Delivering today Investing in tomorrow Annual Report 2016 Annual Report 2016 Contents What’s inside this report Strategic ReportStrategic ReportGovernanceGovernanceFinancial StatementsFinancial Statements Strategic Report Governance Financial Statements Strategic ReportStrategic ReportGovernanceGovernanceFinancial StatementsFinancial Statements Strategic Report Governance Financial Statements Strategic ReportStrategic ReportGovernanceGovernanceFinancial StatementsFinancial Statements Strategic Report Governance Financial Statements Overview Overview Strategic management Strategic management Our global business Chairman’s introduction Chief Executive’s review Our business model Our heritage Our leading brands Our people Our geographic diversity “A vintage year, driven by a successful “ The Group delivered a great set What we do British American Tobacco was founded in 1902 Our fi ve Global Drive Brands – Dunhill, Kent, Lucky Strike, Pall Mall With brands sold in over 200 markets, we have strong market At the heart of our business Source Produce and was fi rst listed in 1912. Today, we are one and Rothmans – play a key role in our growth strategy. These leading positions in each of our four regions. Our Key Markets, shown below, is the manufacturing and brands continued to drive volume and share growth in our markets account for around 80% of both our total volume and Group profi t. strategy and winning culture” of results in 2016, with excellent growth of the top fi ve companies listed on the London marketing of superior worldwide in 2016. What we do What we do Stock Exchange by market capitalisation. We also Provided the acquisition of Reynolds American Inc. (Reynolds tobacco products and Next We have many other famous international and local brands including American) proceeds, we will have a strong market position in the Richard Burrows seen across all key business metrics” While the Group does not own tobacco farms We manufacture high-quality products in state- have a secondary listing on the Johannesburg Vogue, Viceroy, Kool, Peter Stuyvesant, Craven A, Benson & Hedges, United States and our number of principal associate companies will Chairman Generation Products. Our people or directly employ farmers, we buy more than of-the-art manufacturing facilities all over the Innovation 400,000 tonnes of tobacco each year for our world. We also ensure that these products and the Stock Exchange. John Player Gold Leaf, State Express 555 and Shuang Xi. be reduced to one – ITC Ltd in India. We also have a joint operation, Nicandro Durante Our sustainable approach and relationships CTBAT, with China National Tobacco Corporation. Chief Executive tobacco products and Tobacco Heating Products. tobacco leaf we purchase are in the right place at We make signifi cant With factories in 42 countries and offi ces all Our key Next Generation Product brands include Vype, our range to sourcing, production, The e-liquids used in our Vapour Products are the right time. Our Next Generation Products are We employ around 50,000 investments in research of Vapour Products, and glo, our Tobacco Heating Product. The Group’s continuing success is only possible thanks to the nearly made from medical grade nicotine sourced from mainly manufactured in state-of-the-art third- around the world, we have long played a distribution and marketing people worldwide, with a and development to deliver 50,000 talented people across the globe who work with farmers, in high quality third-party manufacturers. party factories. We work to ensure that our costs signifi cant role in the local communities where helps us to create value for workforce that is diverse innovations that satisfy or Dunhill our factories, in city offi ces and out on the road supporting retailers. are globally competitive and that we use our 55+ 44 and multicultural. What makes us different anticipate consumer needs we operate across the globe. We are proud that Dunhill’s roots date back to 1907 This total involvement in the whole tobacco supply chain – from seed a wide group of stakeholders, resources as effectively as possible. countries where cigarette factories • We provide on-the-ground support and advice and generate growth for when Dunhill Tobacco of London Limited A vintage year Board changes Among the notable achievements in 2016, A great year This is a signifi cant step towards the In the UK, our category retail share, as we are frequently rated in many countries as to smoke – and the passion for what we do is what sets us apart. we are market leader in 42 countries from farmers to consumers. We have a devolved structure, the business. This involves was established on Gentlemen’s Row. we launched our Sustainable Agriculture and completion of this transaction and we look independently measured by AC Nielsen, to over 90,000 contracted farmers to help What makes us different Volume Welcome to our Annual Report for 2016. I am delighted to welcome Dr Marion The Group delivered a great set of results with each local company cigarette innovations such as a top employer. More than a century later, Dunhill is our Our products are made all over the world and it is essential to our ensure consistency and quality of supply. • In 2016 we had 44 cigarette factories across the Farmer Livelihoods (SAFL) programme to forward to putting the recommended offer has reached nearly 40% through the growth We use our unique strengths having responsibility for premium international brand, embodying I am very pleased to report that the Group Helmes, who joined our Board as a Non- in 2016, with excellent growth seen globe. These strategically placed factories enable capsule products, additive-free -3.3% continuing success that we employ a diverse range of people and all Group-owned and strategic third-party to shareholders. of Vype and the acquisition of Ten Motives. • Traditional tobacco products are our core perfect taste, always. delivered particularly strong earnings, volume Executive Director in August 2016 and serves across all key business metrics. This was and employ our resources its operations. We work to enable prosperous products, slimmer products, 2015: 59bn cultures. The international nature of our business is refl ected in the suppliers, as well as strengthening our human We also have an estimated market share of us to maximise effi ciency and ensure products business. However, we are also committed to 57bn and market share growth in 2016. as a member of the Audit Committee and the achieved despite a challenging backdrop Strategically, this deal will create a truly and relationships to deliver livelihoods for all farmers who supply tube fi lters and Reloc, our nationalities of our people – in 2016, 74 nationalities were represented rights due diligence processes for all types of around 50% in Poland as well as category We encourage a culture are where they need to be at the right time. Market share Nominations Committee. of adverse foreign exchange rates impacting global business with a world-class portfolio our tobacco leaf, investing over resealable pack technology. developing and selling potentially less risky at our London head offi ce. Key Markets Despite challenging trading conditions suppliers worldwide. retail share of over 7% in Germany, over 4% sustainable growth in earnings of personal ownership our cost base and ongoing pressure on of tobacco and Next Generation Products £60 million each year to support them • Our production facilities are designed to meet persisting across a number of our Key Dr Helmes brings a wealth of international in France and over 2% in Italy. In addition, and value our employees’ We also look outside the alternatives to regular cigarettes. These Next We are also proud to partner with over 90,000 contracted tobacco Americas Western Europe Further details of developments in this consumers’ disposable income in many that will be available across the most for our shareholders. through, among other initiatives, the needs of an agile and fl exible supply chain, Markets, including an ever-growing business skills and experience that we also launched a new vaping concept in talents and abilities. traditional cigarette market Generation Products include Vapour Products, Flat farmers worldwide. While we do not employ them directly, they Argentina Colombia Belgium Netherlands area can be found on pages 15–16, as well of our Key Markets. attractive markets in the world. Financially, training and capacity building, and providing a world-class operational base that Brazil Mexico Czech Republic Poland illicit segment, 2016 has been a vintage includes recent senior executive roles at Europe called the Vype Pebble, which we Their diverse perspectives and research, develop and represent an important part of our business. as online in our Sustainability Report at it will be earnings accretive with enhanced improving productivity. is fi t for the future. like e-cigarettes, and Tobacco Heating Products. Canada Denmark Romania year, driven by a successful strategy and Celesio AG, the German healthcare and The work that has been carried out in believe will enhance the overall category help us to succeed. test Next Generation Products Kent www.bat.com/sustainability. cash generation while maintaining a solid Chile France Spain winning culture. pharmaceutical company. previous years to integrate and streamline and increase consumer penetration. • Our leaf operations are managed • For our Next Generation Products, we expect such as Vapour Products Kent symbolises progress through see pages 13–14 to learn more Germany Switzerland investment grade credit rating. We also have excellent internal systems, identify consumer needs globally to ensure that the Group works our contract manufacturers to comply with the (e-cigarettes) and Tobacco Volume technology in the cigarette category and Italy United Kingdom This success is refl ected in an increase of I would like to thank Dr Gerry Murphy who Outlook In December 2016, we launched a new- relationships with a range of earlier and increase effi ciencies across the We expect the transaction to close during the with reliable, effi cient and responsible same high standards that exist on our own sites.