20-F: BAT Navigates Regulatory Headwinds, Reports Mixed 2025 Results

British American Tobacco reports a 1.0% decline in reported revenue to £25.61 billion for 2025, alongside a significant 265% increase in reported operating profit driven by a Canadian litigation settlement credit.

Summary

• Reported revenue decreased by 1.0% to £25,610 million in 2025, impacted by a 3.1% translational foreign exchange headwind. On a constant currency basis, revenue grew by 2.1%.
• New Categories revenue increased by 5.5% to £3,621 million (up 7.0% at constant rates), driven by Modern Oral products.
• Vapour revenue declined by 10.4% to £1,542 million (down 8.6% at constant rates), primarily due to the proliferation of illicit single-use vapour products in the U.S. and Canada, and market exits in APMEA.
• Modern Oral revenue surged by 47.4% to £1,165 million (up 48.0% at constant rates), with Velo becoming the fastest-growing brand in the category and reaching the number 2 position in the U.S.
• Heated Products (HP) revenue was marginally lower by 0.7% to £914 million, but increased by 1.0% at constant rates of exchange.
• Combustibles revenue declined by 2.3% to £20,201 million (up 1.0% at constant rates), with cigarette volume down 7.9% globally.
• Reported profit from operations increased by 265% to £9,997 million, with reported operating margin up 28.4 percentage points to 39.0%. This was largely due to a net credit of £524 million from the Canadian litigation settlement, compared to a £6.2 billion charge in 2024.
• Adjusted profit from operations decreased by 2.7% to £11,572 million, but increased by 0.4% on a constant currency basis.
• Adjusted diluted earnings per share (EPS) decreased by 2.9% to 352.1 pence, but would have been up 0.7% at constant rates of exchange.
• Net finance costs increased by £721 million to £1,819 million, primarily due to a net credit in 2024 from debt tender offers not repeating, and a £112 million charge related to the unwinding of the discount on the Canadian litigation provision.
• The Group's share of post-tax results of associates and joint ventures decreased by 12.3% to £1,681 million, mainly due to a reduced shareholding in ITC Ltd. following partial divestments.
• Gross capital expenditures for 2025 were £648 million, an 11.7% increase from 2024, with a focus on operational infrastructure and New Categories expansion.
• Net debt at December 31, 2025, was £31,215 million, a slight decrease from £31,253 million in 2024.
• The Group repurchased £1.1 billion of its ordinary shares in 2025 under its share buy-back program, and announced an additional £1.3 billion buy-back for 2026.

Sentiment

Score: 4

Explanation: StockSavvy.ai views this as a cautious outlook. While the company shows strong growth in Modern Oral and has managed a significant litigation liability, the overall revenue decline, adjusted EPS decrease, and persistent challenges from illicit trade and regulatory uncertainty in key categories temper enthusiasm. The large reported profit increase is primarily due to a one-off credit, not underlying operational strength.

Positives

• New Categories revenue grew by 5.5% (7.0% at constant rates), demonstrating continued progress in the transformation strategy.
• Modern Oral products showed strong performance, with revenue up 47.4% (48.0% at constant rates) and Velo achieving the #2 position in the U.S. market.
• Reported profit from operations increased significantly by 265% due to a net credit from the Canadian litigation settlement, improving the reported operating margin to 39.0%.
• Efficiency initiatives delivered £327 million in cost savings in 2025, meeting the target of over £1.2 billion in savings for the three years to 2025.
• The Group successfully refinanced its £5.2 billion revolving credit facility to £5.0 billion in November 2025, maintaining strong liquidity.
• The share buy-back program continued, with £1.1 billion of shares repurchased and cancelled in 2025, and an additional £1.3 billion announced for 2026, indicating confidence in shareholder returns.
• Vuse showed encouraging signs of returning to revenue growth in the second half of 2025 in the U.S., supported by increased enforcement against illicit products.
• The FDA launched a pilot program to streamline the PMTA review process for Modern Oral products, potentially benefiting BAT's Velo applications.

Negatives

• Reported revenue declined by 1.0% due to translational foreign exchange headwinds and lower volumes in combustibles and Vapour.
• Vapour revenue declined by 10.4% (8.6% at constant rates), primarily impacted by the proliferation of illegal single-use vapour products in the U.S. and Canada, and regulatory/excise changes in other markets.
• Combustibles volume declined by 7.9% globally, reflecting market contraction and consumer migration to alternative products.
• Adjusted diluted EPS decreased by 2.9% (though up 0.7% at constant rates), indicating a slight decline in underlying profitability per share.
• Net finance costs increased significantly by £721 million, partly due to the absence of a large credit from debt tender offers in the prior year and increased charges related to Canadian litigation provision unwinding.
• The Group's share of post-tax results of associates and joint ventures declined by 12.3%, mainly due to reduced shareholding in ITC Ltd.
• Goodwill impairment charges of £277 million were recognized in Canada, Peru, and Malaysia due to difficult trading conditions and revised forecasts.
• A £39 million charge was incurred due to the loss of a distribution facility in Ukraine following a missile attack in the second half of 2025.
• A £235 million charge was recognized related to the classification of the Group's business in Cuba as held-for-sale.
• The adjusted operating margin decreased by 80 basis points to 45.2% at constant rates, driven by difficult trading in high-margin markets like Australia and Canada.

Risks

• Competition from illicit trade, including counterfeit and smuggled products, continues to be a significant and growing threat, impacting brand equity, increasing operational costs, and potentially leading to fines and reputational damage.
• Geopolitical tensions, such as the conflict in Ukraine and attacks on shipping routes in the Red Sea, can disrupt supply chains, manufacturing, and distribution, leading to increased costs and reduced sales volume.
• Disruption to digital and information technology systems, including cyberattacks, human error, or malicious data manipulation, poses significant risks to business operations, reputation, and financial condition.
• Failure to meet current or future New Categories demand due to supply chain vulnerabilities, product quality issues, regulatory changes (e.g., flavor bans, product recalls), or failure to receive regulatory approval (e.g., PMTAs).
• Failure of a financial counterparty could lead to significant financial loss and disruption to payment systems.
• Exposure to unavailability of, and price volatility in, raw materials (like tobacco leaf, wood pulp, energy) and increased employment costs due to inflation, political influence, or natural disasters, impacting product margins and profitability.
• Failure to retain key personnel or attract skilled talent, particularly in New Categories and Beyond Nicotine, could adversely impact operations and strategic growth plans.
• Disruption to the supply chain and distribution channels due to various factors including global health crises, political tensions, strikes, or natural disasters, leading to adverse effects on reputation and financial condition.
• Failure to uphold high standards of sustainability management, performance, and reporting could result in reputational damage, increased costs, regulatory sanctions, and reduced investor confidence.
• Inability to obtain adequate supplies of tobacco leaf due to climate change, weather events, land use competition, or sustainability commitments, leading to quality issues, higher prices, and reputational damage.
• Exposure to product contamination, whether accidental or malicious, leading to recalls, reputational damage, loss of sales, and potential civil/criminal liability.
• Failure to successfully design, implement, and sustain an integrated operating model and future-fit organization could lead to increased costs, operational disruption, and reduced effectiveness.
• Inability to transition to a future-fit ERP platform (SAP S/4HANA) in a timely manner could result in increased operational costs, technical debt, and challenges in meeting strategic objectives.
• Failure to manage climate change-related risks (physical and transition risks) could disrupt supply chains, harm employees, reduce demand for products, and lead to regulatory non-compliance and reputational damage.
• Failure to manage circularity risks (product design, EPR requirements) could lead to missed commercial opportunities, loss of market share, unrecoverable costs, and reputational damage.
• Impact of a pandemic or other global health crises on consumer demand, supply chains, workforce productivity, and financial markets, potentially leading to adverse effects on operations and financial condition.
• Exposure to sustained and organized reputational activism and public campaigns, potentially influencing investor confidence, triggering regulatory scrutiny, and harming the employer brand.
• Exposure to, or enactment of, regulation that significantly impairs the ability to communicate, differentiate, market, or launch products, or lack of appropriate regulation for New Categories, affecting volume, revenue, and profits.
• Adverse implications of EU legislation on single-use plastics (SUP Directive), leading to increased administrative burdens and operating costs due to EPR schemes and environmental warnings.
• Exposure to litigation, regulatory action, or criminal investigations on tobacco, nicotine, New Categories, and other issues, potentially resulting in substantial liability, fines, and reputational damage.
• Significant and/or unexpected increases or structural changes in tobacco and nicotine-related taxes, impacting pricing, sales volume, and profit margins.
• Exposure to unfavorable tax rulings, leading to significant financial and legal penalties, including additional taxes, fines, and interest.
• Exposure to potential liability under competition or antitrust laws, resulting in legal liability, fines, criminal sanctions, and forced changes in business practices.
• Failure to establish and maintain adequate controls and procedures to comply with applicable securities, corporate governance, and compliance regulations, leading to legal liability, fines, and reputational damage.
• Lack of external recognition and acceptance of the foundational science for Smokeless products and inability to effectively communicate their potential health impact, leading to regulatory restrictions and market share reduction.
• Insufficient product stewardship and failure to comply with product regulations, leading to safety incidents, product recalls, and regulatory enforcement actions.
• Failure to uphold high standards of corporate behavior, including through breaches of anti-bribery, anti-corruption, and other anti-financial crime laws, resulting in fines, share price impact, and reputational harm.
• Unexpected legislative changes to corporate income tax laws, potentially leading to a material increase in overall tax rate.
• Imposition of sanctions under sanctions regimes or similar international measures, affecting operations in certain territories, sourcing, currency repatriation, and financial transactions.
• Failure to uphold New Categories marketing practices, leading to claims for breach of regulations, litigation, fines, and reputational damage.
• Loss or misuse of personal data through failure to comply with data privacy legislation (e.g., GDPR, UK DPA, CCPA), resulting in civil/criminal liability, material fines, and reputational damage.
• Foreign exchange rate exposures, leading to volatility in reported earnings per share, cash flow, and balance sheet, and potentially impacting credit ratings.
• Inability to obtain price increases or exposure to risks from excessive price increases and value chain erosion, impacting market share, revenue, and profitability.
• Effects of declining consumption of legitimate tobacco products and a tough competitive environment, leading to reduced sales volume, loss of market share, and lower profits.
• Funding, liquidity, and interest rate risks, potentially leading to shortages of cash, increased funding costs, and adverse effects on credit ratings and share price.
• Failure to achieve growth through mergers, acquisitions, joint ventures, investments, and other transactions, resulting in increased costs, decreased revenues, or loss of opportunities.
• Unforeseen underperformance in key global markets (e.g., U.S.) due to price increases, marketing restrictions, health campaigns, migration to reduced-risk products, and non-compliant competitors.
• Increases in net liabilities under retirement benefit schemes due to actuarial assumptions, asset returns, salary increases, inflation, and life expectancies, leading to higher contributions and adverse financial impact.

Future Outlook

The Group expects to invest around £750 million in gross capital expenditure in 2026 to enhance growth opportunities and deliver operational efficiencies, with continued investment in New Categories. Net finance costs are expected to increase as debts are refinanced due to higher interest rates. The Group aims to become a predominantly smokeless business, with over 50% of its revenue from Smokeless products by 2035, and targets 50 million adult consumers of Smokeless products by 2030. The FDA's proposed menthol ban and nicotine limit rule for cigarettes have been withdrawn by the new administration, but the risk of future re-introduction remains. The Canadian litigation settlement requires annual payments based on net income after tax, excluding New Categories, until the aggregate settlement amount is paid, expected to continue for at least 40 years.

Management Comments

• "We are encouraged by the FDA's actions, the implementation of vapour directories and enforcement actions in 18 states, representing 48% of the legal Vapour industry."
• "We remain optimistic that Vuse will benefit as the authorities continue with enforcement initiatives in 2026."
• "Based upon the published science, we believe that a ban on menthol cigarettes would negatively affect, not benefit, public health."
• "We believe a ban on menthol is contrary to the FDA's stated goal of reducing the health effects of tobacco use."
• "Our strategic focus is to drive growth in Vapour through premiumisation of rechargeable closed system products (including via Vuse Ultra) while approaching the single-use product category, where relevant, in a responsible way."
• "We continue to seek opportunities and develop the category in other markets as we believe that Modern Oral is an exciting longer-term opportunity to commercialise reduced-risk products."
• "We committed to deliver cost savings of over £1.2 billion in the three years to 2025 and have delivered £1.2 billion, in line with expectations."
• "The Board seeks to reward shareholders with a progressive dividend, which is to pay dividends of 65% of long-term sustainable earnings calculated with reference to adjusted diluted earnings per share."
• "The Group is confident of its continued ability to successfully access the debt capital markets for future refinancing requirements."
• "Our corporate purpose is to build A Better Tomorrow by reducing the health impact of our business. To accelerate the next phase of our transformation, we are committed to Building a Smokeless World."
• "We will deploy our global multi-category portfolio to actively encourage adult smokers – who would otherwise continue to smoke – to Switch to Better nicotine products, and continue to seek long-term opportunities Beyond Nicotine in Wellbeing and Stimulation, realising the multi-stakeholder benefits of A Better Tomorrow."
• "Our commitment is demonstrated by our ambition to become a predominantly smokeless business, with over 50% of our revenue from Smokeless products by 2035."
• "We continuously monitor and assess our capital allocation framework to: unlock shareholder value through investing in the right opportunities; optimise the return on our investments; maximise our cash generation; reduce our leverage; and generate sustainable cash returns for our shareholders."

Industry Context

StockSavvy.ai notes that the global nicotine market is undergoing rapid transformation, driven by the growth of oral nicotine and heated products, and the continued uptake of vapour products. The industry faces significant challenges from increasing illicit trade, particularly in the U.S. vapour market, and evolving, often stringent, regulatory environments globally (e.g., EU TPD, generational sales bans). While some regulators recognize the reduced-risk potential of smokeless products, others impose broad restrictions or bans, creating a fragmented regulatory landscape. The shift away from traditional combustible tobacco is a major trend, with HP and nicotine pouches projected for significant volume growth, while vapour product growth remains inconsistent due to legislative uncertainty. The company's focus on 'New Categories' aligns with this broader industry shift towards reduced-risk alternatives, but regulatory hurdles and illicit market competition remain critical factors.

Comparison to Industry Standards

• The company's Vuse brand is reported as the #1 brand in the global Vapour category (rechargeable closed system consumables and disposables in tracked channels), indicating a leading competitive position.
• Velo is positioned as the fastest-growing brand in the Modern Oral category, reaching the number 2 position in both volume and value share in the U.S., suggesting strong market penetration and consumer acceptance compared to competitors.
• The company's global cigarette volume decline of 7.9% is slightly worse than the U.S. industry volume decline of 7.4%, indicating some underperformance in the core combustible segment in its largest market.
• The company's adjusted operating margin of 45.2% (at constant rates) is a key metric for comparison, but specific competitor margins are not provided in the filing for a direct benchmark. However, the decline of 80 bps suggests pressure on profitability relative to prior periods.
• The company's average cost of debt at 5.0% in 2025 (up from 4.9% in 2024) can be compared to industry peers, but specific peer data is not available in the filing. The increase suggests rising financing costs in line with broader market trends.

Management Changes

Corporate Governance

Legal Proceedings

• **U.S. Tobacco Litigation:** The Group is a defendant in approximately 297 U.S. tobacco product liability cases as of December 31, 2025, including medical reimbursement cases, class actions, individual smoking and health cases, Engle progeny cases, Broin II cases, and Filter Cases. Total damages sought are significant, potentially billions of US dollars.
• **DOJ Action:** The U.S. Department of Justice (DOJ) action against various industry members, including RJRT, B&W, Lorillard Tobacco, and Investments, concluded its corrective statements at retail in June 2025, marking the last remaining remedy to be implemented.
• **No Additive/Natural/Organic Claim Cases:** 17 pending putative class actions against Reynolds American, RJRT, and SFNTC regarding 'natural,' '100% additive-free,' or 'organic' descriptors in Natural American Spirit (NAS) brand advertising. A district court order certified a subset of proposed classes in September 2023, with appeals pending.
• **Engle Progeny Cases (Florida):** Approximately 33 Engle progeny cases were pending against RJRT, B&W, and/or Lorillard Tobacco as of December 31, 2025. From January 1, 2023, through December 31, 2025, 15 trials occurred, with 7 resulting in plaintiffs' verdicts, totaling approximately US$58.21 million in damages against RJRT. RJRT paid judgments totaling approximately US$16 million in 2025.
• **Broin II Cases:** RJRT resolved the remaining Broin II cases due to inactivity, except for one case pending as of December 31, 2025.
• **Filter Cases:** Lorillard Tobacco and/or Lorillard Inc. were defendants in 31 Filter Cases as of December 31, 2025. Since January 1, 2023, Lorillard Tobacco and RJRT have paid or agreed to pay approximately US$19.1 million in settlements for 80 Filter Cases.
• **State Settlement Agreements (U.S.):** RJRT and SFNTC are subject to substantial perpetual payment obligations under the Master Settlement Agreement (MSA) and State Settlement Agreements (Mississippi, Florida, Texas, Minnesota). Payments for 2025 amounted to US$2,037 million in expenses and US$2,140 million in cash payments. NPM Adjustment proceedings are ongoing, with various states settling disputes, potentially reducing future payment obligations.
• **Florida State Settlement Agreement:** The Delaware Supreme Court affirmed a judgment in December 2025, awarding Reynolds American and RJRT approximately US$370 million against ITG for prior settlement payments with interest. A confidential settlement agreement was entered into in January 2026.
• **Mississippi State Settlement Agreement:** RJRT and the state entered into a settlement in August 2025, closing the matter.
• **Texas State Settlement Agreement:** The State of Texas issued a demand letter to RJRT, PM USA, and ITG for underpaid sums. The court ordered RJRT to pay approximately US$104 million plus interest in March 2025, with appeals pending.
• **Minnesota State Settlement Agreement:** The district court issued a judgment against RJRT for US$71.1 million in January 2026, which RJRT intends to appeal.
• **Canadian Tobacco Litigation (Approved Plans):** Imperial Tobacco Canada Limited (ITCAN) and Imperial Tobacco Company Limited (ITCO) exited CCAA protection in August 2025 following the implementation of Approved Plans. The plans resolve all Canadian tobacco litigation, requiring an aggregate settlement amount of CAD$32.5 billion (approximately £17.6 billion) to be funded by an upfront payment (CAD$5.5 billion paid by ITCAN in 2025) and annual payments based on a percentage of net after-tax income (initially 85%, reducing over time) until the total is paid. A provision of £2,794 million was recognized as of December 31, 2025.
• **Nigerian Medical Reimbursement Cases:** BAT Nigeria, the Company, and Investments are defendants in medical reimbursement actions by the federal government and several Nigerian states, seeking approximately NGN10.6 trillion (approximately £5.4 billion) in damages. The Lagos action will be remanded to the trial court after the Supreme Court denied the Company's appeal in November 2025.
• **South Korean NHIS Case:** Korea's National Health Insurance Service (NHIS) filed a healthcare recoupment action. The Seoul High Court dismissed NHIS's appeal in January 2026, upholding the first instance judgment. NHIS filed a notice of appeal to the Korean Supreme Court in February 2026.
• **Brazilian Federal Attorneys Office Action:** AGU filed an action seeking medical reimbursement for tobacco-related diseases. The court permitted ACT and FIOCRUZ to intervene as amicus curiae. Motions for clarification are pending.
• **Argentinian Individual Cases:** Two cases resulted in pending unfavorable judgments, with one reversed on appeal and the other currently on appeal.
• **Turkish Individual Action:** An adverse judgment was reversed against BAT Türkiye via an appellate court ruling in January 2025, on the basis that BAT Türkiye does not have standing to be sued.
• **Croatian Distributor Dispute:** Claims by Mr. Perica against BAT Hrvatska d.o.o u likvidaciji and TDR d.o.o. for damages relating to a distribution agreement. The Municipal Court of Zagreb determined the value of the claim at €15.85 million (approximately £13.8 million).
• **Florence Proceedings (Italy):** British American Tobacco Italia SpA was charged with administrative offenses related to alleged corruption. Charges were dismissed at the preliminary hearing in December 2024, but the prosecutor filed an appeal.
• **Patent and Trademark Litigation:** The Group is involved in patent litigation, including proceedings against RJR Vapor by Healthier Choices Management Corp. (HCMC) and Altria Client Services LLC. A jury found infringement by Vuse Alto in September 2022, awarding US$95 million in damages. Appeals are ongoing, with the Supreme Court denying a petition for certiorari in October 2025. RJR Vapor filed a motion for relief from judgment due to a sublicense, which is pending.
• **Mozambican IP Litigation:** SAT (a BAT Group company) filed a complaint regarding alleged trademark infringements. The Court of Appeal partially upheld SAT's appeal, but GST has submitted an appeal to the Supreme Court.
• **Malawi Group Action:** The Company and British American Tobacco (GLP) Limited are defendants in a claim by approximately 11,000 Malawian tobacco farmers and their family members alleging unlawful and exploitative working conditions. The Company and GLP intend to vigorously defend the claims.
• **Asbestos Litigation:** Four active asbestos personal injury cases are pending against BATUS Holdings Inc. as of December 31, 2025, with plaintiffs seeking unspecified compensatory and punitive damages.
• **Cigarette Filter Litter Litigation:** The Mayor and City Council of Baltimore, Maryland, filed a lawsuit against RJR, PM USA, and others. The trial court dismissed several claims but allowed design defect, public nuisance, and failure to warn claims to proceed. The state of Maryland filed a motion to intervene.
• **Carbon Neutral Litigation:** A putative class action lawsuit filed against RJR Vapor, RJRT, Reynolds American, and the Company alleging false marketing of Vuse products as carbon neutral. Motions to dismiss are pending.
• **Nahadi Litigation:** A claim filed in the U.S. District Court for the Eastern District of Virginia against the Company and BATMS by 196 U.S. nationals and family members claiming civil damages under the U.S. Anti-Terrorism Act, related to previously disclosed sanctions breaches. The Company and BATMS intend to vigorously defend the claim.
• **Fox River Environmental Liabilities:** Industries is potentially liable for further costs associated with the clean-up of the Fox River. A provision of £41 million represents the current best estimate of its further exposure.
• **Kalamazoo River Environmental Liabilities:** NCR filed a complaint against Industries seeking compensation for 60% of costs incurred relating to the Kalamazoo River site. Proceedings are ongoing.
• **DOJ and OFAC Investigations:** The Group reached settlement agreements with the DOJ and OFAC in April 2023 to resolve investigations into sanctions breaches related to North Korea, resulting in total payments of US$635 million plus interest.
• **Competition Investigations:** The Group is subject to ongoing competition law investigations in various jurisdictions, including Belgium and Brazil.
• **Marketing Activities Investigations:** The Group is, and may in the future be, subject to investigations or legal proceedings related to its marketing, promotion, or distribution activities, potentially leading to damages, fines, or penalties.
• **Tax Disputes (Brazil):** Brazilian Federal Tax Authority claims against Souza Cruz for reassessment of profits of overseas subsidiaries (BRL1,645 million) and challenges to Rio de Janeiro VAT incentives (BRL1,047 million). Appeals are pending.
• **Tax Disputes (Indonesia):** Directorate General of Taxes filed assessments against Bentoel group companies (IDR6,054 billion). Disputes are being challenged at various court levels.
• **Tax Disputes (Netherlands):** Dutch tax authority issued assessments on various intra-group transactions (aggregate net potential liability of £1,082 million). The Group recognized a further adjusting charge of £171 million in 2025, with a total provision of £326 million.
• **Tax Disputes (Bangladesh):** NBR claims BDT24,371 million for unpaid VAT & Supplementary Duty, BDT20,540 million for alleged extra cigarette production, and BDT3,794 million for excise avoidance. VAT rebate claims of BDT5,137 million were denied. NBR also issued a demand notice for BDT2,515 million for local raw tobacco leaf purchases. All matters are subject to ongoing appeals or litigation.

Related Party Transactions

• **ITC Limited:** The Group's equity interest in ITC reduced from 25.45% to 22.91% in 2025 due to partial divestments and ITC's employee share option scheme. Transactions include the sale of 313 million ordinary shares for net proceeds of INR121.0 billion (£1.0 billion) in 2025, and 436.9 million shares for INR166.9 billion (£1.6 billion) in 2024.
• **ITC Hotels:** Following ITC's demerger of its hotel business in January 2025, the Group recognized an initial 15% direct stake in ITC Hotels. In December 2025, the Group sold 9% of ITC Hotels for net proceeds of £318 million, retaining a 6.3% stake.
• **Surya Nepal Pvt. Limited:** The Group sold its 2% investment in Surya Nepal Pvt. Limited and brand rights in certain jurisdictions to ITC for £24 million in 2025.
• **Organigram Global Inc.:** The Group made its third and final tranche investment of CAD$42 million (£23 million) in Organigram in February 2025, increasing its equity stake to 36.8% (restricted to 30% voting rights). The Group and Organigram have a Product Development Collaboration Agreement.
• **Awake Corporation:** The Group invested an additional £3 million in Awake Corporation in June 2025, increasing its interest to 41.6% and reclassifying the investment to an associate.
• **Steady State LLC:** The Group fully impaired its investment in Steady State LLC, resulting in a loss of £6 million in 2025.
• **JSC JV UZBAT A.O.:** The Group acquired a further 2.60% in JSC JV UZBAT A.O. for £16 million in 2025, increasing ownership to 99.99%.
• **British American Tobacco Mozambique Limitada:** The Group acquired 5% of British American Tobacco Mozambique Limitada for £3 million in 2025, increasing ownership to 100%.
• **Hrvatski Duhani d.d.:** The Group acquired 1.31% in Hrvatski Duhani d.d. for less than £1 million in 2023.
• **UK Pension Fund:** The Group provided a temporary liquidity facility to the main UK pension fund, which was cancelled in March 2024.
• **Producer Responsibility Organisations:** The Group established Producer Responsibility Organisations with other tobacco manufacturers for Extended Producer Responsibility obligations related to tobacco product butt filter waste collection in certain EU countries.

Stakeholder Impact

• **Shareholders:** The 2.9% decrease in adjusted diluted EPS (at current rates) and the decline in reported revenue may negatively impact shareholder returns, despite the increased dividend payout and share buy-back program. The significant credit from Canadian litigation settlement boosted reported profit, but this is a one-off item.
• **Employees:** Increased employee benefit costs due to salary inflation and a higher average headcount, including reinvestment in trade capabilities in the U.S. Restructuring initiatives like the Fit2Win program and factory closures (e.g., Heidelberg, Dhaka) may lead to job changes or redundancies. The global strategic partnership with Accenture involves the transfer of approximately 3,000 roles.
• **Customers:** Regulatory restrictions (e.g., flavor bans, plain packaging) and increased illicit trade may limit product availability and choice for adult consumers, potentially leading to downtrading to cheaper illegal products. The company's focus on 'New Categories' aims to meet evolving consumer preferences.
• **Suppliers:** Restricted availability and price volatility of raw materials (e.g., tobacco leaf, energy) and increased transportation rates may impact suppliers. The Group maintains a diversified sourcing strategy and works closely with suppliers to ensure resilience. Supplier financing arrangements are in place.
• **Creditors:** The Group maintains investment-grade credit ratings (Baa1, BBB+, BBB+), providing confidence in its ability to access debt capital markets. However, increased net finance costs and potential future litigation liabilities could impact creditworthiness. The Canadian litigation settlement involves substantial ongoing payments.
• **Regulators/Governments:** Ongoing litigation (e.g., U.S. tobacco, Canadian litigation, tax disputes) and investigations (e.g., competition, sanctions) highlight continuous scrutiny. The company's compliance with evolving regulations (e.g., FSPTCA, TPD2, SUP Directive) and tax laws is a significant operational and financial factor. The DOJ/OFAC settlement resulted in a US$635 million payment.
• **Public Health Organizations:** The Group's 'Building a Smokeless World' strategy and investment in 'New Categories' aim to reduce the health impact of its business, aligning with harm reduction objectives, but faces skepticism and calls for stricter regulation from some public health bodies.

Next Steps

• Invest approximately £750 million in gross capital expenditure in 2026 to enhance growth opportunities and deliver operational efficiencies, with continued investment in New Categories.
• Continue to proactively assess the performance of assets to ensure value is maximized through operational returns or disposal.
• Continue to monitor the evolving regulatory environment for New Category products and engage with governments and regulators.
• Implement a £1.3 billion share buy-back program commencing in 2026.
• Finalize the buy-out process for the UK Pension Fund in the first half of 2026, including the issuance of individual insurance contracts to all scheme members.
• RJR Vapor's motion to vacate ongoing royalties after obtaining a sublicense is pending, with an evidentiary hearing likely in H1 2026.
• The final merits hearing for the Middle East Litigation will take place in Q1 2026.
• The Supreme Court's decision in the Maryland climate change litigation is expected in Q1 2026, which could impact the Baltimore cigarette filter litter litigation.
• The NBR Appellate Tribunal hearing for Bangladesh tax disputes is expected to pronounce an order in June 2026.
• BAT Bangladesh is expected to appeal the NBR's demand notice for BDT2,515 million (approximately £15 million) by April 7, 2026.
• The first annual contribution payment for the Canadian litigation settlement, estimated at CAD$156 million (approximately £85 million), will be due on July 30, 2026.
• The next Conference of the Parties (COP12) to the WHO FCTC will take place in Armenia in November 2027.
• The European Commission is expected to propose a revision to the existing EU tobacco control framework (TPD3) in 2027.
• The EU Single-Use Plastics Directive (SUP Directive) is undergoing an evaluation to be completed by July 2027, which could lead to revisions.

Key Dates

Recommendation

The filing presents a mixed picture. While British American Tobacco is making strategic progress in its 'New Categories' portfolio, particularly with Modern Oral, and has successfully navigated a significant Canadian litigation settlement, the underlying financial performance shows challenges. Reported revenue declined, and adjusted diluted EPS, a key measure for shareholders, also decreased. The substantial increase in reported profit is largely due to a one-off credit from the Canadian settlement, which masks ongoing operational headwinds like declining combustible volumes and intense competition from illicit trade in the vapour segment. The company's commitment to shareholder returns through dividends and share buy-backs is positive, but the increasing net finance costs and persistent regulatory uncertainties (despite some recent delays in U.S. bans) create a cautious outlook. A 'hold' recommendation is appropriate as the company executes its transformation strategy, with potential upside from New Categories growth and effective cost management, balanced against the significant and ongoing risks in its traditional and emerging markets.

Keywords

British American Tobacco, BAT, SEC Filing, 20-F, Annual Report, Financial Results, New Categories, Vapour, Heated Products, Modern Oral, Combustibles, Revenue, Profit, EPS, Net Debt, Share Buy-back, Canadian Litigation, ITC Divestment, FDA Regulation, Illicit Trade, Corporate Governance, Risk Management, Sustainability, Tobacco Industry, Nicotine Products, Capital Expenditures, Dividends, Sanctions, Tax Disputes, Intellectual Property