Transforming Tobacco Annual Report and Form 20-F 2017 Contents Strategic Report Overview Transforming Tobacco 01 British American Tobacco p.l.c. (No. 3407696) Annual Report 2017 Chairman’s introduction 07 This document constitutes the Annual Report and Accounts of British American Tobacco p.l.c. (the Company) and the British American Tobacco Group prepared in Our strategic framework for transforming tobacco 08 accordance with UK requirements and the Annual Report on Form 20-F prepared in Our year in numbers 10 accordance with the US Securities Exchange Act of 1934 (the Exchange Act) for the Strategic management year ended 31 December 2017, except that certain phrases, paragraphs or similar sections denoted with a ‘@’ symbol do not form part of the Annual Report on Form Chief Executive’s review 12 20-F as fled with the SEC and certain phrases, paragraphs or similar sections denoted Finance Director’s overview 14 with a ‘»’ symbol do not form part of the Annual Report and Accounts. Moreover, the Global market overview 15 information in this document may be updated or supplemented only for purposes of Our global business 16 the Annual Report on Form 20-F at the time of fling with the SEC or later amended if Our business model 18 necessary. Any such updates, supplements or amendments will also be denoted with a ‘»’ symbol. Insofar as this document constitutes the Annual Report and Accounts, it Delivering our strategy 20 has been drawn up and is presented in accordance with, and reliance upon, applicable Stakeholder engagement 30 English company law and the liabilities of the Directors in connection with this report Financial Review shall be subject to the limitations and restrictions provided by such law. Financial performance summary 33 This document is made up of the Strategic Report, the Governance Report, the Income statement 34 Financial Statements and Notes, and certain additional information. Our Strategic Report, pages 1 to 54, includes our vision and strategy, global market overview, Treasury and cash fow 38 business model, global performance, as well as our fnancial performance and Other 41 principal group risk factors. The Strategic Report has been approved by the Regional review 42 Board of Directors and signed on its behalf by Paul McCrory, Company Secretary. Our Governance Report, pages 55 to 99 contains detailed corporate governance Business environment information, our Committee reports and responsibility of Directors. The Directors’ Principal Group risk factors 48 Report on pages 55 to 72 (the Governance pages), page 99 (Responsibility of Directors)@ and 215 to 262 (the Additional Disclosure and Shareholder Information pages) has been approved by the Board of Directors and signed on its behalf by Governance Paul McCrory, Company Secretary. Our Financial Statements and Notes are on Directors’ Report pages 100 to 198. The Other Information section commences on page 215. Chairman’s introduction 55 This document provides alternative performance measures (APMs) which are not defned or specifed under the requirements of International Financial Reporting Board of Directors 56 Standards (IFRS). We believe these APMs provide readers with important additional Management Board 58 information on our business. This year, we have included a Non-GAAP measures Leadership and effectiveness 59 section on pages 218 to 222 which provides a comprehensive list of the APMs Board activities in 2017 60 that we use, an explanation of how they are calculated, why we use them and a Board effectiveness 62 reconciliation to the most directly comparable IFRS measure where relevant. Audit Committee 65 BAT has shares listed on the London Stock Exchange (BATS) and the Johannesburg Nominations Committee 71 Stock Exchange (BTI), and, as American Depositary Shares (ADSs), on the New York Stock Exchange (BTI). Remuneration Report 73 Responsibility of Directors@ 99 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 notifed that the Annual Report is available on the website and will, at the time of that notifcation, receive a short Performance Summary (which sets Financial Statements out an overview of the Group’s performance, headline facts and fgures and key Group Financial Statements 100 dates in the Company’s fnancial calendar) and Proxy Form. Independent auditor’s report 100 Specifc local mailing and/or notifcation requirements will apply to shareholders Group companies and undertakings 199 on the South Africa branch register. Parent Company fnancial statements@ 209 References in this publication to ‘British American Tobacco’, ‘BAT’, ‘Group’, ‘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 Other Information Group operating companies, collectively or individually as the case may be. Additional disclosures 215 The material in this Annual Report is provided for the purpose of giving information about the Company to investors only and is not intended for general consumers. Shareholder information 240 The Company, its directors, employees, agents or advisers do not accept or assume responsibility to any other person to whom this material is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. The material in this Annual Report is not provided for product advertising, promotional or marketing purposes. This material does not constitute and should not be construed as constituting an offer to sell, or a solicitation of an offer to buy, More available online at any of our products. Our products are sold only in compliance with the laws of the bat.com/investors particular jurisdictions in which they are sold. References in this document to information on websites, including the web addresses of BAT and Reynolds American Inc. (Reynolds American or RAI), have been included as inactive textual references only. These websites and the information contained therein or connected thereto are not intended to be incorporated into or to form part of the Annual Report and Form 20-F. Cautionary statement This document contains forward-looking statements. For our full cautionary statement, please see page 239. www.bat.com/reporting www.bat.com/investors BAT IR app Overview Strategic Report Governance Financial Statements Other Information British American Tobacco (BAT) is one of the world’s leading consumer goods companies, with brands sold around the globe. We employ over 55,000 people globally, partner with over 90,000 farmers and have factories in 42 countries, with offices in even more. Transforming Tobacco At BAT, we have been Our acquisition of Reynolds satisfying consumers, American Inc. (Reynolds delivering shareholder American or RAI), which has value and creating valued transformed both the scale employment for over and geographic reach of our a century. business and our portfolio of potentially reduced-risk However, we are entering products, now positions us the most dynamic period perfectly to capitalise on of change our industry has this ambition. ever encountered. We call this ambition An unprecedented ‘transforming tobacco’ and confuence of technology, we are fully committed to societal change and public leading this transformation. health awareness has created a unique opportunity: the opportunity to make a substantial leap forward in our long-held ambition to provide our consumers with lower risk tobacco and nicotine choices. BAT Annual Report and Form 20-F 2017 01 Overview The advent of new and better consumer technologies meant that, in 2012, we articulated a new vision – to be the best at satisfying consumer moments in “tobacco and beyond” – with consumers right at the centre of our strategy. We were clear then, as we are now, that we would build our business based on outstanding products, informed consumer choice and a drive towards a reduced-risk portfolio. More choice, more innovation, less risk. Leading change to shape the future It is widely accepted Since 2012, together with that most of the harm Reynolds American, we associated with tobacco have invested approximately is caused by inhaling US$2.5 billion in the growth the smoke produced of our range of NGPs. by the combustion of We have also signifcantly tobacco. That is why increased the size of our we are dedicated to the existing oral tobacco development and sale business with the addition of a range of potentially of more snus and moist reduced-risk products snuff brands in the US. that provide the enjoyment Our commitment to of smoking without leading and accelerating burning tobacco. this transformation is also These potentially reduced- demonstrated by the risk products include changes we are making in Next Generation Products how we run our business – (NGPs), comprising vapour including our NGP activities and tobacco heating being integrated into the products (THPs), as well as heart of the Company across oral tobacco and nicotine all functions and across products such as snus all geographies. and moist snuff. 02 BAT Annual Report and Form 20-F 2017 Strategic Report Governance Financial Statements Other Information While we cannot be certain whether all smokers will switch to potentially reduced-risk products, we are committed to making a range of high-quality, innovative products as widely available as practicable to address the varied preferences of our consumers. We believe that by doing this, and working with regulators to establish supportive regulatory regimes, many millions of smokers will increasingly make the choice to switch. …supported by proactive external engagement This transformation is We also need the objective larger than just BAT. Lasting and balanced support change will only be achieved of public health bodies, by a combination of the politicians, media and commitment and product academics in driving investment from companies informed choice and like BAT and the support consumer trust. of regulators through the If we can all work establishment of sensible successfully together regulation promoting a we can drive a triple win.