British American Tobacco P.l.c. · LSE:BATS
British American Tobacco P.l.c — Investor Presentation (October 2008)
64 slides from British American Tobacco P.l.c's investor presentation, October 2008
Slide 1: Investor presentations: South Africa
Investor presentations: South Africa October 2008
Slide 2: Important information
Important information This presentation has been prepared by British American Tobacco p.l.c. ("British American Tobacco") for information purposes only and does not constitute, or form part of any offer or invitation to acquire, or any solicitation of any offer to acquire any securities of British A
Slide 3: Agenda
Agenda Jan du Plessis - Overview and review of the Group since the merger with Rothmans Paul Adams - Industry overview, the Group and strategy John Taylor - BAT South Africa, innovations and Russia Ben Stevens - The productivity strategy, financials and 2008 performance Questions and answe
Slide 4: World's most international tobacco group
World’s most international tobacco group Over 300 brands Focus on Global Drive Brands + Vogue & Viceroy 180 markets Leadership in 50 markets Almost 54,000 employees £26 bn gross turnover £10 bn net turnover £3 bn profit from operations £17 bn tax contributions Market capitalisati
Slide 5: 2007 statistics
2007 statistics Sales volume: 684 billion cigarettes 47 factories in 40 countries 5 Regional Product Centres Over 460,000 tonnes of leaf bought 280,000 farmers providing leaf
Slide 6: Our world
Our world 245 bn 42 bn 145 bn 101 bn 151 bn •Organised into 5 regions – Europe to split in 2009 •Two key associates: Reynolds American (US) and ITC (India)
Slide 7: Associates
Associates Reynolds American Inc. - 42% shareholding - Number 2 cigarette manufacturer in US - Brands include, Camel, Kool and Pall Mall - Significant non-combustible business ITC Ltd. - 32% shareholding - Largest cigarette manufacturer in India - Includes paper and packaging and hotels business
Slide 8: Milestones since demerger in 1998
Milestones since demerger in 1998 1998: British American Tobacco listed as a standalone tobacco company 1999: Rothmans merger completed 2002: Growth, Productivity and Responsibility strategy and 5 year cost savings programme announced 2003: Acquisition of ETI in Italy 2004: B&W and RJR for
Slide 9: Earnings per share
Earnings per share 108.5 98.1 89.3 76.6 66.5 69.2 61.8 62.0 pence 56.9 53.5 52.3 9.6% CAGR +16% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2007 2008 YTD 6 months The target of high single figure earnings growth has been delivered Source: Company’s financial results
Slide 10: Dividends per share
Dividends per share 66.7 55.9 47.0 38.8 41.9 pence 35.2 29.0 32.0 26.2 22.1 18.6 12.4% CAGR +19% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2007 2008 Interim dividend Targeting a 65% payout ratio in 2008 Source: Company’s financial results
Slide 11: BAT share price since Jan 2000
BAT share price since Jan 2000 Daily Relative performance to FTSE100 03/01/2000 - 07/10/2008 (GMT) Price Value GBp GBp 1,800 7 1,700 6.5 1,600 6 1,500 5.5 1,400 1,300 5 1,200 4.5 1,100 4 1,000 3.5 900 800 3 700 2.5 600 500 Out-performance 2 1.5 400 300 1 .12 .123 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Slide 12: Total shareholder return per annum
Total shareholder return per annum Since Jan 2000 28.3% Since Jan 2003 27.7% Since Jan 2005 28.0% Since Jan 2007 24.1% Source: Bloomberg (Based BAT share price at close 3 October 2008)
Slide 13: FMCG Comparator Group
FMCG Comparator Group Altadis InBev Altria (Phillip Morris) Johnson & Johnson Anheuser-Busch Kellogg Cadbury Schweppes Kimberly-Clark Campbell Soup LVMH Möet Hennessy Carlsberg Nestlé Coca Cola Pepsico Colgate-Palmolive Procter & Gamble Danone Reckitt Benckiser
Slide 14: Total Shareholder Return v. FMCG group
Total Shareholder Return v. FMCG group Source: Company Annual Report & Accounts 2007
Slide 15: FT Global 500 – BAT progression
FT Global 500* – BAT progression Ye ar 2001 2002 2003 2004 2005 2006 2007 2008 0 50 85 100 117 131 150 140 166 200 205 186 250 300 350 348 400 450 Rank 500 *By market capitalisation as at end of March each year Source: Financial Times
Slide 16: Industry dynamics
Industry dynamics Industry volume (excluding China) continues slow, steady decline Geographic mix is deteriorating Relatively few players There are still opportunities for growth in key segments Legitimate manufacturers squeezed by governments and illicit trade The level of regulation wi
Slide 17: Major competitors
Major competitors 2007 World Market Share % (Proforma) PMI 15.7 BAT Subs / Assoc 13.6 3.6 17.2 JT 11.0 Imperial 6.0 CNTC 39.1 Altria 3.4 Others 11.0 On a proforma basis (i.e., adding in the full year impact of acquisitions), the Big 4 have a combined global market share of nearly 50% Source: Compa
Slide 18: Strategy for shareholder value
Strategy for shareholder value ACHIEVE VISION LEADERSHIP ACHIEVEOF VISION THE GLOBAL LEADERSHIP OF TOBACCO INDUSTRY THE GLOBAL TOBACCO INDUSTRY GROWTH PRODUCTIVITY RESPONSIBILITY GROWTH PRODUCTIVITY RESPONSIBILITY STRATEGY Organic Organic Growth Smart Growth Cost Smart Cost Business STRAT
Slide 19: Global Drive Brands volume
Global Drive Brands 161 146 Volume (Billions) 125 113 114 93 100 78 85 87 72 9.5% CAGR +20% 08 07 99 00 01 02 03 04 05 06 07 20 20 19 20 20 20 20 20 20 20 20 1 1 H H Global drive brands sales volumes have grown consistently Source: Company’s financial results
Slide 20: Brand momentum
Brand momentum The top-13 international brands 350 2007 global volumes and growth v 2006 -4.8 Volume movement in 300 billions PMI -11 250 JT +9 BAT +22 200 +8.4 -2.4 -7.2 150 100 +4.5 +8.4 +6.7 +5.0 +3.1 +2.9 +2.1 +5.0 +3.0 50 0 International volumes, excluding the USA Source: Company estimates and
Slide 21: Global Drive Brands: volume growth index
Global Drive Brands: volume growth index 200 British American Tobacco 180 160 140 120 Japan Tobacco 100 Philip Morris 80 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Advertising Principles International Marketing Standards Base 100: 1997 Source: Company estimates and competitors’ published
Slide 22: Key consumer segments (top markets)
Key consumer segments (top 22 markets) Designated Global Drive and/ or International Brands* * Includes Designated GDB/Flagship Brands "Flagship" Brands 56.3 % Share of T22 markets 54.1 48.7 % Share of T22 markets 39.6 42.1 35.0 2007 2012 2017 2007 2012 2017 Premium Lights % Share of T22 markets % S
Slide 23: Priority markets
Priority markets Eastern Europe Far East North Africa Middle East
Slide 24: Growth summary
Growth summary We have delivered growth - Improvements in key Industry segments - Spectacular GDB volume growth - Value added deals Going forward -- we are well positioned for further growth - Real momentum in the business
Slide 25: Regulation
Regulation Engage with stakeholders to: - compete in the legal market; - differentiate and innovate with our product category (including harm reduced products); - maintain channels of communication; - ensure there are opportunities for consumers to smoke; - enjoy free trade; and - combat illicit tra
Slide 26: Winning organisation strategy
Winning organisation strategy Ensure we have the right people and the right working environment to deliver our Vision. Great Place Outstanding to Work People From To A loose federation An integrated global enterprise
Slide 27: High single figure EPS growth model
High single figure EPS growth model* Volume growth of 1 to 1½% Drive brands to grow at high single figures Net turnover growth of 3 to 3½% Implies volume growth and pricing Profit from ops growth of 6% Implies significant cost savings EPS growth of around 8% Implies balance sheet & below the line ef
Slide 28: The business model
The business model Bad stuff Invest in long term Cost savings Earnings growth
Slide 29: Earnings per share growth
Earnings per share growth 17% 16% % Growth 11% 11% 10% 10% 9% 8% 4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD 6 months Source: Company’s financial results
Slide 30: In previous economic downturns…
In previous economic downturns… Tobacco is not recession proof… … but recession resistant Our geographic diversity mitigates risk Consumers are loyal to their brands Switching where they buy not what they buy High unemployment may lead to changing behaviour Balanced portfolio covering
Slide 31: Common vision of success
Common vision of success An enterprise which has: A leading portfolio of sustainable brands -- having a strong brand in each segment which the consumer perceives to be of greater value than competition A highly effective, flexible and efficient operation that leverages the synergies of being par
Slide 32: Agenda: SA Market Context
Agenda 1 SA Market Context 2 BATSA – Progress to date 3 Learning from other markets
Slide 33: South Africa at a glance
South Africa at a glance Population Industry Total: 49 mn Adult Smokers 18-65 years 18-65: 27 mn All Products: 27.7% (7.5 mn) Growth Rate: 0.6% Cigarettes: 23.6% (6.4 mn) 4 International Players (c. 98% of vol) Retail Universe: c. 140,000 outlets Excise Rate: 52% Economy R 9 bn+
Slide 34: Emerging consumer class...
Emerging consumer class... 7000 Growing per capita income 6000 GDP per Capita (US$) Disposable income and 5000 expenditure growth 4000 3000 Growing middle class 2000 1000 Increased demand for 0 branded consumer products '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 9 8 Final household cons
Slide 35: Local portfolio positioning
Local portfolio positioning Premium + 81% 1.5% Premium 64% 16% Popular 97% 73% VFM 97% 2.7% Low 40% 6.3% Note: SA Local Price Card; Source: Estimated Sales, Nielsen
Slide 36: Competitors struggling in changing market dynamics
Competitors struggling in changing market dynamics 5.5% 5.7% 5.7% 6.1% 5.9% 5.6% 5.3% 4.7% 4.7% 5.0% 5.0% 5.3% 4.1% 3.9% 3.5% 1.8% 1.8% 1.8% 1.8% 2.0% 1.2% 1.4% 2005 2006 2007 2008 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 2005 2006 2007 2008 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 YTD YTD Source: Estimated Sal
Slide 37: Agenda: SA Environment
Agenda 1 SA Environment 2 BATSA – Progress to date 3 Learning from other markets
Slide 38: BATSA – A history of delivery…
BATSA – A history of delivery… 100 BATSA Vol index vs '00 90 80 70 60 50 40 30 20 10 0 '00 '01 '02 '03 '04 '05 '06 '07 250 NTO (ZAR) index vs 250 UOP (ZAR) index vs '00 '00 200 200 150 150 100 100 50 50 0 '00 '01 '02 '03 '04 '05 '06 '07 0 '00 '01 '02 '03 '04 '05 '06 '07 Source: Estimated Sales; Niel
Slide 39: Embracing innovation
Embracing innovation Our challenge is to deliver sustainable NTO growth… Innovation allows us a platform to do so. Innovation: - Creates excitement - Provides a competitive advantage - Delivers value to the consumer - Justifies higher pricing
Slide 40: BATSA … driving innovation harder
BATSA … driving innovation harder
Slide 41: We challenge even our own success models
We challenge even our own success models Indirect Sales Model Direct Sales Model Production Sales & Distribution Retail Production Sales & Distribution Retail Wholesalers TM Rep Cash & Carry No commercial relationship with Speed to Market retail Targeted distribution Reduced flexibility and
Slide 42: Focus on International and Premium
Inspiring consumers Focus on International and Premium brands, Lights and ASU30 (adult smokers under the age of 30) Global Drive Brands - Dunhill - Kent International Brands - Peter Stuyvesant - Rothmans
Slide 43: Changing with the times
Peter Stuyvesant undoubtedly no 1 Changing with the times Growing in the lights segment 44.5% 44.9% 43.4% 43.8% 43.8% 41.9% 41.1% 40.3% 39.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008
Slide 44: Agenda: SA Environment
Agenda 1 SA Environment 2 BATSA – Progress to date 3 Learning from other markets
Slide 45: A Strategy for Value Creation…
A Strategy for Value Creation…
Slide 46: Key value creation opportunities
2 key value creation opportunities Consumer saliency to Premium, Lights & International The ability to drive Innovation hard…..both to build market share and as a value-generator
Slide 47: Attractive segment dynamics
Attractive segment dynamics Price Segment Dynamics 100% 9% 14% 16% 80% 19% 24% 26% 15% 60% 13% 12% 40% 43% 42% 41% 20% 14% Emerging Segments 7% 5% 0% 2004 2005 2006 2007 2008 2009 80% NF Low VFM Medium Premium 70% 60% 50% 40% Premium 30% 20% International 10% Brands Lights 0% 2004 2005 2006 2007 200
Slide 48: Innovation as a value driver
New product development / Innovation as a value driver 2 0 Vogue Collections: Ephemere (Feb) Derived Value Share 0 Yava Export (Jan) 8 100% Dunhill Top Leaf (Jan) 2 Vogue Collections: B&W (Feb) 90% 0 Kent Nanotek (Apr) 0 80% Pall Mall SS Aromatic & TT (Jun & Oct) 47.0% 7 54.7% Dunhill Tribute (July)
Slide 49: Creating accelerated value and enhancing sustainability…
Creating accelerated value and enhancing sustainability… T30 SOM BAT VOLUME 35% 30% 26.8% 27.2% 28% 0% +0.4% 4+2 Other 25% 5% 26.6% 26.8% 23% 20% 15% 10% 5% BAT MS PMI MS GLH MS JTI MS 0% JAN '04 AUG '04 MAR '05 OCT '05 MAY '06 NOV '06 MAY '07 NOV '07 JUN’08 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '
Slide 50: Summary
Summary Our business in South Africa is GREAT!! Growing consumer class with $$ looking for more The innovations journey is the road to take We are on the way…..taking learnings from where we have a proven track record.
Slide 51: Productivity initiatives 2003 – 2007
Productivity initiatives 2003 – 2007 Cumulative savings, 2003 2004 2005 2006 2007 £m Overheads & indirects 64 153 256 355 455 Supply chain 27 120 226 374 551 Total 91 273 482 729 1,006 Factory Footprint 2003 2004 2005 2006 2007 Cigarette factories 72 67 64 52 47 Countries 61 58 55 45 40 Annualised s
Slide 52: Productivity savings goal: 2008 – 2012
Productivity savings goal: 2008 – 2012 Productivity savings a significant driver of profit growth Some drop through to the bottom line Balance reinvested in the business Target of a further £800m by 2012 - Savings from supply chain, overheads & indirects - Supply chain efficiencies - Back of
Slide 53: Earnings to Cash
Earnings to Cash 2004 2005 2006 2007 Total ’04 - ’07 Attributable Profit (£ bn) 2.8 1.8 1.9 2.1 8.6 Adjusted Earnings (£ bn) 1.7 1.9 2.0 2.2 7.8 Free Cash Flow (£ bn) 1.3 1.6 1.5 1.7 6.1 FCF to Adj. Earnings 81% 84% 76% 77% 78% In the last 4 years, the cumulative ratio of free cash flow to net pro
Slide 54: Use of funds
Use of funds £ bn 2003 2004 2005 2006 2007 Total ’02 - ’07 Free Cash Flow (1.6) 1.3) 1.6) 1.5) 1.7) 7.7) Dividends Paid (0.8) (0.8) (0.9) (1.0) (1.2) (4.7) Share buy-back (0.7) (0.5) (0.5) (0.5) (0.8) (3.0) Sub Total 0.1) (0.1) 0.2) 0.0) (0.3) 0.0) Other net flows (1.9) 0.2) (0.1) 0.0) 0.2) (1.6) Ne
Slide 55: Financial policies
Financial policies Board commitment to investment grade ratings Liquidity: to maintain minimum of £1bn in cash and committed facilities Maturity profile has an average maturity of 5 years Gross interest cover targeted between 5 and 9 times Dividend policy is to distribute 65% of long term
Slide 56: Financing plan / liquidity
Financing plan / liquidity £1.75bn committed Group revolving credit facility Strong cash flows and cash balances Smooth maturity profile Almost all debt is unsecured with a limited use of leasing Credit ratings Moody’s S&P Fitch Long term rating Baa1 BBB+ BBB+ Short term rating P-2 A-2 F2
Slide 57: Volume and revenue: first half 2008
Volume and revenue: first half 2008 14% 4% -6% Europe AsiaPac LatAm AME AmPac Total Volumes 2% 3% -4% 5% 1% 1% Revenue (const) 8% 6% -1% 12% 3% 6% Revenue (curr) 21% 10% 12% 12% 17% 15% Source: Company data
Slide 58: Volume and profit: first half 2008
Volume and profit: first half 2008 34% 24% 14% 4% -6% -16% Europe AsiaPac LatAm AME AmPac Total Volumes 2% 3% -4% 5% 1% 1% Profit (const) 18% 13% -12% 8% 11% 7% Profit (curr) 31% 20% -1% 4% 22% 16% Source: Company data
Slide 59: Margins: profit per 1000 cigarettes
Margins: profit per 1000 cigarettes £12 £11.62 £9.56 £5.26 £5.21 £5.34 £5.33 £5.28 £5.26 £4.55 £4.51 £4.61 £3.53 £0 Europe Asia-Pac Lat Am AME Am-Pac Group H1 2007 H1 2008 Source: Company’s interim report 2008
Slide 60: Operating margin
Operating margin 45.0% 42.2% 40.9% 40.3% 39.2% 37.5% 36.0% 36.1% 34.7% 32.2% 32.2% 25.7% 23.6% 0.0% Europe Asia-Pac Lat Am AME Am-Pac Group H1 2007 H1 2008 Source: Company’s interim report 2008
Slide 61: Drivers of adjusted EPS growth
Drivers of adjusted EPS growth Pence % EPS H1 2007 53.5. Profit performance 3.5. 6.5. Net finance costs (1.1) (2.0) Associates 0.3. 0.5. Taxation 0.7. 1.3. Minorities 0.1. 0.3. Share buy-back 0.9. 1.7. Exchange 4.1. 7.6. EPS H1 2008 62.0. 15.9. Source: Company data
Slide 62: Future expectations
Future expectations Top Line Growth Productivity Savings • Volume growth • Overheads • Pricing • Indirects • Mix Improvements • Supply Chain Operating Profit growth of 6% p.a. on average Financial Efficiencies • Share buy backs • Others High single digit earnings growth Distributing 65% of sustainab
Slide 63: In summary
In summary: Significant global business Geographically diversified to mitigate risk Leadership position in more than 50 markets Clearly articulated strategy that works Powerful brand portfolio Innovative business developing new propositions Improving margins through brand mix and produ
Slide 64: Investor queries
Investor queries should be addressed to the Investor Relations Department in London. Please do not contact the local offices in South Africa. Ralph Edmondson +44 207 845 1180 Rachael Brierley +44 207 845 1519 ralph_edmondson@bat.com rachael_brierley@bat.com
British American Tobacco p.l.c. — Investor Presentation (October 2008) on 6ix