SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  August 1, 2019

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The use of non-GAAP measures, including adjusting items and constant currencies, are further discussed on pages 78 to 82, with reconciliations from the most comparable IFRS measure provided.  

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KEY PERFORMANCE INDICATORS - SUMMARY

The next quarterly dividend payment of 50.75p per share will be paid in August 2019, as part of the previously announced dividend of 203.0p per share which is payable in four equal instalments.

1 – Value share represents customer sales price earned as a proportion of the industry total customer sales price. 2 - Key Market offtake volume share, as independently measured by retail audit agencies (including Nielsen), shipment share estimates, and share of retail for the US business, based upon latest available validated data. The Group’s Key Markets represent over 80% of the Group’s cigarette volume.

^ Adjusted revenue excludes excise on bought-in goods, acquired and sold under short-term contract manufacturing agreements which distort revenue and operating margin in a temporary basis. Such adjustment only applies to revenue related to certain non-strategic combustible volume in ENA. * Source: Internal estimates

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Definition of key terms

Adjusting items and constant currency measures

To provide a more comprehensive understanding of the performance of the Group, this announcement also presents the adjusted performance of the Group, at current and constant translational rates of exchange. This excludes the adjusting items explained on pages 31 to 35.

Adjusting items within this report represent certain items of income and expense which the Group considers distinctive based upon their size, nature or incidence. In addition, certain adjusting items within this report represent the potentially distorting impact of foreign exchange on certain of the Group’s results. As explained on page 78, the Group does not adjust for normal transactional gains or losses in profit from operations which are generated by exchange rate movements.

Cigarette s

The term cigarette principally refers to factory made cigarettes (FMC) and includes products that have similar characteristics and are manufactured in the same manner, but due to specific features may not be recognised as cigarettes for regulatory, duty or similar reasons.

Strategic Portfolio

Adjusted Revenue Growth of the Strategic Portfolio is a management measure, included within the Group’s short-term incentive scheme. 

The Strategic Portfolio is comprised of:

Strategic Combustibles

Strategic C ombustibles comprise the Strategic Cigarette and OTP (defined below) brands Kent, Dunhill, Lucky Strike, Pall Mall, Rothmans, Newport, Camel (US) and Natural American Spirit (US).

Potentially Reduced-Risk Products (PRRP)

PRRPs include:

Based on the available science, PRRPs have been shown to be reduced-risk; are likely to be reduced-risk; or may have the potential to be reduced-risk, in each case if switched to exclusively as compared to continuing to smoke cigarettes.*

New Categories comprises THP, Vapour and Modern Oral.

Other tobacco products (OTP) comprises largely the sales of roll your own (RYO), make your own (MYO), pipe and cigarillos.

*Our vapour product Vuse, and oral products Grizzly, Camel Snus, Kodiak and Velo, which are only sold in the US, are subject to the Food and Drug Administration (FDA) regulation and no reduced-risk claims will be made as to these products without agency clearance.

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3. Not applicable.

4. Adjusting items represent certain items which the Group considers distinctive based upon their size, nature or incidence. See pages 31 and 35. Reconciliations from the most comparable IFRS measures have been provided, for revenue, on page 80, for profit from operations on page 80, for tax, on page 80 and for diluted earnings per share, on page 81. For additional information on the use of non-GAAP measures, see the discussion regarding other “Non-GAAP Measures” under the section “Other Information” on pages 78 to 82.

5. CC – 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. For additional information on the use of non-GAAP measures, see the discussion regarding “Non-GAAP Measures” under the section “Other Information” on pages 78 to 82.

Note: In respect of the United States region, all financial statements and financial information provided by or with respect to the US business or RAI (and/or the RAI Group) are prepared on the basis of US GAAP and constitute the primary financial statements or financial information of the US business or RAI (and/or the RAI Group). Solely for the purpose of consolidation within the results of BAT p.l.c. and the BAT Group, this financial information is then converted to International Financial Reporting Standards as issued by the IASB and adopted by the European Union (IFRS). To the extent any such financial information provided in these financial statements relate to the US business or RAI (and/or the RAI Group), it is provided as an explanation of the US business’ or RAI’s (and/or the RAI Group’s) primary US GAAP based financial statements and information.

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The following review presents the Group’s performance for the six-months ended 30 June 2019.

TOTAL GROUP REVENUE

On a reported basis, revenue increased by 4.6% to £12,170 million , as a price/mix in cigarettes of 7%, the growth of New Categories and Traditional Oral, and a translational foreign exchange tailwind of 1.2% more than offset a decline in total cigarettes and THP volume of 3.5%. Excluding the foreign exchange tailwind and the effect of excise on bought-in goods, adjusted revenue increased 4.1% at constant rates of exchange.

Cigarette volume was up in Pakistan, Turkey, Nigeria, Saudi Arabia, Poland, Vietnam and Romania. This growth was more than offset by lower volume in Bangladesh (due to industry contraction and growth in illicit trade following the excise-led price increases in 2018); Russia (partly due to industry contraction and the growth of illicit trade); the US (primarily due to the industry contraction); Egypt (due to the impact of excise-led price increases on Pall Mall); Ukraine (partly due to industry contraction and competition in the low-price segment); and Indonesia (due to industry contraction as macroeconomic pressures reduced consumer disposable income).

Revenue from the Strategic Portfolio

Revenue from the Strategic Portfolio increased 8.7% (to £8,835 million), driven by robust cigarette pricing (including a reduction in discounting in the US) and growth in revenue from New Categories and Traditional Oral. On a constant currency basis, this was an increase of 6.6% .

Strategic Cigarette and THP brands

The Strategic Cigarette and THP brands collectively increased volume share by 60 bps as volume declined only 0.5% :

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Performance summary cont…

Tobacco Heating Products (THPs)
The Group continued to deliver significant growth in THPs during the first half of 2019. Consumable volume grew 17% to 3.9 billion sticks in the six-months ended 30 June 2019 (30 June 2018: 3.3 billion sticks), while revenue increased 8.5% to £313 million (30 June 2018: £289 million), or 4% at constant rates of exchange as the Group’s reported performance benefited from the relative movements in sterling.

Vapour
The Group’s vapour portfolio continues to perform strongly, with significant growth of Alto in the US, ePen3 in ENA and ePod in Canada. Volume of vapour consumables was up 32% to 102 million units in the six-months ended 30 June 2019 (30 June 2018: 78 million units), driving revenue up 63% to £189 million (30 June 2018: £116 million) or 58% at constant rates of exchange.

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Performance summary cont…

By June 2019, the Group’s vapour products were present in a total of 20 markets. The Group intends to further expand the geographic footprint in the second half of 2019.

Modern Oral
The Group is leading the growth of the Modern Oral category with volume up 179% to 412 million pouches in the six-months ended 30 June 2019 (30 June 2018: 148 million pouches). Revenue increased 274% to £46 million (30 June 2018: £12 million) or 284% at constant rates of exchange. This was driven by:

Additionally, in July the Group commenced the roll out of modern oral in the US, with Velo expected to be available in over 75,000 retail outlets by the end of 2019.

Traditional Oral

In the Traditional Oral category (comprising traditional snus and moist snuff) volume was in line with the prior year. The strategic brands grew revenue by 16.4% to £491 million or 9.8% at constant rates of exchange.

In the US, traditional oral value share grew 90 bps, with volume share up 20 bps, largely driven by Grizzly. Total volume declined 2.4%.  

The Modified Risk Tobacco Products (MRTP) application for Camel Snus was discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) in September 2018. A response is expected by the end of 2019.

Outside the US, volume was higher in Sweden with volume share increasing by 90 bps to 11% of the total oral category, driven by growth in Lundgrens.

Other Tobacco Products

Volume of other tobacco products (OTP) declined 6.4% to 10.0 billion sticks equivalent (being 3% of the Group portfolio).

PROFIT FROM OPERATIONS AND OPERATING MARGIN

Profit from operations, on a reported basis, was down 1.3% at £4,380 million, with operating margin down 210 bps to 36.0%, as an improvement in the Group’s operating performance was more than offset by the impact of the charge (£436 million) in respect of the Quebec Class Action (see page 19).

Adjusted profit from operations and adjusted operating margin

Adjusted profit from operations at constant rates of exchange was 5.9% higher at £5,103 million, with adjusted profit from operations increasing in all regions, notably in the US (which was up over 11%). The Group’s performance was driven by an increase in revenue and cost management to fund a significant increase in marketing investment behind the expansion of New Categories in the six months to 30 June 2019. Adjusted operating margin was up 110 bps at current rates of exchange to 42.9% due to the performance of THP in Japan and substantial margin enhancement in the US.

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UNITED STATES (US):

The Group performed strongly in the US, with increases in revenue, profit from operations, and vapour volume share. Strong pricing more than offset volume decline, and the US business increased its total value share of combustibles 30 bps and its share of premium 40 bps.

Volume and Share

The cigarette industry was estimated to be around 5.4% lower than the same period in 2018, largely due to higher fuel prices impacting consumer disposable income and the growth of vapour. Full year industry volume is expected to be down around 5.5%.

While cigarette volume from the US business declined 6.0% to 36 billion sticks, due to industry contraction, total value share increased 30 bps, with share of the premium market up 40 bps. Volume share was marginally lower as growth in Newport and Natural American Spirit was more than offset by Camel, Pall Mall and declines across the remainder of the portfolio.

Vapour volume share, measured as a share of millilitres, grew over 500 bps in the six-months ended 30 June 2019, compared to the second half of 2018. This was largely due to the success of Alto, with volume share up 360 bps to 7.5% in June 2019 (compared to December 2018). Vuse vapour value share reached 14.0% in June 2019, driven by Alto increasing 320 bps from December 2018 to 5.9% in June 2019.

Value share of traditional moist oral increased 90 bps, with volume share of moist up 20 bps driven by Grizzly (up 10 bps). Total volume of traditional moist oral declined 2.4%, with Grizzly down 3.0%.

In the Modern Oral category, the Group commenced the roll-out of Velo which is expected to be available in over 75,000 retail outlets by the end of 2019.

The Modified Risk Tobacco Products (MRTP) application for Camel Snus was discussed by the Tobacco Products Scientific Advisory Committee (TPSAC) in September 2018. A response is expected by the end of 2019.

Revenue

Reported revenue increased 10.2% to £4,989 million. This was due to pricing, including a reduction in discounting leading to a price/mix on cigarettes increase of over 8%, and higher revenue from both vapour (driven by growth of Alto) and Traditional Oral. Revenue also benefited from a favourable translational foreign exchange tailwind due to the relative strength of the US dollar against sterling (of 6%). These more than offset the decline in cigarette volume described earlier. On a constant currency basis, revenue was up 3.7%.

Revenue from vapour grew 48% in the six-months ended 30 June 2019 to £95 million, with traditional oral up 12.7% to £506 million. On a constant currency basis, these increased by 39% and 6.0%, respectively.

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Regional review continued…

Profit from operations

Reported profit from operations increased 19.9% to £2,249 million. This was driven by the increase in revenue, timing of marketing investment, lower MSA charges and a prior year comparator impacted by the Vibe recall. The performance also benefited from efficiencies delivered since the acquisition of RAI, with total annualised savings of over US$400 million expected to be realised by the end of 2019, a year ahead of the Group’s initial schedule. Excluding adjusting items largely related to Engle, adjusted profit from operations was £2,483 million, an increase of 18.9% on an adjusted basis, or 11.2% excluding the translational foreign exchange tailwind discussed previously.

Regulatory activity

During the six-months ended 30 June 2019, the FDA focussed on addressing their concerns relating to youth usage of vapour products. Following a legal challenge by the American Academy of Pediatrics, the Maryland Federal Court has ordered the FDA to require manufacturers to submit all Premarket Tobacco Product Applications (PMTA) by 11 May 2020. In the event that this order is not successfully appealed by the FDA, the Group is well positioned to meet this new deadline.

In relation to the proposed FDA rules on menthol and nicotine reduction, there has been no visible material developments in the comprehensive rule making process in the first six months of the year and the Group is not aware of any plans to advance this rule making process for the remainder of the year. In any event, the Group remains confident in its ability to manage any such proposals given the need for a thorough review of the science and all unintended consequences for any rule to withstand judicial review.

ASIA-PACIFIC AND MIDDLE EAST (APME):

Group volume share in the region increased 20bps, as volumes outperformed the industry. Revenue and profit from operations increased, while THP achieved a 5.0% volume share in Japan, where the Group’s share of total nicotine increased 80 bps to 17.5%.

Volume and Share

Cigarette and THP volume was 2.3% lower than the same period in 2018 at 113 billion sticks. Cigarette volume increased in Pakistan and Australia (driven by the success of Pall Mall); Saudi Arabia (driven by the success of Pall Mall in the low segment following the excise-led price increase in prior periods); and Vietnam. THP consumable volume increased in both Japan and South Korea. This was more than offset by lower cigarette volume in Bangladesh (due to industry contraction and an increase in illicit trade following the change in excise in 2018); Indonesia (due to industry contraction as macroeconomic pressures affected disposable income); and the continued effect of industry contraction and down-trading in South Korea and Malaysia.

Volume share in the region increased 20 bps, driven by the growth of both Neo (THP) and Lucky Strike in Japan, which has resulted in the Group’s share of total Japanese nicotine increasing to 17.5%, up 80 bps from December 2018. This, combined with the growth of Pall Mall in Pakistan, Australia and Saudi Arabia, more than offset lower total volume share in South Korea and Malaysia.

Revenue
Reported revenue grew 0.9% to £2,405 million. This was driven by pricing in a number of markets, including Australia, Indonesia, Saudi Arabia and New Zealand. Combined with the positive mix effect of growth in THP consumables in Japan and positive geographic mix, these more than offset the impact of lower cigarettes and THP volume, reduced sales of THP devices ahead of new product launches planned in the second half of 2019 and translational foreign exchange headwinds. On a constant currency basis, revenue grew 1.6%.

Profit from operations
Reported profit from operations increased 2.1% to £940 million. This was driven by Japan (largely due to the performance of THP) and Saudi Arabia (driven by pricing and volume). This was partly offset by continued difficult trading in South Korea, lower volume in Bangladesh and an increase in marketing investment. Excluding adjusting items, which largely related to the ongoing factory rationalisation programme (principally in South East Asia), and the impact of foreign exchange on the regional results, adjusted profit from operations grew 4.6% to £995 million, at constant rates of exchange.

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Regional review continued…

AMERICAS AND SUB-SAHARAN AFRICA (AMSSA):

Revenue grew strongly in AMSSA, and Vype performed well in Canada where the vapour market is rapidly expanding.

Volume and Share

Cigarette and THP volume was 3.5% lower at 74 billion sticks. Higher volume in Nigeria, East and Central Africa and South Africa was more than offset by the difficult trading environment in Venezuela, higher illicit trade in Brazil and the impact of continued market contraction in Argentina and Canada.

Volume share was marginally lower, as a good performance in Colombia (where growth in Lucky Strike and Rothmans more than offset the performance of the local portfolio) and the success of Pall Mall in Mexico, South Africa, Canada and Chile was offset by lower volume share in Brazil, where growth in Rothmans was outweighed by the remainder of the portfolio.

Vype ePod performed well in Canada as the vapour segment grew strongly reaching 12% vapour value share in June 2019. The Group recently launched Vype in Mexico, being the first international company to enter the vaping market.

Revenue

Revenue grew 3.3% to £2,015 million, as pricing across the region (notably in Canada, Kenya, Chile and Nigeria) and the growth of New Categories in Canada more than offset the lower total cigarette volume described above and the translational foreign exchange headwind of 4%. On a constant currency basis, revenue grew by 7.5% to £2,098 million.

Profit from operations

Reported profit from operations was down 59% to £328 million, mainly due to the £436 million charge in relation to Quebec, as previously announced and described on page 19, and the effect of currency headwinds. Excluding adjusting items (mainly related to Quebec and costs related to the Group’s restructuring initiatives) and the effect of currency, adjusted profit from operations on a constant currency basis grew 0.8% to £835 million, driven by higher profit from operations in Nigeria and Canada, despite the increased investment in New Categories, specifically related to ePod.

EUROPE AND NORTH AFRICA (ENA):

Profit from operations increased in the region, even after increased investment in New Categories. Modern Oral grew strongly driven by EPOK and Lyft, while vapour volumes also increased significantly, driven by the strong performance of Vype in the UK, France and Germany.

Volume and Share

Cigarette and THP volume declined 4.0% to 112 billion sticks as growth in Turkey, Poland, Romania and Italy was more than offset by lower volume in both Russia and Ukraine (partly due to industry contraction and competition in the low-price segment), Egypt (driven by excise-led price increases in the low-price segment particularly affecting Pall Mall) and Germany (due to competition in the low-price segment).

Volume share was down 10 bps as growth in Kent (leading to higher total volume share in Ukraine and Turkey) and Rothmans (leading to an increase in total volume share in Italy, Poland and Spain) was more than offset by a reduction in Russia (due to the competitive pricing environment in the low-price segment) and lower volume share from Pall Mall in Germany and Denmark.

The Group’s THP and vapour portfolio continued to develop well, with volume of THP growing in Russia, Kazakhstan and Ukraine, while also developing in the other launch markets of Romania, Italy and Poland.

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Regional review continued…

Vapour volume was 66% higher than the same period in 2018. This was driven by the success of ePen3 in the UK (where the Group’s portfolio of products maintained value leadership with 39% vapour value share in June 2019), France (where ePen3 reached 13.6% vapour value share in June 2019, an increase of 980 bps) and in Germany, where Vype reached 12% share of total vapour consumers due to growth in the closed system category.

The Group’s Modern Oral portfolio increased volume by 177% to 410 million pouches in the six-months ended 30 June 2019 (30 June 2018: 148 million pouches), with presence in 9 markets.

In Sweden, the Group’s oral portfolio performed well, increasing total volume share of the oral category to 13.4% (June 2019).  This was driven by an excellent performance from the Traditional Oral brands, up 90 bps to 11.2%, principally due to the success of Lundgrens, and the Modern Oral portfolio which increased to 2.1% volume share of the total oral category, being 57% volume share of the modern oral category.

In Norway, EPOK volume share grew to 11.1% of the total oral category, or 73% volume share of the modern oral category, driving the performance of the Group’s total oral portfolio to 12.1% of the total oral category.

The Modern Oral portfolio performed very well in Switzerland with a total oral category share of 42% and continues to lead the development of the oral category in Denmark with a volume share of the total oral category of 67%. The Group also launched modern oral in Russia where it reached 25% volume share of the total oral category in just two months.

Revenue

Reported revenue declined 0.5% to £2,761 million as strong pricing across the region (notably in Germany, Romania and Ukraine) and an increase in revenue from New Categories by 123% (to £144 million) were more than offset by the end of a contract manufacturing arrangement in Bulgaria (which led to a short term increase in revenue due to the recognition by the Group of excise within revenue in prior periods), lower regional volume and translational foreign exchange headwinds of 2.5%.

Adjusted revenue, at constant rates, increased 4.6% to £2,795 million. This was driven by pricing across the combustible portfolio as noted above, as well as the 126% growth in revenue from New Categories to £146 million driven by:

Profit from operations

Reported profit from operations grew 1.9% to £863 million, driven by lower costs resulting from the restructuring programme, with savings reinvested in the expansion of the New Categories portfolio. Profit from operations was up in Germany, Romania, Italy, Sweden, France and Denmark, which more than offset declines in Russia (due to lower volume, the investment behind New Categories and local inflation), Ukraine (due to transactional foreign exchange headwinds and New Category investment) and Poland (driven by the New Categories investment). Excluding adjusting items (related to the factory closure in Russia and downsizing in Germany, amortisation of acquired brands, and other costs related to the Group’s restructuring initiatives) and the impact of the foreign currency headwind, adjusted profit from operations at constant rates was marginally higher (up 0.1% against the first half of 2018), at £950 million.

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NET FINANCE COSTS

Net finance costs for the six months to 30 June 2019 were £773 million, compared to £701 million in the same period in 2018. This was largely driven by lower investment income, the increase in short term borrowings required to fund the timing of payments and working capital movements in the period (as discussed on page 36) and the impact of the translational headwind on costs due to the relative weakness of sterling against the US dollar. On a constant currency basis, and after adjusting for items including the finance costs related to the Franked Investment Income Group Litigation Order (FII GLO, as described on page 45), adjusted net finance costs were £721 million, an increase of 8.3%.

Net finance (costs)/income comprise:

In the six-months ended 30 June 2019, the Group incurred interest on adjusting tax payables of £23 million (30 June 2018: £35 million), including interest of £15 million (30 June 2018: £12 million) in relation to the FII GLO, as described on page 45. Interest on adjusting tax payables in the six-months ended 30 June 2018 also included £22 million in relation to retrospective guidance by a tax authority on overseas withholding tax.

All of the adjustments noted above have been included in the adjusted earnings per share calculation on page 39.

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RESULTS OF ASSOCIATES AND JOINT VENTURES

The Group’s share of post-tax results of associates and joint ventures increased, in the six-months ended 30 June 2019, from £232 million to £258 million driven by the performance of the Group’s main associate, ITC Ltd (ITC) in India. The Group’s share of ITC’s post-tax results grew 10.6% to £251 million (30 June 2018: £227 million). Excluding the impact of foreign exchange and adjusting items of £29 million (compared to £37 million in the six-months ended 30 June 2018), which largely related to the deemed gain on dilution of the Group’s shareholding in ITC, the Group’s share of post-tax adjusted results from ITC, at constant rates of exchange, was an increase of 17.4% to £223 million (30 June 2018: £190 million).

TAXATION

The tax rate in the income statement was 25.1% for the six months to 30 June 2019, compared to 30.1% for the six months to 30 June 2018 (31 December 2018: 25.6%).

The Group’s tax rate is affected by the inclusion of the share of associates’ and joint ventures’ post-tax profit in the Group’s pre-tax results and by other adjusting items discussed below. Excluding these items, the underlying tax rate for subsidiaries reflected in the adjusted earnings per share on page 39 was 26.6% in 2019 and 26.9% for the six months to 30 June 2018. For the year to 31 December 2018, it was 26.4%.

The adjusting tax items include £209 million for the six months to 30 June 2019 (30 June 2018: £71 million; 31 December 2018: £199 million) in respect of the taxation on other adjusting items, which are described on pages 33 and 34, with the increase on the prior year largely related to the charge associated with the Quebec Class Action.

The adjusting tax items also include a net credit of £7 million mainly relating to changes in the US State tax rates in the period, related to the deferred tax liabilities arising on trademarks on the RAI acquisition in 2017.

As the above items are not reflective of the ongoing business, these have been recognised as adjusting items within taxation.

Refer to page 45 for the Franked Investment Income Group Litigation Order update.

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CASH FLOW

In the Group’s cash flow, prepared in accordance with IFRS and presented on page 29, net cash generated from operating activities fell by 41% to £2,288 million largely due to timing of the payment of the MSA in prior periods (the 2018 payment was paid in 2017), in the US. The MSA returned to the standard payment date in 2019. The reduction in cash generated was also due to working capital movements. The Group’s conversion rate (defined as net cash generated from operating activities as a proportion of profit from operations) fell accordingly from 87% to 52% in the first half of 2019.

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BORROWINGS AND NET DEBT

Total borrowings were £50,292 million at 30 June 2019, compared to £48,512 million at 30 June 2018, and £47,509 million at 31 December 2018, with the movement principally related to the timing of working capital movements, recognition of lease liabilities under IFRS 16 (£607 million) and the payment of dividends to shareholders in the period . The Group defines net debt as borrowings including related derivatives, less cash and cash equivalents and current investments held at fair value. Closing net debt was £46,447 million (30 June 2018: £45,679 million; 31 December 2018: £ 44,351 million). A reconciliation of borrowings to net debt is provided below.

The Group remains confident about its ability to access the debt capital markets successfully and reviews its options on a continuing basis. As part of the management of liquidity, funding and interest rate risk the Group regularly evaluates market conditions and may enter into transactions, from time to time, to repurchase outstanding debt, pursuant to open market purchases, tender offers or other means.

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Borrowings and net debt cont…

Borrowings includes £915 million (30 June 2018: £940 million; 31 December 2018: £944 million) in respect of the PPA adjustments related to the acquisition of RAI. The Group also adjusts net debt for the PPA adjustment to the debt acquired as part of the acquisition of RAI as this is an accounting adjustment and does not reflect the enduring repayment of the instrument. The Group management board believes that this additional measure, which is used internally to assess the Group’s financial capacity, is useful to the users of the financial statements in helping them to see how the Group’s financial capacity has changed over the year. The adjusted net debt position is provided below:

Adjusted net debt is impacted by the relative movement of sterling against, primarily, US dollar which has weakened from 1.320 US$:£ (30 June 2018) to 1.273 US$:£. The decrease in adjusted net debt, at constant rates, since 30 June 2018 reflects the net cash generation in the second half of 2018 partially offset by the net cash outflow in the six-months ended 30 June 2019. Adjusted net debt in 2019 was also impacted by the requirement to recognise lease liabilities under IFRS 16 (£607 million).

FOREIGN CURRENCIES

The principal exchange rates used to convert the results of the Group’s foreign operations to pound sterling for the purposes of inclusion and consolidation within the Group’s financial statements are indicated in the table below. Where the Group has provided results “at constant rates of exchange” this refers to the translation of the results from the foreign operations at rates of exchange prevailing in the prior period – thereby eliminating the potentially distorting impact of the movement in foreign exchange on the reported results.

The principal exchange rates used were as follows:

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RISKS AND UNCERTAINTIES

The principal risks and uncertainties which may affect the business activities of the Group were identified under the heading ‘Principal Group risks’, set out on pages 48 to 52 of the Annual Report and Form 20-F for the year ended 31 December 2018, a copy of which is available on the Group’s website www.bat.com .

In the view of the Board, the principal risks and uncertainties for the Group have remained unchanged over the last six months.

The principal Group risks and applicable sub-categories are summarised under the headings of:

The Group also considers the risk relating to the adverse consequences of the UK’s potential exit from the EU and currently does not deem it to be a principal risk for the Group.

A summary of other risks for the Group which are not considered principal risks but are monitored by the Board through the Group’s risk register is set out on pages 270 to 284 of the Annual Report and Form 20-F for the year ended 31 December 2018. These and all of the Group’s risks should be read in the context of the forward-looking statements on page 84 of this Half-Year Report.

UK PENSION FUND – BUY-IN

On 31 May 2019, the Trustee of the British American Tobacco UK Pension Fund (“UK Fund”) entered into an agreement with Pension Insurance Corporation plc (“PIC”) to acquire an insurance policy that operates as a UK Fund investment asset, with the intent of matching a specific part of the UK Fund’s future cash flow arising from the accrued pension liabilities of pensioners and deferred (i.e. individuals who have left the Group but have yet to take their pension) pensioner members. Such an arrangement is commonly termed as a “Buy-In”. The Buy-In reduces the UK Fund’s value at risk in relation to key risks associated with improved longevity, inflation and interest rate movements whilst improving the security to the UK Fund and its members. The Group consequently benefits from the Buy-In as it reduces the UK Fund’s reliance on the Group for future cash funding requirements.

The Buy-In transaction involved the transfer of £3.4 billion of assets held by the UK Fund to PIC and, as such, has no cash effect to the Group. On an IAS 19 basis, the fair value of the insurance policy will match the present value of the liabilities being insured and a loss of £0.7 billion has been recognised through the statement of other comprehensive income on the revaluation of the insurance asset with no impact to the income statement.

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UPDATE ON ONGOING INVESTIGATION INTO MISCONDUCT ALLEGATIONS

As previously reported, the Group has been investigating, through external legal advisors, allegations of misconduct and has been liaising with the UK’s Serious Fraud Office (SFO) and other relevant authorities. It was announced in August 2017 that the SFO had opened an investigation in relation to the Company, its subsidiaries and associated persons. The Group is cooperating with the SFO’s investigation. A sub-Committee of the Board has oversight of these matters, providing support for the investigation between Board meetings. The outcomes of these matters will be decided by the relevant authorities or, if necessary, the courts. It is too early to predict the outcomes, but these could include the prosecution of individuals and/or of a Group company or companies. Accordingly, the potential for fines, penalties or other consequences cannot currently be assessed. As the investigation is ongoing, it is not yet possible to identify the timescale in which these matters might be resolved.

UPDATE ON QUEBEC CLASS ACTION

In 2015, the plaintiffs in the two certified classes in Quebec were awarded damages and interest in the amount of CAD$15.6 billion (£9 billion), of which Imperial Tobacco Canada Ltd’s (ITCAN) share is CAD$10.4 billion (£6 billion). Also in 2015, the Quebec Court of Appeal upheld the Order for Security, of which ITCAN’s share was CAD$758 million (£436 million), which has been paid in full to the Court escrow account as required by the judgment and was held on the balance sheet as a receivable at 31 December 2018.

Please refer to the 2018 Annual Report and Form 20-F, note 28 Contingent Liabilities and Financial Commitments paragraph 72 (page 204) for further discussion of the development of the case.

On 1 March 2019, the Quebec Court of Appeal in Montreal upheld the Superior Court’s decision of May 2015 (reducing ITCAN’s share of the judgment due to a change in interest computation to a maximum of CAD$9.2 billion). The Court of Appeal also upheld the previously stated requirements for the defendants to deposit CAD$1.1 billion into an escrow account. The Board of Directors of ITCAN reassessed the recoverability of the deposit and, accordingly, the Group recognised a charge against the income statement of £436 million in the period, reflecting the amount of the judgment that is considered to be probable and estimable in line with IAS 37 Provisions, Contingent Liabilities and Contingent Assets . As a consequence, in the Group’s consolidated balance sheet the deposit has been utilised against the current estimate of the liability.

Further, on 12 March 2019, ITCAN obtained an Initial Order from the Ontario Superior Court of Justice granting it protection under the Companies’ Creditors Arrangement Act (CCAA). This has the effect of staying all current tobacco litigation in Canada against ITCAN and other Group companies (the “Stays”). The Stays are currently in place until 4 October 2019 and a further extension of the Stays may be sought at the next comeback hearing, which is scheduled for 2 October 2019. While the Stays are in place, no steps are to be taken in connection with the Canadian tobacco litigation with respect to ITCAN, certain of its subsidiaries or any other Group company.

In addition to Quebec, across Canada, other tobacco plaintiffs and provincial governments are collectively seeking significant damages which substantially exceed ITCAN’s total assets. In seeking protection under the CCAA, ITCAN will look to resolve not only the Quebec case but also all other tobacco litigation in Canada under an efficient and court supervised process, while continuing to trade in the normal course.

Under the terms of CCAA, the court has appointed FTI Consulting Canada Inc. to act as a monitor. This monitor has no operational input and is not involved in the management of the business. The Group considers that ITCAN continues to meet the requirements of IFRS 10 Consolidated Financial Statements , and, until such requirements are not met, the Group will continue to consolidate the results of ITCAN. The £2.3 billion of goodwill relating to ITCAN on the Group’s balance sheet at 31 December 2018 will continue to be reviewed on a regular basis. Any potential future impairment charge would result in a non-cash charge to the income statement that would be treated as an adjusting item.

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RUSSIA – PRELIMINARY ASSESSMENT RELATED TO HISTORIC AL TAXES INCLUDING EXCISE AND VAT

On 27 June 2019, the Russian tax authority issued a preliminary audit report related to the application of legislation introduced in 2017 that prospectively limited the amount of production that could take place prior to excise tax increases, without being subject to higher excise tax rates. The preliminary audit report seeks to retrospectively apply the legislation to the years 2015 to 2017, with an assessment against the Group of £395 million plus penalties. The Group believes there are strong grounds to object to the preliminary assessment and has responded to the Federal Tax Service, confirming that the Group has acted within the tax code and stating that the legislation should not apply retrospectively. Accordingly, at 30 June 2019, the Group has treated the assessment as a contingent liability in line with IAS 37 Provisions, Contingent Liabilities and Contingent Assets .

BOARD CHANGES

As announced in February 2019, Ben Stevens will retire from the Board as Finance Director on 5 August 2019. Ben joined the Group in 1990 and has served as Finance Director since 2008.

As also previously announced, Ben will be succeeded as Finance Director on 5 August 2019 by Tadeu Marroco, who was appointed Deputy Finance Director on 1 March 2019 in addition to his role as Director, Group Transformation.

In a separate announcement today, Jeremy (‘Jerry’) Fowden has been appointed to the Board of British American Tobacco p.l.c. as an independent Non-Executive Director and member of the Audit Committee and Nominations Committee with effect from 1 September 2019.

GOING CONCERN

A full description of the Group’s business activities, its financial position, cash flows, liquidity position, facilities and borrowings position together with the factors likely to affect its future development, performance and position, as well as the risks associated with the business, are set out in the Strategic Report and in the notes to the accounts, all of which are included in the 2018 Annual Report and Form 20-F that is available on the Group’s website, www.bat.com . This Half-Year Report provides updated information regarding the business activities, including cash flow, for the six months to 30 June 2019 and of the financial position and liquidity position at 30 June 2019.

The Group has, at the date of this report, sufficient financing available for its estimated requirements for at least the next 12 months. This, together with the proven ability to generate cash from trading activities, the performance of the Group’s Strategic Portfolio, its leading market positions in a number of countries and its broad geographical spread, as well as numerous contracts with established customers and suppliers across different geographical areas and industries, provides the Directors with the confidence that the Group is well placed to manage its business risks successfully in the context of the current financial conditions and the general outlook in the global economy.

After reviewing the Group’s annual budgets, plans and financing arrangements, the Directors consider that the Group has adequate resources to continue operating for the next three years and that it is therefore appropriate to continue to adopt the going concern basis in preparing this Half-Year Report.

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All of the activities during both years are in respect of continuing operations.

The accompanying notes on pages 30 to 75 form an integral part of this condensed consolidated financial information.

¹ Revenue is net of duty, excise and other taxes of £18,607 million and £18,250 million for the six-months ended 30 June 2019 and 2018 respectively, and £38,553 million for the year ended 31 December 2018.

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The accompanying notes on pages 30 to 75 form an integral part of this condensed consolidated financial information.

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