BRITISH AMERICAN TOBACCO p.l.c.
HALF-YEAR REPORT TO 30 JUNE 2018
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ON TRACK FOR ANOTHER GOOD YEAR |
“Our strategy is to continue to grow our combustible business while investing in the exciting potentially reduced risk categories of THP, vapour and oral. As the Group expands its portfolio in these categories, we will continue to drive sustainable growth.
In the first six months of 2018, the Group continued to perform well. The cigarettes and THP portfolio has outperformed the industry as market share grew 40 basis points (bps) with a tobacco price mix of approximately 4% which is expected to strengthen in the second half of the year. The performance of Reynolds American Inc. (RAI) since acquisition is encouraging and the Group's diverse NGP portfolio has grown strongly. The foreign exchange impact on the Group's results was a headwind of 8% for the first six months of the year and is estimated to be 5-6% for the full year, based upon the current foreign exchange rates.
Despite the recent slowdown in the THP category in some markets, including Japan and South Korea, we remain confident of exceeding £1 billion of reported revenue in NGP in 2018 as we expect a range of new launches to re-energise growth in THP in the second half of the year. We anticipate another good year of adjusted earnings growth at constant rates of exchange”.
Nicandro Durante, Chief Executive
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KEY FINANCIALS |
2018 |
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Change vs 2017 |
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Six Months Results – unaudited |
Current |
Constant |
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Current |
Constant |
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rates |
rates |
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Rates |
rates |
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Revenue |
£11,636m |
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+56.9% |
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Profit from operations |
£4,438m |
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+72.4% |
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Basic earnings per share (EPS) |
117.7p |
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-3.4% |
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Diluted EPS |
117.4p |
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-3.3% |
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Net cash generated from operating activities |
£3,858m |
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+126.1% |
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Borrowings |
£48,512m |
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-1.9% |
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Non-GAAP: |
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Adjusted revenue on a representative basis* |
£11,533m |
£12,553m |
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-6.4% |
+1.9% |
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Adjusted profit from operations on a representative basis* |
£4,818m |
£5,216m |
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-5.4% |
+2.4% |
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Adjusted diluted EPS |
137.2p |
148.4p |
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+2.1% |
+10.4% |
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Adjusted cash generated from operations |
£2,953m |
£3,147m |
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+204% |
+224% |
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Net debt |
£45,679m |
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+0.2% |
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The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on page 50 to 51, with reconciliations from the most comparable IFRS measure provided.
* Representative basis – see page 3 for explanation of this metric. All variances above are against equivalent 2017 information for the six-month period ended 30 June 2017, except for borrowings and net debt which are against the 31 December 2017 position.
· On an IFRS reported basis, due to the inclusion of the results from acquisitions completed in 2017, notably RAI (contributing approximately 40% to revenue and profit from operations), which was partially offset by a translational foreign exchange headwind of approximately 8%:
o Revenue increased by 56.9% with revenue from the strategic portfolio up 128%;
o Volume from cigarettes and THP grew 11.0%;
o Profit from operations was up 72.4%; and
o Operating margin increased 340 bps to 38.1%.
Key financials continued…
· On a representative basis (as if BAT had owned RAI and the other acquisitions, completed in 2017, from 1 January 2017, and defined on page 3):
o Cigarettes and THP volume fell 2.2% to 348 billion (including 3 billion of THP), outperforming the industry which is estimated to be down 3-4% in the first half of 2018;
o Cigarettes and THP market share1 in the Key Markets2 increased by 40 bps driven by strategic cigarette and THP volume growth of 11.7%;
o Adjusted revenue, at constant rates, increased by 1.9%, driven by robust price mix (4% on cigarettes and THP, which is expected to strengthen in the second half of the year as the impact of Pakistan and GCC unwinds);
o Adjusted revenue would have grown by 2.6% on a representative, constant currency basis, excluding an estimated £89 million of revenue recognised by RAI in the first six months of 2017, largely related to the sale of inventory associated with the international brand rights of Natural American Spirit;
o Revenue from the strategic portfolio (defined on page 3) was up 8.5% on a constant rate basis, driven by a 5.0% growth in revenue from the strategic combustible brands and the growth of THP revenue (up over 750% at £305 million) driven by glo in Japan;
o Adjusted profit from operations grew 2.4% at constant rates as the adjusted revenue growth was partly offset by increased investment in NGP; and
o Adjusted operating margin, at current rates, grew 50 bps.
· Basic earnings per share fell 3.4%, with diluted earnings per share 3.3% down, as the net effect from the inclusion of the operating performance of RAI was more than offset by higher financing costs, an increase in costs associated with the amortisation of acquired trademarks, provisions for tax claims and the foreign exchange headwinds;
· Adjusted diluted earnings per share rose 10.4% at constant rates of exchange; and
· The next quarterly dividend payment of 48.8p will be paid in August 2018, as part of the previously announced interim dividend of 195.2p per share which is payable in four equal instalments.
The Group expects foreign exchange to be a headwind on the full year financial results of approximately 5-6%.
1 – Key Market offtake share, as independently measured by retail audit agencies (including Nielsen), shipment share estimates, and share of retail for the US business, based upon latest available validated data.
2 – The Group's Key Markets represent over 80% of the Group's cigarette volume.
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PERFORMANCE REVIEW |
The following review presents the Group's performance for the six-months period ended 30 June 2018.
Revenue
On a reported basis, revenue increased by 56.9% to £11,636 million. This was driven by an 11.0% growth in volume from cigarettes and THP, which was mainly due to both the inclusion of RAI as a wholly-owned subsidiary and good pricing, partly offset by an estimated translational foreign exchange headwind of 8%.
On a representative basis, adjusted revenue was up 1.9% at constant rates of exchange. This excludes the distorting effect on revenue discussed on page 28 related to excise on products acquired under short-term contract manufacturing arrangements and includes the impact of acquisitions undertaken in the prior year.
2017's revenue comparator included a number of other non-recurring items recognised by RAI prior to the acquisition, including revenue from the sale of inventory related to the international brand rights of Natural American Spirit. Excluding these items, adjusted revenue would have increased by 2.6% on a representative, constant currency basis.
The drivers of growth in revenue are summarised below:
· Robust pricing in cigarettes and THP (with approximately 70% of pricing taken in the year so far) which more than offset the decline in mix due to both the growth in volume in Pakistan and Bangladesh, and downtrading in Malaysia and GCC – resulting in an aggregate price mix from cigarettes and THP of 4%;
· The growth of the NGP portfolio (with adjusted revenue up 167% to £427 million on a constant rate, representative basis). NGP revenue comprises:
o THP revenue of £305 million, up over 750% compared to the first six months of 2017; and
o Vapour revenue of £122 million (in line with 2017, on a representative basis), which was impacted by the product recall related to an isolated consignment of batteries in the US. Excluding the recall, vapour revenue would have been up 8% on a representative basis; and
· The growth of the oral category (up 11.3%) driven by the US.
These drivers more than outweighed a 2.2% reduction in volume, on a representative basis. The movement in volume was due to an increase in Pakistan, as the market recovered following the revision to excise, and increases in Turkey, Bangladesh and Egypt being more than offset by lower volume in GCC (due to trade inventory movements in the first six months 2017), Brazil (due to down-trading) and Russia due to both market contraction and inventory movements in the supply chain and lower volume in the US.
Revenue from our Strategic Portfolio grew by 128% (to £8,125 million) mainly due to the inclusion of RAI. On a representative constant currency basis, this was an increase of 8.5% driven by pricing and the performance of the Group's strategic brands which grew share over 160 bps.
The strategic cigarette and THP brands collectively grew volume 11.7% on a representative basis:
· Dunhill's overall market share was down 10 bps (despite a strong performance in South Africa and Brazil) with volume 9.3% lower. The volume decline was driven by the down-trading in the GCC following the excise changes, as well as a reduction in volume in both Indonesia and South Korea which were a result of the contraction in those combustible markets;
· Kent's market share was up 50 bps, with volume increasing 8.7%, driven by the growth of glo in Japan and higher volume and market share in Turkey and Brazil. This more than offset lower volume in Russia (despite an increase in market share), which was affected by trade inventory movements;
Lucky Strike grew market share 10 bps and volume increased by 2.0% driven by Indonesia, Colombia, and Japan, more than offsetting lower volume in France;
· Rothmans' market share continued to grow, increasing a further 80 bps with volume up 34.4% driven by Russia and Malaysia, and supported by migrations in Poland, Brazil and Colombia;
· Pall Mall market share grew 30 bps, with volume up 46.6% due to the inclusion of RAI (as the Group now includes the volume of Pall Mall in the US). This was an increase of 20.9% on a representative basis, due to strong post-excise revision volume performance in both Pakistan and the GCC and successful launch in Egypt;
· Newport grew market share 10 bps in the US. Volume fell 5.6%, on a representative basis, mainly due to inventory movements within the supply chain;
· Natural American Spirit's share momentum continued in the US, up 10 bps, with volume lower by 4.0% on a representative basis, outperforming the market (estimated to be 5% down) due to a strong performance in the premium segment;
· Camel's market share fell 10 bps in the US. Volume was lower by 3.2%, on a representative basis, partly due to a strong comparator period which was impacted by various brand launches; and
· In Japan, glo grew market share to 4.3% (from 3.3% at the end of 2017) and to a share of the category of 20%, against a backdrop of slowing category growth after an initial rapid expansion driven by early adopters. New product developments are planned for the second half of 2018 and we expect to see category growth in Japan during this period. Elsewhere, glo reached 6.4% category share in South Korea (which will also benefit from new product and device developments) and is present in five other markets with several more market launches planned for the second half of 2018 and early 2019.
Vapour volume increased 16.5% on a representative basis. The Group continues to perform well in a number of markets and is the closed system market leader in the UK and Germany. Exciting new product launches are planned for the second half of 2018 with Vype ePen3 launched earlier this month in the UK and Canada where initial indicators have been extremely positive regarding consumer acquisition, conversion and retention. In the US, Vuse grew volume of consumables (up over 20%) despite a decline in market share to 21%.
Oral tobacco volume was significantly higher, due to the inclusion of the RAI portfolio and EPOK. This was an increase of 2.0% on a representative basis, as oral volume was in line with prior year in the US and EPOK drove growth in Sweden, Norway and Switzerland, where EPOK achieved 14% market share ten weeks after launch.
Volume of other tobacco products (OTP) fell 6.9% (or 8.5% on a representative basis) to 10 billion sticks equivalent (being less than 3% of the Group portfolio), driven by a reduction in the US and competitive pricing in France and Hungary.
Profit from operations and operating margin
Profit from operations, on a reported basis was up 72.4% at £4,438 million with operating margin up approximately 340 bps. This was largely due to the growth in revenue described above, partly offset by:
· Raw materials and other consumables were £474 million higher due to the inclusion of RAI and an increase in Japan due to the growth in THP;
· Employee benefit costs, increased by 23.2% to £1,409 million due to the inclusion of RAI;
· Depreciation, amortisation and impairment costs, up 26.3% to £437 million, driven by higher amortisation and impairment charges related to the previous acquisitions (including RAI) and an increase in depreciation due to the consolidation of RAI's manufacturing infrastructure; and
· Other operating expenses, higher by £1,636 million or 111% to £3,105 million. RAI accounted for over 95% of the increase, which was largely due to the charges in relation to the master settlement agreement (MSA), whilst the increased investment across the Group in NGP was partly offset by the ongoing cost efficiency programmes throughout the organisation.
Adjusted profit from operations and adjusted operating margin
Adjusted profit from operations, on a representative basis and at constant rates of exchange was 2.4% higher at £5,216 million, reflecting the ongoing performance whilst investing behind the expansion of NGP. On a representative basis, adjusted operating margin, at current rates, was 50 bps higher.
or £2,295 million on an adjusted constant currency basis. This is an increase of 5.6% on an adjusted, constant currency, representative basis, and is driven by the timing of expenditure and cost reductions since the acquisition of RAI.
Cost synergies are progressing well, with annualised savings of approximately US$140 million delivered to date. The Group continues to expect to deliver over US$400 million of synergies by the end of 2020.