging our insights on consumer satisfaction, innovation needs and taste preference. We are building the brands of the future – strong, global brands, specifically positioned in each target consumer segment.

Last year we increased the number of consumers of our non-combustible products by 3m to 13.5m, doubling the rate of consumer adoption in the second half of 2020. We have excellent momentum in New Categories, with accelerating volume and value share gains.

Our investment behind New Categories has increased by a further £426m compared to 2019, enabled by a 5th consecutive year of value share growth in combustibles. Enabled by Project Quantum, we continued to simplify the company and drive efficiencies, delivering £660m of cost savings (being well on track to deliver our ambitious £1bn of savings by 2022), further supporting new capabilities investment.

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

Our ESG targets are transformational and support our A Better Tomorrow ambition. We will track and share our progress. We are committed to reducing the health impact of our business, whilst delivering sustainable results that create long-term multi-stakeholder value”.

 

 

1

CHIEF EXECUTIVE’S STATEMENT

BUILDING A BETTER TOMORROW^TM - OUR TRANSFORMATION JOURNEY

We are transforming our business to build A Better Tomorrow for our shareholders and other stakeholders. The greatest contribution we can make to society is to reduce the health impact of our global business. Above all, this means accelerating the growth of our New Categories business as fast as possible.

Our transformation journey continues to be led by our three strategic priorities:

 

🌑

Accelerating growth in New Categories, fuelled by

 

🌑

Value growth in combustibles and

 

🌑

Benefitting from a faster, simpler, more agile business.

We delivered against all of these priorities in 2020 despite the unprecedented challenges posed by the COVID-19 pandemic. I am deeply appreciative of the determination and resilience of our people who have helped ensure our business is strongly positioned for continued growth.

Last year, we announced several ambitious targets and are making steady progress towards achieving them. We aim to further accelerate the growth of revenue from our New Categories, reaching £5 billion by 2025. We are proud that we now have 13.5 million consumers of non-combustible products, a growth of 3 million - doubling the rate of consumer adoption in the second half of 2020. We are well on track to meet our ambition of 50 million consumers of our Non-Combustible brands worldwide by 2030.

The sustainability of our business goes beyond the financial results alone. At the centre is our continued commitment to our purpose to build A Better Tomorrow by reducing the health impact of our global business. This entails:

 

🌑

Committing to providing adult consumers with a wide range of enjoyable and less-risky products**;

 

🌑

Continuing to be clear that combustible cigarettes pose serious health risks, and the only way to avoid these risks is not to start or to quit;

 

🌑

Encouraging those who otherwise continue to smoke, to switch completely to scientifically-substantiated, reduced-risk alternatives**; and

 

🌑

Tracking and sharing progress of our transformation.

Our A Better Tomorrow purpose is underpinned by an ESG strategy which sets out clear commitments to deliver a positive impact on the environment, on society and on our employees. Chief amongst those, beyond reducing the harm impacts of our business, is achieving carbon neutrality for direct emissions (scope 1 and scope 2) by 2030. We are making good progress towards achieving these ambitions and are proud of the recognition we have received. In 2020, we:

 

🌑

Were named in the Dow Jones Sustainability Indices (DJSI) for the 19th consecutive year;

 

🌑

Increased our scores with respected ESG ratings agencies, including Sustainalytics and Vigeo Eiris;

 

🌑

Were awarded the prestigious ‘A’ score’ for climate change by the Carbon Disclosure Project (CDP);

 

🌑

Maintained our BBB MCSI rating; and

 

🌑

Were named as a Global Top Employer for the fourth year running by the Top Employers Institute.

As Chief Executive, I am determined that we make a positive contribution to society by transforming our business and accelerating growth of our New Categories. I am proud of our achievements, yet I am clear that there is more to do. I am excited by the prospect of the journey ahead. With our history of strong financial delivery, coupled with deep consumer insights and an innovation-led, consumer-centric, multi-category approach, we have the foundations in place to propel this great company even further forward and build A Better Tomorrow for all stakeholders.

FINANCE AND TRANSFORMATION DIRECTOR’S STATEMENT

STRONG CASHFLOW GENERATION AND ENHANCED LIQUIDITY.

BAT is a highly cash generative business. We delivered £9.8bn of net cash generated from operating activities.

During 2020, the Group further strengthened its liquidity profile and successfully raised £8.9bn in new debt (in $, € and £), in the capital markets, completed a liability management transaction repurchasing and redeeming debt that would have otherwise matured in 2021 and 2022, signed short-term bilateral facilities (with £3.4 billion available) and refinanced the Group’s £6.0 billion Revolving Credit Facility (RCF), extending its maturity and removing the financial covenant. As a result, average debt maturity is 9.9 years, with maximum annual debt maturities around £4 billion. We remain committed to our 65% dividend pay-out ratio and to balance sheet deleveraging.

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

 

2

GROUP OPERATING REVIEW

TOTAL GROUP VOLUME and REVENUE

 

For year ended 31 December		Volume (unit)								Reported Revenue (£m)												Adjusted Revenue (£m)
		2020 Unit				Change %				2020 £m				2019 £m				Change %				Adj £m				FX £m				2020 cc £m				2019 £m				Change %
New Categories											1,443				1,255				+14.9%				-				6				1,449				1,255				+15.4%
Vapour (10ml units / pods mn)			344				+51.9%				611				401				+52.3%				-				4				615				401				+53.4%
THP (sticks bn)			11				+18.9%				634				728				-12.9%				-				2				636				728				-12.7%
Modern Oral (pouches mn)			1,934				+62.0%				198				126				+57.1%				-				-				198				126				+57.1%
Traditional Oral (stick eq bn)			8				-0.9%				1,160				1,081				+7.2%				-				5				1,165				1,081				+7.7%
Total Non-Combustibles											2,603				2,336				+11.3%				-				11				2,614				2,336				+11.9%
Cigarettes (sticks bn)			638				-4.6%
OTP incl RYO/MYO (stick eq bn)			20				-1.7%
Total Combustibles			658				-4.5%				22,752				23,001				-1.1%				-				842				23,594				22,951				+2.8%
Other											421				540				-21.7%				-				41				462				540				-14.4%
Total											25,776				25,877				-0.4%				-				894				26,670				25,827				+3.3%
Strategic											19,535				18,793				+4.0%				-				571				20,106				18,793				+7.0%
Non-strategic											6,241				7,084				-11.9%				-				323				6,564				7,034				-6.7%
Total											25,776				25,877				-0.4%				-				894				26,670				25,827				+3.3%
Cigarettes and THP (sticks bn)			649				-4.3%

Use of the term “at cc” refers to the variance between the 2020 adjusted performance, at 2019 exchange rates, against the adjusted 2019 performance.

Strong volume growth in all New Categories was offset by a 4.5% decline in combustibles. Group cigarette volume grew in the US, Brazil, Turkey, Bangladesh and Russia, but was more than offset by declines in Global Travel Retail (GTR) which was impacted by travel restrictions related to COVID-19, in South Africa (due to the unique government mandated sales ban between March and August in response to COVID-19), in Indonesia (due to outsized excise tax increases, and the delayed implementation of minimum pricing), and due to a more severe impact on consumption caused by the global pandemic in a number of emerging markets.

On a reported basis, revenue was marginally lower than the prior year (down 0.4%), with good growth in New Categories up

14.9%, supported by strong combustibles price/mix of 7.3% offset by a translational foreign exchange headwind of 3.5%, and a 4.6% decline in total cigarette volume. Excluding the foreign exchange headwind and the effect of excise on bought-in goods (in 2019), adjusted revenue grew 3.3% at constant rates of exchange, despite an estimated headwind on revenue from COVID-19 of approximately 2.5%.

Revenue from the Strategic Portfolio increased 4.0% (or 7.0% on a constant currency basis) driven by revenue growth from New Categories, robust cigarette pricing and value share gains (up 40 bps) with strong performances from our premium brands including Kent, Newport and Natural American Spirit.

PROFIT FROM OPERATIONS AND OPERATING MARGIN

 

		Reported PfO (£m)												Adjusted PfO (£m)
		Operating Margin (%)												Adjusted operating margin (%)
		2020				2019				Change				Adj				FX				2020 cc				2019				Change
Profit from Operations (PfO)			9,962				9,016				+10.5%				1,403				296				11,661				11,130				+4.8%
Operating Margin			38.6%				34.8%				+380 bps												43.7%				43.1%				+60 bps

Use of the term “at cc” refers to the variance between the 2020 adjusted performance, at 2019 exchange rates, against the adjusted 2019 performance.

Profit from operations, on a reported basis, was up 10.5 % at £9,962 million, with operating margin up 380 bps to 38.6%, driven by an improvement in the Group’s operating performance which more than offset litigation charges recognised in the US (£400 million), whilst recognising that 2019 was impacted by a number of charges that did not repeat (including in respect of the Quebec Class Action (£436 million) and an excise dispute in Russia (£202 million)).

Adjusted profit from operations and adjusted operating margin

Adjusted profit from operations at constant rates of exchange was 4.8% higher. This performance was driven by the increase in revenue, in combination with £660 million of savings driven by Quantum (through organisational change and productivity savings programmes). These efficiency gains enabled an incremental £426 million in investment in New Categories in 2020, and the delivery of adjusted operating margin up 100 bps at current rates of exchange (up 60 bps at constant rates of exchange).

 

3

CATEGORY PERFORMANCE REVIEW

A STEP CHANGE IN NEW CATEGORIES

 

For year ended 31 December		Volume (unit)								Reported Revenue (£m)												Adjusted Revenue (£m)
		2020 Unit				Change %				2020 £m				2019 £m				Change %				Adj £m				FX £m				2020 cc £m				2019 £m				Change %
New Categories											1,443				1,255				+14.9	%			-				6				1,449				1,255				+15.4	%
Vapour (10ml units / pods mn)			344				+51.9	%			611				401				+52.3	%			-				4				615				401				+53.4	%
THP (sticks bn)			11				+18.9	%			634				728				-12.9	%			-				2				636				728				-12.7	%
Modern Oral (pouches mn)			1,934				+62.0	%			198				126				+57.1	%			-				-				198				126				+57.1	%
Traditional Oral (stick eq bn)			8				-0.9	%			1,160				1,081				+7.2	%			-				5				1,165				1,081				+7.7	%
Total Non-Combustibles											2,603				2,336				+11.3	%			-				11				2,614				2,336				+11.9	%

Use of the term “at cc” refers to the variance between the 2020 adjusted performance, at 2019 exchange rates, against the adjusted 2019 performance.

VUSE – VAPOUR: On track to Global Category leadership

 

🌑

Vuse/Vype fastest growing vapour brand reaching 26% total vapour value share in the top five markets*

 

🌑

Vuse/Vype value share leader in four of the top five markets

 

🌑

Vuse gained market leadership in Canada in migration year with 46.1% value share (up 2,220 bps vs 2019)

 

🌑

Vuse closed system device volume share leader in the US

Our Vuse/Vype brand delivered a strong performance, rebounding well from the EVALI crisis in 2019 and the implementation of the US flavour ban in early 2020. Total vapour revenue grew by 52% in 2020, accelerating through the second half of the year.

In the US, Vuse Alto drove total revenue from vapour up 85% in a challenging vapour market which declined 13% (in volume) in 2020. The Group achieved strong value growth in consumables and gained market leadership in closed system devices (by volume) during the year, with over 60% volume share in the final quarter of 2020. Vuse is now the market leader (by value share) in fifteen US states, and in the final quarter of 2020 Alto represented over 85% of Vuse revenue in the US up from 50% in 2019.

In the other top four markets, we:

 

🌑

maintained our leadership positions by total vapour value share in the UK and France;

 

🌑

built on the momentum from 2019 to become market leader (by value) in Germany; and

 

🌑

became the market leader (by value share) in Canada in the second half of 2020, whilst simultaneously migrating from Vype to our global brand Vuse.

Due to the continued success of ePod and ePen3, Vuse/Vype now holds the No.1 position (by value share) in four of the top five markets.

Despite the challenges of COVID-19 in 2020, we successfully migrated our vapour products to Vuse in a number of markets and will continue with our brand migration programme during 2021.

In January 2021, we have pilot-launched our first cannabidiol (CBD) vaping product, Vuse CBD Zone. This latest innovation will allow us, for the first time, to offer adult consumers a range of high-quality CBD vaping products from our trusted, global brand, Vuse. Initially available in Manchester, UK, it will offer adult smokers and vapers sensorial enjoyment, as Vuse CBD Zone caters to a variety of moods and moments in their busy lifestyles.

* top five markets by revenue accounting for 75% of total industry vapour revenue (closed systems)

^ source: Subscribe Pro, Magento, Shopify

 

4

Category Performance Review (cont..)

 

glo - TOBACCO HEATING PRODUCTS – Accelerating momentum driven by Hyper

 

🌑

Device volumes +33% and consumable volumes +19% (or +29% excluding Sens)

 

🌑

Successful launch of Hyper in April driving glo to 14% volume share of category in key (T9) markets, an increase of 30 bps on 2019

 

🌑

glo reached total volume share in Japan at 5.9% (December 2020) driven by glo Hyper, up 85 bps on 2019

 

🌑

Further market rollouts and strong innovation pipeline driving good momentum into 2021

glo Hyper was successfully launched in Japan in April and rolled out across ENA mainly in the second half of the year. Hyper is the first to world THP launched with induction heating which provides a step change in consumer satisfaction, driven by 30% more tobacco, faster heating and a boost button. This has resulted in conversion ratios 50% higher than previous glo launches. The success of Hyper was achieved despite the impact of COVID-19 restrictions as the launch and ongoing marketing campaigns were successfully switched to digital.

THP consumable volume grew 18.9% in 2020 to 10.7 billion sticks (being growth of 29% excluding Sens), as the success of Hyper more than offset a tough comparator due to the product launches in the final quarter of 2019. Revenue was down 12.9% in 2020 due to the decision to withdraw Sens from the market during the second half of 2020 (being a deduction to revenue of £50 million) and excise harmonisation in Japan.

In Japan, glo grew 85 bps (versus December 2019) to achieve a record volume share of total nicotine of 5.9%, with THP category share of close to 20%, driven by the strong performance of glo Hyper (which already represents more than 50% of our portfolio). Temporary revenue weakness was driven by the withdrawal of Sens and excise harmonisation referred to above. With glo capturing over 30% of category growth post excise increase, we are confident that we will return to volume and revenue growth in Japan in 2021.

In ENA, strong momentum after the glo Hyper launch in Russia and Ukraine continued through the second half of the year with glo volume share (of cigarettes and THP) in Russia at 1.4% in December 2020, and glo’s volume share of THP more than doubling from 7.6% in June 2020 to 15.5% in December 2020. Since the launch of Hyper in pilot cities in Italy, glo has more than tripled its volume share of category to 7.8% (December 2020), with retention rates doubling.

In 2020, we successfully leveraged our digital capabilities, adapting our commercial and marketing campaigns and resulting in a 1.5x increase in earned social media versus 2019, with Hyper the highest interest THP new product launch recorded. Our e-commerce channel is starting to gain critical mass and scale to be an important driver of our performance going forward.

Looking into 2021, we will look to consolidate Hyper’s success with further market rollouts planned. In addition, continuous product enhancements in both consumables and devices are expected to build upon the performance in the final quarter of 2020 in Japan, Italy, Russia and Romania, providing momentum for further success in 2021.

VELO - MODERN ORAL – Continued share gain in a fast growth category

 

🌑

Strong global volume and revenue growth, up 62% and 57%, respectively

 

🌑

Consolidating Modern Oral category leadership in Scandinavia and growing share of total oral market

 

🌑

US portfolio strengthened by the acquisition of Dryft, with national rollout continuing in early 2021

 

🌑

Future opportunity in Emerging Markets as affordable New Category proposition

We consolidated our leadership position in Modern Oral outside the US (whilst strengthening our position in the US with an expanded portfolio), with strong global volume and revenue growth up 62% and 57%, respectively.

In ENA, where we are the clear market leader with 71% volume share of Modern Oral in the key markets, revenue grew 59% and is now over five times larger than in 2018, as the category continued to take volume and value share from traditional oral products. In Sweden, we grew our leadership position* in the Modern Oral category reaching 62% volume share in 2020 (2019: 56%) driven by Lyft and maintained our leadership positions* in Norway, Denmark and Switzerland. In Germany, Velo gained market leadership,* accelerating the growth of Modern Oral within the total oral category.

In the US, whilst still growing volume and revenue strongly (up 45% and 14%, respectively), the portfolio has been strengthened by the acquisition (in October 2020) of the nicotine pouch products of Dryft Sciences, LLC (Dryft). These products have been rebranded Velo and expands the US portfolio from 4 to 28 variants, with representation in the above 6mg nicotine strength segment. This acquisition marks a further step in BAT’s societal commitment to accelerate its transformation journey to build A Better TomorrowTM. With the national rollout of Velo branded Dryft products in early 2021 and a return to growth in the final quarter of 2020, we believe we have great momentum for future success. We submitted PMTAs for all Velo products ahead of the 9 September 2020 US FDA deadline.

* Leadership position in 2020 by both volume and value share of the modern oral category

 

5

Category Performance Review (cont..)

 

Pilot schemes in emerging markets are ongoing with some encouraging results in markets such as Pakistan and Indonesia. In Kenya, we have temporarily suspended sales due to local regulatory challenges and continue to engage with the local authorities. 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.

TRADITIONAL ORAL

In the Traditional Oral category, volume declined 0.9% to 8.4 billion stick equivalents. Total revenue was £1,160 million, up 7.2%, driven by price realisation of 9% in the US which accounts for 97% of revenue from the category. This was an increase of 7.7% at constant rates of exchange.

In the US, traditional oral volume declined 1.3% in 2020, with value share of moist down 25 bps and volume share down 35 bps. This was driven by Grizzly which was impacted by pricing pressures in the final quarter of 2019 and early 2020. Utilising revenue growth management techniques, value share stabilised in the second half of the year.

The Modified Risk Tobacco Product (MRTP) applications for Camel Snus were discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) in September 2018. We continue to work closely with the FDA, which announced in December 2020 that it had reopened the comment period after our filing of additional information.

Outside the US, which accounts for 3% of the Group’s Traditional Oral revenue, volume was up 3%, driven by Sweden, where the Group’s Traditional Oral volume share (as a proportion of total oral) in Sweden declined 80 bps, as growth in Lundgrens was more than offset by the remainder of the portfolio, including Granit and the de-list of Knekt, and the growth of Modern Oral products.

VALUE THROUGH COMBUSTIBLES

 

🌑

Strategic cigarette brands delivering value share growth of 40bps

 

🌑

Group value share growth of 20 bps

 

🌑

Strong pricing, with combustibles price/mix +7.3%

Group cigarette value share increased 20 bps in 2020, driven by the continued performance of the strategic cigarette brands across each region. Higher cigarette value share in the US, Mexico, Colombia, Turkey, Russia, Bangladesh and Japan was partly offset by lower value share in Indonesia and Saudi Arabia. Group cigarette volume share grew 40 bps, driven by the strategic portfolio (up 30 bps).

The decline in Group cigarette volume of 4.6% in 2020 to 638 billion sticks (2019: 668 billion) was more than offset by strong pricing, with combustibles price/mix of 7.3%.

Volume grew 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 have generally been relatively resilient during COVID-19 with little evidence of accelerated downtrading. In the US, Group cigarette volume was up 0.5% to 73 billion (2019: 73 billion), due to the performance of the strategic portfolio. In the final quarter of the year, we reintroduced Lucky Strike to the US market, ensuring a truly global footprint for the brand. This was in an industry that was estimated to be up 1.5% driven by reduced consumer switching to vapour, higher supply chain inventories and an extra selling day, and stronger consumption trends resulting from the increase in fiscal stimulus and lower gas prices.

However, due to COVID-19, production or other supply chain restrictions affected sales in several markets including Canada and Mexico. In South Africa, a total sales ban of tobacco products came into effect from March, with sales recommencing in August following the easing of lockdown restrictions. Whilst not a significant part of the Group, travel restrictions due to COVID-19 have impacted our GTR business negatively impacting Group cigarette and THP volume by an estimated 1.0%. 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.

 

6

Category Performance Review (cont..)

 

Volume of the strategic cigarette brands, collectively, declined 1.6% in 2020:

 

🌑

Dunhill’s volume share was down 20 bps as growth in Romania and Netherlands was more than offset by declines in Saudi Arabia, Indonesia, Brazil, South Africa and Malaysia. Volume was 17% lower, largely due to the impact of the tax increases and minimum retail price compliance in Indonesia, the impact of COVID-19 on both South Africa (temporary sales ban in the year) and on our GTR business, and the ongoing challenging operating environment in Malaysia;

 

🌑

Kent’s volume share was up 10 bps as growth in Brazil, Saudi Arabia, Turkey and Russia more than offset lower volume share in Romania and Japan. Volume was up 2.0% as growth in Brazil, across the Middle East (including Saudi Arabia), Russia and Turkey more than offset lower volume in Japan;

 

🌑

Lucky Strike’s volume share grew 10 bps, as growth across AMSSA (particularly Brazil, Colombia and Argentina) and in Japan more than offset lower volume share in Indonesia, Spain and France. Volume declined 2.0% driven by the impact of the tax increases and minimum retail price compliance in Indonesia and lower volume in France and Spain. These more than offset the higher volume in Brazil, Japan and Argentina. Lucky Strike was reintroduced in the US in the final quarter of the year;

 

🌑

Rothmans’ volume share was 20 bps higher as growth in Brazil, Colombia, New Zealand, Malaysia, Russia and Ukraine was partly offset by Pakistan and Turkey. Volume was 6.1% higher as growth in Brazil, Pakistan and Bulgaria more than offset lower volume in Ukraine and Turkey;

 

🌑

Pall Mall’s volume share was stable as growth in Pakistan, Australia, Mexico, South Africa, Chile and Canada was offset by lower volume share in New Zealand, Saudi Arabia, the US and Argentina. Volume was 6.0% lower, largely driven by Pakistan, Saudi Arabia and South Africa; and

 

🌑

The Group’s US domestic strategic combustibles portfolio performed well:

 

🌑

Newport volume share increased 40 bps, while volume grew 2.3%, driven by both menthol and non-menthol variants;

 

🌑

Natural American Spirit performed well with volume share up 10 bps on 2019. Volume was up 6.0% against 2019; and

 

🌑

Camel’s volume share declined 10 bps with volume ahead of the same period of 2019 by 1.2%.

Volume of other tobacco products (OTP) declined 1.7% to 20 billion sticks equivalent (being 3% of the Group’s combustible portfolio).

Revenue from combustibles was down 1.1% at £22,752 million (2019: £23,001 million) with a translational foreign exchange headwind of 3.7% more than offsetting the impact of higher pricing across the Group. After adjusting for currency and the short-term impact of excise on bought in goods that impacted 2019, adjusted revenue from combustibles at constant rates of exchange was up 2.8% at £23,594 million (2019: £22,951 million) driven by good pricing notably in the US, Russia, Germany, Canada, Australia, Mexico and Pakistan. This more than offset the impact of lower volume and absorption of the estimated 2.5% COVID-19 headwind.

SIMPLIFYING THE BUSINESS – stronger, simpler, faster.

In 2020, we realised the benefits of the first phase of Quantum. Alongside greater organisational speed and agility, and through productivity savings programmes, Quantum drove £660 million of gross savings during the year. The first phase of Quantum is largely complete with the headcount reduction savings materialised, however further work on core processes and ways of working simplification is ongoing.

Phase 2 will build on this success with the organisation ready for project rollouts from the beginning of 2021 covering areas such as operational efficiency, route to market focus and supply chain productivity. The key objective in 2020 was to finalise the operational design of Phase 2, running pilots in the second half of 2020 in a few strategically important geographies with the aim to use the learnings to fine-tune the design and methodology to support a successful wider roll-out programme in 2021 and beyond. We are well on track to deliver the target of £1 billion total annualised cost savings from Quantum by the end of 2022, in addition to benefits from our Revenue Growth Management and Marketing Effectiveness initiatives.

The savings from Quantum are being used to fund investment in New Categories leveraging new capabilities. We are attracting new talent from a diverse range of industries globally, in areas such as: IP, insights and analytics, product innovation, design and technology, and digital media. These skills are supporting our work into foresights beyond nicotine (as demonstrated by the launch of the Group’s first CBD product in the UK), 21st century brand building, direct to consumer marketing and e-commerce, and advanced digital and data analytics. In addition, in 2020 the increased agility brought about through Quantum and our diverse geographic footprint enabled us to quickly and effectively adapt and navigate the challenges caused by the global pandemic.

At the end of 2019 we established our corporate venturing unit, Btomorrow Ventures (BTV) and made excellent progress in 2020. During the course of the year, BTV made investments in eight small, innovative technology and consumer businesses, providing us with an exciting capability ecosystem for the future.

 

7

REGIONAL REVIEW

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

UNITED STATES (US):

 

		Volume (unit)								Reported Revenue (£m)												Adjusted Revenue (£m)
For year ended 31 December		2020 Unit				Change %				2020 £m				2019 £m				Change %				Adj £m				FX £m				2020 cc £m				2019 £m				Change %
New Categories											394				217				+81.9%				-				2				396				217				+82.9%
Vapour (10ml units / pods mn)			174				+69.7%				383				207				+85.1%				-				2				385				207				+86.1%
THP (sticks bn)			-				-%				1				1				0.0%				-				-				1				1				+0.5%
Modern Oral (pouches mn)			162				+45.0%				10				9				+13.5%				-				-				10				9				+14.1%
Traditional Oral (stick eq bn)			7.5				-1.3%				1,126				1,052				+7.0%				-				5				1,131				1,052				+7.6%
Total Non-Combustibles											1,520				1,269				+19.8%				-				7				1,527				1,269				+20.4%
Total Combustibles (sticks bn)			73				+0.5%				9,926				9,078				+9.3%				-				54				9,980				9,078				+9.9%
Other											27				26				+4.6%				-				2				29				26				+5.1%
Total											11,473				10,373				+10.6%				-				63				11,536				10,373				+11.2%
										Reported PfO (£m)												Adjusted PfO (£m)
										Margin (%)												Adjusted operating margin (%)
										2020				2019				Change				Adj				FX				2020 cc				2019				Change
Profit from Operations (PfO)											4,975				4,410				+12.8%				809				32				5,816				5,036				+15.5%
Operating Margin											43.4%				42.5%				+90 bps												50.4%				48.5%				+190 bps

Use of the term “at cc” refers to the variance between the 2020 adjusted performance, at 2019 exchange rates, against the adjusted 2019 performance.

 

•

Vuse revenue growth of over 80% in a recovering market

 

•

Portfolio strengthened in Modern Oral through Dryft acquisition

 

•

Strong cigarette pricing and cigarette volume driving revenue growth

 

•

Value and volume share gains in combustibles led by premium brands

Regional Revenue and Profit from operations

Reported revenue increased by 10.6%, or by 11.2% excluding an unfavourable impact from the relative movement of sterling against the US dollar. This was driven by strong cigarette and traditional oral pricing and continued value share gains in Vuse and combustibles.

Reported profit from operations rose by 12.8%, driven by increased revenue and efficiency gains realised through Quantum and marketing spend effectiveness measures. These more than offset higher investment in New Categories and charges recognised in the year in respect of developments in cases regarding payment obligations under the state settlement agreements with Florida, Texas, Mississippi and Minnesota for brands previously sold to a third party. A total charge of £400 million was recognised following a decision in the Florida court (about which the Group will continue to pursue indemnification remedies in a Delaware court) and following settlement discussions with other manufacturers and the states of Texas, Mississippi and Minnesota.

Adjusted profit from operations growth of 14.9%, or 15.5% excluding currency, was delivered with revenue growth and savings from the Quantum re-organisation programme. This allowed further investment into New Categories of over £100 million to drive awareness and trial.

New Categories

In vapour, Vuse revenue was up 85%, or 86% at constant rates of exchange, well ahead of the industry. Vuse consumable volumes increased by 70%, driving total vapour value share higher (to 25% in 2020 from 17%) for 2019. Vuse Alto was the driving force of this growth, and in the final quarter of 2020 represented over 85% of Vuse revenues in the US, up from 50% in 2019. Industry vapour volumes were down 13.1% following the EVALI crisis in the second half of 2019 and the implementation of the flavour regulations in early 2020. However, the sequential recovery continued over the second half of 2020 with industry growth from Q2 onwards.

 

8

Regional Review

United States cont…

 

In Modern Oral, Velo revenue increased 13.5% in 2020 (or 14.1% at constant rates of exchange) with volume up 45%. The portfolio has been strengthened by the acquisition (in October 2020) of the nicotine pouch products of Dryft Sciences, LLC (Dryft). These products have been rebranded Velo and expands the US portfolio from 4 to 28 variants, with representation in the above 6mg nicotine strength segment. With the national rollout of Velo branded Dryft products in early 2021 and a return to growth in the final quarter of 2020, we have great momentum for 2021.

PMTAs were submitted ahead of the 9 September 2020 deadline for four Vuse products (Alto, Solo, Ciro and Vibe) and for Velo modern oral products from both our existing portfolio and the recently acquired Dryft products. We expect to hear more on their progress over the course of 2021.

Traditional Oral

Traditional Oral revenue grew 7.0% (or 7.6% at constant rates of exchange), driven by strong pricing of 9%. Traditional Oral volume declined 1.3% in 2020, with value share of moist down 25 bps and volume share down 35 bps. This was driven by Grizzly which was impacted by pricing pressures in the final quarter of 2019 and early 2020. Utilising revenue growth management techniques, value share has stabilised in the second half of the year.

The MRTP applications for Camel Snus remains under review having been discussed by the TPSAC in September 2018. We continue to work closely with the FDA, which announced in December 2020 that it had reopened the comment period after our filing of additional information.

Combustibles

Combustibles revenue grew 9.3% or 9.9% at constant rates of exchange, driven by value share gains and strong pricing (with four rounds of price increases announced in the year). Cigarette volume was up 0.5% to 73 billion sticks (2019: 73 billion sticks), due to the performance of the strategic portfolio whilst Lucky Strike was reintroduced in the final quarter of the year. This was in an industry that was estimated to be up 1.5% due to reduced consumer switching to vapour, higher supply chain inventories (in response to COVID-19 and the timing of price increases), an extra selling day and resilient consumer demand resulting from the increase in fiscal stimulus and lower gas prices.

Total cigarette value share increased 45 bps, with volume share up 10 bps, driven by our premium brands Newport and Natural American Spirit. Combustibles price/mix rose by 9.4%, driven by four price increases announced in the year, positive brand mix and including the impact of our revenue growth management programme. We continue to experience no acceleration in downtrading.

We will continue to monitor the regulatory developments yet we do not believe there is any significant impact of such restrictions on the Group’s operations at this time. The FDA’s “2020 Unified Agenda” did not progress the potential regulations with regards to menthol in tobacco products or restrictions to nicotine in tobacco products.

 

9

Regional Review

ASIA-PACIFIC AND MIDDLE EAST (APME):

 

		Volume (unit)								Reported Revenue (£m)												Adjusted Revenue (£m)
For year ended 31 December		2020 Unit				Change %				2020 £m				2019 £m				Change %				Adj £m				FX £m				2020 cc £m				2019 £m				Change %
New Categories											514				675				-24.0%				-				(7	)			507				675				-25.0%
Vapour (10ml units / pods mn)			6				+385%				15				4				+255%				-				-				15				4				+260%
THP (sticks bn)			7.4				-6.5%				497				671				-26.0%				-				(7	)			490				671				-27.1%
Modern Oral (pouches mn)			86				N/M				2				-				N/M				-				-				2				-				N/M
Traditional Oral (stick eq bn)			-				-				-				-				-				-				-				-				-				-
Total Non-Combustibles											514				675				-24.0%				-				(7	)			507				675				-25.0%
Total Combustibles (sticks bn)			200				-7.2%				3,935				4,387				-10.3%				-				113				4,048				4,387				-7.7%
Other											88				91				-1.3%				-				1				89				91				-0.4%
Total											4,537				5,153				-11.9%				-				107				4,644				5,153				-9.9%
										Reported PfO (£m)												Adjusted PfO (£m)
										Margin (%)												Adjusted operating margin (%)
										2020				2019				Change				Adj				FX				2020 cc				2019				Change
Profit from Operations (PfO)											1,472				1,753				-16.0%				381				56				1,909				2,059				-7.3%
Operating Margin											32.4%				34.0%				-160 bps												41.1%				40.0%				+110 bps

Use of the term “at cc” refers to the variance between the 2020 adjusted performance, at 2019 exchange rates, against the adjusted 2019 performance. N/M – not meaningful

 

●

glo volume growth, driven by Hyper launch, offset by Japan excise increase

 

●

COVID-19 lockdowns impacted revenue across the region

 

●

Gradual recovery following the easing of lockdown restrictions in H2 2020

 

●

Quantum programme and cost savings enable adjusted operating margin expansion

Regional Revenue and Profit from operations

Reported revenue declined 11.9% at current exchange rates and by 9.9% on a constant currency basis as value market share gains in combustibles were more than offset by a reduction in combustible volume, which fell 7.2%, largely driven the impacts of COVID-19 on GTR and other key markets and the impact of excise increases and minimum pricing in Indonesia.

Reported profit from operations fell 16.0% 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) and unfavourable foreign exchange movements more than offset the efficiencies realised through Quantum. In 2020, the Group recognised an impairment in goodwill in respect of the ongoing difficult trading environment in Malaysia (£197 million), following an impairment in Indonesia

(£172 million) in 2019.

Excluding adjusting items, adjusted profit from operations fell 7.3% at constant rates of exchange, due to the decline in revenue. However, savings from Project Quantum and productivity initiatives including our factory rationalisation programme drove margin expansion of 110 bps.

New Categories

In THP, consumable volume fell 6.5% to 7.4 billion sticks (2019: 7.9 billion), as the launch of glo Hyper was more than offset by excise harmonisation impacting the industry and by a strong comparator period that included the launch of glo Pro, glo Nano and glo Sens. In 2020, as the performance of Sens was not as expected, a decision to withdraw that variant was taken. This acted as a £50 million drag on revenue which, combined with the impact of harmonisation of excise in Japan, led to a decline in revenue of 26% (or 27% excluding the impact of currencies). However, in Japan, the largest THP market in the world, glo’s volume share increased to 5.9% in December 2020, up 85 bps compared to 2019, driven by glo Hyper’s launch in April 2020.

Combustibles

Revenue from combustibles fell 10.3% at current rates, and by 7.7% on a constant currency basis, as 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 combined with the minimum retail price compliance in Indonesia, and the continued increase in illicit trade in Pakistan (following an excise-led price increase in 2019).

Value share increased 10 bps, with volume share up 55 bps, as volume share gains (including in Bangladesh, Japan, Pakistan and Malaysia) more than offset losses in Saudi Arabia and Indonesia.

 

10

Regional Review

 

AMERICAS AND SUB-SAHARAN AFRICA (AMSSA):

 

			Volume (unit)								Reported Revenue (£m)												Adjusted Revenue (£m)
For year ended 31 December			2020   Unit				Change   %				2020   £m				2019   £m				Change   %				Adj   £m				FX   £m				2020 cc   £m				2019   £m				Change   %
New Categories											66				44				+51.3%				-				2				68				44				+57.1%
Vapour (10ml units / pods mn)			31				+118%				65				43				+52.8%				-				3				68				43				+58.6%
THP (sticks bn)			-				-				-				-				-				-				-				-				-				-
Modern Oral (pouches mn)			19				+142%				1				1				-49.8%				-				(1	)			0				1				-47.3%
Traditional Oral (stick eq bn)			-				-				-				-				-				-				-				-				-				-
Total Non-Combustibles											66				44				+51.3%				-				2				68				44				+57.1%
Total Combustibles (sticks bn)			149				-3.8%				3,535				3,992				-11.4%				-				508				4,043				3,992				+1.3%
Other											171				225				-24.3%				-				39				210				225				-7.2%
Total											3,772				4,261				-11.5%				-				549				4,321				4,261				+1.4%
											Reported PfO (£m) Margin (%)												Adjusted PfO (£m) Adjusted operating margin (%)
											2020				2019				Change				Adj				FX				2020 cc				2019				Change
Profit from Operations (PfO)											1,553				1,204				+29.0%				65				178				1,796				1,842				-2.5%
Operating Margin											41.2%				28.3%				+1,290 bps												41.6%				43.2%				-160 bps

Use of the term “at cc” refers to the variance between the 2020 adjusted performance, at 2019 exchange rates, against the adjusted 2019 performance.

 

●

Revenue growth of over 50% in New Categories, led by Vuse

 

●

Vuse reaches leading value share in key Canadian vapour market

 

●

COVID-19 lockdown impact on combustibles volumes across the region – with South Africa revenue rapidly recovering from sales suspension

Regional Revenue and Profit from operations

Reported revenue declined 11.5%, predominantly due to a translational foreign exchange headwind caused by the relative strength of sterling against a number of currencies, particularly the Brazilian real, Chilean peso, Mexican peso and the South African rand. On a constant currency basis, revenue grew by 1.4% as cigarette pricing and New Categories revenue growth more than offset lower cigarette volume and the impact of the COVID-19 related sales restrictions, notably in South Africa.

Reported profit from operations grew 29.0% to £1,553 million, largely from the absence of the £436 million charge in the prior period in relation to the Quebec class action. Excluding adjusting items in both periods, adjusted profit from operations declined 2.5% on a constant currency basis, as the growth in revenue was more than offset by the impact of COVID-19 which led to supply restrictions in South Africa and additional supply chain costs elsewhere (estimated to be £57 million) to manage the operational volatility.

New Categories

In vapour, during 2020 the Group gained leadership in Canada with total value share up 2,220 bps (compared to 2019) to 46% in 2020 driven by the growth of the ePod variant and supported by the migration to Vuse from Vype.

Growth in Canada was partially offset by the restrained performance in South Africa where sales of vapour products were suspended, alongside those of cigarettes, between March and August 2020 as part of the country’s COVID-19 response. Since the lifting of the sales suspension, our vapour operations have started to recover, and we remain confident of the category potential in South Africa, yet we recognised an impairment of Twisp of £11 million in 2020 ahead of the planned migration to Vuse.

Combustibles

Combustibles revenue fell 11.4% largely due to a negative translational foreign exchange impact. Revenue grew 1.3% at constant rates of exchange as price/mix and value share gains (particularly in Mexico and Colombia) of 30 bps more than offset combustibles volume decline of 3.8%. The lower volume was largely due to industry-wide contractions following the impact of COVID-19 in a number of markets, particularly from the sales suspension in South Africa, but also from temporary periods of supply chain disruption in other markets such as Mexico and Argentina. This was partially offset by an increase in duty paid cigarette volume in Brazil as COVID-19 related lockdowns and increased border security led to a reduction in illicit trade.

 

11

Regional Review

 

EUROPE AND NORTH AFRICA (ENA):

 

			Volume (unit)								Reported Revenue (£m)												Adjusted Revenue (£m)
For year ended 31 December			2020   Unit				Change   %				2020   £m				2019   £m				Change   %				Adj   £m				FX   £m				2020 cc   £m				2019   £m				Change   %
New Categories											469				319				+46.7%				-				9				478				319				+49.6%
Vapour (10ml units / pods mn)			133				+23.0%				148				147				+0.4%				-				(1	)			147				147				+0.2%
THP (sticks bn)			3.3				+203%				136				56				+143%				-				9				145				56				+159%
Modern Oral (pouches mn)			1,667				+55.6%				185				116				+58.5%				-				1				186				116				+59.3%
Traditional Oral (stick eq bn)			0.9				+2.8%				34				29				+16.2%				-				-				34				29				+14.2%
Total Non-Combustibles											503				348				+44.1%				-				9				512				348				+46.6%
Total Combustibles (sticks bn)			236				-4.1%				5,356				5,544				-3.4%				-				167				5,523				5,494				+0.5%
Other											135				198				-31.6%				-				(1	)			134				198				-31.7%
Total											5,994				6,090				-1.6%				-				175				6,169				6,040				+2.1%
											Reported PfO (£m) Margin (%)												Adjusted PfO (£m) Adjusted operating margin (%)
											2020				2019				Change				Adj				FX				2020 cc				2019				Change
Profit from Operations (PfO)											1,962				1,649				+19.0%				148				30				2,140				2,193				-2.4%
Operating Margin											32.7%				27.1%				+560 bps												34.7%				36.3%				-160 bps

Use of the term “at cc” refers to the variance between the 2020 adjusted performance, at 2019 exchange rates, against the adjusted 2019 performance.    

 

●

50% New Categories revenue growth at constant currencies

 

●

glo Hyper launch drives more than doubling of THP revenue

 

●

Immaterial impact of EU Menthol ban on combustibles

 

●

Significant New Categories investment leads to adjusted operating margin contraction

Regional Revenue and Profit from operations

Reported revenue reduced 1.6% at current rates due to translational foreign exchange headwinds. Adjusted revenue increased 2.1% at constant rates as combustible pricing across the region and 49.6% growth in New Categories revenue more than offset combustibles volume declines.

Reported profit from operations increased 19.0%, largely due to the absence of the £202 million charge in respect of the Russian excise dispute that impacted the prior year. Adjusted profit from operations at constant rates was down 2.4% as higher revenue and Quantum cost savings were more than offset by increased investment behind New Categories (up over £200 million).

New Categories

Vapour revenue increased slightly (up 0.4%) as consumable volume growth of 23.0% (despite the impact of COVID-19 on our vape stores) was offset by marketing investment to drive consumer activation, which is recognised as a deduction to revenue, in line with IFRS 15 Revenue from Contracts with Customers. Vype grew across the region and saw record vapour value shares as the Group consolidated value share leadership positions in the key markets of France and Germany. In the UK, the Group maintained its value share leadership position as Vype’s good performance was moderated by a reduction in Ten Motives and the remainder of the local portfolio.

In January 2021, we have pilot-launched our first CBD vaping product, Vuse CBD Zone. This latest innovation will allow us, for the first time, to offer adult consumers a range of high-quality CBD vaping products from our trusted, global brand, Vuse. Initially available in Manchester, UK, it will offer adult smokers and vapers sensorial enjoyment, as Vuse CBD Zone caters to a variety of moods and moments in their busy lifestyles.

THP volumes tripled and revenue more than doubled driven by the launch of glo Hyper in a number of markets across the region and the continued progress of glo Pro. glo has grown volume share in key THP markets since the launch of glo Hyper, including in Russia, where glo volume share reached 1.4% (in December 2020), doubling its volume share of the THP category from 7.6% in June 2020 to 15.5% in December 2020. Since the launch of Hyper in pilot cities in Italy, glo has more than tripled its volume share of category to 7.8% (December 2020), with retention rates doubling.

In Modern Oral, revenue grew 58.5%, led by 55.6% volume growth and positive price/mix. 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 oral category, and our volume share within it, in Denmark and Switzerland.

 

12

Regional Review

 

EUROPE AND NORTH AFRICA (ENA) cont…

Combustibles

Combustibles revenue fell 3.4% at current rates but grew 0.5% excluding the impact of foreign exchange. Combustibles volume declined 4.1% as higher volume in Turkey (driven by Kent and the local portfolio) was more than offset by industry volume contraction in a number of markets, partly due to COVID-19. Cigarette value share was in line with the prior year, with cigarette volume share up 30 bps, driven by Russia and Turkey partly offset by France, Spain, 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 and has successfully navigated the menthol ban in combustibles with an increase in consumer retention across the nicotine delivery product range as consumers have either migrated to our New Categories portfolio or switched to non-menthol combustible products.

 

13