bat plc annual report 2007 - Chief Executive's review

 
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Annual Report and Accounts 2007
Chief Executive's review
 
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Group numbers 2007
£26,234 million
Gross turnover (including duty, excise and other taxes)
£10,018 million
Revenue
£3,003 million
Profit from operations, excluding exceptionals item
108.53 pence
Adjusted diluted earnings per share
£86 million
Research and development expenditure
53,907
Employees
684 billion
Group cigarette volumes, excluding associates

2007 was another very good year for British American Tobacco. We maintained the strong momentum of the past five years as we made progress in all areas of our Group strategy – Growth, Productivity, Responsibility and building a Winning Organisation.

Key Fact
+62%
Increase in GDB volumes over five years

Since 2002, our organic growth has been driven by our Global Drive Brands (GDBs), which have been rising by an average of over 10 per cent per annum, resulting in a 62 per cent increase over the last five years. This is partly due to successful innovations, that have real appeal to our consumers, and the roll-out of our GDBs into new markets.

We have achieved volume growth in developing markets, such as Russia, Nigeria and Pakistan. We have also entered new markets, such as Turkey, Bulgaria and Kazakhstan.

While our growth has been boosted by previous merger and acquisition activities, including the purchase of Ente Tabacchi Italiani, the Reynolds American transaction and the acquisition in Peru, there has also been steady and notable organic growth. This will be the basis for achieving our future targets, supported by further acquisitions as opportunities arise.

For example, we have recently announced the acquisition of both the cigarette assets of Tekel, the Turkish state-owned tobacco company, and 100 per cent of the cigarette and snus business belonging to Skandinavisk Tobakskompagni, our associate company in Scandinavia. As a result, our market positions will be significantly strengthened in Turkey, Denmark, Sweden, Norway and Poland.

Key Fact
>£1 billion
Productivity savings over five years

As detailed under Productivity, we have delivered over £1 billion of productivity savings over the last five years. More than half of our worldwide manufacturing capacity has been restructured to achieve greater efficiencies. Additionally, we are conducting extensive reorganisations to enhance our market effectiveness and achieve above-market synergies.

Margins have improved over the last five years. Profit from operations, excluding exceptional items, has risen from 24 per cent of revenue in 2002, to 30 per cent in 2007. Not content with that, we have announced our target to achieve a further £800 million savings over the next five years.

We have been pursuing our Responsibility strategy with the same rigour as Growth and Productivity targets.

Our increased investment in research and development really kicked off in 2005. Developing new products which meet consumer needs and are recognised by scientific and regulatory authorities as reduced-risk, remains top of our agenda.

In 2007, we test-marketed snus in Canada and ran a limited consumer test in Japan, in addition to our existing presence in Sweden, Norway and South Africa.

I believe we are becoming a truly global enterprise – our people are aligned with our strategy and are relentless in executing it. We are rigorous with our recruitment policies, performance management and succession planning. We will continue to ensure we have the right people on board to tackle the challenges ahead with confidence.

Industry outlook

The world market has consistently exceeded five trillion cigarettes over the last two decades.

Key Fact
>5 trillion
Cigarettes sold
in the world

This is predominantly propelled by year-on-year growth in China which has offset the softening of volumes from the rest of the world, especially in higher-value markets such as America-Pacific and Western Europe. This trend is expected to continue into the next decade.

Tobacco regulation has been on the rise in recent years. This will continue with, for example, further restrictions on smoking in public places and workplaces.

As national regulations increasingly reflect global influences, the scope of areas regulated will further expand, particularly in the design features of cigarettes, such as setting ceilings for tar and nicotine content and increasing restrictions on advertising and promotions.

Illicit trade remains a key challenge and is fuelled by many factors including tax-driven price increases, poor enforcement of borders, weak laws, loosely regulated Free Trade Zones, a lack of intellectual property rights protection and the growth of the internet as a trading medium. We estimate that 330 billion cigarettes a year are smuggled, manufactured illegally or counterfeited.

We remain fully committed to tackling the problem, and are liaising with governments, customs and law enforcement agencies around the world. We also support the World Health Organisation’s development of a global treaty specifically to address the problem of the growing global trade in illicit tobacco products.

Where does this leave us?

Despite these challenges, we expect the profitability of the global industry to increase over the next five years.

Some of this increase will be due to consumers up-trading, leading to higher volumes of premium-priced brands. We expect this trend to be most marked in developing markets, where we expect most of the future profit growth of the industry to come from.

British American Tobacco’s market positions, in both developed and developing economies, mean we are strongly positioned to benefit from increases in industry profits.

Competitive landscape

The recent round of consolidation means that our competition has got stronger. However, we have the geographic spread, brand portfolio, innovation pipeline and global scale to continue to compete and win.

In 2008, we will continue to sharpen our focus on growing our GDBs, achieving stretching productivity targets and practising high standards of corporate responsibility, underpinned by continuing efforts to build a winning organisation. These combined efforts will place us in a strong position to keep winning in the marketplace.

Conclusion

In an industry confronted with challenges, British American Tobacco will continue to grow. We are seeing positive trends in share growth and margins through improved product mix and lower costs across our key markets.

We are confident we can continue to meet the expectations of our shareholders. Our strategy and business model are clear. We have been consistently effective in executing them and this success will continue.

© British American Tobacco