Analyst Briefing 16th October 2018 - Nicandro Durante - British American Tobacco
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Analyst Briefing
16th October 2018
Nicandro Durante
1
Important Information
The information contained in this presentation in relation to British American Tobacco p.l.c. (“BAT”) and its subsidiaries has been prepared solely for use at this presentation. The presentation
is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any jurisdiction where such distribution, publication, availability or use
would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction.
References in this presentation 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 Group operating companies, collectively or individually as the case may be.
The information contained in this presentation does not purport to be comprehensive and has not been independently verified. Certain industry and market data contained in this presentation
has come from third party sources. Third party publications, studies and surveys generally state that the data contained therein have been obtained from sources believed to be reliable, but that
there is no guarantee of accuracy or completeness of such data.
Forward-looking Statements
This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any BAT shares or other securities. This presentation contains certain forward-
looking statements, made within the meaning of Section 21E of the United States Securities Exchange Act of 1934, regarding our intentions, beliefs or current expectations concerning,
amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the economic and business circumstances occurring from time to time in the
countries and markets in which the Group operates.
These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,”
“will,” “expect,” “estimate,” “project,” “positioned,” “strategy,” “outlook”, “target” and similar expressions.
It is believed that the expectations reflected in this presentation 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.
The forward-looking statements reflect knowledge and information available at the date of preparation of this presentation and BAT undertakes no obligation to update or revise these forward-
looking statements, whether as a result of new information, future events or otherwise.
Among the key factors that could cause actual results to differ materially from those projected in the forward-looking statements are uncertainties related to the following: the impact of
competition from illicit trade; the impact of adverse domestic or international legislation and regulation; changes in domestic or international tax laws and rates; adverse litigation and dispute
outcomes and the effect of such outcomes on the Group’s financial condition; changes or differences in domestic or international economic or political conditions; adverse decisions by
domestic or international regulatory bodies; the impact of market size reduction and consumer down-trading; translational and transactional foreign exchange rate exposure; the impact of
serious injury, illness or death in the workplace; the ability to maintain credit ratings and to fund the business under the current capital structure; the inability to lead the development and roll-out
of BAT innovations (NGP and Combustible); and changes in the market position, businesses, financial condition, results of operations or prospects of the Group.
2
Important Information
Forward-looking Statements (continued)
Additional information concerning these and other factors can be found in BAT’s filings with the U.S. Securities and Exchange Commission (“SEC”), including the Annual Report on Form 20-F
filed on 15 March 2018 and Current Reports on Form 6-K, which may be obtained free of charge at the SEC’s website, http://www.sec.gov, and BAT’s Annual Reports, which may be obtained
free of charge from the British American Tobacco website www.bat.com.
Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. Readers are cautioned not to place undue reliance on such
forward-looking statements.
No Profit or Earnings Per Share Forecasts
No statement in this presentation is intended to be a profit forecast and no statement in this presentation should be interpreted to mean that earnings per share of BAT for the current or future
financial years would necessarily match or exceed the historical published earnings per share of BAT.
Audience
The material in this presentation is provided for the purpose of giving information about BAT and its subsidiaries to investors only and is not intended for general consumers. BAT, 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 presentation 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, any of our products. Our products are sold only in compliance with the laws of the particular jurisdictions in which
they are sold.
3
We have delivered consistent eps growth
300 Adj EPS CAGR 9.8% p.a
Reported Adj EPS DPS CAGR 11.9% p.a
250
200 Reported DPS
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1966 1971 1999 2003 2005 2012 2017
First Health First Health Advertising banned The FCTC is Tobacco display Standardised FDA regulation and
Warnings in the US Warnings in the UK in South Africa established bans introduced Packaging introduced Growth in Vapour
in Canada in Australia
source: Company data 4
A proven strategy
5
A winning strategy
FMC THP Oral Vapour
HIGH LOW
TOBACCO TOBACCO
AFFINITY AFFINITY
6
Nicotine consumer pool continues to grow
6mn
8mn
NGP consumers
366 ADDED
359 362 IN 2017
355 354 357
351 351
346 345 347
3mn
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Number of consumers T40 markets excl. US, source: Company data 7
A proven strategy
W I N I N COM B U ST I B L ES
WI N IN NON‐ COMBU ST I BLES
WIN IN HIGH GROWTH MARKETS
PROAC TIVE REGULATORY ENGAGEMENT
8
BAT continues to outperform the Industry: 2014‐2017
BAT vs Industry Volume Big‐4 Market Share Evolution BAT Organic Revenue Growth
2014‐17 2014‐17 2014‐17
5% 5%
140
4%
Ave.
‐1.0% 3%
3%
20
‐30
‐2.2%
Industry ‐80
2014 2015 2016 2017
Source: BAT Internal Estimates (Organic) Nielsen RMS data T40 markets exclude USA, China and India Company data on an organic basis
9
Winning in Non‐Combustibles
Built a £2bn Potentially Reduced Risk Products business in 3 years
Our revenue is now bigger than some…
~£2.0bn £2 Billion
RRP NTO Revenue
Qualifies for FTSE 250
companies
Source: Company data
10Winning in Non‐Combustibles
Built a ~£1bn Next Generation Products business in 3 years
0.1 5X £0.5bn 2X £0.9bn
2016 2017 2018*
* estimate
11A growing sustainable business
C O M B U S T I B L E F U N DA M E N TA L S S T R O N G ; BAT C O N T I N U ES TO O U T P E R F O R M
F DA R EG U L AT I O N M A N AG EA B L E
P R R P S A G R EAT O P P O R T U N I T Y
M A R G I N G R OW T H A N D D E ‐ L E V E R AG I N G ; A N D I N V ES T I N G I N P R R P S
S U S TA I N A B L E H I G H S I N G L E F I G U R E C O N S TA N T E P S G R OW T H
12Market concerns
“Combustible volumes and pricing are under pressure, can the business sustain LT
profit growth?”
“US cigarette market volumes are under increased pressure, share is not growing, will
results in the US match those of the past?”
“How can FDA regulation not be a negative for the industry and BAT?”
“Barriers to entry in vapour are low, how can the tobacco incumbents win?”
“The THP category and glo has stalled in Japan and shown limited results elsewhere, how
can you succeed in THP?”
“Is 50‐100bps of margin growth a realistic deliverable, given future NGP
investment requirements?”
“How can you reach the net debt/EBITDA target of around 3 times by the end of 2019?”
13Market concerns ‐ Agenda today
“Combustible volumes and pricing are under pressure, can the business sustain LT
profit growth?”
“US cigarette market volumes are under increased pressure, share is not growing, will
results in the US match those of the past?”
“How can FDA regulation not be a negative for the industry and BAT?”
“Barriers to entry in vapour are low, how can the tobacco incumbents win?”
“The THP category and glo has stalled in Japan and shown limited results elsewhere, how
can you succeed in THP?”
“Is 50‐100bps of margin growth a realistic deliverable, given future NGP
investment requirements?”
“How can you reach the net debt/EBITDA target of around 3 times by the end of 2019?”
14Combustibles
Kingsley Wheaton
15Addressing concerns ‐ What we will show you
“Combustible volumes and pricing are under pressure, can the business sustain
LT profit growth?”
Industry volume and pricing is robust
BAT continues to outperform the industry
Combustible business model remains sustainable
16“Our Combustibles Story”
Powerful & Sustainable BAT Global Brands (GDSBs)
176 Key Areas to Discuss
1 2 3
Industry & BAT Pricing A Proud History
Volume Trends Environment Of Innovation
4 5 6
Quality of Our Regional Powerful, Winning
Share Growth Performance Brands
18
BAT estimate, BAT Volume adjusted for the impact of acquisitions (except RAI), Source: Company dataBAT Volume Outperforms the Industry
Industry & BAT Volume (FMC+THP)
2011 2012 2013 2014 2015 2016 2017 H1 2018
CAGR
‐0.5% (2011 – H1 18)
‐1.0%
BAT
‐1% to ‐2%
‐1.5%
‐2.0% INDUSTRY
‐2% to ‐3%
‐2.5%
‐3.0%
UNDERLYING VOLUME DECLINE : (a) INDUSTRY ‐2% to ‐3% (b) BAT ‐1% to ‐2%
Source : BAT Estimates (Industry & BAT Volume Excludes USA from 2011 – 2017)
Note: BAT Volumes in 2017 & 2018 adjusted for ‘one‐off’ events : SK & UKR (Excise / Price War in 2017) and KSA & TWN (Excise in 2018) 19...Whilst Consistently Delivering Mid‐Plus Single
Figure Price Mix
Average Price Mix 2012 to 2018 : 5.6%
8.0
2018 FY Price Mix
7.0 expected > 5.5%
6.0
5.0
4.0
3.0
6.8 6.2
5.8 5.8 5.4 5.5
2.0 4.1
1.0
0.0
2012 2013 2014 2015 2016 2017 2018
2011 ‐ 2017 Organic ‐ Excluding RAI
BAT Price Mix (%) : 2012 – 2018
20Powered by our long‐standing Innovation DNA
Triple Filter Capsules Double Capsule Triple Capsule
(3Tek)
1998 2003 2005 2007 2012 2014 2015 2018
Resealable Pack KS Super Slims Tube Filter Tube + Capsule
21Driving the BAT Portfolio Transformation Story
GDSBs now 62% of BAT Volume GDSBs drive BAT Performance ……Powered by Innovation
55%
+170
62% +900bps in 8 Years Innovation as % of
GDSB Share GDSB volume
+110
+100
+120
32%
+90
+90
+40 +30
+80 +40
+50
+40
+20 +10
+40 +10 BAT Share
2010 H1 2018
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Company data Nielsen RMS data
22‘Quality Share’ Growth Track Record
GDSB PREMIUM ASU30 INNOVATION STRATEGIC SEGMENTS MARKET
SHARE SHARE SHARE SHARE RANK* F&S, SLIMS, NFF SHARE
200
L3Y
CAGR
(2014‐17)
100
bps
30bps
20
bps
1 st 70
40
50 bps
bps
YTD
170 70 30 1 st 120 30
2018
vs 2017 FY bps bps bps 20 bps
50
bps
23
Source: Company Data *Numeric Weight T40 Innovation >0.3% shareDelivering Across Regions
USA ENA
NTO: +1.8%* NTO: +1.3%
Value Share: +20bps Value Share: Flat
Premium SoS: +20bps Premium SoS: Flat
GDSB Share: Flat GDSB Share: +190bps
AMSSA APME
NTO: +2.9% NTO: +5.6%
Value Share: ‐20bps Value Share: +90bps
Premium SoS: +50bps Premium SoS: +120bps
GDSB Share: +710bps GDSB Share: +90bps
Source: H1 2018 NTO LE and YTD’18 Share
*Excluding one‐off comparator benefits (NAS Inventory sales)
24And Well Balanced Across OECD/ Non‐OECD
% Contribution to BAT OECD Non‐OECD
Volume 34% 66%
Weighted Average Price (pack of 20s) £3.76 £1.28
UOP 66% 34%
‘Source: Company Data 2017 at current rates inclusive of full year US volumes and financials.’ 25
*Weighted Average Price: Cigarettes & THP consumables.Today, £50Bn Portfolio….
Growing @ Double Digit CAGRs
£5.8bn £7.3bn £6.7bn £12.7bn £7.8bn
CPTO CPTO CPTO CPTO CPTO
£5.3bn £2.8bn £1.1bn
CPTO CPTO CPTO
NTO Growth (L3Y) 8.3%
26
Source: GDSB Company Data27
US Market Overview
Ricardo Oberlander
28Addressing concerns ‐ What we will show you
“US cigarette market volumes are under increased pressure, share is not growing, will results
in the US match those of the past?”
US industry volumes are improving and pricing is good
BAT is growing value share
The Vapour category is small relative to the tobacco market and is having a minimal impact
on cigarette volumes
Oral tobacco remains an exciting, profitable opportunity
29USA market size
50% : Open Systems
50% : Closed Systems
£ 31 Bn £ 3.4Bn £ 3.4Bn
ORAL VAPOUR
COMBUSTIBLES
30
BAT estimate, BAT Volume adjusted for the impact of acquisitions (except RAI), Source: Company data
*Estimated industry NTO 2012‐2017Portfolio positioned to capture multi‐category repertoire
Regain Vapor Leadership
Take NAS to the Next Level
Reinforce Menthol Leadership
Accelerate ASU35 Momentum
Maintain Value Leadership
Accelerate Growth for Leadership
31FMC shipments improving to full‐year outlook of ‐4.3% vs. H1 of ‐5.3%
U.S. Historical Volume Change
External Factors impacting 2018 volume change:
‐0.10% • California SET -0.2%
• 27% rise in gasoline cost since 2016
‐2.30% ‐2.40%
‐3.20% AVG • Vaping -0.7%
‐3.80% ‐3.60% ‐3.7%
‐4.20% ‐4.30%
‐4.60%
‐8.40%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 LE
Source: Industry Shipments to Wholesale
32Change in Gasoline prices highly correlated to industry volume
Cigarette Industry Volume Change vs. Gasoline Prices
Total FMC Volume Gasoline Prices
1 ‐40
0 R2 = 0.63 ‐30
Total FMC Volume – 3mo Rolling Avg
‐1
% Change Gasoline Prices
‐20
‐2
‐10
‐3
0
‐4
10
‐5
20
‐6
‐7 30
‐8 40
Mar‐14 Sep‐14 Mar‐15 Sep‐15 Mar‐16 Sep‐16 Mar‐17 Sep‐17 Mar‐18 Sep‐18
Source: U.S. Midgrade Conventional Retail Gasoline Prices, Energy Information Administration, company data
33Cig industry STR volume drivers – outlook for 2018
+2.6% ‐1.5%
‐0.7%
‐4.2% ‐0.2% ‐0.3% ‐4.3%
* Impact of SET * Gasoline prices
to Q1 only, three * Price increases expected to be ~20%
quarters of lap higher YOY
2017 Incremental Incremental Macroeconomic Fuel Prices Vapor Growth (2) 2018 EST
SET Pricing Environment (1)
1) Macroeconomic factor model components include unemployment measures, Used Goods Demand, CPI, HH Disposable Income, Real Wage Growth, CPG Factory Output and other factors
2) Vapor impact is an estimation combining measured/unmeasured channel volumes and Consumer Tracker data for cross‐category trends
Source: Company data
34Robust Price Mix in Combustibles
Source: Company data. (LE) Latest estimate
35U.S. combustible brand gross margins are very strong
Combustible Margin/Mille – Index to Low End
Premium
Low End
Share
Brands
Leader
695 508 440 414 228 100
$5/mille on 2018 industry volume is worth $1.2B or GBP 900 M
0.10 Share for 2018 with average GM $94/mille is worth $22M or GBP 17M
Source: Company data 36Premium segment resilient, low price segment gaining from
downtrading linked to gas prices
Cigarette Price Tiers: Share of Market YOY Change
Value For Money
17%
Low End
8%
76%
Value for
Premium Money
Source: Company data 37Share evolution YTD 2018 vs FY 2017
+0.6
RAI ALTRIA ITG
‐0.1 NB3
‐0.2
‐0.4
RAI Premium Share +0.2 Value Share +0.2 GDSB Share 0.0
38
Source : Shipment to RetailersORAL Tobacco: Size & Growth
Oral Tobacco Consumers
Oral Tobacco NTO ($B)
Index to Adult Smokers
CAGR 7.1% 8.6%
Age 85
% Male 161
5.1 Income 150
3.4 College 135
2.4
2012 2017 2022E • Affluent
• More Educated
Growth category • Experiential
• Growing in urban centers
BAT estimate, Source: Company data
39ORAL Tobacco: Performance of Grizzly
Strong Value Share Growth Winning in the Key Moist Segments Leading ADU35 Profile
28.0 Wintergreen
27.5 48 48
26.2
25.9 WG Share of Industry Grizzly Share of WG
25.4
Pouch
46
21
Pouch Share of Industry Grizzly Share of Pouch
2014 2015 2016 2017 2018
14% YOY Brand Margin growth
Source: Company data
40ORAL Tobacco: Attractive Opportunity & Near‐term Pipeline
Grizzly
Grizzly
• Continue driving value with consumer • Strengthen category leadership • Implement extended product use
relevant programming research to validate product appeal
• Launch first MRTP advertising in the
• Maintain leadership position in key category to add a relative risk benefit • Plan for potential 2019 geographic
segments: Wintergreen and Pouch for adult smoker consideration expansion aligned with market
(pending FDA decision) development
41Managing FDA Impact
Dr. J. N. Figlar
42Addressing concerns ‐ What we will show you
“How can FDA regulation not be a negative for the industry and BAT?”
The process is evidence based, complex and will take a long time
We support evidence‐based regulation
The vapour category needs tighter regulation
The FDA proposals are manageable and BAT is well‐placed
43FDA Engagements
Positive Meetings
Cigarette / Smokeless Provisional Examples
Vapor Change / Marketplace Examples
CDER Lozenge / Vapor Examples
Transformation Agenda
Encouraged Rulemaking
Discussed Scientific Review process
44Submission Types
Exemption Requests
“Minor” modifications (tobacco additives only) 60 Days
(EX)
Product Quantity Change SE
Changes to product quantity 90 Days
(PQCSE)
Products either have the same characteristics as those marketed on/before February 15, 90 Days
Substantial Equivalence (SE) 2007 or have different characteristics but do not raise different questions of public health (Regular SE)
Pre-Market Tobacco
Application Products that do not meet criteria for either SE or SE Exemption and are appropriate for
the protection of the public health
180 Days
(PMTA)
Modified Risk Tobacco Authorization to market as reduced harm or reduced risk
360 Days
Product Application (MRTPA)
Note: Timing is based on non-binding FDA established performance metrics or requirements set forth by the Tobacco Control Act.
FDA has not generally reviewed and made determinations within the timeframes outlined above.
45Our FDA approach is yielding results
SE Exemptions FDA Engagements
100 20
80
83 15
60 16
40 10 12
20 5
1
0 0
2009 - 2015 2016 - Current 2009 - 2015 2016 - Current
Substantial Equivalence Determined
30
26
20
Positive Camel Snus TPSAC Meeting
10
4
0
2009 - 2017 2018 - Current
Provisional SEs Regular SEs 46
Source: Company data..Future – Rulemaking Process
Future
Step Step Step Step Step Step Step Step Step
One Two Three Four Five Six Seven Eight Nine
Preparation OMB Review Publication
Determination Preparation OMB Review Publication
Initiating Public of Final, of Final, of Final,
Whether a of Proposed of Proposed of Proposed
Event Rule is Needed Comments Interim, or Interim, or Interim, or
Rule Rule Rule Direct Rule Direct Rule Direct Rule
Agency Initiatives Agencies are Proposed Rule OMB Review Proposed rules An agency must Final Rule OMB Review An agency must
required to publish OMB reviews only must be published provide the public OMB reviews only submit most final,
Required Reviews in the Federal Optional those rulemaking in the Federal the opportunity to Special Types of those rulemaking interim, and direct
Register Procedures to actions determined Register submit comments Final Rules: actions determined final rules to both
Statutory Mandates substantive rules, Help Prepare a “significant” for consideration Interim Final “significant” houses of
rules of procedure, Proposed Rule: Rule Congress and
Recommendations 60 days is the
and interpretive Advance Notice Direct Final General Accounting
from Other Groups standard for a
rules of Proposed Rule Office before they
comment period
Rulemaking can take effect
Lawsuits Negotiated A public hearing is
Rulemaking discretionary Agencies are
Petitions unless required by required to publish
Rules may be statute or agency final rules in the
OMB Prompt Letters established only policy Federal Register
after rulemaking
procedures (steps
three through six)
have been
followed, unless an
exemption applies
47Future – Rulemaking Process
Future
Step
Three
Preparation
of Proposed
Rule Proposed Rule
Proposed Rule
Optional Procedures to Help Prepare a
Optional
Procedures to
Proposed Rule:
Help Prepare a
Proposed Rule:
Advance Notice Advance Notice of Proposed Rulemaking
of Proposed
Rulemaking (ANPRM)
Negotiated
Rulemaking
Rules may be
Negotiated Rulemaking
established only
after rulemaking
procedures (steps
Beginning a process of up to 9 Years
three through six)
have been
followed, unless an
exemption applies
48Recent Announcements/Industry Meetings/
Compliance Letters
Commissioner has serious concerns about Youth Appeal, particularly flavors
Useful meeting with Commissioner outlined our response to letter and how to address Youth appeal
Compliance Letter (Alto) is a routine enforcement requirement
FDA regulation sets a level playing field for all and is science based
2022 PMTA requirements likely to lead to increased contestable space
Organizations focused on compliance, understanding the statute and regulatory science are likely to thrive
49VAPOUR
Ricardo Oberlander
Tadeu Marroco
50Addressing concerns ‐ What we will show you
“Barriers to entry in vapour are low, how can the tobacco incumbents win?”
Vapour is small, but a significant, profitable opportunity
BAT is performing well in the US and in the rest of the world
Vuse Alto and Vype ePen3 are great products and are showing good initial results
We have the products and pipeline to win
51Vapour Global
Vaping Global Footprint BAT Footprint
High incidence Medium incidence Low incidence
>3% : US, Canada, W . Europe 1‐3% : Russia E. EuropeThe vapour business is additive
Alone
Outside with At Home VAPOUR
5% Others 22%
8%
£Mns NTO evolution
COMBUSTIBLES
78%
18% Home
With
Others
70% THP
22%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Alone COMBUSTIBLES
At Office / Out of Home 78%
Combustibles (Duty Paid) Vapour Dual Quitter Returner Never smoked Workspace
NEW OCCASIONS
When I can’t smoke cigarettes 86%
In the car 62%
Inside pubs and restaurants 47%
Source: Company data..
53Building the Strongest Vapour Portfolio
Reassuringly Refined Exceeding High
Familiar Flavor Expectations Performance
Simple
Intuitive
Effective
solo
ciro
vibe
alto
Despite Vibe Recall, VUSE Shipments up 20% vs. SPLY, GM > 40% 54Competitive Adult Vapour users and Adult
smokers say VUSE Alto is a winner
VUSE Alto test results among adult smokers and vapour users:
Satisfaction on Key Measures
Majority of respondents claim Alto tastes
better than competitive pod‐mods 86%
2/3 of committed to future purchase of Alto 81%
80%
78%
77%
76%
93% claimed that Alto satisfied their overall 74%
needs 72%
STR 4.5% (in stores handling) after 4 weeks
Draws Good Value Latest Flavor Durability Quiet Draw Charges Lasting
Easily Technology Quickly Battery
Source: Company data..
55Unsolicited social chatter supports VUSE Alto research
Performance, silent draw, satisfaction, design & value equation
“Makes absolutely no
crackling noise” “Hits smoother than any other
compact system I’ve used”
“This isn't cheap by any
means, but when compared
to Juul, it's actually a pretty
good deal”
“I stopped bringing my Juul with
the draw is smooth and easy
me to work because I'm finding
the Alto to just be so much better.
Battery lasts me a day and a half
“The refills also last WAY
with constant usage”
longer. One lasts 2-3 days for
me & I hit this thing
constantly”
“With my Juul, I always needed to bring a
spare battery with me if I was going out for
“Produces an impressive amount
more than just a couple hours”
of vapor”
56VAPOUR – Other markets
57Vaping represents a margin opportunity
POTENTIAL GM PER CONSUMERS (Index) OPPORTUNITIES TO FURTHER DRIVE SCALE
PRODUCT
100 130 SATISFACTION
SIMPLICITY &
100 190 CONVENIENCE
TRUST &
100 210 CREDIBILITY
Based on average annual individual consumption. Sources: Vype online consumer surveys;
58EPEN3 promising results proving potential to drive conversion
EPEN3 OUTSCORES COMPETITORS IN KEY ATTRIBTUES A FUTURE‐FIT MARKETING MODEL DRIVING RESULTS
OUT‐OF‐HOME
44% TRADITIONAL RETAIL PUBLIC RELATIONS /
PRODUCT 49% EARNED MEDIA
SATISFACTION 54%
NON‐RETAIL
ACTIVATION
4.6
SIMPLICITY & 4.5
CONVENIENCE 4.8
SPECIALIST
BRAND
RETAIL
AMBASSADORS
38%
TRUST & 43%
CREDIBILITY 44% RESPONSIBLE USE OF
DIGITAL & SOCIAL
MEDIA
ePen3 Comp 1 Comp 2 Comp 3
LOYALTY & OFFERS CRM & HYPERCARE
Source: Quantitative Study with one week product placement among Smokers & Vapers;
UK Vaping Tracker among Vapour users. 59EPEN3 promising results proving potential to drive strong
conversion
ON TRACK TO ACHIEVE 70% WD
82% 57% 43% ACROSS VAPE SHOPS & TRADITIONAL RETAIL
ePen3 Active Predominant Solus
Conversion to Usage Usage Usage
Ratio 13
Cartridge /
Device
4
Comp 3
Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Source: Company data..
60Canada EPEN3 shows strong early results, after 11 weeks
COMPETITIVE REACHING FULL POTENTIAL
AWARENESS CONSTANT GROWTH
DISPOSITION ROS will accelerate at POS
Devices/week
ePen3 Comp 1
11
40% 42%
+20% 33% 33%
WEEK‐ON‐WEEK
3.1
1.9
W1 W2 W3 w4 w5 w6 w7 w8 w9 w10 w11
66% Claimed regular
usage* Aware Purchase intent AVERAGE OUTLET TOP 10% OF OUTLETS BEST 6 OUTLETS
* Consumers managed via Hypercare Program Source: OneTRACK Missile Tracker Combined July/Aug. among dual users. Intention to Purchase Amongst those Aware
61Leveraging leadership to build Multi‐category capabilities
CATEGORY LEADERSHIP WITH OVER 50% VALUE SHARE
FULLY LEVERAGE CHIC RETAIL NETWORK FOR GLO ACTIVATION
THROUGH DIFFERENTIATED PRODUCT PORTFOLIO
NTO (£Mn)
10% 35.3
32.2
2016 2018
Source: Company data..
62An Exciting Innovation Pipeline for 2018 and beyond
Vype ePen3 Vype iSwitch
PureTech Blade
Compact Powerhouse
World‐first technology
Vype ePod Vype eLiquids
High performance Flavour & satisfaction
‘Pod‐Mods’ system technologies
63Vaping is an exciting growing opportunity for BAT
NTO and GM accretive
Robust consumer validation underpinning current & future pipeline
Step change in Marketing Activation to follow consumer path with new capabilities
More stringent/science based regulation and enforcement are expected & welcome
64THP
Paul Lageweg
65Addressing concerns ‐ What we will show you
“The THP category and glo has stalled in Japan and shown limited results elsewhere,
how can you succeed in THP?”
THP is a significant, profitable opportunity, but it remains small compared to cigarettes
Category growth has slowed, but glo is performing well
The global rollout of glo is on track and early signs are encouraging
We have the products and pipeline to win
66Focused THP investment in markets with the
largest potential
THP Industry Global Footprint & Performance Glo Footprint & Performance
14 markets > 90% of global THP volume
2016 2017 2018
0.01 bn 2.2 bn 6.9 bn
Fast THP Growth Markets: National Launches
4.4% SOM 0.8% SOM
Medium THP Growth Markets: City Focus
Low share, Medium High share,
slow share & growth Small but growing SOM
It Ro Ca Ru CH
growth growth slowed
Aug/Sep 2018 launches
8% : Japan & S.Korea Ukr Kaz Ser Cro Cz Po Gr
Source: Company data. Market share based on CVS data.
67Poly‐Usage Becoming the Key Consumer Dynamic
Dualists not always ‘on a journey’ to solus Consumer moments are key Poly‐usage growing
NGP only, 13% Outside with Poly‐users among all NGP
Alone
Others consumers
At Home
Home with
Others
23%
19%
13%
FMC only, 65%
Dualist
FMC & NGP
Q4'17 Q2'18 QTD
22% At Office / Alone
Workspace Out of Home
76% of dualists using NGP for Similar dynamics seen in Europe for Fast growth in consumers using
more than 6 months dual FMC / THP or Vapour use >1 device platform
Source: Kantar research
68Glo is Winning in the Next Growth Segment
Key smoker segments for THP Glo superior within Considerates Glo leads in high potential segment
• Style/modernity THP
• Experimentation Penetration Trend‐Seekers
• Innovation
• Flavour 70% — Main source of switch‐out
Competitive Advantage:
low THP — Very dynamic ‐ higher switching &
use Consecutive sessions more dualists
Trend Seekers
Functionality — Leading brand is suffering
32% Considerates
22% Quality
Value Considerates
low THP
use
70% of recent THP inflow from FMC
THP
•
60% Glo share of THP in
•
Consideration
Harm reduction
Penetration More stable – lower switching
Considerates
•
•
Value
Subtle smoke
32% Glo is segment leader for THP
Source: Kantar research
69Neo Launch is Adding to Continuous Value Share Growth
Neo Growing Fast Neo Further Enhances Margins Continued Glo Share Growth
Blended
Index to
30.0%
Competition
25.8%
24.8% 25.0%
Solus £385 £425 140 Share of 25.0%23.2% 24.4%
Annual GM
Contribution
THP NTO
20.5% 20.7% 21.1%
per user Share of THP
Dual £240 £270 140 20.2%
Volume 20.0% 19.1%
15.0%
Launched in Premium July Series 2
2018 Discounted
price ¥3,980
10.0%
4.2% 4.3% 4.3% 4.3%
Latest weekly share 1.4% Vol. Share in 4.0%
Payback 16 packs Total Tobacco
5.0%
Jan '18 Feb Mar Apr May Jun Jul Aug
Source: Company data. Market share based on CVS data.
70Leading on Digital Activation in Japan
Digital Ecosystem Data Platform Unique QR Code Glo attracts more consumers than
Connecting All Online & Enabling Automated Enabling Personalized
Offline Touchpoints Consumer Engagement CRM Rewards Program competition
# of in‐switchers
RETAIL DIGITAL
Index
Index 144
NEWSPAPER
MAGAZINE
SOCIAL
& LINE Index 144
118
121 OWNED
RETAIL
SAMPLING
EVENT SEM / SEO
TV MEDIA PROG
1.4 million Registered users Jun Jul Aug
+15% SOLUS Conversion Glo THP Competitor
‐ 45% Consumer Acquisition Cost
Source: Company data. Source: Kantar research
71South Korea Relaunch – Early Signs are Very Encouraging
Total Brand Relaunch ‐ Back to Growth
0.78
0.74
Relaunch Area
0.67
0.63
0.60
0.57
0.62
0.52 0.52
0.51
Market Share 0.56 Non‐ Relaunch Area
0.51
W‐4 W‐3 W‐2 W‐1 W1 W2 W3 W4 W5 W6 W7 W8 W9 W10
New Activation Model: Consumer Focused, Digitally Enabled
Exclusive partnership
with biggest database 7.2 MN
company Consumers
Engaging with #1 THP Brand
32 Mn adults Glo content searched in social
networks
Source: Company data. Market share based on CVS data.
72European Markets : Strong Momentum as We Fine‐Tune
and Scale‐up our Marketing Model
Bucharest Moscow Turin
Share of THP Share of THP Share of THP
13% GROWING MONTHLY 6% GROWING MONTHLY 6% GROWING MONTHLY
Pilot & scale‐up of social selling
Ramping up CRM capabilities Ramping up CRM capabilities
model
New marketing model: Glo conversion from daily to solus usage 50‐65% after 3 months of use
Source: Company data. Share based on Nielsen data.
73An Exciting Innovation Pipeline for 2019
LEPs
& Series 3
Customisation
Capsules
Higher
&
Satisfaction
Flavours
74Coming Soon ‐ Tobacco Fusion Technology
75Margin & Leverage
Ben Stevens
76Addressing concerns ‐ What we will show you
“Is 50‐100bps of margin growth a realistic deliverable, given future
NGP investment requirements?”
Underlying margin growth has been robust
We are confident we can fund our PRRP investment and grow margin
“How can you reach the net debt/EBITDA target of around 3 times by the end of 2019?”
We are highly cash generative and can de‐leverage rapidly
Ex‐currency, we are de‐leveraging according to plan
FX movements may impact reported Net Debt/EBITDA
77Consistent underlying Operating
Margin improvement
Adjusted Operating
0.7% 0.5% ‐0.6% ‐0.9% 0.2%
Margin Increase
Components of Operating Margin change:
Underlying
Combustibles & Oral
5‐year average
2.1%
1.4% 1.5% 1.4% 1.5%
1.3%
‐0.4% ‐0.3%
‐0.6%
‐0.2%
‐0.1% ‐0.7%
‐2.1% ‐0.2%
‐2.4%
Transactional FX
NGP Impact ‐0.3%
M&A ‐0.2%
2013 2014 2015 2016 2017*
* Excluding RAI
78We remain confident in future margin growth of
50‐100bpts on average
Medium Term
5‐Yr Average 2018 Illustrative
Illustrative
Underlying Combustibles & Oral
1.5% 1.0% to 1.5%
NGP
‐0.5% to ‐1.0%
‐1.5%
+£500m NGP investment
impact
79BAT is highly cash generative
Free Cash Flow % Adjusted Earnings* MSA timing adjustment
24%
86% 90%
81% 82% 80%
73%
64%
60%
2011 2012 2013 2014 2015 2016 2017 Average
* Adjusted profit attributable to shareholders at reported FX 80With a 65% Dividend Pay‐out ratio, 15% of Adjusted Net Earnings*
is available as cash to pay down debt
Adjusted Net Earnings*
Free Cash Flow @ 80%
› ~15% of Adjusted Net Earnings
available for debt paydown
Dividends @ 65% › Additional £1.4bn Net Cash Flow
in 2018 to reduce Net Debt
following early MSA payment
* Adjusted profit attributable to shareholders 81Good progress on deleveraging partly offset by FX
NET DEBT / ADJUSTED EBITDA DRIVERS
2017 Closing* 4.0x
FX movements +~0.2x
Underlying deleveraging at consistent FX rates ‐0.4x
2018 Outlook 3.8x ‐ 3.9x Incremental 2018 NGP investments +0.1x
EBITDA growth
Debt reduction driven by operating cash conversion
2019 Outlook 3.3x ‐ 3.5x Management cash initiatives
FX translation rates: GBP / USD, Emerging Market currencies
Sensitivities Enforced working capital changes (e.g. excise payment terms)
* on a representative basis and excluding fair value adjustments 82Currency composition of Net Debt & ADJUSTED EBITDA
Net Debt ADJUSTED EBITDA
Other, 1%
EUR, 13%
GBP, 24% EUR, 12% Other, 36%
GBP, 2%
USD, 63% USD, 51%
GBP USD EUR Other GBP USD EUR Other
The Net Debt / EBITDA metric is impacted by FX from timing (Income Statement vs Balance Sheet rates) and mix
83Analyst Briefing
16th October 2018
Jack Bowles
84We have delivered consistent eps growth
300 Adj EPS CAGR 9.8% p.a
Reported Adj EPS DPS CAGR 11.9% p.a
250
200 Reported DPS
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1966 1971 1999 2003 2005 2012 2017
First Health First Health Advertising banned The FCTC is Tobacco display Standardised FDA regulation and
Warnings in the US Warnings in the UK in South Africa established bans introduced Packaging introduced Growth in Vapour
in Canada in Australia
source: Company data 85Market concerns
“Combustible volumes and pricing are under pressure, can the business sustain LT
profit growth?”
“US cigarette market volumes are under increased pressure, share is not growing, will
results in the US match those of the past?”
“How can FDA regulation not be a negative for the industry and BAT?”
“Barriers to entry in vapour are low, how can the tobacco incumbents win?”
“The THP category and glo has stalled in Japan and shown limited results elsewhere, how
can you succeed in THP?”
“Is 50‐100bps of margin growth a realistic deliverable, given future NGP
investment requirements?”
“How can you reach the net debt/EBITDA target of around 3 times by the end of 2019?”
86A growing sustainable business
C O M B U S T I B L E F U N DA M E N TA L S S T R O N G ; BAT C O N T I N U ES TO O U T P E R F O R M
F DA R EG U L AT I O N M A N AG EA B L E
P R R P S A G R EAT O P P O R T U N I T Y
M A R G I N G R OW T H A N D D E ‐ L E V E R AG I N G ; A N D I N V ES T I N G I N P R R P S
S U S TA I N A B L E H I G H S I N G L E F I G U R E C O N S TA N T E P S G R OW T H
87A bright future
88Analyst Briefing
16th October 2018
Jack Bowles
89Questions
90Important Information
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is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any jurisdiction where such distribution, publication, availability or use
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business activity refer to British American Tobacco Group operating companies, collectively or individually as the case may be.
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of BAT innovations (NGP and Combustible); and changes in the market position, businesses, financial condition, results of operations or prospects of the Group.
91Important Information
Forward-looking Statements (continued)
Additional information concerning these and other factors can be found in BAT’s filings with the U.S. Securities and Exchange Commission (“SEC”), including the Annual Report on Form 20-F
filed on 15 March 2018 and Current Reports on Form 6-K, which may be obtained free of charge at the SEC’s website, http://www.sec.gov, and BAT’s Annual Reports, which may be obtained
free of charge from the British American Tobacco website www.bat.com.
Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. Readers are cautioned not to place undue reliance on such
forward-looking statements.
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financial years would necessarily match or exceed the historical published earnings per share of BAT.
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