BRITISH AMERICAN
TOBACCO GROUPADR (BTI)
Vincent M. BoccioAnalyst, Consumer Staples
October 22nd, 2008
AMERICAN DEPOSITARY RECEIPT?
BTI is traded on the AMEX as an ADR ADR stands for American Depositary Receipt
Helps to reduce administration and duty costs that would otherwise be levied on each transaction
In BTI’s case one ADR is equal to one of its foreign shares
COMPANY OVERVIEW International tobacco company that manufactures,
distributes, and sells cigarettes, cigars, leaf and other tobacco products
Produce mainly under Global Drive Brands Dunhill Kent Lucky Strike Pall Mall
Large Diversification Over 300 brands sold in over 180 different markets
KEY STATISTICS Price: 52.64
Market Cap: 56.40B 52 Week Low: 48.02 52 Week High: 81.04
Average Volume: 237,223 P/E: 14.30 F P/F: 11.97 Beta: 0.69 PEG: 1.19 EPS: 1.11
Dividend: 1.76 Yield: 3.00%
Outstanding Shares: 998.16M Source: Yahoo Finance
INDUSTRY Recently all tobacco companies have been
effected by declining sales volume.
Many threats do lye within the industry. Illicit Trade Litigations Anti-Tobacco Ad’s Smoking bands
However there are many promising and recovering opportunities that can serve as a defense for well managed tobacco companies.
THREATS Illicit Trade
Smuggling of tobacco has taken off Increased taxation makes it very profitable to
cross boarders undetected This effects major tobacco companies
tremendously, it hurts their revenue streams so they must make sure not to ignore boarders
Empirical evidence shows that illicit trade has led to an increase in teenage smoking and it harbors terrorism
THREATS Litigation
Biggest hurdle that tobacco companies face is the omnipresent court battles.
Class action suits, third party reimbursement, and punitive damage threats are all very real dangers Fortunately, tobacco companies have been
“winning” The “light” litigation not an issue as the Supreme Court
just wants to get it off the table Another positive aspect is that the judiciary make-up of
the foreign market is not very strong
THREATS Anti-Tobacco Campaigns
Significantly increased as activists see declining returns from litigation
Research shows that tobacco education is making a difference Increased vigilance pertaining to ID-ing has sharply
decreased the number of teen smokers
Laws ban most advertisement and displaying techniques
Increase in the Anti-Tobacco ballot initiatives
THREATS Increasing Excise Taxes
Stemming from a decline in litigations potency
Tobacco is targeted because it is considered a negative externality Increase in taxes in order to “save the third party”
Number one driver of price hikes
Smoking bans New phenomenon sweeping the nation which is picking
up speed
Becoming a very controversial issue How it will affect the tobacco companies?
Businesses are required to ban smoking or face stiff penalties.
OPPORTUNITIES
Merger Completions Many mergers have dominated the tobacco industry’s
news feed These mergers are now starting to take shape
Industry as a whole is a lot stronger
Synergy is the key word in the industry as companies continue to add to their repertoire
Biggest trend for mergers is to attain a consolidated litigation service
OPPORTUNITIES
Narrowing Price Gaps Increase in excise taxes and litigation costs
have caused discount sellers to hike up their prices
Major players gaining back a lot of lost market share
Better advertising strategies play a role as well Tobacco companies are learning how they can bend
the advertisement laws favoring the big players
OPPORTUNITIES
Globalization Tobacco companies are expanding just like everyone
else
Capitalization that these companies used to see in the US has gone global Industry looks to benefit
Simplicity of global judiciary requirements allow tobacco companies freedoms that are strictly prohibited within the US
OPPORTUNITIES
The biggest opportunity that the Tobacco Industry has is to address their threats
Certainly attainable while there has already been quite a bit of work done to make this a possibility
BTI’S INITIATIVESLitigation
Created a consolidated litigation forceAnti-Tobacco/Smoking Bans
Embrace this movementIllicit TradeIncreased Excise Taxes
Seen as a positive
BTI’S INITIATIVES Have taken advantage of mergers and acquisitions.
Acquired Reynolds American Skandinavisk Tobakskompagni (ST) Tekel Ente Tabacchi Italiani
Results of boosts in growth and credibility.
Management says this will be the basis for achieving their future targets and will continue to acquire profitable companies, when the timing is right.
MANAGEMENT At least half of the Main Board, excluding the
Chairman, is comprised of Non-Executive Directors who are independent.
Jan Du Plessis, Chairman Jan du Plessis joined the Board of British American
Tobacco as a Non-Executive Director in 1999 and became Chairman on 1 July 2004.
Paul Adams, Chief Executive Paul Adams has been Chief Executive of British American
Tobacco since January 2004, however has been in with the company since 1991 and has risen respectfully through the ranks.
MANAGEMENTBen Stevens, Finance Director
Ben Stevens joined the Board of British American Tobacco in March 2008 and assumed the role of Finance Director at the end of April 2008
Nicandro Durante, Chief Operating Officer Nicandro Durante joined the Management Board in 2006
and was appointed to the role of Chief Operating Officer in January 2008.
The rest of the board members (7) are all non-executive directors.
CEO BACKGROUND Paul Adams has been Chief Executive
of British American Tobacco PLC since January 2004. He is currently 53 years old.
Paul joined British American Tobacco in 1991 as Regional Director, Asia-Pacific.
In 1999, he was appointed Regional Director in Europe. Then in March 2001, he became an Executive Director on
the PLC Board. Paul was Managing Director from January 2002 until the
end of 2003, where he was then appointed as the CEO.
COST CUTTING BTI has taken multiple steps to cutting costs
Over past five years have saved more than 1 billion pounds
Projections for next five years Achieve further annualized savings in areas such
as supply chain efficiencies, back office integration and management structure
Approx. 800 million pounds by 2012
Reinvests cost savings back into the company Primarily into R&D
SPECIFICS ON COST CUTTING
In 2007 shut down operations at five excess factories
Transferred to Mexico for the production of the Canadian market Cheaper labor costs
Own less tobacco stock while still being able to produce efficiently Product complexity reduction
Continue to focus on the leveraging of their global purchasing power to drive down costs of indirect purchases
PRODUCTS OVERVIEW Portfolio of approximately 300 brands including
international and regional brands
Focus on four Global Drive Brands: Dunhill Kent Lucky Strike Pall Mall
Brands include ready-made cigarettes, cigars, roll-your-own, pipe tobacco, and smokeless tobacco
Important consumer segments include international, premium, lights, and “adult smokers under 30”
GLOBAL DRIVE BRANDS Dunhill
Premium Brand Sells in over 120 countries Offers range of premium and super premium
cigars and cigarettes Key markets: South Korea, Malaysia, Taiwan,
South Africa, and Australia
Kent Modern Premium Brand Introduced in America in 1952; now sells in over
70 countries Largest growth brand of four GDBs Key markets: Russia, Eastern Europe, and Chile
GLOBAL DRIVE BRANDS Lucky Strike
Premium brand Oldest brand with an iconic trademark Sells in more than 90 countries Key markets: Germany, Spain, Japan, France,
Indonesia
Pall Mall Value-for-Money brand Sells in over 60 countries Offers a range of cigarettes and make-your-own
products Key markets: Germany, Italy, Russia, Uzbekistan
GLOBAL DRIVE BRANDS
020406080100120140160180
2001 2002 2003 2004 2005 2006 2007
Gro
wth
(in
billi
ons)
Year
Global Drive Brand Volume Growth
• Since 2001, the four GDBs have increased combined volume by 73%.
• Over the past year alone GDB sales have increased 10%, and BTI’s Premium volume grew by 3% in contrast to a 1% decline in
the overall industry volume.
Source: BAT Comp. Filing
OTHER INTERNATIONAL BRANDS
Vogue International Premium Superslim brand Gained importance in global portfolio Meets needs of female consumer Big player in Eastern Europe
Viceroy International low price brand Achieved high growth in 2007 at 21%
PRODUCT INNOVATION Menthol capsules
• Allows consumers to choose when to enhance menthol experience.
• Introduced in Japan with positive response.
Swedish-style Snus• Currently more than 95% of world’s smokers consume
ready-made cigarettes, but other forms of tobacco are gaining popularity.
• Form of smokeless tobacco placed under the lip.• Reported by independent health experts as being less
harmful than cigarettes.• Hugely popular in Scandinavia.• Sold under Lucky Strike brand and two other international
brands.
COMPETITIVE ADVANTAGES Company recognizes and embraces nature of tobacco
industry.
Concentrated on cost reduction, and organic growth through GDB’s.
Diversified Brand Portfolio.
Targeting key growth markets/Geographic spread
Innovation Pipeline.
Only Tobacco Company to be listed on the Dow Jones Sustainability Index.
REVENUE BREAKDOWN BY REGION
America- Pacific; 6.2
Latin America; 22
Europe; 35.8
Africa/Middle East; 14.8
Asia Pacific; 21.2
Source: BAT Comp. Filing
VOLUME GROWTH
America- Pacific
Latin America Europe Africa/Middle East
Asia Pacific0
50
100
150
200
250
300
2006
2007
In Billions
Source: BAT Comp. Filing
REVENUE GROWTH
America- Pacific
Latin America Europe Africa/Middle East
Asia Pacific0
500
1000
1500
2000
2500
3000
3500
4000
20062007
Source: BAT Comp. Filing
PROFIT GROWTH
America- Pacific
Latin America Europe Africa/Middle East
Asia Pacific0
100
200
300
400
500
600
700
800
900
20062007
In Millions
Source: BAT Comp. Filing
FINANCIAL CONCERNS Net decrease in cash flows in 2007
Attributable to financing cash outflows Operating cash flow has been increasing Current interest ratio: 8x
FINANCIAL HIGHLIGHTS Revenue growth: 5% increase Operating profits: 11% increase Dividend/share: 18% increase FCF: 11% increase S&P credit rating: BBB+
THE END
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