British American Tobacco Annual Report 2008 Results at a glance Group results 2008 £m pence Gross turnover Basic earnings per share (including duty, excise and other taxes) 33,921 123.28 +25% +17% Revenue 12,122 Adjusted diluted earnings per share 128.78 +21% +19% Profit from operations 3,572 Dividends per share 83.70 +23% +26% Profit from operations, excluding adjusting items 3,717 +24% bns bns Group cigarette volumes, Group cigarette volumes, excluding associates 715 including associates 919 +4% +1% Total shareholder return (annual %) 2008 results Total shareholder return (annual %) British American Tobacco continued its strong growth and had FTSE 100 – 1 January 2006 to 31 December 2008 another very successful year. Group revenue was 21 per cent The FTSE 100 comparison is based on 3 months’ average values. higher (11 per cent at constant rates of exchange). Group ■ Upper quartile ■ Lower quartile profit from operations was 23 per cent up, 24 per cent if British American adjusting items are excluded (14 per cent at constant rates). 20 Tobacco 14.7% 00 Group volume from subsidiaries, at 715 billion, increased by 4 per cent. Median (4.7)% Adjusted diluted earnings per share were 19 per cent higher, –50 while dividends for the year increased by 26 per cent. Cautionary statement: the Business 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. Our vision Our strategy Our vision is to achieve leadership ■ Growth Page 08 of the global tobacco industry in ■ Productivity Page 14 order to create shareholder value. ■ Responsibility Page 18 ■ Winning organisation Page 24 Quantitatively, we seek volume leadership among our international competitors. Qualitatively, we aim to lead our industry as the preferred Achieve leadership partner of key stakeholders and in of the global tobacco industry demonstrating responsibility. GrowthProductivity Responsibility Winning Organisation The strategy to deliver our vision is based on growth, productivity, responsibility and building a winning organisation. We use a range of indicators to assess our performance against See our online our strategy. They include our Key Performance Indicators, described Quick read on pages 6 and 7, together with some of our other business go to www.bat.com/annualreport2008 to see our online Quick read presentation measures, described on pages 10 to 29. A number of other business measures, financial and non-financial, are monitored and assessed frequently to ensure that the Group’s strategy is delivered. Although these are not included in management’s incentives, we believe that these business measures contribute to the success of the Group, particularly over the long term. We have therefore included the performance of some of these business measures relating to the 4 elements of our strategy. ▼ Our Global Our regions Quick read Drive Brands ▼ Volume (bns) Revenue (£m) Profit (£m)* Europe 254 4,745 1,213 +4% +30% +44% Asia-Pacific 153 2,151 804 +5% +15% +20% Dunhill, the ‘perfectionist in tobacco’, Latin America sells in more than 120 countries. It offers 147 2,246 759 a diverse range of premium and super premium cigarettes and cigars at the –2% +13% +11% top end of the tobacco market. 37 billion Dunhill cigarettes were sold Africa and Middle East in 2008, up 7 per cent on 2007. Key markets include South Korea, Malaysia, 120 1,797 536 Taiwan, Saudi Arabia, South Africa and Australia. +19% +24% +15% Kent is our largest premium brand, selling more than 63 billion cigarettes America-Pacific in 2008, up 18 per cent on 2007. 41 1,183 515 Sold in more than 70 countries, Kent is consistently perceived as delivering –4% +12% +15% ‘the modern way to smoke’. Key markets include Russia, Japan, *Profit from operations, excluding adjusting items. Eastern Europe and Chile. Lucky Strike was launched in 1871 and remains 1 of the world’s most iconic trademarks. It is among our leading premium brands and offers consumers a ‘rich tobacco experience’. Its volumes rose 9 per cent to 25 billion cigarettes. Sold in more than 60 countries, key markets include Germany, Spain, Japan, Europe France, Argentina and Indonesia. America-Pacific Pall Mall is our leading global value-for- money brand, positioned to exceed Asia-Pacific consumer expectations. Introduced in 1899, it now sells in more than Africa and Middle East 80 countries, offering a range of cigarette and make-your-own products. Volumes were up 22 per cent on 2007 Latin America to 62 billion cigarettes. Key markets include Germany, Italy, Russia and Uzbekistan. Business review overview Chairman’s The last 10 years as Chairman’s overview 45 Financial review British American 02 Chairman’s statement 45 Profit from operations 46 Adjusting items Performance and strategy Tobacco p.l.c. 46 Net finance costs 04 Chief Executive’s review 46 Interest cover 06 Measuring our performance 46 Associates We have been in business for more 08 Our strategy 47 Profit before tax and strategy Performance than 100 years across Europe, the 08 Growth 47 Effective tax rate Americas, Africa and Asia. We have 14 Productivity 47 Earnings per share been a quoted company on the 18 Responsibility 47 Dividends London Stock Exchange in our 24 Winning organisation current form since 1998. 47 Total equity Risk factors 48 Cash flow 1998 30 Key Group risk factors 48 Treasury operations 49 Net debt/financing factors Risk B.A.T Industries divests its financial Regional and financial review 50 Liquidity services businesses and British 36 Regional review 50 Retirement benefit schemes American Tobacco p.l.c. becomes 38 Europe 50 Going concern a separately quoted company, 40 Asia-Pacific 50 Changes in the Group solely focused on tobacco. 41 Latin America 50 Share buy-back programme 42 Africa and Middle East 50 Regional structure from 2009 1999 43 America-Pacific 51 Non-GAAP measures Global merger announced with 44 Associates financial review Regional and Rothmans International. 51 Accounting developments 51 Franked Investment Income 2002 Group Litigation Order We celebrate our centenary. 51 Foreign currencies We also become the first tobacco company to publish a social report. Directors’ report Parent Company report Directors’ 2003 We acquire Italy’s former state 54 Board of Directors financial statements tobacco monopoly, ETI. 55 Management Board 56 Directors’ report 181 Report of the independent auditors 182 Balance sheet 2004 66 Remuneration report 183 Notes on the accounts Brown & Williamson, the Group’s 82 Corporate governance statement US subsidiary, combines with 91 Responsibility of Directors RJ Reynolds Tobacco Company statements Group financial to form Reynolds American, in Shareholder information which we hold a 42 per cent share. Group financial 186 Shareholder and contact information 2005 statements We trial Swedish-style snus in a 92 Report of the independent auditors number of markets, giving smokers 94 Group income statement the chance to enjoy a less harmful financial statements Parent Company 95 Group statement of recognised form of tobacco, without lighting up. income and expense 96 Group balance sheet 2008 98 Group cash flow statement We complete our secondary listing 99 Notes on the accounts on the JSE Limited. We also acquire 176 5 year summary the cigarette business assets of 177 Quarterly analyses of profit Tekel, the Turkish state tobacco information Shareholder 178 Principal subsidiary undertakings company, and the cigarette and 180 Principal associate undertakings snus businesses of Skandinavisk Tobakskompagni. Chairman’s statement “We made good progress with all 4 elements of our strategy: growth, productivity, responsibility and building a winning organisation. It should continue to build sustainable shareholder value in the years ahead.” Jan du Plessis Chairman Value creation Excellent results Growth Over the past 10 years, British 2008 was an extraordinary year, with Our continued focus on our 4 Global American Tobacco has achieved financial markets in unprecedented Drive Brands (GDBs) has played a major compound growth of 11 per cent in turmoil, economies slowing and role in these achievements. Last year, earnings per share and 13 per cent confidence badly shaken. Despite our 4 GDBs grew by 16 per cent, in dividends per share. Our total these conditions, British American with about a quarter of the increase shareholder return has been Tobacco continued to deliver excellent attributable to successful brand 486 per cent, compared to results and completed 2 important migrations. Kent rose by 18 per cent 3 per cent for the FTSE 100 acquisitions. and Pall Mall by 22 per cent and they as a whole. each achieved sales of over 60 billion Revenue rose by 11 per cent at constant cigarettes for the first time. Kent, which rates of exchange and by 21 per cent to is premium priced, is now the Group’s £12,122 million at current rates. Profit biggest brand. Completing a very from operations, excluding adjusting strong all round performance, Lucky items, increased by 14 per cent at Strike increased by 9 per cent and constant rates of exchange and by Dunhill by 7 per cent. 24 per cent to £3,717 million at current rates. The benefit from the translation of GDB volume now represents over our results into sterling was £295 million. 26 per cent of our total volume, providing us with a significant Adjusted diluted earnings per share opportunity to add scale to our key grew by 19 per cent to 128.8p and competitive innovations. Moreover, as the Board has recommended a final the GDBs are predominantly premium, dividend of 61.6p, an increase of our premium volume grew by 5 per cent 29 per cent.