British American Tobacco : FY 2019 Presentation slides

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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 and the impact of an unfavourable ruling by a tax authority in a disputed area; 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 develop, commercialise and deliver New Category products; and changes in the market position, businesses, financial condition, results of operations or prospects of the Group.

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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 2019 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.

Additional Information

All financial statements and financial information provided by or with respect to the US or Reynolds American Inc. ("RAI") are initially prepared on the basis of U.S. GAAP and constitute the primary financial statements or financial records of the US business/RAI. This financial information is then converted to International Financial Reporting Standards as issued by the IASB and as adopted by the European Union (IFRS) for the purpose of consolidation within the results of the BAT Group. To the extent any such financial information provided in this presentation relates to the US or RAI it is provided as an explanation of, or supplement to, RAI's primary U.S. GAAP based financial statements and information.

Our vapour product Vuse (including Alto and Vibe), and certain products including Grizzly, Granit, Camel Snus, Velo and Kodiak, which are sold in the US, are subject to FDA regulation and no reduced-risk claims will be made as to these products without agency clearance.

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, officers, 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.

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Delivering a stronger, simpler, faster organisation

COMBUSTIBLE VALUE GROWTH

STEP-CHANGE IN NEW CATEGORIES

SIMPLIFY THE COMPANY

4

Reported results impacted by adjusting items

Revenue

New Category Revenue

Operating Margin

Profit From Operations

Diluted EPS

Leverage

REPORTED FY 2019

@ Current rates

+5.7%

+36.9%

-320bps

-3.2%

-5.4%

-

Adjusting items incl:

• Canada (Quebec)
• Quantum (simplification)
• Other litigation (including Engle)
• Russia (excise dispute)
• Indonesia (Goodwill impairment)

Source: Company data

5

A strong operational performance drives deleveraging

Strong adj revenue and profit at upper end of guidance*

Group value share up +30bps in key markets, volume up +20bps

New Category revenue growth*+32%

De-leveraging of 0.4x (ex currency) and 0.5x (current rates) Dividend up 3.6% to 210.4p; 65% pay-out ratio**

High Single Figure constant currency earnings**growth

* constant rate basis. Profit: Adjusted profit from operations. See Appendix A1-A2.
**Adjusted diluted earnings per share at constant rates. See Appendix A1-A2.	6

Delivered on our commitments

Revenue

New Category Revenue

Operating Margin

Profit From Operations

Diluted EPS

Leverage

2019 Guidance

Mid-Upper end

+3-5%*

of range

+30-50%*

+50-100bps

Upper end of

+5-7%*

range

High Single Figure*

-0.4xex-currency

ADJUSTED FY 2019 @ Constant rates

+5.6%

+32.4%

+50bps

Current rates

+6.6%

+8.4%

-0.4x

* Adjusted and constant rate basis. See Appendix A1-A2. Source: Company data

7

Creating value

EXCELLENCE IN

ENVIRONMENTAL

MANAGEMENT

24% reduction in CO2e scope 1&2 emissions v 2010

60% reduction in waste to landfill v 2010

34% reduction in water withdrawn v 2010

DELIVERING A POSITIVE

SOCIAL IMPACT

Supplier code of conduct defines minimum standards

~11m consumers using non- combustibles in 45 markets

Policy of 100% suppliers subject to Human Rights due diligence

ROBUST CORPORATE

GOVERNANCE

100%*adherence to our Youth Access Prevention guidelines

Global Speak Up line: +35% cases v FY18

100% employees completed annual SoBC sign-off

Source: Company data. * Markets exempted where guidelines conflict with local law

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… in a sustainable way

A STRONG APPROACH TO ESG*

COMMITMENT TO

TOBACCO HARM

REDUCTION

ConsumersEmployees

CREATING VALUE

ShareholdersSociety

EXTERNAL

RECOGNITION FOR

PROGRESS TO DATE

* ESG: Environmental Social Governance

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Delivering on our priority areas…

COMBUSTIBLE VALUE

GROWTH

STEP-CHANGE

IN NEW CATEGORIES

SIMPLIFY THE

COMPANY

• +4.6% Revenue growth*from combustibles
• Productroll-outs across New Categories
• Simpler, faster, more agile organisation

* Adjusted and constant rate basis. See Appendix A1-A2.

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Combustibles |Delivering value growth

Revenue*from Combustibles

22.9	Growth drivers:
+4.6%	•	Value share growth
•	Strong brands
	•	Cigarette Price/Mix**9%
	•	Improved geographic mix

21.9

2018 £bn

2019 £bn

*Adjusted and constant rate basis. See Appendix A1-A2 ** See Appendix A4..

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Combustibles |Value growth driven by strong brands

+180bps

+110bps

+70bps

Strategic brand

volume share

						+100bps
				+120bps
		+100bps							+20bps
	+110bps					+40bps	+20bps	Group volume
						+50bps
		+20bps	+10bps	+40bps				share
2012	2013	2014	2015	2016	2017	2018	2019
		Combustible Strategic Brands		Group Combustibles
		Value share			Volume share		Value share	Volume share
	+40bps		+70bps		+20bps	+20bps
						+30bps Excl.
Share growth versus FY18. Source: Company data				migrations
								12
The BAT Group does not own all brands referred to in this presentation in all markets e.g. BAT is the owner of the Camel and Natural American Spirit brands in the United States only

US Combustibles |Value growth and share gains

+30bps

Value share

36.8%

-10bps

Volume share

34.6%

+50bps +50bps

Strategic Brands	Premium share
value share	34.5%
34.6%
+20bps	bps
	+30
Strategic Brands	ASU30 share
volume share	44.1%
33.0%

Share growth versus FY18 See Appendix A3. Source: Company data

The BAT Group does not own all brands referred to in this presentation in all markets e.g. BAT is the owner of the Camel and Natural American Spirit brands in the United States only

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Step-change in New Categories | Strong progress

		Modern Oral	+32%
	Vapour	+273%
	+23%	New Category
	FY revenue	FY revenue
	growth*
THP	growth*
+23%	FY revenue
growth*
FY revenue
growth*

*Adjusted and constant rate basis. See Appendix A1-A2.

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Vapour |Strengthening our position in Vapour

• Category returning to sequential growth in all key markets in Q4 following the US vapour slowdown
• Growing volume and value share across all markets including US through H2
• Well placed to meet PMTA May deadline

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THP |Category growth has slowed

Industry volume split

Japan &

South Korea

63%

• Opportunity is correlated with a unique set of characteristics:
• • Fewer potentially reduced risk*alternative products

RoW

37%

• • Lower cigarette strength delivery levels
• Our focus:
• • Targeted geographic expansion (ENA)
  • Increasing consumer satisfaction

* When compared to conventional cigarettes

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Modern Oral |Global category leader

ENA Modern OralUS Modern Oral

Category		Category
1,728m pouches		794m pouches
		BAT share
	10%

BAT share

62%

BAT Global volume share

47%

Source: category size in number of pouches based on company data	17

Delivering sustainable High Single Figure EPS growth

• Dynamic New Category regulation
• Agile and responsive
• Retain flexibility to invest

Guidance

3-5% Revenue growth*

£5bn New Category Revenue^in 2023/24

Increased New Category Investment

Continued margin growth

Cash generation

Continued deleveraging

65% Dividend pay-out ratio

High Single Figure EPS Growth**

* Adjusted, Constant currency basis. See Appendix A1-A2. ^ Adjusted basis. See Appendix A1. Stated at 2019 budget rates. ** Adjusted diluted earnings per share at constant rate basis. See Appendix A1-A218

Looking into 2020

• Vapour markets yet to return to previous levels
• Modern Oral sales suspension in Russia; Vapour ban in Mexico
• First signs of Coronavirus impact

Guidance

3-5% Revenue growth*

£5bn New Category Revenue^in 2023/24

Increased New Category Investment

Continued margin growth

Cash generation

Continued deleveraging

65% Dividend pay-out ratio

High Single Figure EPS Growth**

* Adjusted, Constant currency basis. See Appendix A1-A2. ^ Adjusted basis. See Appendix A1. Stated at 2019 budget rates. ** Adjusted diluted earnings per share at constant rate basis. See Appendix A1-A219

Long-term sustainable growth

›

›

›

›

Delivering on our three priorities

Investment in expanding New Category business

Quantum provides the efficiencies and capabilities

Creating a Better Tomorrow

High Single Figure constant currency earnings**growth

** Adjusted diluted earnings per share at constant rate basis. See Appendix A1-A2

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Delivering today while investing in the future

Margin growth*	+50bps
Investment	£500m incremental marketing investment
Strong Cash-Flow	£1.9bn free cashflow after dividends
De-leveraging on track	0.4 x (constant rates)
Dividend	65% pay-out ratio
*Adjusted basis See Appendix A1. Source: Company data	21

Strong revenue growth

Strategic Combustible	25.7
revenue up +5.6%*

+5.6%

Improved pricing

24.3

Good progress on New	FY18 £bn	FY19 £bn
Categories growth	Total Revenue

*2019 Adjusted and constant rate basis V 2018 adjusted and current rate basis. See Appendix A1-A2. Source: Company data	22

Strong profit*growth

Strong profit*growth

across all regions

Pricing and cost

management focus

Significantly increased

investment

in New Categories

11.0

+6.6%

10.3

FY18 £bn

FY19 £bn

Adj Profit from Operations

* Adjusted profit from operations. 2019 Adjusted and constant rate basis V 2018 adjusted and current rate basis. See Appendix A1-A2. Source: Company data

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Strong financial results*across each region

	Adjusted	Value	Adjusted Profit
	Revenue*	Share	from operations*
APME	+5.6%	+30bps	+7.9%
AMSSA	+9.2%	+20bps	+10.0%
ENA	+5.0%	Flat	+3.3%
US	+4.4%	+30bps	+6.4%

*Adjusted and constant rate basis. See Appendix A1-A2.

Value share of cigarettes (APME: cigs+THP).

Source: Company data

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US |Strong results in the US

Revenue*		Adj. Profits from Ops.*

9.9

4.8

+4.4%+6.4%

9.5	4.5

2018 £bn

2019 £bn

2018 £bn

2019 £bn

*2019 Adjusted and constant rate basis V 2018 adjusted and current rate basis. See Appendix A1-A2. Source: Company data

Driven By:

• Improved Pricing
• Reduced discounting
• Strong brands
• Efficiency savings

2020 Estimates:

~5%

Volume Decline

Source: Internal Estimates

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US Vapour |Strong growth in Vuse value share

21.2

Vuse value share

+8.7ppts	15.4
	12.5

Vuse Alto value share

+12.7ppts

2.7

Dec '18

Dec '19

Source: Retail value share data Dec 19 with growth v Dec 18. See Appendix A3.	26

Vapour |Great products driving growth

Market leaders in ENA

ePen3 reached 10.3% Value share;

2ndproduct of the year win for Vype with ePOD

Vype is market leader in closed systems; fastest growing brand with 23.3% Value share

Vype reached 17% share of total vapour consumers

Building momentum in AMSSA

ePOD driving Vype's value share recovery to 28.2%

Twisp acquisition: National distribution, 70 dedicated stores and e-commerce

Source: Nielsen (FR: Strator). Value share in vapour segment based on scan in measured channels. See Appendix A3.	27

THP |glo launches completed Q4

glo Pro - good initial results

Encouraging	Boost function
Induction heating
consumer
response	Faster ramp up

glo Sens - work to do

• Consumer interest in the hybrid category
• Limited traction for our offer to date

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THP |Growing share of total nicotine in Japan

Latest weekly share of glo of 5.2%

Latest Total Nicotine	19.2
18.9

volume share of 19.2%

16.8

15.9		+2.4ppts
	Jan '18	Dec '18	Dec '19 Jan '20

Source: CVS BC

Share data based on FY19 with growth v FY18. glo exit share is Jan 20. See Appendix A3.

>1% volume share of FMC+THP

Russia	+1.5ppts
1.9% volume share
(Moscow)
	+1.5ppts
Kazakhstan	1.9% volume share
(Nur-Sultan)	+1.2ppts
Ukraine	1.5% volume share
(Kiev)
Source: Share data based on Dec 19 with growth v Dec 18	29

Modern Oral |Global leadership achieved

Traditional Oral Markets

+1.8ppts

Sweden 3.2% volume share

+5.2ppts

Norway 14% volume share

+75ppts

Denmark75% volume share

New Modern Oral Markets

	+15.5ppts
Switzerland	41% volume share
	+27ppts
Russia	27% volume share

Encouraging early results

Kenya Pakistan from city tests

Source: Modern oral FY volume share of total oral category data. SWE, NOR, DEN: Nielsen. SWITZ: scan data.

30 30

Modern Oral |Growing share in a growing category in the US

10.1%

Volume share of Modern Oral

• Over-indexing*share in key states
• National distribution at >100k outlets
• Top 5 Velo share in states approximating 13% of US total nicotine volumes
• <6mg strength segment grew 6% to 34% of the Modern oral category

Top 5**Velo shares

58.0%New Jersey

48.4%Maryland

33.8%Indiana

31.4%Georgia

28.7%Wisconsin

Source: Company data. * Key states ranked in terms of total nicotine volume being: Texas, California & Florida. Velo share is growing at a higher rate than the National average growth.

** Velo volume share of Modern Oral by US state Jan 20

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Increasing investment and growing margin

+0.5%

		3.9%		-3.0%
+50bps
								43.1%
	42.6%						-0.4%

growth v FY18

2018 Adjusted	Changes in	Incremental New	Impact of	2019 Adjusted
Operating Margin	underlying business	Categories	transactional FX	Operating Margin
		investment impact

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Strong cash generation driving de-leveraging

Adj. Net Debt	4.0x	-0.4x	3.6x	-0.1x	3.5x
/ Adj. EBITDA

	1.8	0.6
		0.9
43.4
0.4		-0.5x
£bn
		42.6
			41.7

Adj. Net Debt 2018 Free Cash Flow after	Other cash & non	IFRS16 Adoption	Adj. Net Debt FY	FX	Adj. Net Debt FY
	Dividends @CONR	cash @CONR	@CONR	2019 @ CONR		2019 @ CURR
USD rates								USD rates
			+4.02%
Closing: 1.2736						Closing: 1.32475

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Committed to de-lever to below 3.0x by end of 2021

Adj Net Debt*/Adj EBITDA**

4.0 x

3.5 x
c.3.2 x	<3.0 x

2018

2019

2020e

2021e

2020 Guidance

FY Operating cash

conversion target above

90%

Dividend - 65% pay-out

ratio /

growth in GBP terms

*Adjusted Net Debt is total borrowings, including related derivatives, less cash and cash equivalents and current available-for-sale investments, excluding the impact of the revaluation of RAI acquired debt arising as part of the purchase price allocation process.

**Adjusted EBITDA is not a measure defined by IFRS. Adjusted EBITDA is defined as profit for the year (earnings) before net finance costs, taxation on ordinary activities, share of post-tax results of associates and joint ventures, depreciation, amortisation, impairment costs and adjusting items.

e Company guidance for FY20/21

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Continued High Single Figure earnings growth*

		+8.4%				+9.1%
					321.6	323.8
			0.7	0.1	2.2
		1.0
	2.6	3.4
+8.4%*	22.1
296.7

2018 FY Adjusted	Net	Associates Taxation	Non-	Number	2019 FY at	FX Impact 2019 FY at
Profit from	Finance		Controlling	of Shares	Constant	Current FX
Operations	Costs		Interests		FX

*FY18 Adjusted basis. FY19 Adjusted and constant rate basis. See Appendix A1-A2. Source: Company data

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A strong year of delivery

COMBUSTIBLE VALUE

GROWTH

STEP-CHANGE

IN NEW CATEGORIES

SIMPLIFY THE

COMPANY

• Continued strong combustibles performance
• Delivering earnings and dividend growth for shareholders
• Good progress on our priority areas, with more to come
• Capital Markets Day on March 18th

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Appendix

A1: Adjusting (Adj.)

Adjusting items represent certain items which the Group considers distinctive based upon their size, nature or incidence.

A2: Constant currency

Constant currency - measures are calculated based on a re-translation, at the prior year's exchange rates, of the current year's results of the Group and, where applicable, its segments.

A3: Share metrics

Volume share: The number of units bought by consumers of a specific brand or combination of brands, as a proportion of the total units bought by consumers in the industry, category or other sub-categorisation. Sub categories include, but are not limited to, the total nicotine category, modern oral, vapour, traditional oral or cigarette.

Value share: The retail sales value of the product sold as a proportion of total retail sales value in that category.

Premium share: The retail sales volume of the premium product sold as a proportion of total retail sales volume of premium products in that category.

Nicotine share: The retail sales volume of the nicotine product sold as a proportion of total nicotine product volume in that category.

A4: Price/Mix

Price mix is a term used by management and investors to explain the movement in revenue between periods. Revenue is affected by the volume (how many units are sold) and the value (how much is each unit sold for). Price mix is used to explain the value component of the sales as the Group sells each unit for a value (price) but may also achieve a movement in revenue due to the relative proportions of higher value volume sold compared to lower value volume sold (mix).

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Top BAT Market Share Movements (1)

Market	SOM FY19	Movement
(%)	(ppt)
Argentina	23.3	0.0
Australia	41.5	0.4
Bangladesh	68.4	1.1
Belgium	24.8	(0.5)
Brazil	75.8	(1.4)
Bulgaria	37.8	(1.8)
Canada	48.7	0.3
Chile	97.4	(0.1)
Colombia	52.3	1.7
Czech Republic	21.9	0.0
Denmark	71.6	(0.5)

Market	SOM FY19	Movement
(%)	(ppt)
France	17.4	0.1
Germany	20.0	(0.4)
Indonesia	7.9	(0.2)
Italy	18.9	0.2
Japan	17.9	1.7
Kazakhstan	15.9	(1.0)
KSA	36.8	(2.0)
Malaysia	54.4	(1.8)
Mexico	35.0	1.0
Netherlands	22.5	(1.1)

Source: Retail Audit except for Bangladesh, Belgium, Canada, Indonesia and Japan

Top BAT Market Share Movements (2)

Market	SOM FY19	Movement
(%)	(ppt)
New Zealand	72.1	0.4
Pakistan	74.9	1.6
Poland	28.6	0.3
Romania	58.9	0.2
Russia	23.8	0.4
South Africa	77.2	(0.2)
South Korea	12.0	(0.4)

Market	SOM FY19	Movement
(%)	(ppt)
Spain	11.9	0.4
Switzerland	35.0	(0.5)
Taiwan	10.0	0.0
Turkey	22.9	(0.1)
UK	9.3	(0.1)
Ukraine	28.1	0.4
Vietnam	28.0	0.9

Source: Retail Audit except for New Zealand, Switzerland and Vietnam

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