Jan du Plessis, Chairman of British American Tobacco p.l.c.
I am delighted to report that, in 2007, your company delivered another impressive set of results. Revenue and profit were up, our global drive brands again achieved strong growth, we have made excellent savings from our initial five-year productivity drive and we have delivered earnings per share growth above our medium to long term target.
I will today outline why I believe that our latest performance is not just a run of good fortune. I believe it demonstrates the strength of a consistent and responsibly implemented strategy that should reassure shareholders in these turbulent times.
First, however, it has been a year of changes to your Board, and I would like to pay tribute to three outstanding Directors who have reached retirement.
Ken Clarke is your longest serving Director, who has been with us since we listed on the London Stock Exchange as a free-standing tobacco company 10 years ago. I am sure Ken is as well known to you as our Deputy Chairman and Senior Independent Director as he is to millions of people as the popular, jazz-loving former Government Minister. He is also widely respected by his colleagues across all parties in the House of Commons. I would particularly like to thank Ken for his work as the first Chairman of our CSR Committee and as a consistent champion of our commitment to corporate responsibility.
Going forward, his role will be split three ways. Thony Ruys will be Chairman of the Remuneration Committee, Karen de Segundo will chair the CSR Committee and the role of Senior Independent Director will pass to Sir Nick Scheele.
Paul Rayner has made an exceptional contribution as Finance Director since 2002. He joined Rothmans in 1991 as Finance Director of the Australian group and, after our merger with Rothmans in 1999, became Chief Operating Officer of the merged business across Australasia. Paul's contribution to financial discipline in the Group - driving operating efficiencies and improved cash flows - has made a huge contribution to the high regard in which we are held today within the investment community. He will leave a considerable gap by returning to Australia for family reasons and our sincere good wishes go with him. His successor, Ben Stevens, brings in-depth knowledge of our business to the role, following seven years on the Management Board, most recently as Regional Director Europe.
Antonio Monteiro De Castro, who stood down in December, has given us four outstandingly successful years as Chief Operating Officer. He joined your Board six years ago, initially as Regional Director, Latin America and the Caribbean. His 18-year career with the Group also included being President of Souza Cruz, our large Brazilian subsidiary. Antonio leaves many friends in the business worldwide and has made a tremendous contribution through his wide business knowledge and experience. He is quite an act to follow, but I am confident that he is ably succeeded by Nicandro Durante, whose 27-year career with us has also included being President of Souza Cruz and serving on the Management Board as Regional Director, Africa and the Middle East.
On your behalf, I would like to thank Ken, Paul and - in his absence - Antonio, for their tremendous service over so many years.
We also welcome two Non-Executive Directors who joined your Board in October. Christine Morin-Postel has held several senior executive positions, including Chief Executive of Société Générale de Belgique, and has served on the Executive Committee of the Suez Group in France. She is also a Non-Executive Director of 3i Group and Royal Dutch Shell.
Karen de Segundo joined us after a long career at Shell, which included being the first woman to run a Shell country business, in Uruguay, and she was, amongst other roles, Chief Executive, Renewables and President, Hydrogen, of Shell International. Her Non-Executive Directorships include Lonmin and Ahold and she is a member of General Electric's Eco Advisory Board.
I appreciate the insights that these two highly experienced Directors are already bringing to your Board's deliberations.
Your company's performance in 2007 again demonstrates consistent application of our strategy - based on growth, productivity, responsibility and developing the business as a winning organisation.
Revenue was up 3 per cent and each region delivered profit growth, raising overall operating profit, before exceptionals, by 11 per cent to £2.9 billion and adjusted diluted earnings per share by 11 per cent to 108.5 pence. Although overall volumes were down slightly, volume of our premium brands grew, with our global drive brands, Dunhill, Kent, Lucky Strike and Pall Mall, collectively growing by 10 per cent.
Both Kent and Pall Mall broke through the 50 billion volume mark. Kent again raced ahead, growing by 19 per cent to become our best-seller at 54 billion, while Pall Mall rose 10 per cent to 51 billion. Dunhill was up 6 per cent at 35 billion and Lucky Strike achieved a second year of growth to reach 23 billion. Our global drive brands have doubled their volume since 1999 and now account for 24 per cent of our volume worldwide.
While organic growth is a key part of our growth strategy, inorganic growth through mergers and acquisitions also plays a part. However, we have often stressed that we will not buy just anything at any price simply to boost volume. We are willing to wait patiently for opportunities that are financially intelligent and strategically attractive, with the right fit to our strategy, geography and portfolio.
Our last major acquisition was in 2003, when we won the bidding for ETI, the Italian state-owned tobacco business, giving us number two position in the European Union's second largest tobacco market. A five-year wait for similar opportunities finally bore fruit in February, when we announced two significant transactions at sensible prices that offer prospects for attractive financial returns.
We have agreed to acquire the cigarette and certain snus and roll-your-own businesses of Skandinavisk Tobakskompagni, in exchange for our current 32 per cent stake in the company and £1.1 billion in cash. By turning our shareholding in a diversified group into full control of a very profitable tobacco business, we believe we will greatly strengthen our position in the Nordic countries. Subject, of course, to regulatory approvals, the deal brings us cigarette volumes of 30 billion across Poland, Denmark, Norway and Sweden, the premium brand Prince and roll-your-own tobacco sales across Europe. It also brings into the Group the smokeless snus business, Fiedler & Lundgren, who already manufacture snus for us and have an annual volume of 16 million tins.
We also made the winning bid of £860 million when the Turkish Government auctioned the cigarette assets of Tekel, its state tobacco business. This will transform our position in the world's eighth largest cigarette market, boosting our market share in Turkey five-fold to 36 per cent and giving us a stronger platform to grow our international brands.
I am confident that both transactions represent wellplaced investment of shareholders' funds and are an excellent fit to our goal of creating long term shareholder value.
Speaking of patience and long term goals, you may like to know that our archives record a Board discussion in 1932 about a proposal for the British-American Tobacco Company Limited - and I quote from the Minutes - to 'undertake the management of the Turkish Tobacco Monopoly… at an estimated annual expense of £10,000'. It was thought this might be 'a satisfactory arrangement'. I think the modern arrangement is better - and well worth a wait of 76 years - albeit that things have become rather more expensive.
Last year we completed our initial five-year productivity programme, focused on reducing costs and complexity and making savings in the supply chain, which includes streamlining our manufacturing footprint. During the five years, we have removed or relocated over 400 billion sticks of manufacturing capacity, equivalent to over half our annual production volume. For overheads and indirects, our initial target was to save £200 million, but as we continued to make inroads we doubled this target to £400 million. We have actually saved £455 million in overheads and indirects and over £550 million in supply chain costs.
To have saved over a billion pounds from the annual costs of running your business, compared to five years ago, is a major achievement that shows how well the Group has driven the productivity element of our strategy. But we are not ticking the box and saying 'job done'. We have now set a new target to save a further £800 million over the next five years.
Productivity savings of course contribute to growth in profit, offering immediate benefit to shareholders. But an important point is that these savings also reflect our focus on the long term. They release funds to reinvest in the business for the future. This enables us to drive the performance of our brands through innovations that our consumers value, to continue investing in research towards reduced harm products, to streamline our distribution as a world-class supplier to the trade, to run programmes to reduce our environmental impacts and to invest in developing our people.
I believe that our most recent performance is not only good news for shareholders today, but is the result of consistent application of strategies aimed at shaping our business for the long term.