british american tobacco p.l.c. annual report 2008 - Chief Executive's review

British American Tobacco p.l.c. Annual Report 2008

"We are as determined as ever to ensure that our strategy is executed effectively and to meet our shareholders’ expectations."

Paul Adams
Chief Executive

Strong growth

Group volumes from subsidiaries were 715 billion, up 4 per cent. The slightly softer volumes in Latin America and America-Pacific were more than offset by growth in Asia-Pacific, Africa and Middle East, and Europe.

Organic volume was up 1 per cent, driven by the strong performance of our Global Drive Brands (GDBs)– Dunhill, Kent, Lucky Strike and Pall Mall – and revenue improved due to a beneficial price mix.

Our acquisitions of the cigarette assets of Tekel and the cigarette and snus businesses of Skandinavisk Tobakskompagni (ST) have further strengthened our market positions in Turkey, Scandinavia and Poland. We have now integrated the manufacturing, distribution and sales operations of these businesses and they are meeting our marketing and financial expectations.

Productivity gains

Over £245 million in productivity savings were delivered in 2008. We are well on the way to delivering our cost savings target of £800 million by 2012. Our operating margin has increased to 31 per cent in the year.

Savings in 2008 were largely achieved through primary supply chain efficiencies and further standardisation and complexity reduction. An example of this is our Global Leaf Pool organisation, which has allowed us to reduce leaf stocks, saving £111 million in working capital at 2007 prices.

Progress on responsibility

We published our first Sustainability Report, building on our social reporting over the previous six years. You can read the Report at Opens new window. We will publish our 2008 Report by May 2009.

In addition to our existing snus brands, Lucky Strike, Peter Stuyvesant and du Maurier, we have introduced Pall Mall snus in Norway and Sweden. With the acquisition of ST, we now own the Fiedler & Lundgren business and its Granit, Mocca and Metropol brands. These will strengthen our capability for further progress in this product category.

Building a winning organisation

Our recent employee opinion survey, Your Voice, found that 87 per cent of respondents are proud to be associated with our organisation, 82 per cent would recommend the Group as a good place to work and 90 per cent say they understand how their role contributes to the achievement of the Group’s strategy. These are all higher than the norm for the comparator group of businesses.

There is more about these topics in our Winning organisation section.

Industry outlook

World consumption

The World Health Organisation (WHO) has estimated that even allowing for an average decline in tobacco consumption of 1 per cent per year, adult population growth could see the number of smokers in the world increase from 1.4 billion to 1.5 billion between 2005 and 2050.

Volume declines are evident in developed markets. However, some developing markets in eastern Europe and east Asia are recording growth. This trend should be maintained and the profit pool is expected to continue to grow.

Illicit trade

We estimate that global illicit trade volumes are in excess of 300 billion cigarettes per annum, representing around 6 per cent of world cigarette consumption and losing governments internationally about £10 billion in taxes.

As such, illicit trade represents a major global competitor. Addressing this could provide a potential source of growth for the Group, tax revenue for governments and better serve the needs of consumers.

The Parties to the WHO Framework Convention on Tobacco Control (FCTC) are developing a protocol aimed at creating an international regulatory framework for addressing illicit trade. We strongly support the development of a protocol as it should provide measures to help address the problem.

Increasing regulation

In November 2008, the Parties to the FCTC adopted guidelines containing recommendations for governments on tobacco policy-making. These recommendations include bans on tobacco companies publicising their corporate social responsibility activities, bans on the display of tobacco products at the point of sale and the introduction of plain tobacco packaging. These guidelines are not mandatory for governments and in our view several aspects of them would be unworkable or illegal in various parts of the world.

As governments consider incorporating elements of the FCTC into their own laws, we will continue to offer constructive views and solutions. We believe there is much to be gained by including the responsible tobacco industry in the regulatory process and we remain in dialogue with many governments.

Challenging economic times

The short-term outlook is overshadowed by deteriorating consumer confidence and the prospect of many key economies being in recession.

Although it is prudent to expect some level of adverse consumer response, on the whole we have not experienced a loss of consumer interest in our premium brands, which recorded a 5 per cent rise in organic volumes in 2008.

We are well placed to capture down-trading consumers with our balanced brand portfolio covering all the key consumer price points. Our volume is approximately one-third in each of the premium, mid-price and low-price segments.

Our geographic spread also helps to protect shareholders from volatility in foreign exchange markets.

Competitive landscape

The last two years have seen a high level of corporate activity in the industry with Japan Tobacco’s acquisition of Gallaher, the spin-off of Philip Morris International and Imperial Group’s Altadis deal, as well as our two acquisitions.

In the near term, corporate activity is likely to comprise further disposals of state-owned or privately-owned tobacco businesses rather than large scale, transformational deals. We will continue to monitor acquisition opportunities and participate where it makes financial and strategic sense to do so.

Moving forward

Tobacco has shown itself to be one of the more resilient industries in economic downturns. We are confident that our balance across price segments and geographies, our strong brand portfolio and our dedicated and talented people will help us to navigate through this challenging period.

We are as determined as ever to ensure that our strategy is executed effectively and to meet our shareholders’ expectations.

Our strategy to deliver our vision is based on growth, productivity, responsibility and building a winning organisation.

To achieve leadership of the global tobacco industry.

To increase our volume and value share of the global tobacco market through organic growth and mergers and acquisitions.

To effectively and efficiently deploy our global resources to increase profits and generate funds to reinvest in our business.

To continue balancing our commercial objectives with the expectations of a broad range of stakeholders, thus ensuring a sustainable business.

Winning Organisation
To ensure we have the right people and the right work environment to deliver our vision.

More about our strategy

Group numbers 2008

Gross turnover (including duty, excise and other taxes):
£33,921 million
Profit from operations, excluding adjusting items:
£3,717 million
Adjusted diluted earnings per share:
128.78 pence
£12,122 million
Research and development expenditure:
£105 million
Group cigarette volumes, excluding associates:
715 billion
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