Annual Financial Report

RNS Number : 7046A

British American Tobacco PLC

25 March 2013

 

BRITISH AMERICAN TOBACCO p.l.c.

Annual Report for the Year Ended 31 December 2012 and Annual General Meeting 2013

British American Tobacco p.l.c. (the "Company") reports that the following documents are being mailed to its shareholders (as applicable) today, Monday 25 March 2013. Those documents with a web-link shown will also available to be viewed or downloaded on the British American Tobacco website as indicated:

(1)    Annual Report and Accounts 2012 www.bat.com/annualreport

(2)    Performance Summary 2012 www.bat.com/AGM

(3)    Notice of Annual General Meeting 2013 www.bat.com/AGM

(4)    Proxy Form 

(5)    Proxy Form - South Africa 

(6)    Voting Instruction Form - South Africa 

In compliance with Listing Rule 9.6.1, copies of each of the above documents will be submitted to the National Storage Mechanism as soon as practicable and will be available for inspection via the following link: www.morningstar.co.uk/uk/nsm.

The Company made its Preliminary Announcement of its audited results (which included a Directors' responsibility statement) in respect of the year ended 31 December 2012 (the "Preliminary Announcement") on 28 February 2013. Further to the Preliminary Announcement and in accordance with the requirements of Rule 4.1 of the Disclosure and Transparency Rules, Appendix A to this announcement contains a description of the key Group risk  factors (page 39 of the Annual Report 2012) and Appendix B is a statement of related party disclosures (page 174 Annual Report 2012).

The Annual General Meeting of the Company is scheduled to be held at The Banqueting House, Whitehall, London SW1A 2ER on Thursday 25 April 2013 at 11.30am.

G C W Cunnington

Deputy Secretary

25 March 2013

Press Office:

Kate Matrunola/Jem Maidment/Will Hill 020 7845 2888

Investor Relations:

Mike Nightingale 020 7845 1180

Rachael Brierley 020 7845 1519

APPENDIX A

KEY GROUP RISK FACTORS

The key risk factors that may affect the Group are set out below.

Each risk is considered in the context of the Group's strategy, set out earlier in this business review section of the Annual Report. Following a description of each risk, its principal causes and potential impact on the Group are summarised. The Group's response to each risk is highlighted. The action it is taking to mitigate the risk is also set out.

The Group has identified, actively monitors and takes action to mitigate many different risks. This section does not include them all, but focuses on those risks that the Directors believe to be the most important ones that the business faces currently. 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. Others, currently regarded as immaterial, could become material risks in the future.

The risk factors listed in this section and the specific activities in place to manage them should be considered in the context of the Group's internal control framework. This is addressed in detail in the section on risk management and internal control in the corporate governance statement in the Annual Report. This section should also be read in the context of the accompanying cautionary statement below regarding forward-looking statements.

Developments in the assessment of Group risk

The Board's assessment of the key risks and uncertainties facing the Group has remained broadly unchanged over the past year, particularly with regard to illicit trade, excise and tax and financial risk. However, as a consequence of the Board's continuing reappraisal of Group risks and the activities in place to address them, some risks which have in previous years been considered as key Group risks are no longer assessed as such in terms of their impact and likelihood. These risks are not identified in this report. They are, nevertheless, still addressed as Group risks, remain on the Group risk register, and continue to be reviewed in accordance with the Group's risk management procedures. This applies, for example, to the management of the Group's cost base, which was included in last year's Annual Report but does not feature this year.

Conversely, the Group's internal audit procedures in 2012 identified a number of opportunities for the Group to enhance its Environment Health and Safety standards in multiple sites and operations. After a detailed consideration of the risks faced by operational employees, the Board decided to elevate the risk of injury, illness or death in the workplace to the status of a key Group risk in the course of the year, in order to recognise this as a fundamental concern of the Group and to drive improvements.

Regulatory risks facing the Group have been addressed in our risk management governance for a number of years, and reported as key risks previously. As this category of risk has become more important in the context of the future development of the Group's business, so has the need to ensure that all aspects of regulatory risk are specifically identified and addressed effectively. This year's report includes a number of sub-categories of regulatory risk that the Directors now consider to be key.

Cautionary statement

The business review and certain other sections of the Annual Report 2012 contain forward-looking statements which 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 which could cause actual results to differ materially from those currently anticipated.

A. Illicit trade

Competition from illicit trade

Illicit trade in the form of counterfeit products, smuggled genuine products and locally manufactured products on which applicable taxes are evaded, continues to represent a significant and growing threat to the legitimate tobacco industry.

The majority of such illicit products are sold at the bottom end of the market and in contravention of applicable regulatory requirements.

Increasing excise rates can encourage more consumers to switch to illegal cheaper tobacco products and provide greater rewards for smugglers. The risk is exacerbated where current economic conditions have resulted in high unemployment and/or reduced disposable incomes.

Global volume of illicit trade is currently estimated to be up to 12% of consumption. In the next 10 years, we believe that the problem is likely to increase, driven by the increased regulatory and compliance burden for legitimate manufacturers and fuelled by further significant excise increases.

Time frame: Long term

Principal causes

·    Sudden and disproportionate excise increases and widening excise differentials between markets.

·    Unintended consequences of regulation, e.g. plain packaging, display bans and ingredients restrictions.

·    Extra compliance costs imposed on legitimate industry giving competitive advantages to illicit manufacturers.

·    Economic downturn.

·    Lack of law enforcement and weak border controls.

Potential impact

·    Erosion of brand equity.

·    Reduced ability to take price increases.

·    Investment in trade marketing and distribution is undermined.

·    Product is commoditised.

·    Lower volumes and reduced profits.

Strategic impact: Growth (organic revenue growth)

Mitigation activities

·    Dedicated Anti-Illicit Trade (AIT) teams operating at global, regional, area and key market levels and internal cross-functional coordination.

·    Active engagement with key external stakeholders.

·    Cross-industry and multi-sector cooperation on a wide range of AIT issues.

·    Global AIT strategy development supported by a research programme to further the understanding of the size and scope of the problem.

·    AIT Intelligence Unit (including a dedicated analytical laboratory) cooperates with law enforcement agencies in pursuit of priority targets and capacity building.

·    Strong internal business conduct and customer
approval policies.

Risk owner: Legal Director

B. Excise and tax

Excise shocks from tax rate increases or structure changes

Tobacco products are subject to substantial excise and sales taxes in most countries in which the Group operates. In many of these countries, taxes are generally increasing, but the rate of increase varies between countries and between different types of tobacco products.

A number of significant excise increases have taken place over the past two years, for example in Egypt, Greece, Japan, Mexico, Romania, Turkey and Brazil. To date, the Group has been able to balance these increases with its geographic spread, and continues developing effective measures to address the risk.

Time frame: Long term

Principal causes

·    Fiscal pressures for higher government revenues.

·    Increases advocated within context of national health policies.

·    Insufficient capacity to engage with stakeholders in meaningful dialogue.

Potential impact

·    Consumers reject the Group's legitimate tax-paid products for products from illicit sources.

·    Reduced legal industry volumes.

·    Reduced sales volume or alteration of sales mix.

Strategic impact:Growth (organic revenue growth)

Mitigation activities

·    Requirement for Group companies to have in place formal pricing and excise strategies including contingency plans.

·    Pricing and excise committees at regional, area and individual market levels.

·    Engagement with local tax and customs authorities, where appropriate.

·    Annual management review of brand portfolio, brand health and equity.

Risk owner: Finance Director

Onerous disputed taxes, interest and penalties

The Group may face significant financial penalties, including the payment of interest, if it fails to meet its obligations to file tax returns and pay applicable taxes or in the event of an unfavourable ruling by a tax authority in a disputed area.

Time frame: Short term

Principal causes

·    Non-filing or late filing of tax returns or incorrect filings.

·    Non-payment or late payments of taxes.

·    Unfavourable ruling by tax authorities in disputed areas and aggressive auditing and/or pursuit of tax claims.

Potential 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.

Strategic impact: Productivity (capital effectiveness)

Mitigation activities

·    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.

Risk owner: Finance Director

C. Financial

Translational foreign exchange rate exposures

The Group faces translational foreign exchange (FX) rate exposures for earnings/cash flows from its global business.

Time frame: Short term

Principal causes

·    FX rate exposures arise from exchange rate movements against sterling, the Group's reporting currency.

Potential impact

·    Fluctuations in translational FX rates of key currencies against sterling introduce volatility in reported results.

Strategic impact:Productivity (capital effectiveness)

Mitigation activities

·    While translational FX exposure is not hedged, its impact is identified in results presentations and financial disclosures; earnings are restated at constant rates for comparability.

·    Debt and interest are matched to assets and cash flows to mitigate volatility where possible.

Risk owner: Finance Director

Access to end market cash resources

Liquidity - access to cash and sources of finance - is essential to maintaining the Group as a going concern and for sustainably funding local operations. Inability to access all the Group's cash resources will impact the Group's capital structure, cost of capital, debt and equity quality and shareholder returns.

Time frame: Short term

Principal causes

·    End markets with economies that are closely regulated by the state, with substantial government intervention in foreign exchange markets and limitation on the convertibility of local currency.

·    Insufficient hard currency available to local operating companies to pay for imported goods, dividend remittances, royalties and fees.

Potential impact

·    Economic losses as a result of devaluation of assets (including cash) valued or held in local currency.

·    Inability to mitigate accounting or financial exposures.

·    Loss of commercial opportunities to manufacture and sell tobacco products.

Strategic impact: Productivity (capital effectiveness)

Mitigation activities

·    On-going monitoring of 'trapped cash', with established maximum exposure limits in affected end markets.

·    Controls in place to ensure full compliance in the repatriation of funds from countries subject to sanctions regimes.

·    Projects designed to tackle currency conversion issues in specific markets and reduce foreign currency requirements.

Risk owner: Finance Director

D. Marketplace

Geopolitical tensions

Geopolitical tensions, including international sanctions, social unrest, terrorism and organised crime have the potential to disrupt the Group's business in multiple markets.

Time frame: Short term

Principal causes

·    Regional and/or global conflicts.

·    Terrorism and political violence.

·    Criminal activity leading to attacks on our people, supply chain or other assets.

·    International trade sanctions.

·    Economic policy changes, including nationalisation of assets and withdrawal from international trade agreements.

Potential 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.

·    Reduced volumes and impact on profits.

·    Reputational impact of inability to protect staff and assets from serious harm.

Strategic impact: Growth (organic revenue growth)

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, supply chain, with an emphasis on the protection of Group employees.

Risk owner: Legal Director

Risk of injury, illness or death in the workplace

The Group is committed to operating responsibly by maintaining the necessary controls that safeguard the health, safety and welfare of the people who work for the Group and alongside it, as well as minimising the impact on the natural environment and the local communities in which the Group conducts business activities. 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 affect on its operations.

Time frame: Short term

Principal causes

·    Failure to assess the risk and implement appropriate control measures.

·    Failure to monitor, assess and implement the requirements of regulations that apply to Group sites and operations resulting in non-compliance with applicable Environment, Health and Safety (EHS) standards.

·    Insufficient information, instruction and training in health and safety.

Potential 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 immediately addressed.

·    Cost of remediation work, such as replacing or upgrading plant and equipment, rehabilitation and medical costs.

·    High staff turnover or difficulty recruiting employees if perceived to have a poor EHS record.

Strategic impact: Responsibility

Mitigation activities

·    Risk control systems in place to ensure equipment and infrastructure are provided and maintained.

·    Launch of a refreshed EHS strategy, so that employees at all levels receive appropriate EHS training, information and communications.

·    Analysis of incidents undertaken regionally and globally to identify increasing incident trends or high potential risks that require coordinated action to address.

·    Dedicated global team to support management of EHS risks.

·    Key issues and incidents monitored regionally and reported globally to oversee compliance.

Risk owner: Operations Director

E. Regulation

Tobacco controls inhibit growth strategy

There is a risk that the enactment of regulation that is not evidence-based or consistently interpreted and applied, with industry input, will impact on the Group's ability to achieve its strategic growth initiatives and increase business costs and complexity.

Time frame: Long term

Principal causes

·    Pressure from international organisations, governments and the private sector to pursue tobacco regulation which is not evidence-based.

·    Adoption of differing regulatory regimes in different countries/groups of countries and/or lack of consensus on interpretation/application.

·    Exclusion of the industry from participating in engagement with regulators and policy makers.

Potential impact

·    Adverse impact on ability to compete within the legitimate tobacco industry, and also with increased illicit trade.

·    Shocks to share price on enactment of regulation.

Strategic impact: Growth (organic revenue growth)

Mitigation activities

·    Engagement aligned across the Group to drive a balanced global policy framework for tobacco control via a number of projects and workshops and further development of the Group's Regulatory Futures team in 2012.

·    Prioritisation of key regulatory issues such as retail display bans, ingredients bans and pack space appropriation.

·    Stakeholder mapping and prioritisation, developing robust advocacy materials, building third-party alliances and a programme of targeted regulatory engagement.

Risk owner: CORA Director

Product-based regulation impacts costs and consumer demand

Regulation could drive commoditisation and a reduced ability to meet consumers' product expectations. Product-specific regulations and the requirement to measure and disclose tobacco product contents impact our cost base and ability to deliver a viable business model.

Time frame: Long term

Principal causes

·    Product regulation aimed at reducing the ability to differentiate cigarettes through severe restrictions on ingredients and design.

·    Regulation on the content and design of tobacco products which increases complexity and cost.

Potential impact

·    Reduced consumer acceptability of new product specifications, leading to loss of volume and contributing to an increase in illicit trade.

·    Loss of volume due to regulation in individual markets impacting on established portfolio.

·    Increased cost and complexity of meeting product specific regulations.

·    Loss of reputation, penalties and closure of production as a result of non-compliance for inadvertent breach.

Strategic impact: Growth (organic revenue growth)

Mitigation activities

·    A leaf research programme established in order to address consumer differentiation, regulatory compliance and farmer sustainability.

·    A 'Ready for Regulation' workstream ensuring that the business is ready for the effects of regulation in ingredients and the associated impact on consumers, and the development of efficient process and infrastructure to manage the potential impact of regulatory testing and disclosure.

·    Effective and globally integrated processes for sales and operations planning processes, product specification and testing and new product initiatives.

Risk owner: Operations Director

Loss of ability to directly communicate with consumer

Strict and restrictive regulation on advertising, promotion and packaging may reduce the Group's ability to communicate with adult smokers and influence consumer preferences, resulting in increased commoditisation of the category.

Time frame: Long term

Principal causes

·    Adoption of the WHO's Framework Convention on Tobacco Control (FCTC) guidelines on packaging and labelling, advertising and promotion.

·    Adoption of more stringent national regulations, such as point-of-sale display bans and plain packaging.

Potential impact

·    Generic or plain packaging leads to loss of brand equity.

·    Reduced ability to compete and make new market entries.

·    Reduced brand equity and pricing power will result in downtrading and impact on profits.

Strategic impact: Growth (organic revenue growth) and Responsibility (balanced regulation)

Mitigation activities

·    Development of comprehensive plans to support markets to prepare for the implications of an increasingly strict regulatory environment and to address key regulatory issues.

·    Development of innovative solutions to evolve brand portfolio, product and design and product differentiation within the context of regulatory developments and consistent with Group policy and local law.

·    Programme of engagement with stakeholders at global, regional and individual market levels to address key regulatory issues, including plain packaging and product display initiatives, and identify potential unintended consequences, such as a contribution to increased illicit trade.

Risk owner: Marketing Director

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 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 £84 million (2011: £87 million). The Group's share of dividends from associates, included in other net income in the table below, was £487 million (2011: £486 million).

	2012 £m	2011 £m
Transactions
-revenue	32	28
-purchases	(330)	(342)
-other net income	481	487
Amounts receivable at 31 December	92	97
Amounts payable at 31 December	(34)	(40)

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 will 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, with any such notice to be given no earlier than 1 January 2016.

In 2012, the Group acquired non-controlling interests of shareholders in British American Tobacco Bangladesh for £24 million. This transaction is shown as a £21 million reduction to reserves attributable to the owners of the parent and a £3 million reduction in reserves attributable to non-controlling interests in note 20. In 2011, the Group acquired non-controlling interests of shareholders in Chile for £10 million. This transaction is shown as a £10 million reduction to reserves attributable to the owners of the parent in note 20.

During the year, the Group received proceeds of £262 million (2011: £71 million) in respect of its participation in the share buy-back programme conducted by Reynolds American Inc.

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.

	2012 £m	2011 £m
The total compensation for key management personnel, including Directors, was:
-salaries and other short-term employee benefits	22	21
-post-employment benefits	3	3
-share-based payments	10	8
	35	32

There were no other long-term benefits applicable in respect of key personnel other than those disclosed in the remuneration report in the Annual Report.

 

END

 

 

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