British American Tobacco p.l.c. (BATS) Earnings Call Transcript & Summary

Welcome to this pre-AGM shareholder engagement session. The Annual General Meeting and the publication of my accompanying statement will take place on the 28th of April. But the meeting will be convened with the minimum necessary quorum of 2 shareholders. This is due to the COVID-19 pandemic and the U.K. government's compulsory measures restricting public gatherings. The company will ensure that the necessary legal requirements for the AGM are met and that the proposed resolutions, as set out in the AGM notice, are proposed and voted upon with the exception of resolution #9, to reappoint Jerry Fowden as a Non-Executive Director, which has been withdrawn as announced on the 1st of April when Jerry stepped down from the Board. We were sorry to see Jerry leave, but we do understand that conflicts of interest can arise, and we wish Jerry every success in the future. Recognizing that shareholder engagement is important, we set up this shareholder engagement session in order to answer your questions about the company, which we invited through the AGM notice. We will conclude this session with remarks from your incoming Chairman, Luc Jobin. Looking back on 2020, it's clear that the global pandemic has created new and often unforeseen challenges for BAT. As you would expect, our priorities have been the safety and welfare of our people as well as providing the right kind of support to our suppliers and to the communities in which we operate. At the beginning of the crisis, we took swift action across the entire business to ensure we could continue to operate safely and effectively. Today, working remotely remains the norm for many at BAT. Where this has not been possible, for example, in many of our markets and factories around the world, the necessary measures have been put in place to ensure our people can work safely and securely. We are working to support our smaller suppliers across the globe who may be struggling with cash flow issues. We're also taking great care of the farmers who grow our tobacco and remain committed to supporting these communities. BAT's U.S. biotech subsidiary, Kentucky BioProcessing, is developing a potential vaccine for COVID-19 as well as one for seasonal flu. Both are in Phase I of human trials, following approval by the U.S. Food and Drug Administration of their Investigational New Drug Applications. The effects of the pandemic have not been easy for anyone, and I would like to thank our teams around the world for their ongoing commitment, energy and passion. What has been evident during the turbulence of the last year is that BAT has the right strategy and management team in place to deliver for all its stakeholders. Jack and his team on the management board have led the continued transformation of BAT towards becoming a multi-category consumer goods business with reduced health and environmental impacts driven by evolving consumer needs. As you will have seen in our full year results and annual report, in 2020, we delivered good revenue, profit and EPS growth as well as strong cash flows in challenging circumstances. 10% of our revenue now comes from our noncombustible products. And we made excellent progress in all 3 new categories, with consumer acquisition and volume growth both accelerating in the second half of 2020. Our corporate purpose, to build A Better Tomorrow, is about reducing the health impact of our business by offering a greater choice of enjoyable and less risky products. We recognize, of course, that we must transform even more quickly. To that end, we will further accelerate our strategy based around the 3 priorities our CEO set out in 2019. We will: one, drive a step change to increase new categories revenue; two, deliver value in combustibles; and three, build a simpler, faster organization. By focusing on these priorities, we will deliver a range of exciting products today while continuing to invest and develop innovations to meet the demands of tomorrow's consumer. There is the commitment and vision at BAT to transform and grow the business, changing not just our portfolio, but our structure and our culture, which will fundamentally change the nature of our relationship with society. I'm delighted that following a rigorous selection process, the Board has named Luc as my successor. He brings a wealth of experience to the role, and I wish him well. Luc will be saying a few words at the end of this session. Before we move to the question-and-answer session, I would like to thank all the people I've worked with at BAT over the years as well as stakeholders, shareholders, suppliers and other stakeholders. It has been a great privilege to be the Chairman of BAT, and I look forward to seeing his future successes unfold. And with that, we will now turn to the questions our shareholders have submitted.

We received a number of questions from shareholders through our online portal where multiple questions address the same topic. We have selected a representative question that best covers it. And our first question is, "You recently made an investment in Organigram. Could you elaborate on how this fits with the A Better Tomorrow strategy?" Well, to address the question, let me say at the outset that the collaboration with Organigram underscores our previously stated aim and is one further step in BAT's transformation journey to go beyond tobacco and nicotine. The deal will combine BAT's extensive plant-based know-how and resources in R&D with Organigram's expertise in the development and production of high-quality medical and adult-use recreational cannabis products. These products are legally available in Canada. BAT's multi-category strategy, which is key to our transformation, is about providing choice and meeting the evolving needs of adult consumers. Our investment in Organigram is further evidence of our commitment to accelerating our transformation towards building A Better Tomorrow. The next question from a shareholder relates to executive pay. "With executive pay often in the news and given the competitive environment for international talent, what is your strategy to ensure BAT attracts and retains the best?" In what is a very competitive international market for talent, we work hard to ensure that our pay structures are set appropriately and that executive pay reflects performance delivered. When management have delivered on their commitments, it's right that this is reflected appropriately in the performance assessment of the group's incentive plans. The views of our shareholders are important in reaching remuneration decisions, and we regularly hold meetings with shareholders and take their views into account when deciding on salary increases and executive remuneration policies. The next question from shareholders relates to protecting our intellectual property. "What is your strategy for protecting the intellectual property around your innovations?" BAT has a long history of innovation and a robust patent portfolio around our products and innovations. We remain confident in the patent protection we have around our innovations. We've made a significant investment in the development of our products. And the IP we develop ensures we can protect our innovations and technology in order to drive competitive advantage, and ultimately, greater shareholder value. Like any business, we reserve the right to challenge those who we believe infringe our patents or otherwise use our proprietary technology. The next question relates to resolution 18, authority for the company to purchase its own shares. The question from a shareholder is as follows, "Given resolution 18, what are BAT's capital allocation priorities?" As shareholders will have seen from our full year results and annual report, the company is in good financial health and our operational performance is strong, including our record level of cash generation in 2020. We have clear priorities for how we use our cash, as we stated at our full year results in February. We remain clear about our capital allocation priorities with a commitment to a 65% dividend payout ratio, investing in new categories and deleveraging to around 3x adjusted net debt to adjusted EBITDA by the end of 2021, EBITDA, earnings before interest, tax, depreciation and amortization. As we have said previously, share buybacks are, of course, one possible further use of our capital. We're carrying great momentum into 2021, expect continued strong operational delivery with revenue growth in the 3% to 5% constant currency range and strong cash conversion. The next question is in relation to our farming supply chain in the United States. "Will BAT and Reynolds engage with FLOC, a U.S. farmworker union? FLOC standing for Farm Labor's Operatives Committee (sic) [ Farm Labor Organizing Committee ]." BAT and Reynolds embrace their obligations under the United Nations Guiding Principles for Business and Human Rights - to respect and help protect the rights of workers in its supply chain including their rights of a freedom of association. Through our policies, our contracts with farmers and leaf suppliers and our sustainable tobacco production program, BAT has created a global human rights due diligence system. Reynolds has adopted these policies. Its contracts require growers to respect labor rights and specifically prohibit retaliation against workers. Reynolds' human rights due diligence program assesses 100% of its growers every year and provides a workers' rights hotline. Reynolds stands ready to engage with FLOC to identify and evaluate opportunities to improve its program and address FLOC's concerns. The last question for this shareholder engagement event is around BAT's sustainability and ESG strategy. It is as follows, "What are BAT's ESG priorities for the future? And by ESG, we mean environmental, societal and governance." Sustainability has long been at the heart of our business, and our whole of society approach is key to our transformation journey. We have been actively addressing our sustainability impacts for over 20 years and published our first social report in 2001. Putting sustainability front and center is an ongoing focus, and we will continue to raise the bar and set ourselves new and increasingly ambitious targets. We set ambitious ESG targets in 2020, putting ESG front and center to grow the consumer numbers of our noncombustible products to 50 million, and achieving carbon neutrality for our Scope 1 and Scope 2 emissions by 2030 while eliminating unnecessary single-use plastic by 2025. This year, we went further and introduced new stretching targets amongst them to aim for carbon neutrality across our entire value chain by 2050. We are proud that our ESG efforts are being recognized externally through our inclusion in the Dow Jones Sustainability Index for 19 consecutive years. Our scores in leading investor indices, such as MSCI and Sustainalytics and through our CDP Climate A List status. Sustainability is the real essence of our purpose-led strategy to build a better tomorrow. I would now like to hand over to Luc who will introduce himself as your new Chairman.

Thank you, Richard, for your kind words earlier and for the insights you provided during the Q&A. As you might expect, conducting this remotely is not how I envisaged giving my first public address to shareholders. However, despite the ongoing COVID-19 related restrictions, it has been a pleasure to be part of this session which provided answers to shareholders in a way that replicates aspects of a more normal AGM. I hope that from everything you've heard during this session, you can see that this industry is entering into an extraordinary period of change. This transition, which is being navigated so ably by Jack and his team, offers opportunities that will benefit not only BAT, but our employees, suppliers, shareholders and wider society alike. This is one of the main reasons I am so pleased to be succeeding Richard as Chairman. Another reason I'm excited to be taking on the role of Chairman is the talent, passion and, during these uncertain times, the ongoing resilience of the people across BAT. This is something I've witnessed firsthand having met with many across the business over the last few years. While discussions more recently have largely been conducted virtually, they have often centered around the transformation underway at BAT. In essence, we are transforming into a sustainable and growing multi-category consumer products company. We're focused on reducing the health impact of our business by encouraging adult consumers of combustible products who would otherwise continue to smoke to switch to new category products. The passion to transform BAT and build A Better Tomorrow has permeated through every level of the organization. And it's clear that this passion is reaping rewards. The pathway to tomorrow that Jack and Richard and the management board are charting means that I feel very fortunate to be taking on this role now. BAT has a clear strategy, guided by our purpose to create A Better Tomorrow and underpinned by the company ethos. The foundations of our transformation are strong. I take great heart that this clarity and strength will help us navigate the challenges and opportunities of a post-pandemic world. All I've seen from the way BAT conducts itself to the plans it has put in place tells me that we're well positioned to deal with these challenges and build an even stronger business. Before I conclude today's session, I want to express my gratitude to Richard, for the time he has taken to hand over his responsibilities as Chairman to me over the last several months. Ensuring an effective transition to the role of Chairman was important to both of us in order for BAT to maintain a clear focus on accelerating the business transformation. Richard's guidance alongside with the management excellence on display at BAT has ensured that I, together with my colleagues on the main Board, have a strong foundation to help this company continue to deliver for all of its stakeholders. As we continue our journey to build A Better Tomorrow, my sincere hope is that I'll be able to address shareholders at our AGM next year and answer your questions about the company in person. Thank you.

Thank you, Luc. We wish you great success as incoming Chairman of BAT, and I hope I can speak for the shareholders as well as myself and wish you great enjoyment and great return from your role in that job over the years ahead. Thank you all very much for your participation in this shareholder engagement session.