BTI BTI BTI - British American Tobacco p.l.c. - Preliminary announcement - year ended 31 December 2011 British American Tobacco p.l.c. Incorporated in England and Wales (Registration number: 03407696) Short name: BATS Share code: BTI ISIN number: GB0002875804 ("British American Tobacco p.l.c." or "the Company") BRITISH AMERICAN TOBACCO p.l.c. PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2011 SUMMARY 2011 2010 Change Revenue GBP15,399m GBP14,883m +3% Adjusted profit from GBP5,519m GBP4,984m +11% operations Profit from operations GBP4,721m GBP4,318m +9% Adjusted diluted 194.6p 175.7p +11% earnings per share Basic earnings per 157.1p 145.2p +8% share Dividends per share 126.5p 114.2p +11% The Group`s organic revenue at constant rates of exchange grew by 7 per cent with continued good pricing momentum. Reported Group revenue was up 3 per cent. Adjusted Group profit from operations increased by 11 per cent. All the regions contributed to this good profit result. The reported profit from operations was 9 per cent higher at GBP4,721 million. The adjusting items are set out on page 11 and detailed on pages 22 to 23. Group volumes were 705 billion, down 0.4 per cent as the overall market share of the Group increased and industry volume decline moderated. The four Global Drive Brands achieved excellent volume growth of 9 per cent. Dunhill volumes were slightly higher, Kent was up 10 per cent, Lucky Strike 14 per cent and Pall Mall grew by 11 per cent. Adjusted diluted earnings per share rose by 11 per cent, principally as a result of the growth in profit from operations. Basic earnings per share were up 8 per cent at 157.1p (2010: 145.2p). The Board is recommending a final dividend of 88.4p, payable on 3 May 2012. The total dividend in respect of 2011 is 126.5p, an increase of 11 per cent. Free cash flow increased by 3 per cent to GBP3,326 million, 86 per cent of adjusted earnings. 28 million shares were bought back at a cost of GBP750 million, excluding transaction costs. A continuation of the share buy-back to a value of GBP1.25 billion has been agreed by the Board. The Chairman, Richard Burrows, commented "2011 has been a very successful year for your Company and we carry momentum in market share growth and margin improvement into 2012. The economic climate around the world is far from settled but we remain confident that our strategy should continue to generate growth for our shareholders in the years ahead." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph 020 7845 Kate Matrunola/ 02020 020 Edmondson/ 1180 Catherine Armstrong 7845 2888 Mike 020 7845 Nightingale/ 1206 Rachael 020 7845 Brierley/ 1519 Maya Farhat 020 7845 1977 BRITISH AMERICAN TOBACCO p.l.c. PRELIMINARY ANNOUNCEMENT - YEAR ENDED 31 DECEMBER 2011 CONTENTS PAGE BUSINESS REVIEW: Chairman`s statement 2 Extract from Chief Executive`s review 3 Regional review 4 Results of associates 8 Dividends 9 Risks and uncertainties 10 Going concern 10 Directors` responsibility statement 10 FINANCIAL STATEMENTS: Group income statement 11 Group statement of comprehensive income 12 Group statement of changes in equity 13 Group balance sheet 14 Group cash flow statement 16 Accounting policies and basis of preparation 17 Non-GAAP measures* 17 Foreign currencies 18 Segmental analyses of revenue and profit 18 Adjusting items included in profit from operations 22 Other changes in the Group 23 Net finance costs 24 Associates and joint ventures 25 Taxation 26 Earnings per share 27 Cash flow and net debt movements 29 Retirement benefit schemes 33 Litigation: Franked Investment Income Group Litigation 33 Order Contingent liabilities and financial commitments 33 Related party disclosures 52 Share buy-back programme 52 Non-Executive Director: Conflict of interest and Audit 52 Committee membership Annual report 52 SHAREHOLDER INFORMATION: Financial calendar 2012 53 Calendar for the final dividend 2011 53 Corporate information 53 Disclaimers 55 Distribution of report 55 APPENDICES: Appendix 1 - Analysis of revenue and profit from 56 operations 57 Appendix 2 - Key Group risk factors 64 Appendix 3 - Related party disclosures *Non-GAAP measures referred to and used in the preliminary announcement, such as adjusted profit from operations, organic growth and adjusted diluted earnings per share, are explained on page 17. CHAIRMAN`S STATEMENT 2011 has been a very successful year for your Company. While economic uncertainty continues, our operating environment improved during 2011. Our results for the year are driven by revenue growth, an improved operating margin, and growth in market share due to our successful brands, enhanced by the roll- out of product and packaging innovations. Market share growth Overall, industry volumes continued to decline in 2011 but there are signs that the rate of decline has moderated. Our own volumes were down marginally by 0.4 per cent and we grew market share during the year. These positive results were spread across many markets around the world. The expansion of illicit trade is a continuing and growing threat to the business. Sharp increases in excise duty, pressure on consumers` disposable income, and ill-considered regulation of our industry, are all making life easier and more lucrative for traders of illicit products, both contraband and counterfeit. Increasing returns to shareholders Using constant currency exchange rates, revenue rose by 7 per cent on an organic basis. Adjusted profit from operations grew by 11 per cent to GBP5,519 million, or by 10 per cent at constant currency exchange rates. This is reflected in the adjusted diluted earnings per share for 2011 improving by 11 per cent to 194.6p. The Board has recommended a final dividend of 88.4p per share, which will be paid on 3 May 2012 to shareholders on the register at 9 March 2012. This takes the total dividend for the year to 126.5p, an increase of 11 per cent on last year, and maintains our target of paying out 65 per cent of earnings in dividends. In addition, following the suspension of our share buy-back programme in 2009, the Board approved the resumption of the programme in 2011. Between the beginning of March and the end of December 2011, some 28 million shares were repurchased at a value of GBP750 million, excluding transaction costs. A continuation of the share buy-back to a value of GBP1.25 billion has been agreed by the Board. Board and Audit Committee changes Ana Maria Llopis retired from the board after the AGM in April 2011. Ann Godbehere, a Canadian, joined the Board as a Non-Executive Director on 3 October 2011. Paul Adams, former Chief Executive, retired at the end of February 2011 and was succeeded by Nicandro Durante who was introduced to shareholders in his new role at the AGM. Christine Morin-Postel has resigned as a member of the Audit Committee with effect from 21 February 2012 due to a personal conflict of interest, details of which are set out at the end of this Preliminary Announcement. Sustainability Over the years we have built a strong reputation for corporate social responsibility and sustainability and have been recognised as leaders in our industry. For example, we were the first tobacco company to be included in the Dow Jones Sustainability World Index and were included again in 2011. This focus on running our business responsibly helps us create value for our shareholders as well as being in the best interests of our other stakeholders. Continued success I express my thanks and appreciation to my fellow Directors on the Board; to management; to our Chief Executive, Nicandro Durante; and, in particular, to all our 56,000 colleagues around the world. 2011 has been a very successful year for your Company and we carry momentum in market share growth and margin improvement into 2012. The economic climate around the world is far from settled but we remain confident that our strategy should continue to generate growth for our shareholders in the years ahead. Richard Burrows 22 February 2012 EXTRACT FROM CHIEF EXECUTIVE`S REVIEW Our proven strategy continues to deliver The strength of our brands, our consumer-centric innovative products and the quality of our people have delivered another year of very good earnings growth. The Group increased overall market share in 2010 and this continued in 2011 despite challenging economic conditions in some markets. There are signs that the industry volume decline seen in recent years is moderating but substantial excise-driven price increases in a few markets continue to affect overall volumes. While industry volume declined again in 2011, our share improvement ensured that Group volumes were virtually unchanged, down just 0.4 per cent year on year. Our Global Drive Brands and other international brands once again achieved good growth in 2011, driven by the launch of product innovations such as Click & Roll, Reloc and Convertibles in key markets, better retailer relationships and by improving our speed to market. Group revenue grew by 7 per cent on an organic basis and at constant rates of exchange, driven by continued good pricing. The resulting increase in adjusted profit from operations of 11 per cent has helped us to deliver superior returns to shareholders once again, with adjusted diluted earnings per share up by 11 per cent on last year. Our productivity continued to improve in 2011 as we further addressed our cost base through factory rationalisation, systems standardisation and productivity savings. This helped us achieve a substantial increase in operating margin from 33.5 to 35.8 per cent. This is well ahead of our target of improving overall margin by 50-100 basis points per annum. For the foreseeable future, the world market is likely to remain fairly stable at around five and a half trillion cigarettes, more than 40 per cent of which are sold in China. We expect overall market values to grow due to changes in the product mix and we believe the value of emerging markets will grow more quickly. Because of this, our geographic diversity and strong positions in emerging markets remain a key strength. The tobacco industry remained fairly stable during 2011, with little M&A activity among the leading industry players. On 26 May 2011, the Group announced that it had agreed to acquire 100 per cent of privately-owned Protabaco, the second largest cigarette company in Colombia. The transaction was completed on 11 October 2011 and the deal was financed from internal resources. We continue to monitor acquisition opportunities around the world and will participate where it makes financial and strategic sense to do so. The expansion of illicit trade remains a threat globally, driven by sharp excise increases and pressure on consumers` disposable income. We support the development of the World Health Organisation`s Framework Convention on Tobacco Control (FCTC) protocol aimed at creating an international regulatory framework for addressing illicit trade. However, we remain critical of other measures proposed by the FCTC that may drive significant excise increases, retail display bans and plain packaging - all of these measures could play into the hands of organised crime by creating ideal conditions for further increases in illicit trade. Substantial opportunities The last year has seen considerable success for the Group and I am excited when I look to our strengths. We have some great brands and our marketing is based on powerful consumer insights, supported by differentiated and superior products. We have market-leading innovations - and we are getting better at deploying them. We have a great business mix, with a strong presence in emerging markets and a balanced product portfolio across all segments. We have a fully integrated supply chain and our systems are becoming more efficient. We have an industry- leading approach to science and harm reduction and, importantly, we have the people capable of tackling the challenges ahead. I am confident that we are well placed to take advantage of the substantial opportunities ahead for our business and that we can continue to deliver superior shareholder returns. Nicandro Durante 22 February 2012 REGIONAL REVIEW Against the backdrop of global financial uncertainty, generally lower disposable incomes and political upheaval in some parts of the world, the Group delivered a strong performance in 2011, achieving all the goals set as part of its long-term strategy. Reported revenue grew by over 3 per cent as a result of continued good pricing momentum and stable volumes. At constant rates of exchange, revenue was up 4 per cent, while on an organic basis at constant rates of exchange, it increased by 7 per cent. The reported profit from operations was 9 per cent higher at GBP4,721 million with an 11 per cent increase in adjusted profit from operations, as explained on pages 22 to 23. At constant rates of exchange, the adjusted profit increase was 10 per cent. All the regions contributed to this good profit result. Organic adjusted Group profit from operations, at constant rates of exchange, also increased by 10 per cent. Group volumes from subsidiaries were 705 billion, down by 3 billion or 0.4 per cent. Organic volumes were also 0.4 per cent lower. The Group again grew overall market share in its Top 40 markets. The four Global Drive Brands achieved excellent overall volume growth of 9 per cent following the successful launches of innovations, resulting in the continued improvement in market share. Dunhill volumes increased slightly as strong growth in Brazil, Romania and the GCC, and good performances by Malaysia and Russia, were offset by a decline in South Korea which was affected by competitor pricing. Excluding the volumes in South Korea, Dunhill volumes were up 8 per cent. Kent was 10 per cent higher with increased volumes in Romania, Ukraine, Russia, Egypt and Japan. Lucky Strike increased volumes by 14 per cent with growth in Spain, Germany, France, Italy, Japan, Chile and Brazil. Pall Mall volumes rose by 11 per cent with strong growth in Pakistan, Turkey, Russia and Canada, partially offset by lower volumes in Mexico and Spain. The Group announced at the end of 2010 that as part of the plans to reduce complexity, drive efficiency in management structures and achieve a better balance in the scale of our regions, it had decided to reduce the management structure from five to four regions from 1 January 2011. Markets which comprised the Eastern Europe region, were merged into the Africa and Middle East region and the Western Europe region. Russia, Ukraine, Moldova, Belarus, Caucasus and Central Asia form part of the new Eastern Europe, Middle East and Africa region (EEMEA), while Romania, Bulgaria, Serbia, Montenegro, Albania and Kosovo form part of the Western Europe region. The 2010 information has been reallocated on the basis of the new regional structure. Adjusted profit from operations* at constant and current rates of exchange is as follows: 2011 2010 Adjusted Adjusted profit profit from operations* from operatio ns* Consta Curren nt t rates rates GBPm GBPm GBPm Asia-Pacific 1,480 1,539 1,332 Americas 1,440 1,441 1,382 Western Europe 1,204 1,228 1,103 EEMEA 1,362 1,311 1,16 7 5,486 5,519 4,98 4 *Adjusted profit from operations (page 11) is derived after excluding adjusting items from profit from operations. Adjusting items include restructuring and integration costs, amortisation of trademarks, goodwill impairments and the Fox River provision as explained on pages 22 and 23. Regional review cont... In Asia-Pacific, profit was up GBP207 million to GBP1,539 million as a result of strong performances in Japan, Bangladesh and Taiwan and favourable exchange rates in Australia, Japan and New Zealand. At constant rates of exchange, profit increased by GBP148 million or 11 per cent. Volumes at 191 billion were up 2 per cent, with increases in Japan, Pakistan and Indonesia partially offset by lower volumes in South Korea, Australia and New Zealand. In Australia, the steep excise increase during 2010 impacted industry volumes. Profit was up as a result of cost saving initiatives, favourable exchange movements and higher pricing, partially offset by additional costs associated with the campaign against plain packaging. Market share was slightly lower although Pall Mall performed well. In New Zealand, volumes decreased following an ad-hoc excise increase in January 2011. Profit was lower as pricing and favourable exchange rate movements were more than offset by lower volumes. Market share grew in Malaysia, driven by the strong performances of Dunhill and Peter Stuyvesant, although total industry volumes were lower following the excise led price increases in 2010. Profit was higher, mainly as a result of exchange rate movements. In Japan, industry volumes were down sharply following a significant excise increase in October 2010. However, as a result of the disruption to domestic production following the tragic events in March 2011, the Group delivered an exceptionally strong growth in profit and volumes for the year, with underlying market share higher. In Vietnam, volumes and market share grew but profit was adversely impacted by high inflation and an exchange rate devaluation, partially offset by higher pricing and cost saving initiatives. Profit in South Korea was impacted by competitor pricing and significant marketing investment, following a price increase by the Group`s business at the end of April 2011, the first in the industry in over six years. Lower volumes also led to a reduction in market share. In Taiwan, significant profit growth was driven by higher volumes and improved industry pricing. Good performances by Dunhill and Pall Mall achieved higher market share. Volume growth in Pakistan led to a strong increase in market share as Pall Mall performed well, more than doubling its volumes. Profit was stable, adversely impacted by higher special excise duties, high inflation and severe price competition in the low-priced segment. In Bangladesh, both market share and volumes grew due to the strong performance of Benson & Hedges. Profit increased as a result of higher volumes, price increases and tight control of costs. Profit grew in Indonesia following higher volumes, price increases and synergies resulting from the integration of the business units during 2010 which were partially offset by higher clove prices and marketing investment. Market share was marginally lower as the growth of the mild kretek brands was more than offset by the rationalisation of the brand portfolio. In Americas, profit rose by GBP59 million to GBP1,441 million, mainly attributable to a strong performance from Brazil, Venezuela and Mexico and an improved product mix across the region. At constant rates of exchange, profit rose by GBP58 million or 4 per cent. Volumes were down 4 per cent at 143 billion, mainly as a result of decreases in Mexico, Brazil, Chile and Venezuela. In Brazil, strong profit growth was driven by an improved product mix and higher pricing. Market share and volumes were slightly lower due to the growth of local duty evaded product. However, volume, share in the premium segment and share compared to international competitors continued to grow as a result of the solid performances of Lucky Strike, Dunhill and Free. Industry volumes were lower in Canada as a result of increased illicit trade, with aggressive price competition in the low-priced segment fuelling down- trading. These factors adversely impacted volumes, market share and profit, although du Maurier and Vogue maintained their share in the premium segment and John Player Standard remained the number one brand in Canada. In Mexico, industry volumes declined sharply as a result of excise-led price increases at the beginning of 2011, as well as increased purchases by the trade during December 2010 in anticipation of the price increase. Market share was marginally down on last year, while profit was higher, benefiting from increased pricing and lower costs. Regional review cont... In Argentina, market share was lower despite the growth of Lucky Strike and the successful launch of Dunhill. Marketing investment was higher with the launch of new brands and competitors` pricing activities, impacting profitability. Lucky Strike performed well in Chile, and the very strong market share was maintained. Volumes were lower, following the steep excise-driven price increases, adversely impacting profit. Profit in Venezuela grew strongly as a result of higher pricing, partially offset by increased costs and lower volumes, although market share rose. Volumes were down due to industry declines and growth in illicit product. The Group acquired Protabaco, the second largest cigarette company in Colombia, on 11 October 2011. Protabaco and British American Tobacco Colombia are operating from January 2012 as one entity with a