Delivering today Investing in tomorrow Annual Report 2015 Annual Report 2015 Contents STRATEGIC REPORT GOVERNANCE British American Tobacco p.l.c. (No. 3407696) Annual Report 2015 Overview Directors’ Report This is the Annual Report of British American Tobacco p.l.c. Our year in numbers 01 Chairman’s introduction 46 (the Company) and the British American Tobacco Group, Our global business 02 Governance framework 47 comprising the Strategic Report, Directors’ Report and the audited Financial Statements for the year ended 31 December Chairman’s introduction 04 Board of Directors 48 2015. It has been drawn up and is presented in accordance Management Board 50 with, and reliance upon, applicable English company law. Strategic management The liabilities of the Directors in connection with this report Board activities in 2015 52 Chief Executive’s review 06 shall be subject to the limitations and restrictions provided by Board effectiveness 54 such law. Our vision and strategy 08 Audit Committee 58 The Annual Report is published on www.bat.com. A printed Our business model 10 Corporate Social Responsibility (CSR) Committee 64 copy is mailed to shareholders on the UK main register who Industry insight 12 have elected to receive it. Otherwise, shareholders are notified Nominations Committee 66 Delivering our strategy 13 that the Annual Report is available on the website and will, Remuneration Report 67 at the time of that notification, receive a short Performance Our Global Drive Brands in 2015 22 Other corporate disclosures 113 Summary (which sets out an overview of the Group’s Our global performance 23 performance, headline facts and figures and key dates Responsibility of Directors 120 Regional review 24 in the Company’s financial calendar) and Proxy Form. FINANCIAL STATEMENTS Specific local mailing and/or notification requirements will Financial Review apply to shareholders on the South Africa branch register. Group Financial Statements 121 Income Statement 28 References in this publication to ‘British American Tobacco’, Group Companies and Undertakings 206 EPS, dividends and financing 31 ‘BAT’, ‘we’, ‘us’ and ‘our’ when denoting opinion refer to Parent Company Financial Statements 213 British American Tobacco p.l.c. and when denoting tobacco Alternative cash flow 33 business activity refer to British American Tobacco Group Non-GAAP measures and other information 35 Shareholder and contact information 220 operating companies, collectively or individually as the case may be. Business environment Cautionary statement Principal Group risk factors 37 The Strategic Report and certain other sections of the Annual Report contain forward-looking statements that are subject to risk factors associated with, among other things, the economic and business circumstances occurring from time to time in the countries and markets in which the Group operates. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a wide range of variables that could cause actual results to differ materially from those currently anticipated. More available online www.bat.com/review2015 www.bat.com/investors BAT IR app Strategic Report Governance Financial Statements Overview Our year in numbers British American Tobacco is a global company with over 200 brands sold in more than 200 markets. With more than 50,000 people employed across the globe, we make the cigarettes chosen by around one in eight of the world’s one billion adult smokers. The foundations of our continuing success are built on the Group’s diverse strengths – our strong brands, our innovation in new products and product categories, the geographic spread of the markets in which we operate and our talented people. We are an innovative company with a proven strategy that continues to deliver value for our shareholders today whilst investing in tomorrow. Group cigarette volume Group share of Key Markets Global Drive Brands’ Global Drive and Strategic (GDBs) cigarette volume Brands’ (GDSBs) total volume 663bn +40 bps 301bn 323bn -0.5% +8.5% +8.0% 2014: 667bn bps = basis points KPI KPI Revenue Revenue at constant rates1 Profit from operations Adjusted profit from operations2 at constant rates1 £13,104m £14,720m £4,557m £5,620m -6.2% +5.4% +0.2% +4.0% (+10% excl trans FX3) 2014: £13,971m 2014: £13,971m KPI 2014: £4,546m 2014: £5,403m KPI Adjusted diluted Adjusted diluted earnings Basic earnings per share Total dividends per share earnings per share2 per share2 at constant rates1 208.4p 229.1p 230.9p 154.0p +0.1% +10.1% +38.2% +4.0% 2014: 208.1p KPI 2014: 208.1p 2014: 167.1p 2014: 148.1p Cash generated from Free cash flow as a percentage Total shareholder return (TSR) We use these measures and indicators operations at constant rates1 of adjusted earnings (compound annual to assess our performance. To ensure management’s focus is aligned with the growth rate) interests of our shareholders, our KPIs are reflected in our management incentive schemes. Although our business measures are not directly included in these incentives, £3,656m 90% 10.2% they reflect our performance, improve the quality of our business and contribute to +37% shareholder value. 2014: £2,660m KPI 2014: 64% KPI Notes: 1. Constant currency provides the information based on a re-translation, at prior year exchange rates, of the current year information. 2. Adjusted profit from operations is derived after excluding the adjusting items from the profit from operations. These items include restructuring and integration costs, amortisation and impairment of trademarks and similar intangibles, and a payment and release of a provision relating to non-tobacco litigation (see page 35). 3. Estimate to exclude transactional foreign exchange. British American Tobacco Annual Report 2015 01 Strategic Report Governance Financial Statements Overview We are a global business with a proud history Our heritage Our products British American Tobacco was founded in 1902 and was first listed in 1912. Today, we are one of the top 10 companies on the London Stock Exchange. We also have a secondary listing on the Johannesburg Stock Exchange. We make the cigarettes chosen by around one in eight of the world’s one billion adult smokers and are market leaders in more than 55 countries. Traditional tobacco range Our core tobacco product range comprises cigarettes, Fine Cut We continue to deliver value to shareholders today (roll-your-own and make-your-own tobacco), Swedish-style snus and while investing in our markets, our brands, our cigars. Utilising insights from our consumers, we continue to develop new product categories and our people to ensure high-quality products and market-leading innovations to differentiate a sustainable future for our business. our brands. Next Generation Products Investment in building a portfolio of innovative new tobacco and nicotine-based products continues alongside our traditional tobacco business. These Next Generation Products include: Vapour Products (e-cigarettes), battery-powered electronic devices which heat a solution to create a vapour which can be inhaled; Tobacco Heating Products, devices designed to work with specifically engineered cartridges, containing tobacco, to deliver a real tobacco taste and aroma; and Licensed Medicinal Products, licensed nicotine products to help smokers reduce, replace or stop. see pages 13–15 to learn more Our cigarette portfolio Our Global Drive Brands comprise Dunhill, Kent, Lucky Strike, Pall Mall Lucky Strike and Rothmans. These famous brands continued to drive volume and Based on its rich legacy dating back share growth in our markets worldwide in 2015. to 1871 when the brand was created by its founder RA Patterson, Lucky Our portfolio also comprises other popular international brands Strike stands for the true and original with strong market positions in many countries. It includes American cigarette. Vogue, Viceroy, Kool, Peter Stuyvesant, Craven A, Benson & Hedges, John Player Gold Leaf, State Express 555 and Shuang Xi. 32bn Cigarette volume Dunhill Pall Mall Dunhill’s roots date back to 1907 Pall Mall is the third biggest cigarette when Dunhill Tobacco of London Limited brand in the world. For more than was established on Gentlemen’s Row. 115 years its core proposition has been More than a century later, Dunhill is our centred on offering adult smokers round premium international brand, embodying the world a combination of value and 59bn perfect taste, always. 92bn high quality. Cigarette volume Cigarette volume Kent Rothmans Kent symbolises progress through Rothmans is an iconic brand established technology in the cigarette category and in London in 1890. A timeless classic stands out as the most innovative and with high-quality standards, Rothmans forward-looking brand in the industry. is finding increasing appeal among It is a pioneering brand, which has led the adult smokers worldwide thanks to 66bn way since 1952. 52bn a contemporary proposition. Cigarette volume Cigarette volume 02 British American Tobacco Annual Report 2015 Strategic Report Governance Financial Statements Our people Our sustainable approach We employ more than 50,000 people worldwide who work in an Our Sustainability Agenda is about creating shared value for both our array of environments, from city offices to factories, from remote shareholders and our stakeholders in wider society, focusing on the farms to research laboratories. three key areas which have the greatest significance to our business and our stakeholders: The international nature of our business is reflected in the diverse range of nationalities of our people – in 2015, for example, • Harm reduction: We are committed to researching, developing and 69 nationalities were represented at our London head office. commercialising potentially less risky alternatives to regular cigarettes. We are also proud to partner with some 90,000 independent tobacco • Sustainable agriculture and farmer livelihoods: We are committed to farmers worldwide. Whilst we do not employ them directly, they working to enable prosperous livelihoods for all farmers who supply represent an important part of our business.