TIDMBATS
RNS Number : 1958Z
British American Tobacco PLC
13 March 2017
BRITISH AMERICAN TOBACCO p.l.c.
Annual Report for the Year Ended 31 December 2016
In compliance with Listing Rule 9.6.1, British American Tobacco
p.l.c. (the "Company") reports that its Annual Report 2016
(including the Strategic Report 2016) will be shortly submitted to
the National Storage Mechanism and will be available for inspection
via the following link: www.morningstar.co.uk/uk/nsm.
The Company's Annual Report 2016 has been published to be viewed
or downloaded on the British American Tobacco website
www.bat.com/annualreport.
The Annual Report 2016 and other ancillary shareholder documents
will be mailed and made available to shareholders on 23 March
2017.
The Company made its Preliminary Announcement of its audited
results (which included a Directors' responsibility statement) in
respect of the year ended 31 December 2016 (the "Preliminary
Announcement") on 23 February 2017. Further to the Preliminary
Announcement and with reference to the requirements of Rules 4.1
and 6.3.5 of the Disclosure Guidance and Transparency Rules, the
following disclosures are made in the Appendices below.
Appendix A to this announcement contains a description of the
Principal Group risk factors (page 26 of the Annual Report 2016)
and Appendix B is a statement of related party disclosures (page
140 Annual Report 2016). Together these constitute the material
required by Rule 6.3.5 of the Disclosure Guidance and Transparency
Rules to be communicated to the media in unedited full text through
a Regulatory Information Service. This material is not a substitute
for reading the full Annual Report 2016. Any page numbers and
cross-references in the extracted information below refer to page
numbers in the Annual Report 2016.
G C W Cunnington
Deputy Secretary
13 March 2017
Enquiries:
Investor Relations
Mike Nightingale/Rachael Brierley/Sabina Marshman
+44 20 7845 1180/1519/1781
British American Tobacco Press Office
Anna Vickerstaff
+44 20 7845 2888
APPIX A
PRINCIPAL GROUP RISK FACTORS
Overview
The principal risk factors that may affect the Group are set out
on the following pages.
Each risk is considered in the context of the Group's strategy,
as set out in [the] Strategic Report on page 6. Following a
description of each risk, its potential impact and mitigation for
the Group is summarised. Clear accountability is attached to each
risk through the risk owner.
The Group has identified and is actively monitoring and taking
action to mitigate the risks. This section focuses on those risks
that the Directors believe to be the most important after
assessment of the likelihood and potential impact on the business.
Not all of these risks are within the control of the Group and
other factors besides those listed may affect the Group's
performance. Some risks may be unknown at present. Other risks,
currently regarded as less material, could become material in the
future.
The risk factors listed in this section and the activities being
undertaken to mitigate them should be considered in the context of
the Group's internal control framework. This is described in the
section on risk management and internal control in the corporate
governance statement on page 44. This section should also be read
in the context of the cautionary statement set out below.
Assessment of Group risk
During the year, the Directors have carried out a robust
assessment of the principal risks and uncertainties facing the
Group, including those that would threaten its business model,
future performance, solvency or liquidity.
The principal risks facing the Group have remained broadly
unchanged over the past year, particularly with regard to the
principal risks included in Marketplace, Excise and Tax,
Operations, Regulation and Litigation risk factors. The Board has
considered the risks associated with the inability to recruit
required talent and the loss of existing talent. The impact and
likelihood of the risk has decreased and it is no longer a
principal risk.
The viability statement below provides a broader assessment of
long-term solvency and liquidity, the statement being
forward-looking. The Directors have considered a number of factors
that may affect the resilience of the Group, including some of the
principal risks that may impact the Group's viability. This is
indicated in the 'impact on viability statement' key under each
risk.
Cautionary statement
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.
Viability Statement
The Directors have assessed the viability of the Group, in
accordance with provision C.2.2 of the 2016 revision of the UK
Corporate Governance Code. In making this assessment the Directors
have considered the Group's continued strong cash generation from
operating activities and the impact of the proposal to acquire the
shares in Reynolds American not already owned by the Group, as this
will increase the Group's net debt. This assessment included a
robust review of the principal risks that may impact the Group's
viability (as indicated on pages 27-30) which are considered, with
the mitigating actions, at least once a year. The Directors also
took account of the Group's operational and financial processes,
which cover both short term (1-2 year financial forecasts, 2-3 year
capacity plans) and longer term strategic planning. The assessment
included reverse stress testing core drivers that underpin the
specific risks to ensure the business is able to continue in
operation, whilst not breaching the required gross interest cover
of 4.5 times (see page 23). Each impact would, individually, have
to be between 5x and 17x worse than a prudent annual forecast. If
all risks arose simultaneously the Group would continue to be able
to meet the liabilities as they fall due.
The Directors noted that the Group would be able to adjust
certain capital requirements, including but not limited to the
investment in the Group's manufacturing infrastructure in the short
term and the GBP3 billion credit facility (2016: undrawn), to
mitigate the impact of the effect of the above principal risks,
each of which have specific mitigation activities as disclosed on
pages 27-30.
The Group operates in a unique environment, being subject to
inherent uncertainties with regards to regulatory change and
litigation, the outcome of which may have a bearing on the Group's
viability. The Group maintains, as referred to in note 28
"Contingent Liabilities and Financial Commitments" [on the Notes on
the Accounts to the Annual Report] , that, whilst it is impossible
to be certain of the outcome of any particular case, the defences
of the Group's companies to all the various claims are meritorious
on both law and the facts. If an adverse judgment is entered
against any of the Group's companies in any case, an appeal will be
made, the duration of which can be reasonably expected to last for
a number of years.
The Directors have no reason to believe the Group will not be
viable over a longer period. However, given the inherent
uncertainty involved regarding litigation and regulation, the
period over which the Directors consider it possible to form a
reasonable expectation as to the Group's longer term viability,
based on the stress testing and scenario planning discussed above,
is three years.
Risks
Competition from illicit trade
Increased competition from illicit trade - either local duty
evaded, smuggled illicit white cigarettes or counterfeits.
Time frame
Long term
Strategic impact
Growth
Considered in viability statement
Yes
Impact
Erosion of brand value, with lower volumes and reduced
profits.
Reduced ability to take price increases.
Investment in trade marketing and distribution is
undermined.
Mitigation activities
Dedicated Anti-Illicit Trade (AIT) teams operating at global,
country levels and internal cross-functional coordination; best
practice shared.
Active engagement with key external stakeholders.
Cross-industry and multi-sector cooperation on a range of AIT
issues.
Global AIT strategy supported by a research programme to further
the understanding of the size and scope of the problem.
AIT Engagement Team (including a dedicated analytical
laboratory) works with enforcement agencies in pursuit of priority
targets.
Tobacco regulation inhibits growth strategy
The enactment of unreasonable regulation that prohibits the
Group's ability to communicate with consumers, differentiate our
products and launch future products.
Time frame
Medium term
Strategic impact
Growth and Sustainability
Considered in viability statement
Yes
Impact
Erosion of brand value through commoditisation, the inability to
launch innovations, differentiate products, maintain or build brand
equity and leverage price.
Adverse impact on ability to compete within the legitimate
tobacco industry and also with increased illicit trade.
Reduced consumer acceptability of new product specifications,
leading to consumers seeking alternatives in illicit trade.
Shocks to share price on enactment of unduly onerous and
restrictive regulation.
Reduced ability to compete in future product categories and make
new market entries.
Increased scope and severity of compliance regimes in new
regulation leading to higher costs, greater complexity and
potential reputational damage or fines for inadvertent breach.
Mitigation activities
Engagement and litigation strategy coordinated and aligned
across the Group to drive a balanced global policy framework for
tobacco control.
Stakeholder mapping and prioritisation, developing robust
compelling advocacy materials (with supporting evidence and data)
and regulatory engagement programmes.
Regulatory risk assessment of marketing plans to ensure
decisions are informed by an understanding of the potential
regulatory environments.
Advocating the application of our integrated regulatory
proposals to governments and public health practitioners based on
the harm reduction principles.
Development of an integrated regulatory strategy that spans
conventional combustibles and includes Next Generation
Products.
Significant excise increases or structure changes
The Group is exposed to unexpected and/or significant excise
increases or structure changes in key markets.
Time frame
Long term
Strategic impact
Growth
Considered in viability statement
Yes
Impact
Consumers reject the Group's legitimate tax-paid products for
products from illicit sources or cheaper alternatives.
Reduced legal industry volumes.
Reduced sales volume and/or portfolio erosion.
Some absorption of excise increases.
Mitigation activities
Requirement for Group companies to have in place formal pricing
and excise strategies including contingency plans, with annual risk
assessments.
Pricing, excise and trade margin committees in markets, with
regional and global support.
Engagement with local tax and customs authorities, where
appropriate, in particular in relation to the increased risk to
excise revenues from higher illicit trade.
Portfolio reviews to ensure appropriate balance and coverage
across price segments.
Monitoring of economic indicators, government revenues and the
political situation.
Litigation
Product liability, regulatory or other significant cases may be
lost or compromised resulting in a material loss or other
consequence. Legal costs may increase significantly.
Time frame
Long term
Strategic impact
Growth
Considered in viability statement
Yes
Impact
Damages and fines, negative impact on reputation, disruption and
loss of focus on the business.
Consolidated results of operations, cash flows and financial
position could be materially affected, in a particular fiscal
quarter or fiscal year, by an unfavourable outcome or settlement of
pending or future litigation.
Mitigation activities
Consistent litigation strategy across the Group.
Expertise and legal talent maintained both within the Group and
with our external partners.
Closer integration in Group litigation strategy and cost
controls pursued.
Ongoing monitoring of key legislative, case law and tobacco
developments.
Geopolitical tensions
Geopolitical tensions, social unrest, terrorism and organised
crime have the potential to disrupt the Group's business in
multiple markets.
Time frame
Medium term
Strategic impact
Growth
Considered in viability statement
Yes
Impact
Potential loss of life, loss of assets and disruption to normal
business processes.
Increased costs due to more complex supply chain arrangements
and/or the cost of building new facilities or maintaining
inefficient facilities.
Mitigation activities
Globally integrated sourcing strategy and contingency sourcing
arrangements.
Security risk modelling, including external risk assessments and
the monitoring of geopolitical and economic policy developments
worldwide.
Insurance cover and business continuity planning, including
scenario planning and testing and risk awareness training.
Security controls for field force, direct store sales and supply
chain with an emphasis on the protection of Group employees.
Inability to obtain price increases and impact of increases on
consumer affordability thresholds
Annual manufacturers' price increases are among the key drivers
in increasing market profitability. The Group faces a risk that
such price increases will not materialise.
Time frame
Short/Medium term
Strategic impact
Growth
Considered in viability statement
Yes
Impact
Inability to achieve strategic growth metrics.
Funds to invest in growth opportunities are reduced.
Volumes may reduce faster than anticipated due to accelerated
market decline leading to growth of illicit trade.
Mitigation activities
Key market and pricing reviews at Management Board meetings.
Pricing strategies, excise and trade margin committees exist in
all markets with regional and global support.
Robust business cases underpinning key innovative launches.
Clear portfolio and pricing strategies, ensuring a balanced
portfolio of strong brands across key segments.
Disputed taxes, interest and penalties
The Group may face significant financial penalties, including
the payment of interest, in the event of an unfavourable ruling by
a tax authority in a disputed area.
Time frame
Short /Medium term
Strategic impact
Productivity
Considered in viability statement
Yes
Impact
Significant fines and potential legal penalties.
Disruption and loss of focus on the business due to diversion of
management time.
Impact on profit and dividend.
Mitigation activities
End-market tax committees.
Internal tax function provides dedicated advice and guidance,
and external advice sought where needed.
Engagement with tax authorities at Group, regional and
individual market level.
Market size reduction and consumer down-trading
The Group is faced with steep excise-led price increases and the
continuing difficult economic and regulatory environment in many
countries, market contraction and consumer down-trading is a
risk.
Time frame
Short/Medium term
Strategic impact
Growth
Considered in viability statement
Yes
Impact
Volume decline and portfolio mix erosion.
Funds to invest in growth opportunities are reduced.
Mitigation activities
Geographic spread mitigates impact at Group level.
Clear monitoring of portfolio and pricing strategies, ensuring
balanced portfolio of strong brands across key segments.
Increased focus behind product quality and innovation across all
segments to provide tangible differentiation and improve the
price-value ratio.
Overlap with many mitigation activities undertaken for other
principal risks facing the Group, such as competition from illicit
tobacco trade, significant excise increases or structure changes
and inability to obtain price increases.
Foreign exchange rate exposures
The Group faces translational and transactional foreign exchange
(FX) rate exposures for earnings/cash flows from its global
business.
Time frame
Short /Medium term
Strategic impact
Productivity
Considered in viability statement
Yes
Impact
Fluctuations in FX rates of key currencies against sterling
introduce volatility in reported EPS, cash flow and the balance
sheet driven by translation into sterling of our financial
results.
The dividend may be impacted if the payout ratio is not
adjusted.
Differences in translation between earnings and net debt may
affect key ratios used by credit rating agencies.
Volatility and/or increased costs in our business, due to
transactional FX, may adversely impact financial performance.
Mitigation activities
While translational FX exposure is not hedged, its impact is
identified in results presentations and financial disclosures;
earnings are re-stated at constant rates for comparability.
Debt and interest are matched to assets and cash flows to
mitigate volatility where possible and economic to do so.
Hedging strategy for transactional FX and framework is defined
in the treasury policy, a global policy approved by the Board.
Illiquid currencies of many markets where hedging is either not
possible or uneconomic are reviewed on a regular basis.
Injury, illness or death in the workplace
The risk of injury, death or ill health to employees and those
who work with the business is a fundamental concern of the Group
and can have a significant effect on its operations.
Time frame
Short term
Strategic impact
Sustainability
Considered in viability statement
No
Impact
Serious injuries, ill health, disability or loss of life
suffered by employees and the people who work with the Group.
Exposure to civil and criminal liability and the risk of
prosecution from enforcement bodies and the cost of associated
fines and/or penalties.
Interruption of Group operations if issues are not addressed
immediately.
High staff turnover or difficulty recruiting employees if
perceived to have a poor Environment, Health and Safety (EHS)
record.
Mitigation activities
Risk control systems in place to ensure equipment and
infrastructure are provided and maintained.
An EHS strategy ensures that employees at all levels receive
appropriate EHS training and information.
Behavioural-based safety programme to drive Operations' safety
performance and culture closer to zero accidents.
Analysis of incidents undertaken regionally and globally to
identify increasing incident trends or high potential risks that
require coordinated action.
Solvency and liquidity
Liquidity (access to cash and sources of finance) is essential
to maintaining the Group as a going concern in the short term
(liquidity) and medium term (solvency).
Time frame
Short/Medium term
Strategic impact
Productivity
Considered in viability statement
Yes
Impact
Inability to fund the business under our current capital
structure resulting in missed strategic opportunities or inability
to respond to threats.
Decline in our creditworthiness and increased funding costs for
the Group.
Requirement to issue equity or seek new sources of capital.
Reputational risk of failure to manage the financial risk
profile of the business, resulting in an erosion of shareholder
value reflected in an underperforming share price.
Mitigation activities
Group policies include a set of financing principles and key
performance indicators including the monitoring of credit ratings,
interest cover, solvency and liquidity with regular reporting to
the Board.
The Group targets an average centrally managed debt maturity of
at least five years with no more than 20% of centrally managed debt
maturing in a single rolling year.
The Group, through B.A.T. International Finance p.l.c., holds a
central banking facility of GBP3 billion with a final maturity of
May 2021 spread across a wide banking group.
Liquidity pooling structures are in place to ensure that there
is maximum mobilisation of cash liquidity within the Group.
The Group has an externally imposed capital requirement for its
centrally managed banking facilities of maintaining gross interest
cover above 4.5 times. The Group targets a gross interest cover of
greater than 5.
Going concern and viability support papers are presented to the
Board on a regular basis.
APPENDIX B
RELATED PARTY DISCLOSURES
The Group has a number of transactions and relationships with
related parties, as defined in IAS 24 Related Party Disclosures,
all of which are undertaken in the normal course of business.
Transactions with CTBAT International Limited are not included in
these disclosures as it is a joint operation.
As explained in note 30 [on the Notes on the Accounts to the
Annual Report], the Group announced the proposed merger with
Reynolds American on 17 January 2017.
Transactions and balances with associates relate mainly to the
sale and purchase of cigarettes and tobacco leaf. Amounts
receivable from associates in respect of dividends included in the
table below were GBP221 million (2015: GBP145 million). The Group's
share of dividends from associates, included in other net income in
the table below, was GBP1,024 million (2015: GBP640million).
2016 2015
GBPm GBPm
----------------------------------- ------ ------
Transactions
-revenue 370 38
-purchases (298) (270)
-other net income 1,023 639
Amounts receivable at 31 December 270 190
Amounts payable at 31 December (2) (20)
----------------------------------- ------ ------
On 17 December 2012, a wholly-owned subsidiary of the Group,
BATUS Japan Inc. (BATUSJ), entered into an Amendment and Extension
Agreement (referred to as the Amendment) with a wholly-owned
subsidiary of Reynolds American, R.J. Reynolds Tobacco Company
(referred to as RJRTC). The Amendment modifies the American blend
Cigarette Manufacturing Agreement (referred to as the 2010
Agreement), effective as of 1 January 2010.
Prior to the Amendment, the term of the 2010 Agreement was
scheduled to expire on 31 December 2014, subject to early
termination and extension provisions. Pursuant to the Amendment,
the Manufacturing Agreement would remain in effect beyond 31
December 2014, provided that either RJRTC or BATUSJ may terminate
the Manufacturing Agreement by furnishing three years' notice to
the other party, such notice was given in January 2016. As a result
of early termination of this agreement the Group agreed to a
compensation payment of US$90 million of which US$7 million was
paid to RJRTC on 22 September 2016, with the Group recognising the
full expense of US$90 million as required by IFRS in 2016. The
balance is due in March 2017.
During 2016, the Group received proceeds of GBP23 million in
respect of its participation in the share buy-back programme
conducted by Reynolds American. This programme ceased in the fourth
quarter of 2016.
During 2016, the Group acquired the remaining 1% interest in
Souza Cruz at a cost of GBP70 million. This transaction is shown as
a GBP4 million increase in reserves attributable to the owners of
the parent and a GBP4 million reduction in reserves attributable to
non-controlling interests in note 19 [on the Notes on the Accounts
to the Annual Report].
For comparative purposes, prior year's acquisitions are
disclosed in note 24 [on the Notes on the Accounts to the Annual
Report].
As explained in note 12 [on the Notes on the Accounts to the
Annual Report], contributions to the British American Tobacco UK
Pension Fund are secured by a charge over the Group's Head Office
(Globe House) up to a maximum of GBP150 million.
The key management personnel of British American Tobacco consist
of the members of the Board of Directors of British American
Tobacco p.l.c. and the members of the Management Board. No such
person had any material interest during the year in a contract of
significance (other than a service contract) with the Company or
any subsidiary company. The term key management personnel in this
context includes the respective members of their households.
2016 2015
GBPm GBPm
------------------------------------------- ------ ------
The total compensation for key management
personnel, including Directors, was:
-salaries and other short-term employee
benefits 18 20
-post-employment benefits 3 4
-share-based payments 12 11
------------------------------------------- ------ ------
33 35
------------------------------------------- ------ ------
There were no other long-term benefits applicable in respect of
key personnel other than those disclosed in the remuneration
report.
This information is provided by RNS
The company news service from the London Stock Exchange
END
ACSOKKDBABKDDND
(END) Dow Jones Newswires
March 13, 2017 04:00 ET (08:00 GMT)
British American Tobacco (LSE:BATS)
Historical Stock Chart
From Apr 2024 to May 2024
British American Tobacco (LSE:BATS)
Historical Stock Chart
From May 2023 to May 2024