bat plc annual report 2007 - Chairman's statement

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Annual Report and Accounts 2007
Chairman's statement
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British American Tobacco has had another very good year, with increased profit and share growth in many markets. At current rates of exchange, revenue was ahead by 3 per cent and profit from operations, excluding exceptionals, by 7 per cent, despite the £106 million adverse impact of exchange rates. At comparable rates of exchange, revenue was up 5 per cent and profit from operations, excluding exceptionals, up 11 per cent.

Key Fact
Increase in adjusted diluted earnings per share

Adjusted diluted earnings per share increased by 11 per cent to 108.53p. Over the past five years, our earnings per share have grown by 10 per cent compound, clearly demonstrating our ability to meet our goal of delivering high single-figure growth in earnings, on average, over the medium to long term.

Sales of the Group’s Global Drive Brands improved by 10 per cent, as both Kent and Pall Mall broke through the 50 billion sticks volume level for the first time. Kent grew by 19 per cent, driven by the innovative Kent Nanotek in Russia, as well as by growth in Chile, Romania and Ukraine. Dunhill was up 6 per cent, benefiting from new products and packaging, while Lucky Strike grew slightly. Our premium volume grew by 3 per cent, in contrast to the 1 per cent decline in overall volumes, demonstrating the benefit of our continuing investment in innovation.

2007 saw the completion of our initial five year programmes of cost savings from the supply chain and from overheads and indirects. Over the period, we have saved over £1 billion in annual costs. The annualised supply chain savings in 2007 reached £177 million, bringing the total to £551 million and the overheads and indirects annualised savings were £100 million, making the total for that programme £455 million.

Over the next five years, our target is to achieve further annualised savings of £800 million by 2012, in areas such as supply chain efficiencies, back office integration and management structures. Some of the savings will be reinvested in the business, so that we can maintain our investment in innovation, distribution and research and development, driving sustainable revenue growth and improving the quality of our business.

Our share of our associate companies’ post-tax results rose by 3 per cent to £442 million, reflecting higher profits from Reynolds American and ITC, partly offset by adverse exchange movements.

We have announced an agreement to acquire 100 per cent of Skandinavisk Tobakskompagni’s (ST) cigarette and snus business in exchange for our 32.35 per cent holding in ST and the payment of DKK11,384 million (£1,151 million) in cash. ST accounts for more than 60 per cent of cigarette sales in Scandinavia.

By turning our minority stake in a diversified group into full control of a very profitable cigarette business, we will strengthen our market positions in Denmark, Norway, Sweden and Poland and achieve significant synergy benefits. The transaction, which is subject to competition approvals, will be funded from a committed bank facility and, excluding one-off costs, is expected to be immediately earnings enhancing.

We are also delighted to have won the public tender for the cigarette assets of Tekel, the Turkish state-owned tobacco company, with a bid of US$1,720 million (£860 million). On completion, which is expected later this year and is subject to regulatory approvals, the acquisition will raise our market share in Turkey, the eighth largest cigarette market in the world, to some 36 per cent from just over 7 per cent today.

The addition of Tekel’s portfolio will provide a stronger platform for the growth of our International Brands such as Kent, Pall Mall and Vogue in the Turkish market. We expect to achieve significant one-off benefits in addition to the expected cost savings and the transaction, which will also be financed with a committed bank facility, should be earnings enhancing from 2009.

During the year, we repurchased some 45 million shares at a cost of £750 million and at an average price of £16.57. Over the past five years, we have returned almost £3 billion to shareholders in share buy-backs. However, in view of our refinancing plans following the Tekel and ST transactions, we have decided to scale back the 2008 share buy-back to some £400 million with a view to maintaining our credit rating. We will keep the level under review, as we intend to return to the higher level of £750 million announced last year in due course.

Once again, following discussions with the Takeover Panel, the Company will be asking independent shareholders at the Annual General Meeting (AGM) to waive the requirement for R&R Holdings S.A. (R&R) to make a bid for the remaining shares in British American Tobacco, should their combined interest, which currently stands at 29.95 per cent, reach or exceed 30 per cent as a result of our share buy-back programme.

In November 2007, Richemont and Remgro made preliminary announcements that they were considering restructurings that might entail providing their respective shareholders with the option of becoming direct shareholders in British American Tobacco. We have agreed, if requested, to obtain a secondary listing for our ordinary shares on the Johannesburg Stock Exchange with a view to facilitating any such restructurings.

Key Fact
Increase in dividend per share declared

Shareholders may remember that last year the Board announced a phased increase in the dividend payout ratio, which is planned to reach 65 per cent of long term sustainable earnings in 2008. The Board is therefore proposing a final dividend for 2007 of 47.60p, taking the total for the year to 66.20p, an increase of 18 per cent, representing a payout ratio of 61 per cent. Over the past five years, we have achieved compound dividend growth of 13 per cent.

There have been a number of changes to the Board during 2007. Antonio Monteiro de Castro retired following an outstandingly successful period as Chief Operating Officer and was replaced by Nicandro Durante. We have also announced that Paul Rayner will be retiring as Finance Director at the AGM, as he needs to return to Australia for family reasons. Our thoughts are very much with Paul and his family at this difficult time. I would like to thank him for his tremendous contribution to the Group over many years. Paul will be succeeded by Ben Stevens, currently Regional Director, Europe.

Amongst the Non-Executive Directors, Piet Beyers retired in June and Karen de Segundo and Christine Morin-Postel were appointed in October. Ken Clarke will be retiring from the Board at the AGM, having served since 1998. We will miss his wise counsel very much indeed. Ken will be succeeded as Senior Independent Director by Sir Nick Scheele.

At a time of considerable economic and financial uncertainty around the world, British American Tobacco is in good shape. Over the past five years, we have delivered significant shareholder value with a total return of 294 per cent, compared to 89 per cent for the FTSE 100 as a whole.

historical total shareholder performance

© British American Tobacco