british american tobacco group adr (bti)

BRITISH AMERICAN

TOBACCO GROUPADR (BTI)

Vincent M. Boccio

Analyst, 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: 998.16MSource: 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 force

Anti-Tobacco/Smoking Bans Embrace this movement

Illicit Trade

Increased Excise TaxesSeen 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

bil

lio

ns

)

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


VOLUME GROWTH

America- Pacific

Latin America Europe Africa/Middle East

Asia Pacific0

50

100

150

200

250

300

2006

2007

In Billions


REVENUE GROWTH

America- Pacific


Asia Pacific0

500

1000

1500

2000

2500

3000

3500

4000

20062007


PROFIT GROWTH

America- Pacific


Asia Pacific0

100

200

300

400

500

600

700

800

900

2006

2007

In Millions


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+

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