Jan du Plessis, Chairman of British American Tobacco p.l.c.
In 2008, your company delivered an outstanding performance, despite the unprecedented financial and economic turmoil around the world. Revenue, profit and volume all rose strongly, our global drive brands continued their impressive growth, we made a sound start to our second five-year drive on cost-savings and we successfully integrated two major acquisitions.
It is a performance that rounds off a decade of strong and consistent value creation for shareholders. I believe that the strategy we have pursued over the past decade will work in both good and bad times, and that it puts your company in a very strong position to withstand whatever turbulence may lie ahead.
Before I discuss the year in more detail, I would very much like to thank Thys Visser, who now retires from your Board at the expiry of his current term of office. Thys has been involved in many aspects of the tobacco industry since the 1980s and, over his eight years of service to your Board, has made a valuable contribution to our business.
I would also like to welcome Dr Gerard Murphy, who joined the Board in March and stands for re-election today. Gerry is a Senior Management Director at The Blackstone Group and has extensive experience as a Chief Executive of listed companies including Kingfisher and Carlton Communications. He has also served as a Non-Executive Director at Reckitt Benckiser, Abbey National and Novar, as well as at our Irish subsidiary, PJ Carroll. I am sure he will bring valuable insights to your Board, where he has been appointed to the Corporate Social Responsibility, Nomination and Remuneration Committees.
2008 was surely one of the most extraordinary years in financial markets and leading economies that any of us can recall. In these circumstances, I believe you will be particularly pleased to know that your company delivered an outstanding performance for shareholders.
Revenue increased by 21 per cent and operating profit, excluding adjusting items, was up 24 per cent at £3.7 billion, with all our regions contributing to this excellent result. Adjusted diluted earnings per share rose 19 per cent to 128.8 pence, driven mainly by the strong growth in operating profit and favourable exchange movements.
Volumes rose by 4 per cent to 715 billion. We benefited from six months of volume from the two major acquisitions completed in the year, but 1 per cent of the higher volume was organic growth - a very solid achievement. Our global drive brands, Dunhill, Kent, Lucky Strike and Pall Mall, continued their impressive performance, collectively putting in 16 per cent growth in the year.
Kent achieved double digit growth for the sixth year running, up 18 per cent, while Pall Mall rose by 22 per cent. Kent and Pall Mall each hit sales of over 60 billion cigarettes for the first time and Kent, which is premium priced, is now the Group’s biggest brand. Dunhill rose 7 per cent, with innovation continuing to be a significant driver of its success. Lucky Strike grew 9 per cent, with double digit growth in seven of its top ten markets.
Our global drive brands, which are mainly premium, now represent more than a quarter of our total volume. It is also well worth noting that this was one of our best years for some time in terms of growing premium volume, with premium growth of 5 per cent. It was a year when we demonstrated that we have brands that can grow both volume and value, contributing measurably to our strategy of growing shareholder value over time.
As you know, we have previously set a further target to deliver cost savings of £800 million over the five years to 2012, on top of the £1 billion that we took out of the costs of running the business in the five years to 2007. We made a very good start last year, saving £245 million in year one, which puts us well on track towards achieving the new target. Our main areas of focus continue to be the supply chain, overheads and indirect costs.
2008 was also a year that saw significant fluctuations in exchange rates, including a notable weakening of the pound. Our results benefited from the translation of overseas profits to sterling, although favourable exchange movements were by no means the only factor in our strong figures. At constant exchange rates, revenue would still have been up by 11 per cent and profit from operations up by 14 per cent - clear evidence of a strong underlying performance.
At a time when the ability of many companies to generate cash is coming under anxious scrutiny, it is also worth noting that our free cash flow rose in the year by just over 50 per cent to £2.6 billion.
Last year I spoke about the part played by carefully-chosen mergers and acquisitions in our strategy for growth, as well as about my confidence in the value-creation prospects of our two major acquisitions, the Tekel cigarette business in Turkey and the cigarette and snus businesses of Skandinavisk Tobakskompagni.
We completed both acquisitions in the summer of last year and they are living up to their promise. Both contributed positively to earnings in the year and notably strengthened our market positions in Turkey, Denmark, Sweden, Norway and Poland. Importantly, all the businesses have been integrated smoothly.
I believe that British American Tobacco can lay claim to being very good at mergers and acquisitions. Acquisitions can all too readily unravel if they turn out not to be well-embedded, or, as we have sadly seen in the recent financial turmoil, if a company has over-stretched on price.
We are not only patient about paying the right price for good value, but we look thoroughly at the long term fit with our strategy, geography and portfolio. Importantly, we also put a great deal of work into managing the integration that must follow an acquisition. I believe it is a first-class achievement that these significant businesses have already been smoothly integrated in our operations, including combining the sales forces. An important factor in strengthening our market positions is that, in all the relevant markets, we now present a single face to our trade customers, offering both the brands we have acquired and the brands we already had in the market.
Another important development for shareholders in the year was the restructuring of the 30 per cent shareholding in the Group previously held by Richemont and Remgro. To enable both companies to put British American Tobacco shares that they held directly into the hands of their shareholders, we listed British American Tobacco on the Johannesburg Stock Exchange.
About 11 per cent of our shares are now held on the South African register. This gives us a more diversified shareholder base and, because all our shares are now freely tradeable, it means that a larger proportion of our shares now have to be bought by the index funds that invest in all the companies in stock market indices.
Decade of value creation
The excellent results I have outlined enabled us to recommend a final dividend of 61.6 pence per share, up by 29 per cent. This brings the total dividend for the year to 83.7 pence, up by 26 per cent, and reaches our target of paying out 65 per cent of sustainable net earnings in dividends.
We have heard much in recent months about the ‘lost decade’ for shareholders, as plunging asset values have wiped out returns built up since the late 1990s. However, it is very good to be able to report that for shareholders in British American Tobacco, the decade has been one of consistent value creation.
It is just over 10 years since we demerged the financial services businesses and announced the global merger with Rothmans. If you have held your shares for that decade, you have been rewarded with compound growth of 11 per cent in earnings per share and 13 per cent in dividends per share, together with a very large increase in the share price.
Including both growth in the share price and dividends, £100 invested in British American Tobacco 10 years ago would have increased by £486 by the end of 2008, compared to growth of just £3 for the same sum invested in the FTSE 100 as a whole.
I firmly believe that these superior returns have been driven by the successful application of the Group’s strategy to create shareholder value through Growth, Productivity and Responsibility, delivered by a Winning Organisation.
I have so far focused mainly on how our growth and productivity strategies have driven financial performance, as I believe this is likely to be uppermost in shareholders’ minds at this time. But that certainly does not mean we have eased up on the other elements of our strategy – working to embed responsibility across everything we do, nurturing talent and ensuring that our companies are great places to work.
I am pleased to tell you that our 2008 Sustainability Report was published this morning, so that copies are available to you at this meeting.
As Paul Adams makes clear in his foreword to the Report, our sustainability agenda has not altered in the current economic climate. It focuses on our most material issues and is fully integrated in our business strategy. We believe our business strategy works in both good and bad times, so we do not see our sustainability agenda as a ‘nice to have’ that can be dropped if the economic environment gets tough. Regardless of economic conditions, we will continue to focus on tobacco harm reduction, responsibility in our marketplace and supply chain, reducing our environmental impacts and ensuring we have the right people to deliver our vision.
Our Sustainability Report covers these topics in some detail but let me touch on just a few examples.