British American Tobacco Regulatory News (BATS)

27 Apr 2006 11:59

British American Tobacco PLC27 April 2006 Speech by Jan du Plessis, Chairman at the British American Tobacco Annual General Meeting held on 27 April 2006 Good morning, ladies and gentlemen, and welcome to your Annual General Meeting. 2005 was an excellent year, in my view our best since British American Tobaccolisted as a stand-alone tobacco company on the London Stock Exchange in 1998. We built on each element of our strategy - growth, productivity andresponsibility, delivered by a winning organisation - making progress on allfronts. Trading was strong and volumes, profits and earnings were up. Theseachievements and the success of our strategies have been acknowledged byinvestors with a notable rise in the share price. In my address today, I will touch particularly on our commitment to manage ourbusiness responsibly, a commitment that I strongly believe is fundamental to ourability to deliver sustainable shareholder value. But before doing so, I wouldlike to comment briefly on last year's performance. 2005 business review When we announced our results in February, we described 2005 as a vintage year.It certainly was. On a like for like basis, profit from Group operations was up9 per cent at over £2.6 billion, underlying volumes grew by 2 per cent, ourglobal drive brands grew by 9 per cent and earnings per share rose by 17 percent. Your Board is recommending a final dividend of 33 pence, increasing theyear's total dividend by 12 per cent to 47 pence per share. Investors who remained confident in our strategy and the quality of our businessthrough the ups and downs of volatile markets have been well rewarded. If youhave held your shares for five years, you will have seen your dividends grow ata compound rate of 10 per cent per year, alongside a very substantial rise inthe share price. Total shareholder return in the last five years has beenalmost 27 per cent a year, compared to 1.4 per cent for the FTSE 100 as a whole. An investment of £100 in British American Tobacco would have increased invalue by £226, while £100 invested in an index tracker would have grown by £7. Last year we grew market share in several key markets, such as Russia, SouthKorea, Australia, Germany and Japan. Of course, not everything went our way.High excise increases continued to cause down-trading in Canada and the suddenexcise hike in Malaysia in late 2004 continued to impact volume and profit. However, the strong performance of our global drive brands, Dunhill, Kent, LuckyStrike and Pall Mall, was very good news. Kent grew by 18 per cent to reach anew record volume of almost 39 billion. Pall Mall delivered further exceptionalgrowth of 25 per cent to reach almost 33 billion. While Dunhill and Luckiessuffered small declines, affected by circumstances in particular markets, theyturned in volumes of over 30 billion and 22 billion respectively, bringingoverall drive brands growth to an impressive 9 per cent. We have continued to make progress in reducing costs, substantially pruning ouroverheads and indirect costs and finding savings in the supply chain. Since2003, cumulative savings have reached £482 million a year, of which over £200million was achieved last year. Our associate companies are also contributing substantially to shareholdervalue. 2005 was the first full financial year after completion of the ReynoldsAmerican transaction in the United States, combining R.J. Reynolds with the USbusiness of Brown & Williamson. The stock market now values Reynolds Americanat over $16 billion, making our 42 per cent shareholding worth well over £3.5billion. We are also very proud of the performance of our associate company inIndia, ITC, which is continuing to achieve excellent earnings growth. ITC'smarket value of over $16 billion means that our 32 per cent shareholding isworth almost £3 billion. Together, the value of our holdings in these twoassociates represents over 20 per cent of British American Tobacco's marketcapitalisation. The AGM has on occasions been an opportunity for comment on our prospects forthe year ahead. However, as the AGM is now held in the week before we announceour first quarter's results, it would not be appropriate for me to comment onthis year's prospects today. Nonetheless, we are pleased with the progress weare making and your Board is confident that we can continue to deliver qualityearnings growth and good cash flow over the long term. Responsibility For the fourth year running, we are the only tobacco business selected for theDow Jones Sustainability Indices. We have also again been selected as one ofthe top companies in the UK Business in the Community Corporate ResponsibilityIndex. While these objective assessments are very encouraging, I want to stress thatfor us, corporate responsibility is not just a buzzword or a cosmetic exercise.We strongly believe that our business must demonstrate responsibility ineverything it does, especially given that we manage a product that poses realrisks to health. That is why responsibility is a fundamental part of ourbusiness strategy. But of course, a strategy must be a blueprint for actions.Let me offer you a few examples of how we work to translate responsibility intoactions. Restructuring Just over half of the cost savings we made last year were in the supply chain,including the ongoing review of our factory footprint. As shareholders, you will appreciate how important these savings are. We mustsquare up to manufacturing overcapacity and, as a global business, we mustensure that our costs are globally competitive. The savings enable us to keepinvesting for a robust and sustainable business in the future, and they help usto weather the rough waters we will inevitably encounter from time to time, suchas sudden hikes in excise duties or price wars in certain countries. But balancing our responsibilities to all our stakeholders, including employeesand shareholders, is not always easy. We also give considerable thought toaddressing the more difficult and painful aspects of cost cutting. It is one thing to analyse figures to find major savings a business can make,but quite another to have to tell a colleague, perhaps someone you have workedwith for years, that they no longer have a job. Cost cutting initiatives oftenhave very real human impacts, and we try to mitigate these as much as we can. Our Employment Principles, which you can read on our website, make clear that weexpect restructurings to be carried out responsibly and in a manner that issensitive to the human consequences. For example, jobs must only be terminatedafter a comprehensive review of all the alternatives. The reasons must beexplained to all employees and other relevant stakeholders. We expect ourcompanies to be as considerate as possible with severance pay and resettlementsupport. Where there are trades unions, as in many of our companies,redundancies must of course involve union negotiations. Our aim is to reachagreements with all parties. In 2005 alone, we set aside £165 million for redundancy packages, includingpension enhancements. Factory closures may also impact a wider community. We therefore also encourageour companies to make a social assessment and to consider ways of mitigating theimpact of rationalisation decisions on the communities in which they operate. Restructuring means balancing competing tensions, but we try hard to get thebalance right. Our shareholders rightly expect an efficient business buildingvalue for the long term. In today's highly competitive world, employees havehad to recognise that no business can guarantee a job for life. But in managingthe impacts of restructuring, we will continue to be vigilant in ensuring thatour managers continue to honour our commitment to act responsibly. Public place smoking I recently criticised the House of Commons decision to ban smoking in every bar,pub, restaurant and private club in England, despite the Government's manifestopledge for more limited restrictions and its own opinion polls showing that mostpeople do not want an outright ban. In a thought provoking leading article, The Economist recently cited publicsmoking bans as an example of what it called "hard paternalism". In essence,this may be described as a determination by governments, through legislation, toforce individuals towards behaviours - in their own interests of course - whichthey are judged incapable of choosing for themselves. Public smoking bans are,in reality, an ill-disguised attempt to force smokers to quit, rather thanallowing people to make their own choices. However, despite my criticism, let me be clear. We do not think people shouldbe free to light up just wherever they like. Regardless of the debate aboutenvironmental tobacco smoke and risks to public health - which remainscontentious - many people do want to be able to eat and drink amidst comfortablyclean air. This is the key point. There are better, and fairer, solutions based onproviding separate smoking and non-smoking areas, and proven ventilation systemsthat deliver widely recognised air quality comfort levels, even in busy pubswith smoking. That is why our companies are now working proactively with thehospitality industry to champion these types of practical solutions around theworld. Most governments, including twelve countries in Europe alone, have so faradopted more balanced solutions and many are open to considering them. It seems wise indeed for governments to recognise that comfortably clean indoorair can be achieved for everyone, without driving a quarter of a country's adultcitizens - all of them voters - out of their favourite pubs or evenneighbourhood social clubs. Anti-illicit trade Today, trade in contraband and counterfeit products is reaching alarmingproportions in many countries, as more smokers switch to cheaper illegalcigarettes because excessive tax increases have made tax-paid productunaffordable. We are taking real and concerted actions to help crack down onillicit activities that cheat consumers with adulterated products, that cheatgovernments and the legitimate industry of revenues, and that in recent yearshave been penetrated to a worrying extent by organised crime. To reduce the risks of our own products entering illegal channels, our companiesapply stringent 'know your customer' controls and ensure that the quantitiesthey supply are consistent with legitimate demand. Tight controls like theseare one reason why smugglers are turning to counterfeiters for their supplies.In response to this, we have introduced a covert security device on our productsso that counterfeits can immediately be identified, for enforcement agencies toconfiscate them. To gain a better understanding of the scale, type and causes of illicit trade intheir markets, our companies are investing in research and sharing theirfindings with governments, while our Brand Enforcement Group providesintelligence to enforcement agencies to help them take action against smugglersand counterfeiters. All this information is proving increasingly useful togovernments in understanding the size of their revenue losses and the actionsthey need to take. Around the world, including in the UK, we have pioneered formal agreements withcustoms authorities to enhance intelligence sharing and joint actions. Thenumber of these agreements is increasing as more governments recognise ourefforts and see us as a valuable partner in the battle against illicit trade. Supplier responsibility Last year, we committed a further £7.5 million to the British American TobaccoBiodiversity Partnership with four environmental NGOs. I am delighted that halfthe activity over the next five years will focus on internal management ofbiodiversity conservation across the Group, supported by our NGO partners, withhalf continuing to support external projects. Our NGO partners have already helped us to develop new requirements for oursuppliers covering raw materials sustainability, including wood pulp and itsimpacts on forestry. Our partners are also helping us to enhance thebiodiversity potential of the 600 million trees that our companies sponsor ormanage to provide wood for those farmers who need it for curing tobacco leaf. Our Social Responsibility in Tobacco Production programme for leaf suppliersincludes conserving soil and water, using agrochemicals properly, setting safetystandards, promoting afforestation and eliminating exploitative child labour.The programme has been further enhanced with biodiversity elements, and I ampleased to tell you that it now goes beyond the farmers from whom we buy leafdirectly, to cover 100 per cent of the Group's commercial suppliers of leaf. Product responsibility Turning to our product, I wish to make very clear again that British AmericanTobacco does not want children to smoke. That is why our companies have formany years supported programmes to tackle underage smoking around the world -currently 120 programmes - and why youth smoking prevention is at the heart ofour voluntary International Marketing Standards. Unfortunately, not all our competitors market to such standards. But despitethat, we do, even where it may put us at a commercial disadvantage. To helppromote good standards more widely - and a level competitive playing field - ourcompanies therefore engage with governments with a view to similar standardsbeing embodied into local law. We also lobby governments to raise the minimum age for tobacco sales to 18. TheUK Government is amongst these, and although for several years it did notrespond, I welcome the recent announcement that it is now looking to raise theminimum age for sales of tobacco in this country from 16 to 18. Finally, let me touch on harm reduction. While of course the proportion ofadults who smoke has been reducing for many years, it is clear that in futurethere will continue to be many millions of informed adults who do choose tosmoke. Our goal is eventually to give smokers the option of reduced harmproducts, if they can be developed and accepted. Harm reduction is very challenging scientifically and in terms of gainingacceptance from regulators, public health experts and the scientific community.Any reduced harm products would also have to be acceptable to consumers.Despite the challenges, however, we continue to invest in efforts to reducehuman exposure to toxins in tobacco smoke, including work to identify acceptedand accurate measures of exposure and to explore novel technologies. We alsocontinue to seek constructive engagement towards scientific acceptance that someof these approaches may significantly reduce exposure, and thus may reduce risk. One of the few tobacco products reported by several independent researchers tobe significantly harm-reducing is Swedish-style smokeless snus. Last year welaunched it in test markets in Sweden and South Africa, backed by two of ourbiggest brands, Lucky Strike and Peter Stuyvesant. We are encouraged by anumber of positive reactions from within the public health community.Regrettably, sales of snus are currently banned in some countries, including inthe European Union, except for Sweden. In view of the role it could potentiallyplay in harm reduction, we and other supporters of snus have begun engaging withregulators in the hope that they will reconsider the bans. Industry leadership In conclusion, I hope I have been able to give you a broader picture of ourefforts and achievements, not only in terms of financial results, but in termsof the ways in which we are managing our business. I believe we areincreasingly being seen as the company that is providing industry leadership insetting standards for a responsible tobacco business in the 21st century. I am sure that we have room to improve. However, we continue to learn and makeprogress, and we welcome opportunities for constructive engagement with ourstakeholders on issues that concern them. I cannot outline today everything your company is doing to meet the challengesof its trading environment, to innovate for the future, to respond to its manystakeholders and to pursue its commitment to responsibility. You will find muchmore in your Annual Review, our Social Reports and on our website, bat.com. But what I can say is that after two years as Chairman, I find your business intremendous shape. I should particularly like to thank all our employeesworldwide for the hard work, dedication and commitment that is giving thebusiness such momentum. As well as our work in demonstrating corporate responsibility, our financialresults show that our strategy is working, and the quality of your businessgives me confidence that we can continue to deliver, on average, high singledigit earnings growth for many years to come. Thank you for your attention, and let us now move to the formal business oftoday's meeting. This information is provided by RNS The company news service from the London Stock Exchange