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BRITISH AMERICAN TOBACCO PLCTABLE OF CONTENTS
TABLE OF CONTENTS
Company Overview ....................................................... 4
British American Tobacco (BAT) is the second largest tobacco producer in the world.BAT operates through 81 factories in 64 countries, producing over 853 billioncigarettes and using more than 660 million kilos of tobacco per year. The Group alsohas nine other tobacco product (OTP) factories in 7 countries which manufacturecigars, roll-your-own cigarettes (stix) and pipe tobacco. It is headquartered in London,United Kingdom and employs about 90,200 people.
The company recorded revenues of £31,811 million during the fiscal year endedDecember 2004, an increase of 31.7% over 2003. The increase was primarilyattributable to strong performances in Europe and Africa and the Middle East. Theoperating profit of the company during fiscal 2004 was £1794 million, an increase of1.0% over fiscal 2003. The net profit was £1224 million during fiscal year 2004, anincrease of 55.3% over 2003.
KEY FACTS
Head Office British American Tobacco plcGlobe House4 Temple PlaceLondonWC2R 2PGUnited Kingdom
BAT is an international cigarette and OTP manufacturer with manufacturing andprocessing operations in about 64 countries.
The company’s leading international brands include Dunhill, Lucky Strike, Kent, StateExpress 555, Rothmans, Peter Stuyvesant, Benson & Hedges, Kool, Pall Mall,Viceroy, Winfield and John Player Gold Leaf.
BAT’s popular local brands around the world include: Jockey Club (Argentina),Stradbroke (Australia), du Maurier (Canada), North State (Finland), HB (Germany),Sopianae (Hungary), Wills (India), Ardath (Indonesia), Carrolls (Ireland), Boots(Mexico), Jan III Sobieski (Poland), Yava Gold (Russia), Courtleigh (South Africa),Parisienne (Switzerland), GPC (US), and Xon (Uzbekistan).
BAT also produces fine cut tobacco, pipe tobacco and cigars. The company’s leadingfine cut tobacco brands are Samson, Ajja, Javaanse Jongens and locally favoredbrands such as Belgam in Belgium or Schwarzer Krauser in Germany.
Major pipe tobacco brands include Clan, Erinmore, Captain Black and Dunhill. Thecompany’s most widely distributed cigar brands are Mercator, Dunhill andSchimmelpenninck.
The company’s finished products are distributed to retail outlets throughout the world,including: supermarkets, convenience stores, hotels, bars, restaurants, cafes,tobacconists and duty free shops.
The British-American Tobacco Company was established as a joint venture betweenthe UK’s Imperial Tobacco Company and the American Tobacco Company of the USto end an intense mutual trade war in 1902. The parent companies agreed not to tradein each other’s domestic territory; and transferred certain trademarks, exportbusinesses and overseas subsidiaries to the joint venture. Thus the company beganoperating in countries as diverse as Canada, China, Germany, South Africa andAustralia, but not in the UK or US. Operations were extended by 1910 to the WestIndies, India, Sri Lanka, East Africa, Malaysia and Nigeria.
In 1911, the American Tobacco Company broke up its complex group and divested itsshares in the British-American joint venture. British-American Tobacco was listed onthe London Stock Exchange, with most of its American parent’s shares acquired byBritish investors. The company was then free to conduct its business independentlythroughout the world, except for the UK where there were still territorial agreementswith Imperial. In 1914, British-American Tobacco acquired the Brazilian tobaccocompany Souza Cruz.
In 1927, British-American Tobacco moved into the US market by purchasing the smallNorth Carolina company, Brown & Williamson. From 1945-1960, despite internationalturmoil, which resulted in the loss of several markets including, notably, Egypt andChina, the company’s worldwide sales continued to grow. In 1956, the overseasbusiness of Benson & Hedges was added to the portfolio.
With shareholder approval, British-American Tobacco’s Memorandum of Associationwas amended to allow diversification. The group gradually expanded over the nextthree decades into paper and pulp, including Wiggins Teape and Appleton Papers;cosmetics, where British-American Cosmetics became a UK industry leader; retailing,where acquisitions in the 1970s included Argos in the UK and Saks Fifth Avenue inthe US; and later in the 1980s, financial services.
The 1902 covenant with Imperial Tobacco was revoked in 1972. British-AmericanTobacco gained exclusive ownership of its original brands, including State Express, inthe UK and Western Europe. Four years later, the group underwent a comprehensivereorganization and its operations were coordinated under a new holding companyB.A.T Industries. In 1980, Imperial Tobacco sold its remaining shareholding in B.A.TIndustries.
B.A.T Industries acquired Eagle Star (in 1984), Allied Dunbar (in 1985) and Farmers(in 1988), enabling it to become the largest UK-based insurance company by 1989.B.A.T Industries then changed its strategy to re-focus on tobacco and financialservices, and to dispose of almost everything else. Economic liberalization in the1990’s and the break-up of state monopolies opened up new trading opportunities,especially in Central and Eastern Europe and the Far East. This was highlighted bythe first acquisition in the emerging democracies of Eastern Europe with the purchaseof Pécsi Dohánygyár, in 1992, Hungary’s largest cigarette manufacturer.
In 1997, the board of B.A.T Industries announced a proposal to demerge the financialservices businesses and simultaneously merge them with the Zurich Group. Also thatyear the company acquired Cigarrera La Moderna based in Mexico. In 1998, BATbecame a separately quoted company on the London Stock Exchange. The followingyear, BAT announced a global merger with Rothmans International. British AmericanTobacco acquired the remaining 58.5% of Imasco, the group’s principal associate inCanada, in 2000. Imasco’s non-tobacco interests were sold, leaving BAT with fullownership of Canada’s largest cigarette business, Imperial Tobacco.
At the beginning of 2001, the company acquired the 40.5% stake in BAT Australasiathat it did not own previously. As a result, BAT Australasia was de-listed and becamea wholly-owned subsidiary of BAT. In mid 2001, the company announced its intentionto enter the Turkish tobacco market, through an investment of up to $200 million overa 10-year period. While, later in that year, BAT announced plans to build a factory inSouth Korea, which would be the core element in the company’s plans for anincreased market presence in the world’s eighth largest tobacco market. The followingmonth, a similar plan was announced for Nigeria.
In 2003, an agreement was signed to combine R. J. Reynolds with the US tobaccobusiness of Brown & Williamson, under a new public holding company, ReynoldsAmerican, which would apply to be listed on the New York Stock Exchange. BritishAmerican Tobacco would receive 42% of the common equity in Reynolds American. Itwas also announced that Reynolds American would acquire Lane, British AmericanTobacco’s US smoking tobacco and cigar business, for $400 million in cash.
In 2003, the company announced the sale of its cigarette making operation in Burma.BAT agreed to offload its 60% stake in Rothmans of Pall Mall Myanmar to aSingapore-based partner in the venture. The same year BAT acquired Ente TabacchiItaliani, Italy’s state-owned tobacco company. The company agreed to sell Etìnera, thedistribution business of BAT Italia (formerly Ente Tabacchi Italiani) in July 2004 to theCompañía de Distribución Integral Logista (that acquired a 96% stake) and Axiter
Investments (that acquired the remaining 4%). The company also announced duringthe year that the Central Government of China and the relevant governmentdepartments had approved the Group’s major strategic investment in China, thelargest tobacco market in the world, with annual sales of around 1780 billioncigarettes.
In August 2004, R.J. Reynolds Tobacco Holdings (RJR) and Brown & WilliamsonTobacco Corporation (a subsidiary of BAT) completed the transaction that formed anew publicly traded company, Reynolds American, and combined their respective UStobacco businesses. In January 2005 BARH Limited, the 55/45 joint venture betweenBAT and Honda Motor Company, completed the acquisition of the B.A.R Formula Oneracing team from administrators Grant Thornton. In April 2005, the company sold toGallaher the Benson & Hedges and Silk Cut trademarks in Malta and Cyprus (Northand South), and the Silk Cut trademark in Lithuania. May 2005 saw BAT Start the test-marketing of smokeless Swedish-style snus for the first time and putting two of itsbest-known brands (Lucky Strike and Peter Stuyvesant) behind it. In June 2005, BATannounced plans to transfer the production of some 6.2 billion cigarettes from itsSouthampton factory to factories in Korea and Singapore.
In July 2005, BAT announced the planned closure of its Southampton factory,signalling the end of its cigarette production in the UK.
Mr Adams joined British American Tobacco from Pepsi International in 1991 and wasregional director, Asia-Pacific and regional director, Europe prior to becoming deputymanaging director in 2001 and managing director in 2002. He was appointed adirector in 2001 and has been the company’s chief executive officer since January2004.
Mr Monteiro de Castro joined the British American Tobacco Group in 1971. Appointedto the board of B.A.T Industries in 1988, he was group chief executive and deputychairman at the time of the de-merger in 1998. Appointed a director in 2002, he wasregional director, Latin America and Caribbean before being appointed to his currentposition (since 1996). He held senior executive positions at Gillette do Brasil andAlcoa (Brazil) before joining Souza Cruz of Brazil as vice president in 1989. He wasformerly president and chief executive officer of Souza Cruz and since 1995 he hasbeen president of the Souza Cruz administrative council.
BRITISH AMERICAN TOBACCO PLCKey Employee Biographies
Mr Rayner joined Rothmans Holdings in Australia in 1991 as general manager, groupfinance and corporate services. He held senior executive appointments withRothmans before becoming chief operating officer of British American TobaccoAustralasia in 1999. He was appointed to the management board in 2001 and becamefinance director in 2002.
Jan Du Plessis
Board: Non Executive BoardJob Title: ChairmanSince: 2004Age: 51
Mr du Plessis became chairman of the company in July 2004, having been a non-executive director since his appointment to the board following the merger withRothmans in 1999. Prior to taking on the chairmanship, he was group finance directorof Richemont, a position he held since 1988. From 1990 to 1995, he held theadditional role of group finance director of Rothmans International. He retired asgroup finance director of Richemont in April 2004.
Kenneth Clarke
Board: Non Executive BoardJob Title: Deputy ChairmanAge: 64
Mr Clarke was appointed a director in 1998. He has been Member of Parliament (UK)for Rushcliffe for over 30 years. Appointed Queen’s Counsel in 1980, from 1993 until1997, he was Chancellor of the Exchequer. He is non-executive chairman of SavoyAsset Management and British American Racing (Holdings) Limited. He is also adirector of Alliance UniChem, Foreign & Colonial Investment Trust and IndependentNews & Media (UK).
BRITISH AMERICAN TOBACCO PLCKey Employee Biographies
Since: 2001Age: 50
Mr Visser was appointed a director in 2001. He is vice chairman and chief executiveofficer of Remgro, having held senior management positions with Rembrandt Groupsince 1980. He is also a non-executive director of Nampak and Rainbow Chicken.
Nicholas Scheele
Board: Non Executive BoardJob Title: DirectorSince: 2005Age: 61
Mr Scheele was appointed to the board of British American Tobacco as a non-executive director in February 2005. Since 2001, he was president and chiefoperating officer of Ford Motor Company until his retirement in February 2005. He hada long and distinguished career with Ford, during which time he held a number ofsignificant positions including chairman of Ford Europe, chairman and chief executiveofficer of Jaguar Cars and president of Ford of Mexico. He was knighted in 2001 forservices to British exports.
Piet Beyers
Board: Non Executive BoardJob Title: DirectorSince: 2004Age: 55
Mr Beyers is an executive director of Richemont and a non-executive director ofseveral other companies. He has been chairman of FCB (Cape); managing director ofCadbury, South Africa; marketing strategy director of Remgro, formerly known asRembrandt; and has held other roles in the food, liquor, tobacco and advertisingindustries.
BRITISH AMERICAN TOBACCO PLCKey Employee Biographies
Board: Non Executive BoardJob Title: DirectorSince: 2003Age: 54
Dr Llopis was appointed a director in 2003. Her career has been in sales andmarketing with Procter & Gamble and Playtex, and in finance with Banesto (now partof Banco Santander). She was chief executive of Banesto’s branch-less bank. She isexecutive vice-president of Indra, the leading Spanish IT consultancy, and a non-executive director of Reckitt Benckiser.
Rupert Pennant-Rea
Board: Non Executive BoardJob Title: DirectorSince: 1998Age: 57
Mr Pennant-Rea was editor of The Economist and deputy governor of the bank ofEngland. He is chairman of The Stationery Office Holdings, Plantation & GeneralInvestments and Key Asset Management (UK) Limited. He was appointed non-executive director of B.A.T Industries in 1995, becoming a director of British AmericanTobacco in 1998.
Robert Lerwill
Board: Non Executive BoardJob Title: DirectorSince: 2005Age: 53
Until 2003 Mr Lerwill was an executive director of Cable and Wireless plc where heserved as finance director between 1997 and 2002 and chief executive of Cable andWireless Regional between 2000 and 2003. From 1986 to 1996 he was group financedirector of WPP Group. In both companies he was instrumental in developing andmanaging major international businesses. Mr Lerwill was appointed chief executiveofficer of Aegis Group in February 2005 and is also a director of The Anthony NolanTrust.
BRITISH AMERICAN TOBACCO PLCProducts And Services Analysis
PRODUCTS AND SERVICES ANALYSIS
The company recorded revenues of £31,811 million during the fiscal year endedDecember 2004, an increase of 31.7% over 2003. The increase was primarilyattributable to strong performances in Europe, Africa and the Middle East. For thefiscal year 2004, revenues from Europe, the company’s largest geographical market,accounted for 41.4% of the net revenues*.
Revenues by Division
The company operates in a single segment: the manufacture of cigarettes and OTPs.
Revenues by Geography
Europe, BAT’s largest geographical market, accounted for 41.4% of the net revenuesin the fiscal year 2004. Net revenues from Europe reached £4452 million in 2004, anincrease of 51.0% over fiscal 2003.
The America-Pacific region accounted for 21.3% of the total revenues. Net revenuesfrom the America-Pacific region reached £2294 million in 2004, a decrease of 35.6%from fiscal 2003.
The Asia-Pacific region accounted for 13.1% of the total revenues. Net revenues fromthe Asia-Pacific region reached £1410 million in 2004, a decrease of 4.6% from fiscal2003.
Africa and the Middle East region accounted for 12.4% of the total revenues. Netrevenues from Africa and the Middle East region reached £1333 million in 2004, anincrease of 4.6% over fiscal 2003.
Latin America accounted for 11.8% of the total revenues. Net revenues from LatinAmerica reached £1275 million in 2004, a decrease of 2.5% over fiscal 2003.
*Note: The company gives a segmental break-down only for its net revenues(excluding duty, excise and other taxes for subsidiaries) and not for total revenues.
BAT is the second largest tobacco producer in the world. With more than 300 brandsin its portfolio, the company holds robust market positions in each of its operatingregions and has leadership in more than 50 of the 180 markets where it doesbusiness. The company’s strong market position is further strengthened by its wideglobal presence. However, the company’s revenues may be adversely affected due torising health concerns and public opinion against smoking.
Strengths
Strong market position
BAT is the second largest tobacco producer in the world, with a market share of22.1% and more than 300 brands in its portfolio. BAT holds robust market positions ineach of its regions and has leadership in more than 50 of the 180 markets where itdoes business. The company processes some 660 million kilos of tobacco leaf andproducing some 853 billion cigarettes in 2004. Due to the addictive nature of tobaccoproducts, BAT’s products enjoy a built in high level of demand, and the company’svast array of popular brands mean that it is in a position to consistently takeadvantage of this demand. The strong market position of the company is a keystrength for BAT.
Geographically diversified
BAT is very well diversified geographically. The company operates through 81factories in 64 countries. However, the company’s largest market, Europe accounts
for only 41.4% of its net revenues. Geographically balanced in its operations, BAT isnot overly dependent on any of its operating regions. The America-Pacific regionaccounted for 21.3% of the company’s net revenues in 2004; while the Asia-pacificregion accounted for 13.1%. In 2004, Africa and the Middle East contributed 12.4% ofBAT’s net revenues and Latin America contributed another 11.8%. The company hasstrong market position in North America, Western Europe and Eastern Europe, threeof the strongest markets for tobacco products in the world. However, this has notstopped BAT from expanding into emerging markets like China where the sheer sizeof the smoking population presents a significant opportunity for the company. Thecompany’s wide geographical spread has provided it growth opportunities indiversified markets.
Control over tobacco leaf
BAT’s tobacco leaf business is large, with the group purchasing about 517,000 tons ofleaf tobacco annually. Subsidiary companies operate leaf growing programs throughwhich they provide direct agronomy support to farmers if it is not otherwise available.BAT purchases on average about 65% of its leaf through these programs, mainlythrough directly contracted farmers. In 2004, BAT’s subsidiary companies operated 22leaf programs in 22 countries, covering about 254,400 hectares under cultivation. Thisgives the company an assured supply of tobacco leaf and insulates it from demandand price fluctuations for tobacco leaf.
Weaknesses
Declining operating profitability
Despite a 31.7% increase in total revenues during 2004, the operating profit of thecompany increased a mere 1.0% over fiscal 2003. As result, the company’s operatingmargins decreased from 7.4% to 5.6%. Profit from the America-Pacific region was£795 million, a decrease of £200 million from the same period last year. This was theresult of lower profits in Canada and Japan. In Latin America, profits from Brazil wereslightly down from 2003 due to lower volumes requiring higher marketing expenses.Profits in Chile also declined. These declines in profitability were further accentuatedby the translation of US, Canadian and Latin American results into pounds sterling.The decline in profit in these two operating regions caused the overall profitability ofthe company to decline and this reflects poorly on the company.
Three of the company’s five operating regions witnessed declining revenues during2004. Net revenues from the America-Pacific region reached £2294 million in 2004, adecrease of 35.6% from fiscal 2003. At the same time, the Asia-Pacific region’s netrevenues declined by 4.6%. Latin America, which accounts for 11.8% of the totalrevenues, witnessed a 2.5% decline in revenues during 2004. In the Asia Pacificregion, the company witnessed a decline in Indonesia and Malaysia while in theAmerica-Pacific region, Imperial Tobacco Canada witnessed declining volumes anddeteriorating sales mix. In Latin America, regional sales volume at 148 billion wasdown by 2 billion mainly as a result of increased pressure from growing illicit trade.Falling revenues from major operating segments could lead to a loss of market sharefor BAT.
Decreasing operating cash flows
For fiscal year 2004, BAT’s cash flow from operations was £2677 million, a decreaseof 14.0% from 2003. The free cash flow for the company was £2412 million, 10.4%less than the free cash flow in 2003. The decline in the company’s operating cash flowand free cash flow is largely attributable to an increase in working capitalrequirements. Declining cash flows from operations are indicative of the company’spoor cash management.
Opportunities
Light cigarettes
The demand for tobacco products with lower nicotine content has been rising in thepast few years due to increasing health concerns. As a result, most tobaccocompanies have shifted focus from manufacturing strong cigarettes to manufacturing’lighter’ ones, with low nicotine content. Considering the fact that adult womensmoking population presents opportunities for growth, most tobacco companies haveintroduced light cigarettes for the market. BAT has a strong position in the market forlight cigarettes and these are marketed under some of the company’s strongestbrands. The company can thus leverage the growing popularity of light cigarettes toincrease its sales volumes.
Market potential in China
China is potentially a huge market for BAT. While the majority of the market remainsunder the control of China National Tobacco (CNTC), a state tobacco monopoly, thereis a growing demand for international brands in China in all product categories. With2003 volumes of 1.75 trillion cigarette sticks (one-third of the total global market),
China is the large volume prize for all the international majors, who currently havebarely a foothold in the market. However, of all major international players, BAT is thebest-placed as far as taking advantage of this is concerned since, the CentralGovernment of China and the relevant government departments approved theGroup’s strategic investment in China in the year 2004. The new factory is beingestablished by BAT in a joint venture with China Eastern Investments Corporation,and will reach a manufacturing capacity of 100 billion cigarettes (State Express 555and other brands) per year. The venture will also allow BAT to distribute and sell itsbrands all over China.
Rising popularity of smokeless tobacco
The world market for smokeless tobacco is worth an estimated $2 billion of which theUS accounts for approximately 65%, followed by Sweden with sales of $480 million in2003. Other markets with a strong smokeless tobacco tradition include India, Algeria,Pakistan, South Africa and Norway. The European market for snus has beenwitnessing increasing sales. Norway and Sweden especially enjoy a lively snusmarket, with sales increasing rapidly over the past few years as consumers turn toreduced-risk nicotine consumption. During the five years ended 2004, Sweden’smarket for snuff increased by 30%. In May 2005, BAT started test-marketingsmokeless snus for the first time and the company has put two of its best-knownbrands (Lucky Strike and Peter Stuyvesant) behind it. With the market for snusincreasing in Europe, the company’s largest market, BAT could have found a newarea for growth.
Threats
Increasing health concerns
Due to increasing health concerns worldwide, there has been a general decline in theconsumer preference for tobacco products. While active smoking leads to a numberof respiratory and heart ailments, even passive smoking has been proven to causecertain diseases. The frequency of consumers who have suffered irreparable damageto their health is slowly increasing as also the incidence of such people takingcigarette companies to court for punitive damages. BAT is no exception to this, andshould this trend continue, it may be the single largest factor leading to a decline inthe company’s revenues.
Major cigarette manufacturers like BAT, which are subject to pending lawsuits worthbillions of dollars, are facing competition from smaller manufacturers who are notsubject to litigation. The bigger companies are being forced to set aside substantialamounts of their profits to pay for damages they might have to pay in future. Smallercompanies are trying to take advantage of this by tying up with each other and offeringvery-low priced but quality tobacco products. As a result, they are gaining marketshare from established players who cannot afford to price their products below acertain level, in order to maintain the premium image of their products.
Contraband and counterfeit cigarettes
BAT is also threatened by the increased availability of contraband and counterfeitcigarettes. The company plans to tackle this by working in partnership withgovernments. It is playing a major role in The Global Business Leaders AllianceAgainst Counterfeiting, a group whose aim is to increase political awareness of therisks and impact of counterfeit. The company has also been experiencing fallinggrowth volumes because of the planned action taken to restrict the supply of duty-freeproducts. Approximately 15% of all cigarettes sold in the UK are expected to becontraband / counterfeit. In 2002-03, the company’s Benson and Hedges brandaccounted for 19% of all seizures of illicit cigarettes made by the UK customs. Ofthese, 90% were counterfeit. The company has also witnessed counterfeit products inEast European and Asian markets. Since these cigarettes are cheaper (due to notbeing taxed), an increase in the availability of such illicit cigarettes could deprive BATof potential customers.
A statement by Jan du Plessis, chairman of BAT is given below. The statement hasbeen taken from the company’s 2004 annual report.
British American Tobacco’s operating profit before goodwill amortisation andexceptional items grew by 2 per cent to £2,830 million at current rates of exchange. Atcomparable rates of exchange, the improvement would have been 7 per cent.Adjusted diluted earnings per share increased by 10 per cent to 75.83p, reflecting theincrease in operating profit, the reduced effective tax rate, lower minority interests andthe impact of the share buy-back programme.
During the year, 59 million shares have been repurchased, representing 2.8 per centof the average number of shares in issue during 2004, at a cost of around £490 millionand at an average price of £8.35 per share. This brings the total number of sharesbought back since the programme was launched in 2003 to 165 million, accounting for8 per cent of the total outstanding, at a cost of almost £1.2 billion. We expect to restartthe share buy-back programme following the announcement of these results.
The Board has proposed a final dividend of 29.2p per share, bringing the total for theyear to 41.9p, an increase of 8 per cent. The dividend will be paid on 4 May toshareholders on the Register at 11 March 2005.
In future, when the Board is considering the interim dividend, its policy will be that theinterim should represent one-third of the previous year’s total dividend, unless thereare any special factors to be taken into account.
Group cigarette volumes, including make-your-own cigarette ’stix’, were ahead by 8per cent to 853 billion, principally as a result of the inclusion of a full year’s sales fromthe enlarged business in Italy, as well as five months’ results from Reynolds AmericanInc., formed by the successful combination of R.J. Reynolds and the US businessesof Brown & Williamson.
The completion of this transaction was a landmark event for the Group in 2004 andthe integration of the businesses is progressing well. Our 42 per cent shareholding isnow transparently valued, at around US$5 billion, and the Group has the benefit of anindemnity for all existing and future US litigation.
The recent Appeals Court decision to reject the US Federal Government’s US$280billion claim against the US tobacco industry is obviously encouraging, even though
the US Government is seeking a further appeal. Given the appeals pending in theEngle and Price/Miles cases, 2005 is set to be an important year for the US tobaccoindustry’s attempts to put these three lawsuits behind it.
Excluding merger benefits, there were strong volume performances in Russia, Turkey,India and Pakistan offset by declines in Germany, France, Canada and Japan. Theglobal drive brands, Dunhill, Kent, Lucky Strike and Pall Mall, grew by 2 per cent.Kent’s volume increased by 10 per cent to a new record high of 33 billion.
As this is my first Chairman’s statement, I would like to remind shareholders that thereis more to the Group’s strategy for creating shareholder value than achieving growth,vital though it undoubtedly is. It is essential that we maintain our balanced approach toachieving growth, improving productivity, managing our business in a responsiblemanner and developing a winning organisation. We will continue to drive all fourelements of our strategy, in order to build a sustainable business and achieveleadership of the industry.
In terms of productivity, we have continued to meet the commitment made two yearsago to reduce overheads and indirect costs by £200 million per year by 2007. Buildingon the £64 million in 2003, we saved a further £89 million in 2004, principally as aresult of restructuring throughout the Group. Given our excellent progress, we arenow raising our five year target on overheads and indirect costs to £320 million peryear by the end of 2007, around a further £170 million per year over the next threeyears.
Additionally, we have reduced our supply chain costs over the last two years by £120million per year, as a result of factory rationalization and logistics savings. We expectto achieve further substantial supply chain savings in the years ahead.
On the responsibility front, I am pleased to report that we have made further progressin the eyes of those organisations prepared to consider our record in an objective way.The United Nations Environmental Programme ranked British American Tobaccofourth out of the top 50 global reporters in its annual survey of best practice in non-financial reporting. The Group was also favourably mentioned in a UK Department ofTrade & Industry report entitled ’Building Better Boards’ and covering best practice incorporate governance.
We have maintained our position as the only tobacco company, apart from ourMalaysian subsidiary, to be included in the Dow Jones Sustainability World Index. Ourwebsite, bat.com, was, once again, ranked as the best in the FTSE 100 by theFinancial Times’ Webranking Survey.
We will continue to support tobacco regulation that balances the preferences ofconsumers with the interests of society, establishes an open-minded approach toharm reduction as a public health policy and does not undermine the competitivebusiness environment.
In the debate over smoking in public places, for example, we will promote theprovision of segregated and properly ventilated smoking areas. These solutions workperfectly well and are a more balanced approach than the social exclusion of smokersfavoured by anti-tobacco campaigners.
In addition to Martin Broughton’s retirement as Chairman on 30 June 2004, there havebeen some other changes to the Board. Dr Harald Einsmann retired at last year’sAnnual General Meeting and Admiral Bill Owens had to step down unexpectedly onbecoming Chief Executive of Nortel Networks. On shareholders’ behalf, I should liketo thank all of them, and most particularly Martin Broughton, for their service and towelcome Piet Beyers, Robert Lerwill and Sir Nick Scheele as new Non-ExecutiveDirectors of the Board. It is with great sadness that we learned of the sudden death ofK S Wong, a Non-Executive Director since 1998, and I extend my deepest sympathyto his family.
These will be the last set of full year results presented under UK Generally AcceptedAccounting Principles, as the Group will in future present its results underInternational Financial Reporting Standards. Based on the current understanding ofthe requirements, we have set out a restatement of the key figures for 2004 on pages34 to 36. I hope this will help to provide an early insight into the impact of the change.
It has been a good year for the Group, with all regions apart from America-Pacificachieving organic growth at comparable rates of exchange. This demonstrates thefundamental strength provided by British American Tobacco’s successful strategy andgeographical diversity. Our goal remains to grow earnings per share, on average, byhigh single figures and to pay out at least half of our earnings in dividends. Oursuccess over the last three years has enabled us to deliver an average totalshareholder return of 20.8 per cent a year, compared to 2.4 per cent for the FTSE100.
British American Tobacco (La Reunion)5, immeuble Cap 2000Avenue Theodore DrouhetZAC Horizon 200097420 Le PortIle de la ReunionP: 2 62 42 40 40F: 2 62 42 03 56
British American Tobacco (Malawi) LtdPO Box 428BlantyreMalawiP: 265 670 033F: 265 670 808
BRITISH AMERICAN TOBACCO PLCLocations and Subsidiaries
British American Tobacco (Uganda)Plot 69/71 Jinja RoadPO Box 7100KampalaUgandaP: 256 41343231F: 256 41256425
British American Tobacco (United Arab Emirates)Apartment 801-804Al Moosa Tower IISheikh Zayed RoadPost Box 2784DubaiUnited Arab EmiratesP: 9714 3322344F: 9714 3316133
British American Tobacco (Uzbekistan)Nasirov Street, 77700084TashkentUzbekistanP: 998 71 120 62 82F: 998 71 120 62 12
British American Tobacco (Zimababwe) LimitedBox ST 98SouthertonHarareZimbabweP: 263 4 621 170F: 263 4 621 185
British American Tobacco (Belgium) S.A.Rue De Koninck, 38Brussels1080BelgiumP: 32 2 413 12 11F: 32 2 413 14 22
British American Tobacco (Bulgaria) Ltd.Sofia 10002A, Saborna StreetBulgariaP: 359 2 980 8915F: 359 2 981 0079
British American Tobacco (Cyprus) LimitedPO Box 21563Nicosia(PC1510)CyprusP: 357 2433 201F: 357 2437 053
British American Tobacco (Czech Republic)Hybernska 24110 00 Praha 1Czech RepublicP: 42 02 22 81 18 10F: 42 02 22 81 18 71
British American Tobacco Nordic OyPitkansillanranta 3 APO Box 2200531HelsinkiFinlandP: 358 9 731 311F: 358 9 7313 1222www.bat.fi
British American Tobacco (Central Europe Area)H-2040 BudaörsPO Box 8HungaryP: 36 23 504400F: 36 23 504490www.bat.hu
BRITISH AMERICAN TOBACCO PLCLocations and Subsidiaries
British American Tobacco España S.A.C/Alfred Nobel 19 - BUrbanizacion LosTarahales35013 Las Palmas de Gran CanariaSpainP: 34 928 410 404F: 34 928 413 004
Smoking Tobacco and Cigars (France)British American Tobacco STC (France) S.A.R.L.175, rue Jean Jacques Rousseaulssy-Les-MoulineauxCedex 92138FranceP: 33 1 4109 9595F: 33 1 4109 9596
British American Tobacco (Southern Europe Area)CP 186Lausanne 3 Cour1000SwitzerlandP: 41 21 614 1330F: 41 21 614 1398
BAT (Vietnam) Ltd - HCMC6th Floor, Sun Wah Tower115 Nguyen Hue BoulevardDistrict 1Ho Chi Minh CityVietnamP: 84 8 8219 888F: 84 8 8219 338
British American Tobacco (Azerbaijan)Hyatt International CentreTower II - 3rd Floor1033 Izmir StreetBaku 370065AzerbaijanP: 994 12 975877F: 994 12 975878
BRITISH AMERICAN TOBACCO PLCLocations and Subsidiaries
British American TobaccoPO Box 900Car Park BuildingOffice No. 101, Government AvenueManamaBahrainP: 973 214839F: 973 214847
British American Tobacco (West Africa Area)International Cigarette Consultants01 BP2638 (Cocody Danga)AbidjanCote d’IvoireP: 225 224 76416F: 225 275 472249
British American Tobacco AustralasiaPrivate Bag 1MaroubraNSW 2035AustraliaP: 61 2 9370 1500F: 61 2 9370 1188www.bat.com.au
British American Tobacco JapanAtago Mori Tower22nd Floor2-5-1 AtagoMinato-KuTokyo 105 6222JapanP: 81 3 6402 3000F: 81 3 6402 3001
British American Tobacco China19th Floor - Nokia TowerPacific Century Place2A, Gong Ti Bei LuChaoyang DistrictBeijing 100027ChinaP: 86 10 6539 1388F: 86 10 6539 3700www.battaiwan.com
