bat plc annual report 2007 - Key Group risk factors (1 of 4)
Introduction
This section identifies the main risk factors that may affect the British American Tobacco Group’s finances and operations. The table below provides a brief description of the key risks to which the Group’s operations are exposed and identifies, in each case, the principal processes in place to manage those risks. The factors listed all have the potential to have an adverse impact on the Group’s business, its revenues, profits, assets, liquidity and capital resources, and their potential impact is described in greater detail on the following pages.
It is not the intention to provide an extensive analysis of all risks affecting the Group. Not all of the factors listed are within the control of British American Tobacco and other factors besides those listed may affect the performance of its business. Some risks may be unknown at present and other risks, currently regarded as immaterial, could turn out to be material in the future.
This section should be read in the context of the cautionary statement regarding forward-looking statements.
| Risk | Description | Management Processes |
|---|---|---|
| Illicit trade and intellectual property | Illicit trade in the form of counterfeit products, smuggled genuine products and locally manufactured products on which applicable taxes are evaded, may have an adverse effect on Group volumes, restrict the ability to increase selling prices and damage brand equity. | Group companies are required to assess the illicit trade risk in their operating environment, to report significant issues centrally, and to develop appropriate anti-illicit trade policies, practices and procedures which are consistent with the Group’s overall strategy on illicit trade. |
| Excise and sales tax | Increases in tobacco taxes, changes in relative tax rates, or adjustments to excise structures, may impact upon volume sales or alter the Group’s sales mix. Increases in tobacco taxes could also lead to consumers rejecting the Group’s legitimate tax-paid products for products from illicit sources. | Group companies are required to have in place a formalised pricing and excise strategy, with clearly defined roles and responsibilities, to ensure a coordinated approach to strategy execution and regular monitoring. Contingency plans must be in place to manage significant excise changes. |
| Regulation | Increasingly stringent regulation regimes worldwide affecting the manufacture and sale of the Group’s products may potentially impact on volumes and profits. | Major regulatory trends are monitored centrally. Group companies are required to have in place a regulatory strategy to identify regulatory issues material to their operating environment and develop plans to address them in a manner consistent with local law and Group policy. |
| Marketplace | Disruption or change in the economic, regulatory or political situations in the countries and regions in which the Group operates may have an adverse impact on its investments and businesses or on its consolidated results of operations. The actions of competitors, for example, branding changes, new product launches, or price repositioning, could potentially affect the results of the Group’s operations or impact on its volumes or profits. | Group companies are required to develop and implement a business continuity plan covering their key risks, to include business relocation capacity, and to develop a programme for testing those plans to measure their effectiveness and relevance. To maintain a competitive advantage, the Group seeks to anticipate and respond to new consumer trends through continuous innovation, and to develop and market new products, packaging and technologies, including products with potentially reduced harm. Scenario planning for price war situations is also undertaken, where appropriate. |
| Financial | Funding and liquidity risks may expose the Group to shortages of cash and cash equivalents needed in the Group’s operations and for refinancing of existing debt. Changes in currency values and interest rates may have an adverse impact on the financial condition or operations of the Group. Cash deposits and other financial instruments give rise to credit risk on the amounts due from counterparties. Changes in asset returns, salary increases, inflation, long term interest rates and other actuarial assumptions could affect the retirement benefit arrangements operated by the Group, and so have an adverse impact on the Group. | The Group operates within a set of conservative financing principles which target a minimum level of liquidity, a minimum average maturity for the total debt portfolio and a maximum allowable proportion of total debt maturing in any one year. The Group maintains a substantial, medium term committed bank facility which may be drawn at short notice. The Group operates within a conservative cash flow hedging policy which sets out minimum levels of foreign exchange cover against known currency exposures. The Group maintains both floating and fixed rate debt. Where appropriate, the Group also uses derivatives, primarily interest rate swaps, to lock in interest rates. Exposure to each financial counterparty is monitored on a global basis and risk is limited according to the counterparty’s credit rating. The Group centrally monitors its most significant retirement benefit schemes. In three of the five most significant operations with defined benefit schemes, the main schemes have been closed to new entrants in line with the Group’s policy to make this change where possible. The value of funding deficits remains modest when compared with the Group’s market capitalisation and operating cash flow. |
| Litigation | The outcomes of legal and regulatory court proceedings in various jurisdictions, including claims for personal injury, claims for economic loss arising from the treatment of smoking and health-related diseases and claims for unpaid excise tax, could potentially impact on the results of operations or cash flows of the Group. | Any litigation which has the potential to impact upon the Group’s operations or financial position is monitored centrally. Group companies are required to assess their exposure to such litigation and liaise centrally in connection with specific claims. |
| Information technology | A significant disruption to the Group’s information technology systems due to computer viruses, malicious intrusions, the setting up of shared services centres or the installation of new systems could affect the Group’s communications and operations. | The Group has in place processes to ensure robust anti-virus coverage and to protect information security. Secure back-ups are required to be maintained for all business-critical applications, data and supporting systems. |