British American Tobacco Regulatory News (BATS)

26 Apr 2007 11:59

British American Tobacco PLC26 April 2007 Speech by Jan du Plessis, Chairman at the British American Tobacco Annual General Meeting held on 26 April 2007 Good morning, ladies and gentlemen, and welcome to your Annual General Meeting. When we met last year, I was able to report our best year since British AmericanTobacco listed on the London Stock Exchange as a stand-alone tobacco company in1998. We have now followed that with another strong year. Profits and earningsare up, we have enjoyed excellent growth in revenues and volumes, and there hasbeen a highly impressive performance from our four global drive brands. Once again, our consistent approach to balancing the four elements of ourstrategy - growth, productivity, responsibility and a winning organisation - hascontinued to deliver substantial shareholder value. Your total shareholderreturn over the last five years is an outstanding 26 per cent a year on average,compared to 7 per cent for the FTSE 100 as a whole, making £100 invested inBritish American Tobacco worth £314, against £141 for the same money in an indextracker. As well as reviewing how your business performed last year, I will today betouching on a serious issue that I believe is of great importance to the futureof your company, and which I strongly believe should be actively addressed bygovernments everywhere - the multi-billion pound criminal trade in contrabandand counterfeit tobacco products. First, however, I would like to pay tribute to Rupert Pennant-Rea, who retiresas one of your longest serving Directors at the end of this meeting. Rupertjoined B.A.T. Industries as a Non-Executive Director in 1995 and has served onyour Board since British American Tobacco p.l.c. listed in 1998. We will misshis wise counsel and I am sure you will join me in thanking him sincerely forhis service over the last 11 years. 2006 business review Let me now make a few remarks about our performance last year. In 2006, your company delivered on every financial measure, includingoutstanding organic growth. Volumes were up 2 per cent for the second year running, revenues were up 5 percent, profit from operations was up 7 per cent on a like for like basis atnearly £2.8 billion and earnings per share increased by 10 per cent. Our global drive brands, Dunhill, Kent, Lucky Strike and Pall Mall, achieved animpressive growth of 17 per cent. Kent grew by 16 per cent to 45 billion andPall Mall had another excellent year with 40 per cent growth to 46 billion.Dunhill and Lucky Strike were also on the up again. After a patchy 2005,Dunhill grew by 6 per cent to 33 billion and Luckies, after some slow years,perked up to grow again, reaching 22 billion. The global drive brands nowaccount for over a fifth of Group volumes. It was also pleasing to see positive results well spread across our regions.Europe, Asia-Pacific, Latin America and Africa & Middle East all achievedvolume, revenue, profit and global drive brand growth. Inevitably, however, itwasn't all perfect scores. America-Pacific suffered from volume and profitdeclines in Canada, where growth of illicit trade has played a notable part inthe difficulties, but this was balanced by strong growth in profit and marketshare in Japan. Our associate companies also grew volume by 4 per cent and profits were up atboth Reynolds American and ITC in India. Our share of associates' post-taxresults, excluding exceptional items, was up 10 per cent at £431 million. Overall, it was again a year when the good geographic spread of your businesscontinued to be a source of growth and competitive advantage. We also continued to reduce our overhead and indirect costs and to make savingsin the supply chain, particularly through manufacturing rationalisation. In thelast four years, cumulative savings have reached £729 million a year, of whichover a third was achieved in 2006. We will maintain our focus on costs and, oncompletion of the current 5 year programmes, will announce a further 5 yeartarget in a year's time. We are also maintaining our focus on returning cash to shareholders. You willbe asked to vote today on a final dividend of 40.2 pence, increasing the year'stotal dividend by 19 per cent to 55.9 pence per share. We are also proposing toincrease the proportion of sustainable net earnings paid out in dividends fromat least 50 per cent to 65 per cent by 2008, and to increase the share buy backprogramme from about £500 million to £750 million a year. Last year we were again selected, for the fifth year running, as the onlytobacco business in the Dow Jones Sustainability Indices. It is also veryencouraging to be highly ranked amongst the Top 100 companies in the UK'sBusiness in the Community Corporate Responsibility Index, with a score of 93 percent. You can be confident that we will continue to ensure that we manage our businessresponsibly and provide, wherever we can, leadership in corporate responsibilityfor a business in a controversial sector. Illicit trade We have said before that in several areas of tobacco regulation, we believe wehave common goals with the public health community. One of these is in product regulation, where both we and several public healthstakeholders feel strongly that the potential for harm reduction throughinnovative products must not be overlooked in public health policy. I spokeabout this last year and it is a theme to which we will no doubt return infuture. Today, however, I will focus on another key area where well-defined publicpolicy can do much to address a significant global problem - the illicit tobaccotrade. As investors, you probably look at our performance compared to that of ourcompetitors, and I believe you will be reassured. But the less comfortable newsis that you may be looking in the wrong direction. One of our largest globalcompetitors today, now in fourth place behind Philip Morris, ourselves and JapanTobacco, is a growing body of criminals who are turning the illicit trade intobacco products into a lucrative global industry. This trade involves large volumes of smuggled genuine tobacco brands andcounterfeits and, in a few parts of the world, local manufacturers who manage topersuade local judges that they don't need to pay tobacco taxes. The illicit trade is not only big business, but it's growing. It is very hardto quantify but, faced with the growing threat, we have developed researchmethods to estimate its extent in each of our markets. Our research indicatesthat over 6 per cent of all cigarettes consumed in the world today, some 320billion, do not have the relevant taxes paid on them; in other words, thatglobal illicit volumes now exceed the combined volumes of Imperial and Altadis. Worse, this trade is increasingly becoming dominated by organised crime, withofficial concerns that it has links to terrorism. Interpol, the internationalpolice organisation, notes that gangs behind illegal drugs, arms and peopletrafficking are also involved in the illicit cigarette and alcohol trade. Taxes drive illicit trade Why is the illicit trade growing? The answer rests fundamentally withgovernments. Excessive tax increases give a lucrative opportunity to theperpetrators of counterfeiting and smuggling. Governments are of course perfectly entitled to tax tobacco products and wefully accept that this can be a valuable source of revenue for them. The issueis not taxes in themselves. It is very large tax increases, sometimes suddenlyimposed, that push prices higher than consumers are prepared to pay and createbig tax differences, and thus big price differences, across borders. The problem is made worse by weak penalties, poor border controls and corruptionin parts of the world. But the growing lawlessness is fundamentally driven bytax policies that offer huge profit margins to the unscrupulous players who arein business to exploit them. In the UK, for example, tax on cigarettes rose by 173 per cent in the six yearsto 2000, and consumption of cigarettes on which no UK taxes had been paid rosefrom 4 per cent to an estimated 27 per cent today. It is also estimated thatone in ten of these cigarettes is counterfeit. In Hungary, tax increases of 94 per cent in 18 months saw illicit trade soar toover a fifth of the market, losing the Government, over a two-year period, a sumequivalent to its entire annual healthcare budget. In Germany, 70 per centexcise increases over four years saw a 70 per cent rise in consumption ofcigarettes on which German taxes were not paid, losing the Government almost £3billion last year alone - a sum forecast to rise by a further £1 billion thisyear. More and more consumers are simply refusing to pay the fully taxed price andturning to cheap illegal offers. Consumer demand for cheap cigarettes, with noquestions asked, gives the traffickers a huge incentive. Let me give you an example of smugglers' profit margins. Cigarette taxes inUkraine are less than a tenth of those in the UK. An international brand boughtfully tax paid in Ukraine, and sold in the UK by a street hawker at half its UKretail price, nets an illegal profit of £2 a pack, £20 on a carton of 200,£50,000 on a transit van-load and £1 million on a container-load. A so-called 'amateur' smuggler can get 15,000 cigarettes into two suitcases. Bought in Spainat £1.60 a pack, these can net an illegal profit in the UK of over £1,000. Damage Consumers should not imagine that the shadowy figures behind this trade areheroic 'Robin Hoods'. Anyone lighting up a smuggled or counterfeit cigaretteshould know they may unwittingly be helping to fund international organisedcrime, while taxpayers foot the bill. UK Revenue & Customs puts losses to theTreasury from tobacco smuggling, over the five years to 2005, at £19 billion.That's enough to train seven hundred thousand teachers or build 800 newsecondary schools. The UK has had an illicit trade problem for some years. But the virus isspreading to a growing number of markets, including some that are major sourcesof your company's profitability. In Brazil, nearly a third of sales have no local taxes paid on them. In SouthAfrica, 17 per cent of sales are illegal product. In Malaysia, 21 per cent ofsales are smuggled product from neighbouring countries. In Canada, a surveyjust over a year ago found that 17 per cent of tobacco consumption wascontraband, mainly product manufactured in, and smuggled from, First Nationsreservations. All the indicators show things have grown worse since then.Politicians in Canada, a leading country in tobacco control, find it politicallyconvenient to ignore this scourge, despite the disastrous social and economicimpacts. Illicit trade throws markets into chaos, with real losses for both governmentsand the legitimate industry. For the industry, investment in distribution networks is undermined, retail jobsare threatened, margins are undercut and brands are harmed by counterfeiting. For governments, large holes are blown in national budgets, while legitimatejobs and investment are threatened. More insidiously, a culture can develop ofcasual social acceptance of lawbreaking. Any government that turns a blind eyeto smuggling and counterfeit on the grounds that 'it's only tobacco' faces thecorrosive effect of law and order more generally being brought into disrepute. We estimate that your company's losses to the criminals' pockets are now wellover £500 million a year, that legitimate tobacco companies as a whole arelosing over £2 billion a year, and that this large-scale theft robbedgovernments worldwide of some £12 billion in tobacco taxes in 2006 alone. Our controls For our part, we work to ensure that all our operations are directed only atsupporting the legitimate tobacco trade. Our companies ensure that quantitiesthey supply are consistent with legitimate demand and cut off supplies to anycustomers knowingly or recklessly involved in illicit trade. All our companiesare required to have tight 'Know Your Customer' controls for ensuring that salesare only made to reputable customers and we require assurance from our keysuppliers of raw materials that they have adopted similar controls. To support governments, our products now carry a covert security feature so thatwe can help enforcement agencies to identify fakes. Our companies have signedagreements with customs authorities in some 35 countries for intelligencesharing and joint action. Our Brand Enforcement Group has intensified itsintelligence gathering on the sources of illegal product, its targetdestinations and routes, and shares information with enforcement agencies. Wemonitor the destruction of seized products and machinery and analyse suspectfakes in our laboratories. In several countries, we help to train customsofficers in tackling illicit trade. Our companies in many markets are also researching the scale, dynamics andnature of the illicit segment and are sharing the findings with governments, tohelp them understand the link between excise rates and levels of illicit trade. Where governments have responded to our calls for balanced tax policy and betterenforcement, we have begun to see some success, with reductions in illicit tradein markets such as Brazil, Argentina and Hungary. Governments must act But fundamental to this battle is recognition that there is a limit to whatmanufacturers can do on their own. Responsibility for tackling the problemprimarily rests with governments. Governments set tax rates, define laws and decide resources for enforcement, andgovernments must act. Yet in many countries, where enforcement agencies havemany high priority targets, resources to combat tobacco smuggling are ofteninadequate. It is critical for governments to recognise that ever-risingtobacco taxes will drive growth of the illegal segment. An urge to raise revenues or reduce consumption through higher taxes can all toooften be an 'own goal', with lost revenues and taxes higher than consumers willpay, driving them to illegal cigarettes. And because illicit trade is now a global phenomenon, it needs the unifiedeffort of all governments to address it. WHO Protocol We therefore support the anti illicit trade measures in the World HealthOrganisation's Framework Convention on Tobacco Control. We welcome the WHO'smove to develop a global treaty, called a Protocol, on illicit tobacco tradewithin the scope of the Convention, to put more emphasis and detail intotackling the issue. A universally applied set of appropriate measures will domuch to help address a global problem. We have some sound ideas on what these measures should be, reflecting actionsthat we already take. For example, we propose that every manufacturer should ensure its sales areequivalent to legitimate demand, should screen and monitor customers and act toensure that its customers implement similar trading policies. We support packmarking, showing the place and date of manufacture, security devices andgovernment tax markers on packs. We advocate stronger laws, tougher penalties,destruction of seized goods and illicit machinery, and laws to make the copyingof tax markers as serious a crime as forging banknotes. Common ground Global action against illicit trade offers real common ground between theresponsible part of our industry and the tobacco control community. The WHOAnti-Illicit Trade Protocol is a real opportunity to guide best practice forgovernments in addressing this issue in a workable way. We believe we have muchto offer in helping to make it effective and we are committed to working withnational, regional and global bodies like the WHO to find solutions. But if the Protocol brings measures that only hinder the properly run andlegitimate tobacco trade, the outcomes could be perverse, with more criminalityand more consumers turning to illegal traders. We hope, and believe, that some members of the tobacco control communityrecognise that in this battle, the legitimate industry is an ally, not an enemy.The real enemy is the burgeoning body of illicit traffickers which, ifregulation takes a perverse course, could become bigger and more successful yet. Employees As you will have seen, we cover illicit trade as one of the risks to yourbusiness in our first Operating and Financial Review, produced as part of thisyear's Annual Report. Our OFR aims to follow the best practice guidance of theUK Accounting Standards Board by covering significant industry trends, risks,our Key Performance Indicators and other important business measures. I believeit is a high quality document and I commend it to you. In describing our strategy in action, one of the many positive topics itoutlines is the excellent set of results from our most recent global employeeopinion survey. Our people returned scores in all fifteen categories higherthan the norm for the benchmark group of global FMCG companies. This is highly encouraging, and I should like to offer my sincere personalthanks to all our employees worldwide for their hard work and commitment indelivering such strong results. This information is provided by RNS The company news service from the London Stock Exchange