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 Exchange Act of 1934

February 11, 2022

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 11, 2022.

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 2021.
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 2021 and 31 December 2020 and for the years ended 31 December 2021, 2020 and 2019.
Exhibit 99.2		British American Tobacco p.l.c.’s Management’s report on internal control over financial reporting as at 31 December 2021.

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 11, 2022

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 and our forward-looking revenue cannot be estimated with reasonable certainty. 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 or constant currency revenue.

11 February 2022 – PRESS RELEASE / PRELIMINARY RESULTS
BRITISH AMERICAN TOBACCO p.l.c.
YEAR ENDED 31 DECEMBER 2021 2021 – A PIVOTAL YEAR DELIVERED, BUYBACK ANNOUNCED

 

PERFORMANCE HIGHLIGHTS

REPORTED

ADJUSTED

Current rates

Vs 2020     (current)

Current Rates

Vs 2020     (constant)

Cigarette and THP volume share

+10 bps

Cigarette and THP value share

+20 bps

Non-Combustibles consumers1

18.3m

+4.8m

Revenue (£m)

£25,684m

-0.4%

£25,684m

+6.9%

Revenue from New Categories (£m)

£2,054m

+42.4%

£2,054m

+50.9%

Profit from operations (£m)

£10,234m

+2.7%

£11,150m

+5.2%

Operating margin (%)

39.8%

+120 bps

43.4%

-70 bps

Diluted EPS (pence)

295.6p

+6.0%

329.0p

+6.6%

Net cash generated from operating activities (£m)

£9,717m

-0.7%

Borrowings3 (£m)

£39,658m

-9.8%

Dividend per share (pence)

217.8p

+1.0%

The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on pages 46 to 51, with reconciliations from the most comparable IFRS measure provided. Note – 1. Internal estimate. 2. N/A 3. Includes lease liabilities.

 

Faster Transformation		Strong FY Results
· New Categories revenue up 51% to £2,178m* · Non-combustible product** consumer acquisition +4.8m to 18.3m · Vapour revenue up 59%* · glo revenue up 46%* · Modern Oral revenue up 41%* · £2 billion 2022 buyback announced		· Revenue up 6.9%* led by pricing and New Category growth · Combustible revenue up 4.0%* with price/mix of 4.3%, reflecting Emerging Market (EM) performance and COVID-19 recovery · Cigarette value share up 10 bps · Further £595m cost savings, driven by Quantum · Adjusted profit from operations up 5.2%* includes a negative transactional FX impact of 1.7% · Adjusted operating margin down 70 bps · Adjusted diluted EPS up 6.6%*

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

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

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

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

These foundations also provide the financial flexibility to be more active in our capital allocation to deliver sustainable long-term value for shareholders. With leverage within our target range, we will continue to invest in a faster transformation and deliver strong returns to shareholders. In addition to maintaining a growing dividend the Board has approved a £2bn share repurchase programme for 2022.

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

2022 outlook:

 

·

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

·

Constant currency revenue growth of 3%-5%.

·

Strong New Category revenue growth and further reduction in losses.

·

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

^ 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

 

1

CHIEF EXECUTIVE’S STATEMENT

FASTER TRANSFORMATION - TOWARDS A BETTER TOMORROW^TM

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

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

 

·

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

·

Non-combustible products now account for 12% of Group revenues;

·

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

·

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

·

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

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

 

·

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

·

50m consumers of non-combustible products by 2030.

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

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

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

FINANCE & TRANSFORMATION DIRECTOR’S STATEMENT

STRONG CASH FLOW DRIVES DELEVERAGE AND ENABLES SHARE BUYBACK.

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

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

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

We have worked hard to generate strong cash flow over recent years with nearly £10 billion of net cash generated from operating activities in 2021.

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

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

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

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

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

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

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

 

2

GROUP OPERATING REVIEW

TOTAL GROUP VOLUME and REVENUE

For year ended 31 December			Volume (unit)								Revenue (£m)
											Reported																At constant rates
		2021 Unit				Change %				2021 £m				2020 £m				Change %								FX     £m				2021 cc £m				2020 £m				Change %
New Categories											2,054				1,443				+42.4%								124				2,178				1,443				+50.9%
Vapour (10ml units / pods mn)			535				+55.5%				927				611				+51.8%								46				973				611				+59.3%
THP (sticks bn)			19.1				+78.7%				853				634				+34.4%								74				927				634				+46.1%
Modern Oral (pouches mn)			3,296				+70.5%				274				198				+38.8%								4				278				198				+40.6%
Traditional Oral (stick eq bn)			8.0				-3.9%				1,118				1,160				-3.6%								77				1,195				1,160				+3.0%
Total Non-Combustibles											3,172				2,603				+21.9%								201				3,373				2,603				+29.6%
Cigarettes (sticks bn)			637				-0.1%
OTP incl RYO/MYO (stick eq bn)			18				-9.2%
Total Combustibles			655				-0.3%				22,029				22,752				-3.2%								1,640				23,669				22,752				+4.0%
Other											483				421				+14.7%								36				519				421				+23.1%
Total											25,684				25,776				-0.4%								1,877				27,561				25,776				+6.9%
Cigarettes and THP (sticks bn)			656				+1.2%

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

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

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

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

PROFIT FROM OPERATIONS AND OPERATING MARGIN

For year ended 31 December		Reported PfO (£m) Operating Margin (%)												Adjusted PfO (£m) Adjusted Operating Margin (%)
		2021				2020				Change				Adj				FX				2021 cc				2020				Change
Profit from Operations (PfO)			10,234				9,962				+2.7%				916				802				11,952				11,365				+5.2%
Operating Margin			39.8%				38.6%				+120 bps												43.4%				44.1%				-70 bps

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

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

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

Adjusted profit from operations and adjusted operating margin

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

 

3

CATEGORY PERFORMANCE REVIEW

A STEP CHANGE IN NEW CATEGORIES

For year ended 31 December		Volume (unit)								Revenue (£m)
										Reported												At constant rates
		2021 Unit				Change %				2021 £m				2020 £m				Change %				FX     £m				2021 cc £m				2020 £m				Change %
New Categories											2,054				1,443				+42.4	%			124				2,178				1,443				+50.9	%
Vapour (10ml units / pods mn)			535				+55.5	%			927				611				+51.8	%			46				973				611				+59.3	%
THP (sticks bn)			19.1				+78.7	%			853				634				+34.4	%			74				927				634				+46.1	%
Modern Oral (pouches mn)			3,296				+70.5	%			274				198				+38.8	%			4				278				198				+40.6	%
Traditional Oral (stick eq bn)			8.0				-3.9	%			1,118				1,160				-3.6	%			77				1,195				1,160				+3.0	%
Total Non-Combustibles											3,172				2,603				+21.9	%			201				3,373				2,603				+29.6	%

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

VUSE – VAPOUR: Global Value Share leadership¹

 

·

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

 

·

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

 

·

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

 

·

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

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

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

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

 

·

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

 

·

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

 

·

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

 

·

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

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

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

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

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

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

³  Source: Similar Web.

 

4

CATEGORY PERFORMANCE REVIEW

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

 

·

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

 

·

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

 

·

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

 

·

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

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

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

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

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

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

 

·

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

·

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

·

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

·

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

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

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

 

5

CATEGORY PERFORMANCE REVIEW

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

 

·

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

 

·

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

 

·

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

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

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

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

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

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

 

·

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

 

·

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

·

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

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

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

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

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

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

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

 

6

CATEGORY PERFORMANCE REVIEW

BEYOND NICOTINE

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

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

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

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

TRADITIONAL ORAL

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

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

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

VALUE THROUGH COMBUSTIBLES – Continued global value share gains

 

·

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

 

·

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

 

·

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

 

·

Continued strong pricing, partially offset by negative geographic mix.

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

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

 

·

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

·

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

·

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

·

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

was more than offset by volume decline in:

 

·

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

·

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

·

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

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

 

7

CATEGORY PERFORMANCE REVIEW

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

·

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

·

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

·

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

·

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

·

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

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

·

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

·

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

·

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

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

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

SIMPLIFYING THE BUSINESS – Delivering the enterprise of the future

 

·

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

 

·

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

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

 

·

Quantum, our programme designed to simplify our business;

·

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

·

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

·

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

·

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

Phases 1 and 2 of the Quantum programme have already delivered greater organisational speed and agility, alongside operational efficiencies and supply chain productivity improvements. We have realised further savings of £595 million this year and delivered total savings of £1.3 billion to date, 12 months earlier than planned. The savings from Quantum are enabling further increased investment in New Categories and the building of new capabilities.

 

8

REGIONAL REVIEW

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

UNITED STATES (U.S.):

 

		Volume (unit)								Revenue (£m)
										Reported																At constant rates
For year ended 31 December		2021				Change				2021				2020				Change								FX				2021 cc				2020				Change
		Unit				%				£m				£m				%								£m				£m				£m				%
New Categories											564				394				+43.0%								40				604				394				+53.3%
Vapour (10ml units / pods mn)			291				+66.7%				561				383				+46.4%								40				601				383				+56.9%
THP (sticks bn)			0				+0.0%				1				1				-21.8%								-				1				1				-16.2%
Modern Oral (pouches mn)			602				+272%				2				10				-81.5%								-				2				10				-80.1%
Traditional Oral (stick eq bn)			7.1				-5.1%				1,077				1,126				-4.3%								78				1,155				1,126				+2.6%
Total Non-Combustibles											1,641				1,520				+8.0%								118				1,759				1,520				+15.7%
Total Combustibles (sticks bn)			70				-5.0%				10,015				9,926				+0.9%								719				10,734				9,926				+8.1%
Other											35				27				+26.9%								2				37				27				+36.0%
Total											11,691				11,473				+1.9%								839				12,530				11,473				+9.2%
											Reported PfO (£m) Margin (%)												Adjusted PfO (£m) Adjusted operating margin (%)
											2021				2020				Change				Adj				FX				2021 cc				2020				Change
Profit from Operations (PfO)											5,566				4,975				+11.9%				321				456				6,343				5,784				+9.7%
Operating Margin											47.6%				43.4%				+420 bps												50.6%				50.4%				+20 bps

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

 

•

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

 

•

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

 

•

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

 

•

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

Regional Revenue and Profit from Operations

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

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

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

New Categories

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

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

 

9

REGIONAL REVIEW

UNITED STATES (U.S.) cont:

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

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

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

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

Traditional Oral

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

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

Combustibles

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

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

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

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

 

10

REGIONAL REVIEW

ASIA-PACIFIC AND MIDDLE EAST (APME):

 

		Volume (unit)								Revenue (£m)
										Reported																At constant rates
For year ended 31 December		2021				Change				2021				2020				Change								FX				2021 cc				2020				Change
		Unit				%				£m				£m				%								£m				£m				£m				%
New Categories											535				514				+4.2%								53				588				514				+14.2%
Vapour (10ml units / pods mn)			9				+65.6%				18				15				+26.0%								1				19				15				+27.5%
THP (sticks bn)			9.3				+26.5%				511				497				+2.8%								51				562				497				+13.0%
Modern Oral (pouches mn)			254				+197%				6				2				+179%								1				7				2				+199%
Traditional Oral (stick eq bn)			-				-				-				-				-								-				-				-				-
Total Non-Combustibles											535				514				+4.2%								53				588				514				+14.2%
Total Combustibles (sticks bn)			208				+4.4%				3,555				3,935				-9.6%								287				3,842				3,935				-2.3%
Other											101				88				+13.0%								4				105				88				+20.1%
Total											4,191				4,537				-7.6%								344				4,535				4,537				0.0%
											Reported PfO (£m) Margin (%)												Adjusted PfO (£m) Adjusted operating margin (%)
											2021				2020				Change				Adj				FX				2021 cc				2020				Change
Profit from Operations (PfO)											1,287				1,472				-12.6%				430				116				1,833				1,853				-1.1%
Operating Margin											30.7%				32.4%				-170 bps												40.4%				40.8%				-40 bps

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

 

·

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

 

·

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

 

·

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

Regional Revenue and Profit from operations

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

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

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

New Categories

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

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

Combustibles

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

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

 

11

REGIONAL REVIEW

AMERICAS AND SUB-SAHARAN AFRICA (AMSSA):

 

		Volume (unit)								Revenue (£m)
										Reported																At constant rates
For year ended 31 December		2021				Change				2021				2020				Change								FX				2021 cc				2020				Change
		Unit				%				£m				£m				%								£m				£m				£m				%
New Categories											141				66				+114%								-				141				66				+114%
Vapour (10ml units / pods mn)			62				+102%				141				65				+115%								-				141				65				+115%
THP (sticks bn)			-				-				-				-				-								-				-				-				-
Modern Oral (pouches mn)			-				-100%				-				1				-100%								-				-				1				-100%
Traditional Oral (stick eq bn)			-				-				-				-				-								-				-				-				-
Total Non-Combustibles											141				66				+114%								-				141				66				+114%
Total Combustibles (sticks bn)			148				0.0%				3,435				3,535				-2.8%								244				3,679				3,535				+4.1%
Other											225				171				+32.3%								22				247				171				+44.7%
Total											3,801				3,772				+0.8%								266				4,067				3,772				+7.8%
											Reported PfO (£m) Margin (%)												Adjusted PfO (£m) Adjusted operating margin (%)
											2021				2020				Change				Adj				FX				2021 cc				2020				Change
Profit from Operations (PfO)											1,496				1,553				-3.7%				94				98				1,688				1,618				+4.3%
Operating Margin											39.3%				41.2%				-190 bps												+41.5%				+42.9%				-140 bps

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

 

·

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

 

·

Vuse consolidated value share leadership in key Canadian vapour market.

 

·

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

Regional Revenue and Profit from operations

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

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

New Categories

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

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

Combustibles

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

 

12

REGIONAL REVIEW

EUROPE AND NORTH AFRICA (ENA):

 

		Volume (unit)								Revenue (£m)
										Reported																At constant rates
For year ended 31 December		2021				Change				2021				2020				Change								FX				2021 cc				2020				Change
		Unit				%				£m				£m				%								£m				£m				£m				%
New Categories											814				469				+73.6%								31				845				469				+80.3%
Vapour (10ml units / pods mn)			173				+29.8%				207				148				+40.2%								5				212				148				+43.8%
THP (sticks bn)			9.8				+195%				341				136				+150%								23				364				136				+167%
Modern Oral (pouches mn)			2,440				+46.4%				266				185				+43.9%								3				269				185				+45.6%
Traditional Oral (stick eq bn)			0.9				+6.1%				41				34				+18.2%								(1)				40				34				+18.1%
Total Non-Combustibles											855				503				+69.8%								30				885				503				+76.1%
Total Combustibles (sticks bn)			229				-3.1%				5,024				5,356				-6.2%								390				5,414				5,356				+1.1%
Other											122				135				-8.9%								8				130				135				-4.9%
Total											6,001				5,994				+0.1%								428				6,429				5,994				+7.3%
											Reported PfO (£m) Margin (%)												Adjusted PfO (£m) Adjusted operating margin (%)
											2021				2020				Change				Adj				FX				2021 cc				2020				Change
Profit from Operations (PfO)											1,885				1,962				-3.9%				71				132				2,088				2,110				-1.0%
Operating Margin											31.4%				32.7%				-130 bps												32.5%				35.2%				-270 bps

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

 

·

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

 

·

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

 

·

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

 

·

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

Regional Revenue and Profit from operations

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

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

New Categories

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

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

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

Combustibles

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

 

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OTHER FINANCIAL INFORMATION

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

 

		2021																				2020
For six months ended 30 June		Reported				Adj         Items1				Adjusted				Exchange				Adjusted at CC2				Reported				Adj         Items1				Adjusted
		£m				£m				£m				£m				£m				£m				£m				£m
Profit from Operations
U.S.			5,566				321				5,887				456				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				98				1,688				1,553				65				1,618
ENA			1,885				71				1,956				132				2,088				1,962				148				2,110
Total Region			10,234				916				11,150				802				11,952				9,962				1,403				11,365
Net finance costs			(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				10,146				742				10,888				8,672				1,543				10,215
Taxation			(2,189	)			(210	)			(2,399	)			(164	)			(2,563	)			(2,108	)			(322	)			(2,430	)
Non-controlling interests			(173	)			(6	)			(179	)			(14	)			(193	)			(164	)			(8	)			(172	)
Coupons relating to hybrid bonds net of tax			(12	)			-				(12	)			-				(12	)			-				-				-
Profit attributable to shareholders			6,789				767				7,556				564				8,120				6,400				1,213				7,613
Diluted number of shares (m)			2,297								2,297								2,297				2,295								2,295
Diluted earnings per share (pence)			295.6								329.0								353.5				278.9								331.7

Notes to the analysis of profit from operations above:

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

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

NET FINANCE COSTS

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

 

·

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

 

·

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

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

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

RESULTS OF ASSOCIATES AND JOINT VENTURES

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

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

 

·

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

 

·

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

 

·

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

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

 

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