Académique Documents
Professionnel Documents
Culture Documents
Cautionary Statement: the Operating and Financial Review and certain other sections of this document contain forward looking
statements which are subject to risk factors associated with, among other things, the economic and business circumstances
occurring from time to time in the countries and markets in which the Group operates. It is believed that the expectations
reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual
results to differ materially from those currently anticipated.
SUMMARY CORPORATE GOVERNANCE
OPERATING AND FINANCIAL REVIEW AND SUMMARY FINANCIAL STATEMENT
Overview Summary corporate governance
01 An introduction to British American Tobacco 33 Summary corporate governance
02 Chairman’s statement and financial highlights 34 Board of Directors
35 Management Board
Business and strategic review
36 Summary remuneration report
04 Chief Executive’s industry overview
06 Our strategy Summary financial statement
(including Key Performance Indicators) 41 Independent auditors’ statement
10 Our strategy in action 42 Group income statement
(including Business Measures) 43 Group balance sheet
44 Group statement of changes in total equity
Regional and financial review
45 Summary financial statement and notes
20 Regional review
26 Financial review Additional information
26 Profit from operations 48 Shareholder information
26 Interest cover ibc Contact information
26 Effective tax rate
27 Adjusted diluted earnings per share
27 Dividends per share
28 Cash flow
28 Treasury operations
29 Changes in the Group
29 Changes in accounting policies
30 Share buy-back programme
30 Key Group risk factors
ABOUT THIS REVIEW
This Annual Review and Summary Financial Statement for the year ended
31 December 2006 is intended for investors who do not require the full
detail of the Directors’ Report and Accounts, which is produced as Part 2
of a combined report (see ‘About the Combined Report’ below). The Annual
Review comprises an Operating and Financial Review (OFR) and a Summary
Review 06
Annual Review and Summary Financial Statement 2006
Corporate Governance Report, a Summary Remuneration Report and a
Summary Financial Statement.
The OFR has been prepared to a standard which fulfils the requirements for a
business review in accordance with section 234ZZB of the Companies Act 1985,
taking into account, where considered appropriate, the best practice set out
in the UK Accounting Standards Board’s ‘Reporting Statement: Operating and
Founded in 1903 by Albino Souza Cruz with just
16 employees, Souza Cruz is today the undisputed
Financial Review’.
leader in the Brazilian cigarette market and is among
the largest companies in the country.
Souza Cruz employs around 6,000 people and sells
The Annual Review does not contain sufficient information to allow for a
over 78 billion cigarettes a year. It also provides more
than 117,000 tons of tobacco leaf for export to more
than 50 countries on five continents.
full understanding of the results of the Group and of the state of affairs of
This special feature focuses on how our global
strategy of Growth, Productivity, Responsibility and
the Company or of the Group. For further information, reference should be
Winning Organisation is working in Souza Cruz, a
company contributing significantly to the success
of British American Tobacco.
made to the Directors’ Report and Accounts 2006, which incorporates the
full accounts, the Report of the independent auditors on those accounts, the
Directors’ Report, the Remuneration Report and the Corporate Governance
Statement. The Annual Review is issued to all shareholders.
Special feature
Brazil
Special feature
As part of the OFR, we have produced a special feature on our Brazilian subsidiary,
Souza Cruz, to highlight how our strategy is working in a key market.
OVERVIEW
We are also well positioned in all regions
of the world, operating in over 180 markets.
This geographical balance provides stability,
while our presence in markets where volumes
and profits are expected to grow gives us
confidence for the future.
British American Tobacco has had another good year, exceptional items are excluded, reflecting higher profits
with 7 per cent growth in our underlying profit from from Reynolds American and ITC. The contribution from
operations and a 10 per cent increase in adjusted diluted Reynolds American was £285 million, with the early
earnings per share. The improvement in profit was driven results from the acquisition of the Conwood smokeless
OVERVIEW
by volume growth of 2 per cent and net revenue growth tobacco business being distinctly encouraging.
of 5 per cent. The impact of exchange rates for the year
The improvement in profit from both subsidiaries and
as a whole was not material, although it was significantly
associates, together with a lower effective tax rate and
negative in the last six months, especially in the last
the benefit of the share buy-back programme, more
quarter, and has continued into the current year.
than offset the impact of higher net finance costs and
Our Global Drive Brands were exceptionally successful, minorities. As a result, adjusted diluted earnings per share
growing by 17 per cent. They now represent over rose by 10 per cent to 98.12p, just ahead of our long
21 per cent of the Group’s volume from subsidiaries, term goal of achieving, on average, high single figure
while international brands as a whole account for some growth in earnings.
40 per cent of the total.
By the close of business on 1 March, we expect that
Kent volume grew by 16 per cent to 45 billion, while some 35 million shares will have been bought back
Dunhill improved by 6 per cent, with encouraging since 1 January 2006 at a cost of £500 million and at
performances both in its new and its existing markets. an average price of £14.19 per share. Since 2003, when
Lucky Strike grew marginally and the star, once again, the buy-back programme started, around 246 million
CHAIRMAN’S STATEMENT AND FINANCIAL HIGHLIGHTS
was Pall Mall, up 40 per cent. shares have been repurchased at a cost of £2,191 million,
equivalent to an average price of £8.91 per share. We
There were net exceptional charges of £175 million,
continue to view the purchase of our own shares as an
reflecting the restructuring costs relating to the factory
excellent investment.
closure programme, partly offset by the gains on a
disposal of brands. The annual savings from our supply Following a review of the Group’s capital structure,
chain programme in 2006 amounted to £148 million, the Board has decided that there is scope to increase
bringing the total to £374 million per year since we significantly both the dividend payout ratio and the
started four years ago. share buy-back programme.
We also saved a further £99 million from the overheads The previous policy was to pay out at least 50 per cent
and indirects programme, bringing that total over the of long term sustainable earnings in dividends, with the
same four year period to £355 million on an annualised payout ratio in 2005 being 53 per cent. The Board has
basis. The current overheads and indirects programme decided to raise the payout ratio to 65 per cent by 2008
will be completed in 2007. However, we intend to maintain in progressive steps and is therefore proposing a final
our focus on costs and will be announcing a further five dividend for 2006 of 40.2p, an increase of 22 per cent.
year target, along with the final results from the first This takes the total for the year to 55.9p, an uplift of
five years, in March 2008. We will also pursue additional 19 per cent and raises the dividend payout ratio for
supply chain savings over the same five year period. 2006 to 57 per cent. The dividend will be paid to
shareholders on the Register at 9 March 2007. In line
Our associate companies grew their volume by 4 per cent to
with our current practice, the interim dividend for 2007
241 billion and our share of their post-tax results amounted
will be approximately one-third of the total for 2006.
to £431 million. This represents a 10 per cent increase, if
Annual Review 2006 British American Tobacco 03
Operating and financial review
In addition, the level of the share buy-back will rise FINANCIAL HIGHLIGHTS
from around £500 million to some £750 million per year,
starting in 2007. The increase in the buy-back programme Profit from operations: like-for-like
£ million
is likely to mean that, before the Annual General Meeting
+7%
2,797
in 2008, the combined interest of Richemont and Remgro 2,607
(R&R) will rise above 30 per cent. Not only is this the level
at which, under normal circumstances, an offer would
have to be made by R&R for the remaining shares in
British American Tobacco, but such an outcome is specifically
prohibited by the existing agreement between R&R and 2005 2006
the Company.
Operating profit, excluding exceptional items and the impact arising
Following discussions with both the Takeover Panel and from the change in terms of trade in Italy, increased from £2,607 million
to £2,797 million.
R&R, the Panel has indicated, subject to final approval,
that it is prepared to waive the 30 per cent rule, if the Adjusted diluted earnings per share
OVERVIEW
independent shareholders approve such a waiver at the pence
Annual General Meeting. This will allow the Company
+10%
98.12
89.34
to continue the share buy-back programme, despite
the fact that the R&R shareholding will increase above
30 per cent. The existing agreement restricting R&R’s
voting rights to 25 per cent will remain in place.
R&R have given their consent to this proposal and in return 2005 2006
have asked British American Tobacco to obtain a secondary Adjusted diluted earnings per share increased from 89.34 pence to
listing for its ordinary shares on the Johannesburg Stock 98.12 pence per share.
Exchange, if and when requested by them. British American
Tobacco has agreed to this. The proposal will be put to Group volumes
billions
the Annual General Meeting on 26 April for approval and
689
+2%
the Board recommends the independent shareholders to 678
vote in favour.
The Board does not anticipate that it would continue the
threshold is unlikely to be reached in the next seven years. Group volumes from subsidiaries were 2 per cent higher at 689 billion.
While the increased level of the share buy-back programme Dividend per share declared
will create value for shareholders, it continues to preserve pence
financial flexibility because it can be suspended in the event of
+19%
55.9
an opportunity to make a significant acquisition that is both 47.0
financially and strategically attractive in the longer term.
Rupert Pennant-Rea will retire from the Board at the end
of the Annual General Meeting. I would like to thank him
for the significant contribution he has made over the last 2005 2006
11 years, not only as a Director but also as Chairman of
Dividends declared in respect of 2006, were 55.9 pence per share
the Audit Committee. (2005: 47.0 pence), up 19 per cent.
2006 has been a good year and I believe we can look
ahead with confidence in our ability to achieve further
growth and value for shareholders. Over the past five
years, British American Tobacco has delivered an average
annual total shareholder return of 26 per cent, compared
to 7 per cent for the FTSE 100.
04 British American Tobacco Annual Review 2006
Operating and financial review
We have reported another good set of numbers for 2006 ‘fourth dimension’, namely, harm reduction, for the
but what is the state of the tobacco industry and how is millions of adults globally who will continue to be
British American Tobacco expecting to fare in the future? tobacco consumers.
Before looking forward, it is worth examining our recent Current and future market
past. Over the last five years we have grown volume, Currently smokers consume over five trillion cigarettes
with our four GDBs leading the way, up 57 per cent a year globally.
against a backdrop of quickening regulatory changes,
China, the world’s largest cigarette market, makes up
excise increases and declines in the incidence of smoking.
35 per cent of global volumes. Outside China, over half
Not all the changes have been external, some are
the global market is held by the six biggest international
self-imposed. Five years ago we pioneered the industry’s
manufacturers which, in 2006, were: Philip Morris, with
first voluntary code, a set of restrictions on our marketing
a global market share of 18.7 per cent, British American
activity worldwide. The conclusion I’ve drawn is that
Tobacco (including associates’ total volumes) with
it is still possible for us to succeed in an ever tougher
17.1 per cent, Japan Tobacco with 7.7 per cent, Imperial
environment. Whether new challenges come from our
Tobacco with 3.5 per cent, Gallaher with 3.1 per cent
own evolving standards or from regulatory restrictions,
and Altadis with 2.1 per cent.
we can grow if our positioning and strategy are right.
Regulation of the industry and its products has
We have a strong and complete portfolio of brands at
increased in recent years, including graphic health
different price points. As well as our GDBs, it includes an
warnings on packs, advertising and promotion restrictions
CHIEF EXECUTIVE’S INDUSTRY OVERVIEW
OUR STRATEGY
Our vision is to achieve leadership of the global tobacco indirect costs (anything we spend money on other than
industry, through strategies for creating shareholder value leaf, wrapping materials, cigarette making machinery
based on Growth, Productivity, Responsibility and a and labour costs).
Winning Organisation.
We define leadership in both a quantitative and qualitative RESPONSIBILITY
sense. Quantitatively, we seek volume leadership among Because we manage a product that poses real risks
BUSINESS AND STRATEGIC REVIEW
our international competitors. Qualitatively, we aim to to health, we strongly believe that our business must
lead our industry as the preferred partner of key demonstrate responsibility in everything it does. We aim
stakeholders and in demonstrating responsibility. to balance our commercial objectives with stakeholders’
changing expectations of a modern tobacco business.
See diagram 1
Our Business Principles and our Standards of Business
Conduct set out what we require of our companies and
GROWTH employees in terms of responsible corporate behaviour
We aim to grow our revenues and profits and to grow and personal integrity.
our share of the global market. We have two routes to
We support tobacco regulation that balances the
do this: organic growth and mergers and acquisitions.
preferences of consumers with the interests of society,
Organic growth means increasing our market share in
establishes an open-minded approach to harm reduction
existing markets and through entering new markets.
as a policy, and enables our businesses to continue to
To achieve organic growth, we focus on key market compete and prosper.
segments that offer the best long term prospects,
Harm reduction is an important element of our strategy.
including Premium and International Brands. We also aim
For more about our approach, see page 17.
to optimise the performance of our Global Drive Brands
and to exploit opportunities for profitable volume growth
in the Value-for-Money and Low Price segments. We see WINNING ORGANISATION
innovative products that offer consumers meaningful, To achieve our vision of industry leadership, we recognise
value-added differentiation as key to organic growth. that we must continue to have the right people and the
We aim to continue sustaining or developing strong right working environment. We aim to develop leaders
positions in our largest and most profitable markets. at all levels, to foster a confident culture that embraces
change and innovation, to attract and retain talented
Strategically important and financially attractive
OUR STRATEGY
Net revenue for 2006 grew by 5 per cent. The long term
goal is to grow net revenue, on average, by 3-3.5 per cent
per annum.
1 Net revenue growth
OUR STRATEGY
The net revenue figure is calculated as the revenue of £ million
the Group after the deduction of any duties, excise and 9,301 9,672 Long term target, on average
other taxes, as published in the Group Income Statement +7% +5%
on page 42.
2 Global Drive Brand volume
3-3.5%
A key strength of the Group is its diversified Global Drive
Brands (GDBs) portfolio. The growth of the four GDBs
Dunhill, Kent, Lucky Strike and Pall Mall is therefore a 2005 2006
OUR STRATEGY
3Share of global volume amongst key players The purpose of this measure is to ensure that the Group
The long term goal is to become the leading international generates sufficient cash to fund its operations, pay
tobacco company and British American Tobacco is dividends to its shareholders, operate the share buy-back
currently second. programme and undertake other investment opportunities
that may arise.
In 2006, our share of global volumes amongst key players
grew by 0.2 per cent. Share of global volume is calculated Measuring long term performance
BUSINESS AND STRATEGIC REVIEW
of the volumes sold by all international players, namely Adjusted diluted earnings per share (Adjusted EPS)
Philip Morris International, Japan Tobacco, Imperial grew at an average of 12.4 per cent per annum since the
Group, Gallaher and Altadis. The information used to beginning of 2004. This compared favourably to the long
complete this calculation is based on publicly available term goal of growing at the rate of high single figures
information and internal company analysis. per annum, on average, over the medium to long term.
Adjusted EPS grew 10 per cent in 2006 (2005: 17 per cent).
In our endeavour to grow global volumes, we assess all
available acquisition opportunities on a frequent basis, Adjusted diluted EPS is the best measure to assess the
but will only make a move when it is both financially underlying performance of the business, as it excludes
and strategically attractive. all significant distortions (one-off and exceptional items
4 Organic operating profit growth
that occur) but includes the potentially dilutive effect of
employee share schemes. The detail of the calculation
The Group’s long term aim is to grow organic underlying
and the adjustments made, are explained in note 7 to
operating profit by 6 per cent per annum, on average.
the accounts included in the Annual Report and Accounts.
For 2006, it was 7 per cent and for 2005, it was 9 per cent.
This calculation removes the impact of the exceptional
Organic profit used in this assessment is the operating items shown as memorandum information on the Group
profit of the Group’s subsidiaries, excluding any exceptional Income Statement on page 42. These items are the
items – the items shown as memorandum information on restructuring costs and impairment of a business, offset
the Group Income Statement on page 42. by gains on disposal of brands. In addition, the calculation
5 Cash flow
also adjusts for certain distortions in net finance costs
arising under IFRS.
The Group’s free cash flow in 2006 was £1,541 million,
marginally below 2005.
OUR STRATEGY
OUR STRATEGY
98.20 Long term target, on average,
89.34 +10%
+17% high single figures
2005 2006
Upper Quartile Median – 15.3% BAT – 32.2% 35 Upper Quartile Median – 19.9% BAT – 32.2% 70
Lower Quartile Lower Quartile
30 60
25 50
20 40
15 30
10 20
5 10
0 0
–5 – 10
The FMCG comparison is based on three months’ average values. The FTSE 100 comparison is based on three months’ average values.
10 British American Tobacco Annual Review 2006
Operating and financial review
International Brand growth at 11 per cent for the year. 1 Strategic segment volume in 22 key markets
Vogue, our premium superslims offer, led the way with billions
an impressive 32 per cent growth due to excellent results
199 208
in South Korea, Russia, Italy, France and Ukraine. Kool 171
156 150 153
grew by 16 per cent, as the menthol category continues 139 144
to expand worldwide. In addition, we saw robust growth
from Benson & Hedges, Rothmans and Craven ‘A’. Our
succeeded with Viceroy, which grew by 19 per cent in 2006. Based on data from the 22 markets, our share in each segment
increased in 2006 to ASU30 (30.2%), Lights (26.6%), IBs (21.8%)
See chart 3
and Premium (29.4%).
Relationships with customers 2 GDB volume growth
The increasingly restrictive environment in which we billions
can communicate with consumers means that Trade 146
Marketing & Distribution (TMD) is a key element of 113 114
125
our marketing activity. We recognise the importance 93 100
Pall Mall
Pall Mall aims to redefine consumers’ experience at the
Value-for-Money price point by delivering on its promise
of ’imagination in tobacco’ with innovative product
and brand attributes. Pall Mall achieved an outstanding 45 billion cigarettes sold in 2006
performance in 2006, driven by good organic volume and 16 per cent increase on 2005
share growth in its established markets such as Germany,
Poland and Spain, as well as many successful launches in
all regions.
Pall Mall’s success is driven by the strong and globally
consistent brand mix, supported by a solid innovation
pipeline, ensuring Pall Mall has a leadership position in
responding to consumer needs in the Value-for-Money
segment. The launch of House of Pall Mall in Switzerland 22 billion cigarettes sold in 2006
included the introduction of four different tobacco 0.4 per cent increase on 2005
products (small cigars, RYO, Superslims and Stix) along
in the indices gives us an objective third party perspective 4 Dow Jones Sustainability Indexes
on how we are managing the business and allows us to
benchmark our performance against the best in the sector Was 2006 score Was score
same or better higher than
and the sector averages. Dow Jones Criteria than 2005? sector average?
Economic Dimension ✖ ✔
The tobacco sector group is based upon an assessment Environmental Dimension ✔ ✔
of 10 tobacco companies, although the names of all the Social Dimension ✔ ✔
Biodiversity Partnership
See chart 6
We are also working with our Non-Governmental
Recycling Organisation partners (Earthwatch Institute (Europe),
Increasing recycling rates reduces the amount of waste Fauna & Flora International, the Royal Botanic Gardens,
that is sent to landfill. Our 2006 global recycling rate Kew and the Tropical Biology Association) within the
was 81.2 per cent. Biodiversity Partnership to avoid, minimise and mitigate
our impacts on biodiversity and minimise the use of
Through proactively seeking new partners and destinations
ecosystem services, such as soil, water and wood.
for recycling, we have increased our recycling rates over
the last five years. There are now 10 companies within We have categorised our projects in accordance with
the Group achieving 95 per cent recycling rates. definitions from the Intergovernmental Panel on Climate
Change (IPCC), splitting the contribution to the Climate
See chart 7
Change agenda into the following:
Working with our Supply Chain
• Understanding impacts, adaptation and vulnerability
Suppliers are increasingly seen as a critically important
• Mitigation
stakeholder group and there are growing expectations
that businesses should use their influence to encourage Of the current 43 projects within the partnership
good standards of corporate responsibility in their supply programme portfolio, 25 address understanding impacts,
chains. We accept this responsibility and work not only adaptation and vulnerability, and 17 address the mitigation
to set high standards for our suppliers but to support part of the IPCC definitions. 14 of the projects address
them in achieving continuous improvement. both and 15 are relevant to neither aspects of climate
change but are relevant to biodiversity conservation.
We see this as particularly important for a very large
business such as ours, with a primary supply chain that Water use
includes some 250,000 farmers who grow tobacco leaf In many areas where we operate, climatic variations
OUR STRATEGY IN ACTION
and other international suppliers from whom we buy may cause water to become a scarce resource. In 2006,
other raw materials such as packaging and paper. we have reduced our water use by 7 per cent and over
the last five years it has come down by 41 per cent.
Our major supply chain programmes include our Business
Enabler Survey Tool (BEST), which sets out in detail the See chart 8
regulated. Currently, tobacco regulation broadly focuses Since 2001, we have reduced our waste to landfill by 59%.
on three areas: preventing people from starting to smoke,
encouraging quitting and protecting people around smokers. 7 Recycling
percentage of waste recycled
However, we strongly believe that these prevention, 81.2
cessation and protection efforts are missing an important 63.6
69.4 72.3 72.5
‘fourth dimension’, namely, harm reduction, for the 57.3
We are also developing a scientific framework for are afforded the same opportunities for promotion, training
evaluating the relative risks of different tobacco products, and career development as other staff. Our Employment
both combustible and non-combustible. Currently, there is Principles are available to all staff on the Group’s intranet.
no accepted approach to measuring tobacco consumers’
The Group continues to encourage employee ownership
exposure to the toxicants believed relevant to tobacco
through its provision of employee share plans, including the
related disease. This is vital to enable development of
Partnership Share Scheme and the Share Reward Scheme.
lower risk tobacco products. However, we cannot develop
BUSINESS AND STRATEGIC REVIEW
a framework alone. To ensure that the work and supporting In addition to the global survey (see below), we encourage
research are robust, we are expanding our engagement employee engagement through individual discussions, team
with external scientists. briefings, local surveys, publications and regular meetings
with recognised employee representatives.
Research and development
Our research and development activities are focused on See chart 9
challenged and have the opportunity to grow. global employee research organisation, to gather detailed
views from employees to enable regional, functional and
Employees
local action planning. Your Voice was conducted as a global
Creating a safe place to work has to be our primary
census for the first time in October 2005, in over 70 markets,
consideration for employees. We measure and track
followed by a further census in November 2006, capturing
performance using a measure of the Lost Workday
the feedback from over 38,000 employees. The survey
Case Incident Rate (LWCIR).
covers all levels of employees and will now be run at
Over recent years, the rate has been reducing, although two yearly intervals.
the acquisition of ETI in Italy in late 2003 had a negative
Benchmarking
effect on safety performance in 2004. As British American
To establish how employee opinion within British American
Tobacco’s standards for safety were adopted, performance
Tobacco compares with other organisations, our global
in Italy has improved. In 2006, we aimed to achieve a
employee opinion survey data is compared with ISR’s
further 10 per cent reduction to a rate of 0.44. In fact,
global FMCG companies norm.
the rate fell to 0.42 from 0.49. Positive as this trend
is, we continue to aspire to achieve a rate of 0.1-0.2, Many of these companies (e.g. Diageo, Nestlé,
considered to be a best practice standard for comparable Coca-Cola and Unilever) also appear in the peer group
multinational organisations. of FMCG companies used to assess our performance
in the Long Term Incentive Plan (LTIP) – see page 37.
We are committed to providing a work environment
that is free from harassment, bullying and discrimination. 2006 survey results
There is no discrimination against people with disabilities The overall response rate for the survey in 2006 improved
who apply to join the Group and those with a disability over the previous year to reach 89 per cent.
Annual Review 2006 British American Tobacco 19
Operating and financial review
In all of the 15 categories in the 2006 survey, employee 9 Lost Workday Case Incident Rate (LWCIR)
opinion in British American Tobacco is significantly more LWCIR = No. of lost workday cases through injury or occupational illness
positive than in the FMCGs benchmarked by ISR. to employees x 200,000 ÷ total hours worked by all employees
0.72
There were also significant improvements in most of the 0.63
categories compared to the previous survey. 0.55
0.48* 0.49
0.42
See chart 10
0 20 40 60 80 100 0 10
20 British American Tobacco Annual Review 2006
Operating and financial review
REGIONAL REVIEW
REGIONAL AND FINANCIAL REVIEW
■ Europe
■ Asia-Pacific
■ Latin America
■ Africa and Middle East
■ America-Pacific
■ Associates
REGIONAL REVIEW
REGIONAL DATA
Volumes Revenue Operating profit
2006 2005 2006 2005 2006 2005
bns bns £m £m £m £m
REGIONAL SUMMARY
The following section contains:
The reported Group profit from operations was 8 per cent
higher at £2,622 million or, as explained on page 26, 21 Regional review
7 per cent higher on a like-for-like basis, with Asia-Pacific, – Europe
Latin America and the Africa and Middle East regions – Asia-Pacific
contributing to this good result. – Latin America
– Africa and Middle East
REGIONAL REVIEW
– Information technology
– Financial
22 British American Tobacco Annual Review 2006
Operating and financial review
REGIONAL REVIEW
CONTINUED
Asia-Pacific
and despite price competition. The continued growth
In Asia-Pacific, regional profit rose by £85 million to
of Parisienne volume and share was offset by the decline
£616 million, mainly attributable to good performances in
in other brands, resulting in overall volumes the same
Australasia, Malaysia, South Korea and Pakistan. Volumes
as last year and a lower market share.
at 142 billion were 4 per cent higher as strong increases
In the Netherlands, profit was lower due to higher in Pakistan, Bangladesh, South Korea and Vietnam were
excise levels and an adverse product mix, partly offset partially offset by declines in Malaysia and Indonesia.
by cost savings, while cigarette market share increased.
Profit grew strongly in Australia, as a result of improved
Profit in Belgium was affected by intense price competition
margins from a combination of product cost reductions,
Annual Review 2006 British American Tobacco 23
Operating and financial review
REGIONAL REVIEW
excellent performances by Gold Flake and Capstan,
resulting in a strong market share increase. Profit was
up significantly with strong volume growth and higher
margins. In Bangladesh, volumes and market share were
higher while profit significantly increased, with improved
margins after industry-wide price increases. In Sri Lanka,
good profit growth was achieved with higher margins
and an improved product mix.
See chart 2
24 British American Tobacco Annual Review 2006
Operating and financial review
REGIONAL REVIEW
CONTINUED
volumes and margins, an improved product mix, supply Profit in Canada was down £39 million to £280 million,
chain savings and the benefits from productivity initiatives. largely due to lower volumes following the growth of
illicit product and a shift to low-priced brands, as well
See chart 3
as the costs incurred in the move to direct distribution.
Africa and Middle East This was partially offset by the impact of efficiency savings,
Profit in the Africa and Middle East region grew by with the move of production to Mexico, and the stronger
£34 million to £468 million, mainly driven by South Canadian dollar. The premium segment now represents
Africa, Nigeria, the Middle East and Egypt. Volumes were 53 per cent of the total market compared with 57 per cent
slightly higher at 103 billion, as a result of Nigeria, Egypt last year. Imperial Tobacco Canada’s total cigarette market
and the Middle East, partly offset by decreases in Turkey. share was down 1 share point to 53 per cent.
In South Africa, despite the weaker average rand In Japan, volume, market share and profit grew strongly
exchange rate, good profit growth was achieved as a despite the decline in the total market. Market share
Founded in 1903 by Albino Souza Cruz with just
16 employees, Souza Cruz is today the undisputed
leader in the Brazilian cigarette market and is among
the largest companies in the country.
Souza Cruz employs around 6,000 people and sells
over 78 billion cigarettes a year. It also provides more
than 117,000 tons of tobacco leaf for export to more
than 50 countries on five continents.
This special feature focuses on how our global
strategy of Growth, Productivity, Responsibility and
Winning Organisation is working in Souza Cruz, a
company contributing significantly to the success
of British American Tobacco.
Special feature
Home to nearly 30 million smokers, Brazil is the sixth
largest cigarette market in the world. Brazil produces
around 10 per cent of the world’s tobacco and is the
largest exporter of tobacco leaf.
Spanning the full production cycle from ‘seed to smoke’,
Souza Cruz runs three processing plants, two factories
and an internationally acknowledged R&D centre. An
outstanding distribution operation results in 80 per cent
of volumes being delivered in less than 24 hours.
72%
Growth Global Drive Brands
Although the leading cigarette brands
Local brand strength in Brazil are local brands produced by
Souza Cruz leads the Brazilian Souza Cruz, British American Tobacco’s
Souza Cruz has over cigarette market, with six of the Global Drive Brands also have a
70 per cent of the country’s top-selling brands and growing presence in the market.
legal cigarette market a share of over 70 per cent of the
Kent’s launch in 2002 focused on
legal market. Its best-selling brand
brand innovation and was based
is Derby, which became a market
32%
around its activated charcoal filter
leader in just three months when it
technology – a first in the Brazilian
was launched in 1993 and now has
cigarette market. In 2005, the 3-Tek
a share of around 32 per cent.
charcoal filter was introduced, again
Derby accounts for one out In total, Souza Cruz sells 16 brands highlighting Kent’s commitment
of every three cigarettes sold in Brazil including Capri, Charm, to using new technology to deliver
legally in Brazil Hilton, Plaza and Ritz, with more unique flavour.
than 30 variants. Leading brands
Lucky Strike continues to develop
include Hollywood, Souza Cruz’s
its market share through blend and
oldest brand, which became Brazil’s
flavour and packaging innovations.
best-selling cigarette during the
1980s. Launched in 1984, Free was
the first Souza Cruz brand to disclose
full lists of ingredients and smoke
constituents, an initiative that was
subsequently adopted by all Souza
Cruz brands. Carlton is the market
leader in the premium segment.
It was the first to launch a range
of flavoured new variants in 2003.
Agrega’s volume-based purchasing
power gives it a keen competitive
edge in negotiations with suppliers.
£6m
Productivity Agrega’s volume-based purchasing
power gives it a keen competitive edge
Reducing complexity and costs in negotiations with suppliers and
All British American Tobacco Group today, it encompasses over 80 groups
Savings on indirect purchases companies aim to reduce supply of materials and services such as IT,
in 2006 chain complexity and save costs, fuel and medical services.
with Souza Cruz being no exception.
Other British American Tobacco
In 2006, the company delivered
£3m
companies have used Agrega’s success
savings of £6 million on indirect
as a template for establishing their
purchases (anything other than
own versions. In Argentina, Nobleza
leaf, wrapping materials, cigarette
Piccardo has worked with Quilmes,
Savings of over £3 million in making machinery and labour).
the country’s biggest brewer, to set
supply chain management Souza Cruz also achieved savings
up a joint venture to reduce indirect
of over £3 million in its supply
costs and the business model has also
chain management through
been rolled out to Cigarrera Bigott in
closer alignment of leaf purchasing,
Venezuela. In 2006, Agrega moved
procurement negotiation,
into Canada and Mexico.
manufacturing and waste reduction.
Efficient distribution
Agrega
The comprehensive Souza Cruz
Souza Cruz has pioneered an
distribution network directly services
innovative and collaborative approach
more than 200,000 points of sale. At
to delivering competitive advantage
the heart of the system is the São Paulo
through reducing the cost of indirects.
facility, the largest and most modern
In 2001, the company formed a joint cigarette distribution hub in Latin
venture called Agrega, with leading America. With around 1,000 vehicles
brewer AmBev, to identify potential and some 2,000 sales and delivery staff,
reductions in spending on 44 common Souza Cruz guarantees delivery periods
product groups in areas such as office of no more than 24 hours between
materials and travel. Using economies ordering and receipt of the product
of scale and mainly in-house expertise, almost everywhere in Brazil. Souza Cruz
Agrega soon became a benchmark has been acknowledged as a model
for procurement practice in Brazil, supplier and an international benchmark
attracting major clients including for FMCG logistical operations.
Nestlé, Pfizer and Unibanco.
Distribution Centre, São Paulo
210,000 5,000
Retailers in the ‘Available Here’ youth Hectares of forest land enabling Souza
smoking prevention programme Cruz to be self-sufficient in wood fuel
The programme recognises projects
that represent good examples of
leadership and adding value to
the business.
Staff welfare is of
key importance at
Souza Cruz
40
Managers working outside
Brazil, sharing their
knowledge and experience
Distribution in action in São Paulo
growth accelerated during the second half of the year 3 Latin America
with strong performances from Kent and Kool. Profit like-for-like information
rose significantly due to the increased volumes, the 1,791
benefit of the manufacturers’ price increase and the 1,555
absence of one-off costs, which more than offset the 149 153
impact of exchange.
530 611
2005
Results of associates 2006
Volume Revenue Operating profit
The Group’s share of the post-tax results of associates (billions) (£ million) (£ million)
increased by £39 million to £431 million. Excluding the
exceptional items explained on page 26, the Group’s 5 America-Pacific
like-for-like information
share of the post-tax results of associates increased by
£38 million to £427 million. 1,110 1,098
REGIONAL REVIEW
Reynolds American acquired Conwood on 31 May 2006.
Reynolds American reported that on a US GAAP pro forma
basis, as if it had been owned since the beginning of
2005, Conwood increased margins and profits for the
year to December 2006.
The Group’s associate in India, ITC, continued its strong
growth and, excluding the one-off items in 2005, its
contribution to Group profit rose by £11 million to
£91 million.
Associates’ volumes increased by 4 per cent to 241 billion,
and with the inclusion of these, total Group volumes were
930 billion (2005: 910 billion).
26 British American Tobacco Annual Review 2006
Operating and financial review
FINANCIAL REVIEW
From 1 January 2005, the Group is reporting under In 2006, the Group sold its Muratti Ambassador brand
International Financial Reporting Standards (IFRS). The in certain markets, as well as the L&M and Chesterfield
move to IFRS has made the reporting of performance trademarks in Hong Kong and Macao, while acquiring the
more complex. Benson & Hedges trademark in certain African countries.
The transactions resulted in a gain of £60 million.
However, the changes in IFRS during 2006 have not
had a material impact on the Group’s results. The only Profit from operations in 2005 benefited from a
REGIONAL AND FINANCIAL REVIEW
change to impact the income statement is an amendment £72 million gain, principally in respect of the disposal
to IFRS in respect of foreign exchange. This required a of certain trademarks in Malta, Cyprus and Lithuania.
restatement of the 2005 results to increase net finance
Below profit from operations, net finance costs at
costs by £4 million, with a compensating adjustment
£289 million were £61 million higher than last year,
reflected directly in changes in total equity.
principally reflecting the impact of higher interest
Profit from operations like-for-like rates as well as derivatives.
The reported Group profit from operations was 8 per cent
Interest cover
higher at £2,622 million. The table below shows like-for-like
The Group assesses its financial capacity by reference to
operating profit after excluding exceptional items and the
cash flow and interest cover. Interest cover is distorted
impact arising from the change in terms of trade in Italy
by the pre-tax impact of the exceptional items and net
following the sale of Etinera in December 2004.
finance cost distortions reflected in the adjusted earnings
2006 2005
£m £m per share as explained below. The chart shows the cover,
adjusting for these items, on the basis of profit before
As reported (page 42) 2,622 2,420
interest payable over interest payable. The interest cover
Restructuring costs (page 42) 216 271
remains strong at 8.1x (2005: 8.8x), with the lower cover
Losses/(gains) on impairment of a
reflecting higher interest costs.
business and disposal of brands and
joint venture (page 42) (41) (72) See chart 2
29.6%
31.4 29.6
See chart 4
FINANCIAL REVIEW
and the 2006 interim dividend amounting to 48.7p
+10%
98.12
89.34
(£1,008 million) in total (2005: 43.2p – £910 million).
The table on page 28 shows the dividends declared in
respect of 2006 and 2005.
As explained in the Chairman’s Statement, the previous
policy was to pay out as dividends at least 50 per cent of 2005 2006
long term sustainable earnings but the Board has decided
to raise the ratio to 65 per cent by 2008 in progressive 5 Dividends per share declared
steps. Dividends per share declared for 2006 represent pence
57.0 per cent of adjusted fully diluted earnings per share 55.9
(2005: 52.6 per cent).
See charts 4 and 5
47.0
+19%
Total equity was £189 million lower at £6,688 million.
The profit retained after payment of dividends exceeded
2005 2006
the impact of the share buy-back by £388 million. However,
this was more than offset by a £580 million adverse impact
from exchange movements, reflecting the general strength
of sterling.
28 British American Tobacco Annual Review 2006
Operating and financial review
FINANCIAL REVIEW
CONTINUED
Cash flow The other net flows in 2006 principally reflect the purchase
2006 2005
£m £m of minority interests in Chile and shares for the Group’s
share-based compensation plans, largely offset by the sale
Net cash from operating activities of Toscano in Italy and the sale of brands. The other net
before restructuring costs and taxation 3,295 3,229 flows in 2005 mainly arise from the acquisition of further
Restructuring costs (220) (143) shares in the Group’s Danish associate and the acquisition
Taxation (713) (762) of Restomat AG in Switzerland, partly offset by the
REGIONAL AND FINANCIAL REVIEW
Net cash from operating activities 2,362 2,324 proceeds of the brand sale to Gallaher.
Net interest (263) (231)
Net capital expenditure (419) (378) The above flows resulted in net cash inflows of £28 million
Dividends to minority interests (139) (133) compared to £122 million in 2005. After taking account
of transactions related to borrowings, especially the net
Free cash flow 1,541 1,582 repayment of borrowings, the above flows resulted in a
Dividends paid to shareholders (1,008) (910) net decrease of cash and cash equivalents of £292 million
Share buy-back (500) (501) compared to a net decrease of £115 million in 2005, as
Other net flows (5) (49) shown in the IFRS cash flow above.
Net cash flows 28 122
These cash flows, after an adverse exchange impact
IFRS cash flow of £96 million, resulted in cash and cash equivalents,
Net cash from operating activities 2,362 2,324 net of overdrafts, decreasing by £388 million in 2006
Net cash from investing activities (315) (292) (2005: £66 million).
Net cash from financing activities (2,339) (2,147) Borrowings, excluding overdrafts but taking into account
Net cash flows (292) (115) derivatives relating to borrowings, were £6,401 million
compared to £7,117 million as at 31 December 2005.
The IFRS cash flow includes all transactions affecting cash The decrease in this figure principally reflected the net
and cash equivalents, including financing. The alternative repayment of borrowings and the impact of exchange
cash flow above is presented to illustrate the cash flows movements.
before transactions relating to borrowings.
Current available-for-sale investments at 31 December 2006
The Group’s net cash flow from operating activities at were £128 million (31 December 2005: £96 million).
£2,362 million was £38 million higher. The growth in
As a result of the above borrowings, net of cash, cash
FINANCIAL REVIEW
Dividends declared
2006 2005
Pence Pence
per share £m per share £m
Ordinary shares
Interim 2006 paid 13 September 2006 (see page 45) 15.7 323 14.0 293
Final 2006 payable 3 May 2007 40.2 821 33.0 685
55.9 1,144 47.0 978
Annual Review 2006 British American Tobacco 29
Operating and financial review
Finance Director, the Treasury function and the boards of formed joint venture between British American Tobacco
the central finance companies. The Finance Director chairs and Honda Motor Co. Ltd, acquired the BAR business.
the boards of the major central finance companies. Any On 4 October 2005, the Group announced that it had
significant departure from agreed policies is subject to the agreed the sale of its 55 per cent shareholding in BARH
prior approval of the Board. to Honda and the sale was completed on 20 December
2005. As a result of these transactions, a gain of £5 million
Clear parameters have been established, including levels
FINANCIAL REVIEW
raising the Group shareholding from 70.4 per cent to
significantly improved terms.
96.5 per cent. The goodwill arising on these transactions
During 2006, the Group issued three bonds (€525 million was £80 million and the minority interests in Group equity
maturing in 2010, €600 million maturing in 2014 and were reduced by £11 million.
£325 million maturing in 2016) and the proceeds were
On 31 May 2006, the Group’s associate, Reynolds American,
used to refinance maturing bond issues. In addition, the
completed the acquisition of Conwood, the second largest
Group’s central banking facility was extended on existing
manufacturer of smokeless tobacco products in the US,
terms under the first extension option to a term of five
for US$3.5 billion. The acquisition was funded principally
years (plus one remaining one year extension).
with debt, and the fair value of assets acquired and liabilities
The Group continues to target investment-grade credit assumed was US$4.1 billion and US$0.6 billion respectively.
ratings; as at 31 December 2006 the ratings from Moody’s
Changes in accounting policies
and S&P were Baa1/BBB+ (end 2005: Baa1/BBB+). The
In December 2005, the International Accounting Standards
strength of the ratings has underpinned the debt issuance
Board issued an amendment to IAS21 on foreign exchange
during 2005 and 2006 and the Group continues to enjoy
rates. The amendment to IAS21 allowed inter company
full access to the debt capital markets.
balances that form part of a reporting entity’s net investment
Changes in the Group in a foreign operation to be denominated in a currency
The Group ceased to be the controlling company of other than the functional currency of either the ultimate
British American Racing (Holdings) Limited (BAR) on parent or the foreign operation itself. This means that
8 December 2004, when BAR went into administration. certain exchange differences previously taken to the
The Group consequently ceased to consolidate BAR from income statement are instead reflected directly in changes
that date. On 7 January 2005, BARH Ltd. (BARH), a newly in total equity. However, as this amendment was only
30 British American Tobacco Annual Review 2006
Operating and financial review
programme at the end of February 2003. By the close of provides a continuing process for identifying, evaluating
business on 1 March 2007, we expect that some 35 million and managing the significant risks faced by the Company
shares will have been bought back since 1 January 2006 and its subsidiaries. The Group’s regional audit committees
at a cost of £500 million (see page 45). During 2005, (which are all chaired by an Executive Director) focus
45 million shares were bought at a cost of £501 million. on risks and the control environment within each region
and are in turn supported by end market or area audit
committees. The regional audit committees’ reviews
include consideration of the effectiveness of the process
for identifying, evaluating and managing the risks of the
business and the assessments of internal control and
business risks completed by operating companies.
In addition, the Corporate Social Responsibility (CSR)
Committee (see page 33) is responsible for identifying
and assessing, in conjunction with management,
the significant social, environmental and reputational
risks facing the Group’s business and for evaluating
management’s handling of such risks. In this, it is similarly
supported by a framework of regional and end market
CSR committees.
Litigation
The Group is involved in a number of legal and
regulatory court proceedings in a number of countries.
Annual Review 2006 British American Tobacco 31
Operating and financial review
These proceedings may be characterised as covering Further, taking into account the significant number of
smoking and health issues and include claims for personal regulations applying to the Group’s businesses across
injury and claims for economic loss arising from the the world, it is possible that there may be allegations of
treatment of smoking and health related diseases. Regulatory breaches of regulations. Even when such allegations are
proceedings may result in a challenge to new regulations. proven untrue, there is often a reputational impact and
In addition, there are legal proceedings and a governmental a financial cost in defending such allegations.
BOARD OF DIRECTORS
SUMMARY CORPORATE GOVERNANCE
Jan du Plessis (British/South African) The Rt. Hon. Kenneth Clarke QC MP Paul Adams (British) Paul Rayner (Australian)
Chairman ▲ (British) Chief Executive Finance Director
Appointed Chairman in July 2004, Deputy Chairman and Senior Appointed a Director in March 2001 Joined Rothmans Holdings Limited
having been a Non-Executive Director Independent Non-Executive Director and Chief Executive in January 2004. in Australia in 1991. He held senior
since his appointment to the Board in ▲■●◆ He joined British American Tobacco executive positions with Rothmans
1999. He was previously Group Finance Appointed a Director in 1998. in July 1991 and held senior before becoming Chief Operating
Director of Richemont. He is Chairman He is Chairman of the Remuneration appointments as Regional Director, Officer of British American Tobacco
of the Nominations Committee. and Corporate Social Responsibility Asia-Pacific and Regional Director, Australasia Limited in September 1999.
He is Chairman of RHM plc and a Committees. He is Non-Executive Europe prior to becoming Deputy He became Finance Director in January
Non-Executive Director of Lloyds TSB Director of Foreign & Colonial Managing Director in June 2001 and 2002. He has been a Non-Executive
Group plc. (53) Investment Trust PLC and Independent Managing Director in January 2002. (53) Director of Centrica plc since
News & Media (UK) Limited. (66) September 2004. (52)
Antonio Monteiro de Castro (Brazilian) Piet Beyers (South African) Robert Lerwill (British) Dr Ana Maria Llopis (Spanish)
Chief Operating Officer and Director, Non-Executive Director▲ ◆ Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ■ ● ◆
America-Pacific Appointed a Director in June 2004. He Appointed a Director in 2005, he is Appointed a Director in 2003. She
Appointed a Director in March is an Executive Director of Richemont Chairman of the Audit Committee. is Executive Deputy Chairman of the
2002 and Chief Operating Officer and a Non-Executive Director of Distell He has been Chief Executive of Aegis J F Llopis Foundation and a member
in January 2004. He is President of Group Limited and Remgro Limited Group plc since 2005 and was formerly of the Good Governance Working
the administrative council of Souza where he was previously Marketing a Director of Cable & Wireless plc and Group for Spanish listed companies.
Cruz SA and a member of the board Strategy Director. (57) WPP Group PLC. He is Non-Executive Previously she was Executive Vice-
of the Getulio Vargas Foundation. Director of Synergy Healthcare plc President at Indra and Chief Executive
BOARD OF DIRECTORS
He has been a Director of Reynolds and a Director of The Anthony Nolan of Openbank, the Santander Group
American Inc. since July 2004. (61) Trust. (55) online bank. (56)
Rupert Pennant-Rea (British) Anthony Ruys (Dutch) Sir Nicholas Scheele (British/US) Thys Visser (South African)
Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ◆
Appointed Non-Executive Director of A Director from March 2006. He joined Appointed a Director in 2005. A Director since 2001. He is CEO of
B.A.T Industries p.l.c. in 1995, Heineken N.V. in 1993 becoming Formerly President and Chief Operating Remgro Limited, having held senior
becoming a Director of British Chairman in 2002. He is a member of Officer of Ford Motor Company. He is management positions with Rembrandt
American Tobacco in 1998. He will the Supervisory Boards of ABN AMRO Chancellor of the University of Warwick. Group since 1980. He is Chairman of
retire at the conclusion of this year’s Bank and Sara Lee International B.V. He is Chairman of The Cambridge-MIT Rainbow Chicken Ltd and is a Non-
Annual General Meeting. Formerly and a director of Lottomatica S.p.A. Institute and Director of Pegasus Executive Director of Medi-Clinic
Editor of The Economist and Deputy (Italy). He was appointed an Officer Holdings Group (USA), Grupo Proeza Corporation Limited, Nampak Limited
Governor of the Bank of England. He is in the Order of Orange-Nassau in (Mexico) and Caparo plc. (63) and Distell Group Limited. (52)
Chairman of Henderson Group plc and 2005. (59)
Electra Kingsway VCT plc. (59)
Annual Review 2006 British American Tobacco 35
Summary Corporate Governance and Summary Financial Statement
MANAGEMENT BOARD
Michael Prideaux (British) Jimmi Rembiszewski (German) Ben Stevens (British) Peter Taylor (British)
Director, Corporate and Director, Marketing Director, Europe Director, Operations and IT
Regulatory Affairs Joined the Group as a Marketing Appointed Director, Europe in January Joined British American Tobacco in
Appointed Director, Corporate and Director and as a Territorial Director in 2004 having previously joined the 1980 and worked in a variety of
Regulatory Affairs in 1998 following the 1991, having had various senior Management Board in 2001 as operational and general management
demerger of B.A.T Industries. He had marketing and business appointments Development Director. Since joining roles across the Group. He was
previously joined B.A.T Industries in in Procter & Gamble and Jacobs British American Tobacco in 1989, he appointed Global Operations Director
1989 from Charles Barker, a leading Suchard. He has been a member of the has covered a number of senior in 2003. (54)
financial and corporate public relations, Management Board since 1996. (56) marketing, finance and management
MANAGEMENT BOARD
advertising and design agency, where roles particularly in Europe, South Asia
he was Chief Executive. (56) and Russia. (47)
This report is extracted from the full Remuneration Remuneration – key components
Report set out in the Directors’ Report and Accounts Table 1 Executive Directors’ remuneration policy summary
2006 (a copy of which is available on request and can Table 2 Directors’ remuneration
be found on our website, bat.com). Table 3 Summary of share interests including long term
incentives
The role of the Remuneration Committee and
SUMMARY CORPORATE GOVERNANCE
and has determined that 100 per cent of the award will 150
vest. On the TSR measure, the Company ranked tenth 100
out of the FTSE 100 group of companies, giving a vesting
50
of 25 per cent for performance at the upper quartile. Dec Dec Dec Dec Dec Dec
2001 2002 2003 2004 2005 2006
A vesting of 25 per cent was achieved for ranking second
FTSE 100 comparison based on 30 trading day average values.
out of the peer group of international FMCG companies,
this being upper quartile. Earnings per share growth was Total shareholder return (annual %)
8.98 per cent per annum in excess of inflation, resulting (1 January 2004 – 31 December 2006) FMCG group
in a vesting of 50 per cent. Upper Quartile Median – 15.3% BAT – 32.2% 35
Lower Quartile
The members of the FMCG group for the 2004 award 30
20
Altadis Imperial Tobacco Group
Altria Group InBev 15
40
Performance graph
30
Schedule 7A to the Companies Act requires that the
Company must provide a graph comparing the TSR 20
Remuneration
constituents Rationale Delivery Policy summary
Base salary – competitively reward – cash – annual review with changes effective from April
SUMMARY CORPORATE GOVERNANCE
corporate and individual – monthly – benchmarked against a mid-market level of main board
performance directors from a UK comparator group with a mainly
– reflect skills and experience international consumer goods focus chosen from the
FTSE 100 Index
– additional reference to published salary data with
reference to companies in the UK comparator group
Performance related – incentivise the attainment – International Executive – five common measures: underlying operating profit,
bonus of corporate targets on Incentive Scheme (IEIS) market share of key players, Global Drive Brand
an annual basis – 50 per cent cash volume, net revenue and cash flow
– 50 per cent shares (Deferred – for an ‘on target’ performance, the cash and
Share Bonus Scheme - DSBS) shares elements of the IEIS together carry a value
– DSBS shares held in trust for of 100 per cent of the base salary with an overall
three years and participants maximum of 150 per cent
receive cash sum equivalent
to the dividend on the after
tax position of all unvested
shares held in the DSBS at
the dividend record date
Long term incentives – alignment of executive – shares – maximum awards under the New LTIP will be increased
(Long Term Incentive remuneration with the – discretionary annual award from 175 per cent of salary to 250 per cent for the Chief
Plan or LTIP); new Long generation of shareholder – LTIP dividend equivalent as Executive, and from 125 per cent to 200 per cent of salary
Term Incentive Plan or value cash at time of vesting for the Finance Director and Chief Operating Officer
New LTIP proposed for – incentivise growth in – the proportion of shares – cash LTIP dividend equivalent to the dividends that
shareholder approval at earnings per share and Total awarded under an LTIP grant participants would have received as shareholders from
Annual General Meeting Shareholder Return (TSR) which later lapse upon the the date of the LTIP award to the award’s vesting date
SUMMARY REMUNERATION REPORT
on 26 April 2007 over a three year period vesting of an award do not – the value of the LTIP dividend equivalent is taken into
attract the LTIP dividend account when considering awards
equivalent – three year performance period
– TSR performance (50 per cent of the total award)
combines both the share price and dividend
performance during the three year performance period
as against two comparator groups: (1) the constituents
of the FTSE 100 Index; and (2) a peer group of FMCG
companies (25 per cent for each measure)
– earnings per share measure (50 per cent of the total
award) relates to earnings per share growth (on an
adjusted diluted basis) relative to inflation
Pension – provision of competitive – British American Tobacco UK – pension accrues at 1/40 of annual basic salary
post-retirement benefits Pension Fund; defined – UK Pension Fund normal retirement age of 60
benefit plan – maximum pension payable will not exceed 2/3 of
– benefit paid as on-going base salary averaged over the preceding 12 months
pension – Paul Adams and Paul Rayner are both members of the
UK Pension Fund
– UK Pension Fund retains a scheme-specific cap following
the introduction of the new UK pension regime in
April 2006
– excess benefits continue to be accrued within an unfunded
unapproved retirement benefits scheme (UURBS)
– benefits for Antonio Monteiro de Castro are all accrued
in the UURBS, offset by his entitlements under the
defined benefit plan of Souza Cruz of Brazil
Annual Review 2006 British American Tobacco 39
Summary Corporate Governance and Summary Financial Statement
Chairman’s terms of appointment and remuneration relevant notice period as the Board does not require the
Jan du Plessis’s terms of appointment provide that he will Chairman to perform his duties. The Chairman is subject
hold the office of Chairman with effect from 1 July 2004 to the reappointment of Directors’ provisions contained in
for a period of three years unless terminated earlier by: the Company’s articles of association; he will therefore not
(1) the Company giving three months’ notice or a ordinarily serve as a Director for more than two years
discretionary compensation payment in lieu of notice; before seeking reappointment. In common with the
SUMMARY CORPORATE GOVERNANCE
or (2) by the Chairman giving one month’s written Non-Executive Directors, he does not participate in the
notice with the Company having discretion to make a Company’s share schemes, bonus schemes or incentive
compensation payment in lieu of such notice. This is plans and is not a member of any Group pension plan.
limited to any fees which are payable for such part of the
2006 2005
Restated
£m £m
Gross turnover (including duty, excise and other taxes of £15,427m (2005: £14,659m)) 25,189 23,984
Attributable to:
Shareholders’ equity 1,896 1,767
2006 2005
Restated
£m £m
Assets
Non-current assets
Intangible assets 7,476 7,987
Property, plant and equipment 2,207 2,331
Equity
Total equity 6,688 6,877
Liabilities
Non-current liabilities
Borrowings 5,568 5,058
This Summary Financial Statement was approved by the Board of Directors on 1 March 2007 and signed on its behalf by
Jan du Plessis, Chairman.
44 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement
2006 2005
Restated
£m £m
Total equity comprised £6,461 million of shareholders’ funds (2005: £6,630 million), after deducting cost of own shares
held in Employee Share Ownership Trusts of £197 million (2005: £182 million), and minority interests of £227 million
(2005: £247 million).
GROUP STATEMENT OF CHANGES IN TOTAL EQUITY
Annual Review 2006 British American Tobacco 45
Summary Corporate Governance and Summary Financial Statement
The Summary Financial Statement on pages 42 to 47 However, as a result of the technical infringement of the
is a summary of information in the Annual Report and Companies Act 1985, the repurchase and cancellation
Accounts and should be read with the reviews on pages of these shares was invalid and accordingly, their nominal
1 to 32. Reference should also be made to the Summary value is included within the Company's share capital as at
Remuneration Report on pages 36 to 40. 31 December 2006. These shares will be repurchased on
The Annual Review and Summary Financial Statement 1 March 2007 from their present holders, the Company's
brokers, at the same prices agreed between 22 September
the defence in certain tobacco litigation cases with respect as B.A.T Industries p.l.c. was previously a defendant
to which such affiliates are entitled to indemnification. in around 1,000 consolidated individual cases in West
Virginia. British American Tobacco (Investments) Limited
US litigation
has been dismissed from those West Virginia consolidated
1. Medical reimbursement cases
smoking and health cases in which it was a defendant.
These civil actions seek to recover amounts spent by
government entities and other third party providers 5. Conduct-based claims
SUMMARY FINANCIAL STATEMENT
on healthcare and welfare costs claimed to result from In 1999, the US Department of Justice brought an action
illnesses associated with smoking. As at 31 December against various industry members, including RJRT and
2006, a reimbursement suit brought by an Indian tribe B&W. British American Tobacco (Investments) Limited
and two non-governmental reimbursement suits were is a co-defendant in the action. The trial of this claim
pending against B&W. The vast majority of other such was completed in June 2005. In August 2006, the District
claims have been dismissed on legal grounds. Court issued its final judgment, finding in favour of the
Government, and against certain defendants, including
As at 31 December 2006, B&W was named as defendant
B&W and British American Tobacco (Investments) Limited.
in two US cases brought by foreign government entities
The court also ordered a wide array of injunctive relief,
(São Paulo and Panama) seeking reimbursement of medical
including a ban on the use of ‘lights’ and other similar
costs. In July 2006, the Delaware Superior Court granted
descriptors. Defendants filed a motion to stay enforcement
defendants’ motion to dismiss these cases. Plaintiffs
of the judgment shortly after the judgment was issued.
appealed to the Supreme Court of Delaware, which heard
The court denied the stay motion, but defendants filed
oral argument in December 2006 and reserved decision.
a notice of appeal and an emergency motion to stay the
2. Class actions judgment before the Washington DC Circuit Court of
As at 31 December 2006, B&W was named as a defendant Appeals in September 2006. In October 2006, the Court
in some 15 separate actions attempting to assert claims on of Appeals granted defendants’ motion to stay enforcement
behalf of classes of persons allegedly injured by smoking. of the judgment pending the outcome of the appeal.
In the Engle case (Florida), one jury awarded compensatory
6. Settlement of State Health Care Reimbursement Cases
damages totalling US$12.7 million and assessed
After an Independent Auditor found that the terms of the
US$17.6 billion in punitive damages against B&W. The
Master Settlement Agreement (MSA) were a ‘significant
intermediate appellate court reversed the trial court’s
factor’ in market share losses experienced by signatories
judgment. In July 2006, the Florida Supreme Court upheld
to the MSA in 2003, several US tobacco companies
the intermediate appellate court’s decision to decertify
asserted their rights under the MSA to recover a payment
SUMMARY FINANCIAL STATEMENT AND NOTES
In Wisconsin, the Authorities have identified potentially the certification of the class but limited any liability, if
responsible parties to fund the clean up of the Fox River proved, to the period from 1997. In Quebec, in February
after pollution from paper mills operating nearby, a task 2005, two smoking and health class actions were certified.
currently estimated to cost in the order of US$600m. There is no right of appeal against class certification.
Among the potentially liable parties are NCR Corporation
Imperial is currently being investigated by the Royal Canadian
and Appleton Papers Inc. B.A.T Industries p.l.c. purchased
Mounted Police relating to its business records and sales of
what was then NCR’s Appleton Papers Division from NCR
SHAREHOLDER INFORMATION
Analyses of shareholders
Copies of current and past Annual Report and Accounts
At 31 December 2006, there were 2,068,803,944
and Annual Reviews are available on request. Copies
ordinary shares in issue held by 60,226 shareholders.
of the Group corporate descriptive booklet About Us
These shareholdings are analysed as follows by category
and past Quarterly Reports are also available. Highlights
of shareholder and size of shareholding:
from these publications can be produced in alternative
Percentage
formats such as Braille, audio tape and large print. Percentage of issued
Contact British American Tobacco Publications, Unit 80, Category of Number of of total Number of ordinary
shareholder holders holders ordinary shares share capital
London Industrial Park, Roding Road, London E6 6LS
Individuals 53,283 88.47 77,196,613 3.74
tel: +44 (0)20 7511 7797, facsimile: +44 (0)20 7540 4326, Financial institutions/
e-mail: bat@team365.co.uk pension funds 273 0.46 5,913,028 0.29
Nominee companies 6,162 10.23 1,356,353,424 65.56
Dividend Reinvestment Plan Other corporate holders 507 0.84 25,004,252 1.21
A straightforward and economic way of utilising your R&R Holdings S.A. 1 – 604,336,627 29.20
dividends to build up your shareholding in British 60,226 100.00 2,068,803,944 100.00
American Tobacco; contact Computershare Investor
Services for details Percentage of issued
Size of shareholding Number of holders ordinary share capital
Registered office
Globe House, 4 Temple Place, London WC2R 2PG
tel: +44 (0)20 7845 1000, facsimile: +44 (0)20 7240 0555
Incorporated in England and Wales No. 3407696
Secretary
Nicola Snook
General Counsel
Neil Withington
Investor relations
Enquiries should be directed to Ralph Edmondson or
Rachael Brierley, tel: +44 (0)20 7845 1180
Press office
Enquiries should be directed to Fran Morrison or
David Betteridge, tel: +44 (0)20 7845 2888,
e-mail: press_office@bat.com
Auditors
PricewaterhouseCoopers LLP, 1 Embankment Place,
London WC2N 6RH
Registrar
Enquiries concerning your shareholding, mandating your
dividends (including consolidated dividend tax vouchers)
and notifying changes in your personal details
Contact Computershare Investor Services PLC, PO Box 82,
The Pavilions, Bridgwater Road, Bristol BS99 7NH,
tel: 0800 408 0094 (UK); +44 870 889 3159 (International)
www.bat.com
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