British American Tobacco Annual Report 2012 British American Tobacco Annual Report 2012 Read the online Annual Report at www.bat.com/ar2012 Read the online Annual Report at www.bat.com/ar2012 Proud history, bright future Who we are British American Tobacco is a leading tobacco group, In 2012, our subsidiaries enabled governments with brands sold in around 180 markets. We employ worldwide to gather more than £30 billion in duty, more than 55,000 people and, with over 200 brands in excise and sales taxes on our products, more than our portfolio, we make the cigarette chosen by one in seven times the Group’s profit after tax. eight of the world’s one billion adult smokers. We play a significant role in local communities around Founded in 1902, our Group of companies traded the world. In many countries we are a top employer through the turbulence of the 20th century, including and the company of choice for people in all areas wars, revolutions and nationalisations. The Group was of our business. We have 44 cigarette factories in 39 first listed in 1912, and today we are one of the top countries. In addition to cigarettes, we make cigarillos, 10 companies listed on the London Stock Exchange roll your own and pipe tobacco. and feature in the Fortune 500. We have also had a We are also proud of our Research & Development secondary listing on the JSE Limited in South Africa facilities, where our people are striving to reduce the since 2008. harm associated with tobacco products. We hold robust market positions in each of our four With our geographic diversity, strong brands, talented regions – Americas; Asia-Pacific; Eastern Europe, people and proven strategy, the Group is well placed Middle East and Africa; and Western Europe – and we to achieve further success. In particular, we are are leaders in more than 60 markets. Our approach to confident that our investments in both innovative marketing is second to none in our industry, in brand cigarette products and next-generation nicotine and building, innovation and responsibility. Our companies tobacco products will help us drive growth and build adhere strictly to the high standards of our voluntary shareholder value in the years ahead. marketing principles. Our leading brands Our four leading brands are Dunhill, Kent, Lucky Strike Based on its rich legacy dating back to 1871, Lucky and Pall Mall – our Global Drive Brands (GDBs). Strike is the true American original, now a popular choice throughout the world with a presence in more Dunhill’s roots date back to 1907, where Dunhill than 80 countries. Tobacco of London Limited was established on Gentlemen’s Row. More than a century later, Dunhill Pall Mall is the third biggest cigarette brand in the is our premium international brand, embodying the world, sold in over 110 markets. For more than perfect taste, always. 110 years its core proposition has been centred on rewarding smokers globally with real, high quality Since its establishment in 1952, Kent has stood for a value offers. modern, progressive cigarette. Relaunched in 1997, it has grown very quickly in popularity, backed by We have many other famous international and local innovative product offers. brands, including Rothmans, Vogue, Viceroy, Kool, Peter Stuyvesant and Benson & Hedges. References in this publication to ‘British American Tobacco’, ‘we’, ‘us’, and ‘our’ when denoting opinion refer to British American Tobacco p.l.c. and when denoting tobacco business activity refer to British American Tobacco Group operating companies, collectively or individually as the case may be. Contents Directors’ report Financial statements and other information Business Review Group Financial Statements 2 From the Chairman 107 Independent auditors’ report 4 Our year in numbers 108 Group Income Statement 6 Chief Executive’s review 109 Group Statement of Comprehensive Income 8 Global market overview 110 Group Statement of Changes in Equity 10 Our strategy to deliver shareholder value 111 Group Balance Sheet 12 Our business model 113 Group Cash Flow Statement 14 Strategic review 114 Notes on the accounts 22 Sustainability overview 188 Five-Year Summary 24 Chief Operating Officer’s review 189 Half-Yearly Analyses of Profit 26 Asia-Pacific 190 Principal subsidiary undertakings 27 Americas 191 Principal associate undertakings 28 Western Europe Parent Company Financial Statements 29 Eastern Europe, Middle East and Africa (EEMEA) 192 Independent auditors’ report 30 Financial review 193 Balance Sheet – British American Tobacco p.l.c. 39 Key Group risk factors 194 Notes on the accounts Corporate Governance Other information 46 Chairman’s introduction 197 Shareholder and contact information 47 Leadership and governance 48 Board of Directors 52 Board effectiveness 53 Strategic Board activities in 2012 56 Board evaluation 58 Audit and accountability 64 Corporate social responsibility 67 Appointments to the Board 69 Remuneration report 99 Other statutory and regulatory information 106 Responsibility of Directors British American Tobacco p.l.c. (No. 3407696) Annual Report 2012 Cautionary statement This is the Annual Report of British American Tobacco p.l.c. (the Company) The business review and certain other sections of the Annual Report contain and the British American Tobacco Group, comprising the Directors’ report forward-looking statements that are subject to risk factors associated with, and the audited financial statements, for the year ended 31 December 2012. among other things, the economic and business circumstances occurring It has been drawn up and is presented in accordance with, and reliance upon, from time to time in the countries and markets in which the Group operates. applicable English company law. The liabilities of the Directors in connection It is believed that the expectations reflected in these statements are reasonable with this report shall be subject to the limitations and restrictions provided but they may be affected by a wide range of variables that could cause actual by such law. results to differ materially from those currently anticipated. The Annual Report is published on www.bat.com. A printed copy is mailed to shareholders on the UK main register who have elected to receive it. Otherwise, shareholders are notified that the Annual Report is available on the website and will, at the time of that notification, receive a short Performance Summary (which sets out an overview of the Group’s performance, headline facts and figures and key dates in the Company’s financial calendar) as well as a Notice of Annual General Meeting and Proxy Form. Specific local mailing and/or notification requirements will apply to shareholders on the South African branch register. British American Tobacco Annual Report 2012 1 Business Review From the Chairman This success is reflected in adjusted diluted earnings per share for Dear Shareholder 2012 rising to 207.5p, an increase of 7% on last year. Let me welcome you to the Annual Report for 2012. This has been The Board has recommended a final dividend of 92.7p per share, a good year for your Company notwithstanding the challenging which will be paid on 8 May 2013 to shareholders on the register economic environment and the adverse impact of exchange rates. at 15 March 2013. This takes the total dividend for the year to 134.9p, an increase of 7% on last year, and maintains our target of paying Since the Group was first listed in 1912, the business has developed out 65% of sustainable earnings in dividends. and grown significantly, becoming recognised as one of the UK’s leading companies. Today we are among the top 10 companies The Board also approved the continuation of our share buy-back listed on the London Stock Exchange. programme in 2012. Between the beginning of March and the end of December 2012, almost 39 million shares were repurchased Strong performance at a value of £1.25 billion, excluding transaction costs. British American Tobacco delivered strong profit growth in 2012, achieved through good pricing and an outstanding improvement The Board has agreed a £1.5 billion share buy-back programme in operating margin, partially offset by adverse exchange rate for 2013. movements. To grow underlying market share and operating profit, while investing for the long term, is a strong sign of the Governance efficacy of our strategy. Difficult trading conditions persist in parts We are a leading international business, with products sold in 180 of the world, particularly southern Europe, but these results countries around the world. And, of course, we operate in a highly demonstrate the Company is in excellent shape and we remain regulated sector that many regard as controversial. Acting responsibly confident that our strategy will continue to deliver superior makes good business sense and we set high standards for ourselves, shareholder returns. our suppliers and our trade customers. Delivering shareholder value Our values, a key component of our culture, are clearly embraced by our people and we take great care to ensure that they are Our financial highlights indicate how the business is delivering embedded throughout the business. This needs good governance superior returns. You can read a full summary of our successful and, for us, this is not simply an exercise in compliance, it is a key year on the following pages. element underpinning the sustainable, long-term growth of our business. A full report on our corporate governance is set out on pages 46 to 57. Historical total shareholder return Growth in the value of a hypothetical £100 holding in British American Tobacco over five years – FTSE comparison is based on spot daily values. 300 250 200 150 100 50 0 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 British American Tobacco FTSE 100 Over the five-year period our compound growth rate, based on adjusted diluted earnings per share, has been 13.9%.