Financial Review

REGIONAL REVIEW CONTINUED EUROPE AND NORTH AFRICA

MODERN ORAL AND VAPOUR PERFORMANCE DRIVES GROWTH Johan Vandermeulen Regional Director Key markets: Algeria, Belgium, Bulgaria, Egypt, Czech Republic, Denmark, France, Germany, Italy, Kazakhstan, Morocco, Netherlands, Poland, Romania, Russia, Spain, Sweden, Switzerland, Turkey, Ukraine, UK

Volume and share Vapour volume was 44% higher in 2019 than Adjusted revenue, at constant rates, In 2019, cigarette value share was marginally in 2018. Vapour in both years was driven by increased 5.0% to £6,118 million in higher with strategic cigarette volume share the success of Vype (particularly ePen3) in the 2019 (2018: up 3.5% on a representative up 50 bps. Total cigarette volume share was UK (where the Group’s portfolio of products basis). This was driven by pricing across up 10 bps as growth in Rothmans (which maintained value leadership in 2019 with 38% the combustible portfolio as noted earlier, outperformed the market in Ukraine and vapour value share in December 2019), France as well as the 94% growth in revenue Russia), Kent (in Ukraine) and higher total (where ePen3 and ePod combined reached from New Categories to £324 million cigarette volume share in Italy, Poland, 20% vapour value share in December 2019) (2018: £167 million) driven by: and in Germany (where Vype reached 17% Romania and Spain was partially offset – vapour revenue increasing 30% to share of total vapour consumers). by a reduction in Kazakhstan and the UK. £148 million (2018: £114 million) due to This compares to 2018 when volume share The Group’s Modern Oral portfolio increased the performance of Vype in the UK, France was flat against 2017 as increases in Kent (led volume by 157% to 1.1 billion pouches in 2019 and Germany; by Ukraine, Turkey, Kazakhstan and regaining (2018: 0.4 billion pouches, an increase of 44% on – THP revenue growing 200% driven by premium segment leadership in Russia), and 2017), largely due to higher volume in Denmark Russia, Ukraine and Kazakhstan; and Rothmans (Ukraine, Russia, Poland, Spain, and Norway, reaching 75% and 14% volume Bulgaria and Italy) were offset by both the share of the total oral category, respectively. – modern oral revenue increasing 246% to continued reduction in Pall Mall (Poland, In Russia, Lyft achieved 27% volume share of £120 million (2018: £34 million) following Germany and Belgium) and a decline in the the total oral category (in tracked channels) in the increase in volume in Norway and low-price portfolio in Russia. December 2019. Denmark, and the launch in Russia. In 2019, cigarette volume declined 6.3% In December 2019 following concerns in Profit from operations to 230 billion sticks as growth in Poland, Russia regarding the irresponsible marketing In 2019, reported profit from operations Romania, Denmark and Spain was more by our competitors, all sales of modern fell 13.4% to £1,649 million, as the Group than offset by lower volume in Russia (partly oral have been temporarily suspended in increased investment behind New Categories, due to a one-off reduction in stock), Ukraine Russia. There is no indication of a concern recognised a charge of £202 million in respect (largely due to the growth of illicit trade and regarding the Group’s products or practices of the Russian excise dispute as discussed on competition in the low-price segment) and and we expect a regulatory framework will be page 143, recognised additional impairment Egypt (driven by excise-led price increases in implemented in 2020. the low-price segment particularly affecting charges of £29 million related to the Group’s Pall Mall). In Sweden, the Group’s total oral portfolio brand consolidation programme to simplify performed well, increasing total volume share the New Categories portfolio and incurred In 2018, volume declined 4.7% to 246 billion of the oral category to 13.2%. This was driven charges in relation to Quantum. Profit from sticks, which was a reduction of 5.3% on a by the Traditional Oral brands, up 50 bps operations was up in Germany, Turkey, representative basis, as volume from assets to 10.9%, principally due to the success of Romania, Denmark and Poland, which more acquired (from Bulgartabac and FDS) in 2017 Lundgrens, and the Modern Oral products than offset declines in Russia and the UK. combined with growth in Turkey, Egypt, (Lyft) which increased to 2.3% volume share Excluding adjusting items (referred to above) Poland and Romania was more than offset by of the total oral category following the launch and the impact of the foreign currency Russia (partly due to inventory movements in 2018. headwind, adjusted profit from operations at and the growth of illicit trade), Ukraine (due constant rates was up 3.3% at £2,220 million. to market contraction following the excise-led Revenue In 2018, profit from operations grew 12.3% price increase, leading to an increase in illicit In 2019, reported revenue increased 1.4% to £1,905 million. This was due to an trade), Italy (partly due to impact of higher to £6,090 million (2018: decline of 1.7% improvement in the operating performance in prices) and France (following the excise-led to £6,004 million) as strong combustibles Germany, Romania and Ukraine and a one-off price increase). pricing in 2019 across the region (notably in charge of £69 million in 2017 in relation to a Germany, Turkey and Ukraine) and an increase In 2019, THP volume was up over 330%, third party in Croatia that does not repeat in in revenue from New Categories by 91% (to with growth in Russia, Ukraine and Kazakhstan 2018. Excluding adjusting items (related to £319 million) were partly offset by the end of while also developing in the other launch the factory closure in Germany, amortisation a contract manufacturing arrangement (which markets of Romania, Italy, Czech Republic, of acquired brands, other costs related to the led to a short-term increase in revenue due to Bulgaria and Poland. Group’s ongoing restructuring programme the recognition by the Group of excise within and the 2017 impairment in Croatia) and the revenue in prior periods), lower regional impact of the foreign currency headwind, volume and translational foreign exchange adjusted profit from operations at constant headwinds of 1.3% (2018: translational rates, on a representative basis was up 0.8%, foreign exchange headwind of 5%). at £2,217 million.

56 BAT Annual Report and Form 20-F 2019