British American Tobacco Plc – Final Results: Transformational Deal Marks A Record Year

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The following slide deck was published by British American Tobacco p.l.c. (American Depository Receipts) in conjunction with their 2017 Q4 earnings call.

YEAR HIGHLIGHTS

  • Successfully completed the acquisition of Reynolds American Inc. (RAI/Reynolds American) on 25 July 2017 for a total consideration of £41.8 billion in a combination of cash and ordinary shares to become the world’s leading international tobacco and Next Generation Products (NGP) business.
  • Continued roll-out and investment in the development of NGPs, with the national roll-out in Japan of our tobacco heating product (THP), Glo achieving 3.6% national share as well as launches in five new markets combined with the continued growth of our vapor portfolio.
  • Volume of cigarettes and THPs grew by 3.2%, driven by the acquisition of RAI, and fell on an organic basis by 2.6%, outperforming the market which declined by an estimated 3.5%.
  • The Group’s cigarette market share grew 40 basis points (bps), driven by the Global Drive Brand (GDB) portfolio, with volume up 7.6% on an organic basis with market share up, excluding the US, by 110 bps.
  • Group revenue grew 37.6%, with profit from operations up 39.1%, due to the acquisition of RAI, improved revenue from the NGP portfolio, pricing and a translational foreign exchange tailwind due to the relative weakness of sterling.
  • Adjusted, organic revenue grew 6.5% or 2.9% at constant rates of exchange, driven by pricing and the performance of NGP.
  • Adjusted, organic profit from operations at current rates was up 7.8% or 3.7% at constant rates.
  • Operating margin, at current rates, was ahead of 2016 by 30 bps at 31.9%, by 270 bps on an adjusted basis, or 40 bps on an adjusted organic basis.
  • Diluted earnings per share increased by over 600% largely due to a gain of £23.3 billion related to the acquisition of RAI (see page 12) and a deferred tax credit of £9.6 billion from the revaluation of the net deferred tax liability arising on the acquisition net assets to the 21% federal tax rate in the US (described on page 11). On an adjusted basis the increase was 14.9%, or 9.9% on an adjusted, constant rate basis.
  • Dividend per share increased 15.2% to 195.2p, payable in four quarterly dividend payments of 48.8p per share. An additional dividend of 43.6p was also paid in February 2018 – see page 35.

Richard Burrows, Chairman, commenting on the year ended 31 December 2017

“The transformational deal to acquire RAI marked a record year in 2017. The Group continued to deliver on its commitment to high single figure constant currency earnings growth, substantially reinforced the long-term sustainability of that growth with the largest acquisition of a tobacco company ever completed and achieved significant success in its Next Generation Products business. This is an exciting time for the Group and the Board has confidence in the Group’s ability to continue delivering sustainable growth in the years to come.”

CHIEF EXECUTIVE’S REVIEW

The Group delivered another set of strong financial results in 2017, despite a challenging trading environment. Following the transformational deal in July 2017, these results benefit from the acquisition of RAI while also demonstrating the strength of the organic business.

The Group has delivered outstanding returns to shareholders for many years. We recognize that the tobacco and nicotine industry has entered a dynamic period of change. Increased public health awareness, new societal attitudes and rapid developments in new technologies have all combined to create a unique opportunity to accelerate the delivery of our long-held ambition to provide our consumers with less risky tobacco and nicotine choices.

Since 2012, together with RAI, we have invested approximately US$2.5 billion in the growth of our Next Generation Product (NGP) business – comprising vapor and tobacco heating products (THPs). Following the acquisition of RAI, not only have we become the world’s leading vapor company, we have also significantly increased the size of our existing oral tobacco and nicotine business with the addition of leading snus and moist snuff brands in the US. Collectively, we
refer to these products as our potentially reduced-risk products.

Our investments are now coming to fruition and, recognizing that not all consumers are the same, we now have an unrivaled range of exciting and innovative products across the potentially reduced-risk categories – including vapor, THPs, oral tobacco, tobacco-free nicotine pouches and moist snuff. With the increased size and scale coming from RAI, we are clear leaders in the potentially reduced-risk product space and we are confident of leading the NGP category. This
year we generated revenue fromBNGP of £397 million. On a full year basis including the contribution from RAI, this would have been approximately £500million and we expect this to double in 2018 to £1 billion, rising to more than £5 billion in
2022.

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