Speech by Richard Burrows, Chairman, at the British American Tobacco 2010 Annual General Meeting

2009 was a remarkable year to join British American Tobacco and I feel privileged to be Chairman.

While many companies have taken a beating in the deepest global recession since the 1930s, your company lifted revenue by 17 per cent and profit from operations by 20 per cent.

And you will be voting today on a final dividend of 71.6 pence per share, raising this year’s total dividend by 19 per cent to just under one pound per share.

This will maintain our target of paying out 65 per cent of sustainable earnings in dividends.

Excellent results don’t happen by chance: they are the outcome of a well tried-and-tested strategy.

That strategy has delivered growth in both good economic times and bad.

Look at the last decade. You will see earnings per share and dividends per share grew every year without exception to achieve a compound annual growth rate of almost 12 per cent for earnings and almost 15 per cent for dividends.

And our total shareholder return of 26 per cent per annum compares very favourably with the FTSE100 as a whole which yielded under one per cent.

As I said, 2009 was a remarkable year and it rounded-off a remarkable decade.
 

More first impressions

As you would expect, as the new man, I have been getting out of the Boardroom to see first-hand how the business operates.

In the last month alone I have visited Turkey, Brazil and Indonesia and these visits have helped me to appreciate the great strength that comes from the geographic diversity of your business.

Some two-thirds of revenue and about 60 per cent of profit come from emerging economies. This bodes well for the future as many of these countries appear to be bouncing back from the downturn faster than most developed economies.

There is diversity too in our brand portfolio. Broadly speaking we have one third of global volume in premium, one third in mid-price and one third in value-for-money brands.

That’s a good place to be. It means we have a brand or brands to match most consumers’ pockets.

Kent, Pall Mall, Dunhill and Lucky Strike - our Global Drive Brands - lead the way and their upward trajectory continues: a very respectable 4 per cent growth in volumes last year.

Successful innovations are helping to drive that growth. It’s great to see brands becoming more interesting and contemporary.

To mention three recent innovations - our consumers love re-sealable packs that keep their cigarettes fresh, they enjoy capsule technology that offers extra menthol flavour just when they want it, and the look and feel of the super-slim, king-size Kent Nanotek have boosted the brand.

My career in the international drinks industry taught me many things, not least being the importance of having the right products in the right stores and not being out-of-stock: in other words, distribution capability.

At the heart of this are good, mutually beneficial relationships with our substantial cross-section of trade partners – distributors and retailers alike.

British American Tobacco’s Direct Store Sales system of distribution is very good. It now covers more than half of global volumes and gives our own salespeople important, direct relationships with retailers large and small.

It’s not just revenue that has produced the returns you have seen over the past decade. There is also a sharp focus on making the business more efficient.

In 2009 our operating profit margin reached 31.4 per cent and is clearly benefiting from significant efficiency savings worldwide together with improved revenue from higher pricing.

Our target is at least 34 per cent by 2012 and we are confident that the current five-year productivity savings target of £800 million per annum by 2012 will help to deliver it.
 

Extreme regulation - a gift to organised crime

So your business is in great shape, it has grown in the midst of a deep global recession and the economic outlook is now starting to improve again.

But there is an ever present risk that shows no sign of diminishing and could worsen. I am talking about the global illegal trade in tobacco products.

Cigarettes are probably the most smuggled legal product in the world and organised crime is increasingly involved.

Weapons, drugs and people traffickers - and also terrorist groups - are attracted by the easy profits from untaxed booty. They are definitely not deterred by weak criminal penalties.

Anything up to 660 billion cigarettes a year pass through the hands of smugglers, counterfeiters and local tax evaders worldwide

Estimates say that governments worldwide lose up to £26 billion a year in unpaid taxes.

Our industry probably loses £3 - £6 billion a year in revenue and sees brands and jobs undermined.

But the greatest damage is caused through the encouragement of youth smoking because black market vendors will sell shamelessly to the under-age.

Your company works very closely with law enforcers and is very vocal in its support of a draft World Health Organisation protocol designed to drive better international co-operation against illicit trade.

But we are concerned that other new regulation, sponsored by the WHO, will cause the black market to increase.

The WHO’s Framework Convention on Tobacco Control is already guiding member governments to hide tobacco products from view in shops and to consider forcing tobacco companies to sell cigarettes in plain packs.

This year, one focus of the FCTC is ingredients in tobacco products. Baseless restrictions or bans could change the taste of many popular brands.

We believe none of these moves will lead to less smoking nor deter under-age smoking. But we fear they will grow the amount and availability of illicit cigarettes.

Think about it. Concealing cigarettes in shops will help blur the distinction between legal and black market cigarettes. And plain packs will be so much easier to counterfeit.

And changing the taste of favourite brands will simply drive smokers into the arms of the criminal suppliers who will not be so constrained.

In Ireland, my home country, I read that some smokers prefer the taste of counterfeit brands. Maybe they are stronger than the EU allows legal manufacturers to sell.

Gangs in Ireland get children to sell cigarettes door-to-door on housing estates and community notice boards frequently offer cheap cigarettes.

With a display ban in place and cigarette taxes through the roof, is it any wonder that more than 25 per cent of cigarettes smoked in Ireland are contraband?

Is it any wonder that adult smoking incidence is up from 23 to 29 per cent – back to where it was six years ago?

In Britain a new law introduces a retail display ban from October next year. You may have seen this week that tobacco companies, including ours, and worried retailers are seeking a judicial review of the law in the High Court.

But there is a better way. Governments can consult with the legal and responsible part of the tobacco industry to shape sound regulation that can help to reduce the impact of smoking on public health while also avoiding the chaos of tobacco markets run by criminals.

British American Tobacco can help support retailers to block illegal sales to children, fight illicit trade, set standards for appropriate marketing and support thousands of jobs and pay valuable taxes.
 

It’s not rocket science

One of my first visits as Chairman-designate was to the Group’s laboratories in the UK where work continues to address the many challenges around developing and assessing a potentially less risky cigarette.

It may surprise you to know that we employ experts not just in smoke chemistry but also in clinical research, genetics, biochemistry and microbiology.

We are still a long way from producing a less harmful cigarette but I was impressed by the dedication of our scientists and their world-class laboratories.

One of our scientists explained to me that it is painstaking work because it is ground-breaking work. “It’s not rocket science,” he said. “It’s much, much harder than that.” And I believe him.

Doing the right thing is important to us in British American Tobacco – no matter how tough the challenge – and I can assure you we are completely committed to harm reduction.
 

People

Of course it is to the great credit of all our people that British American Tobacco continues to thrive and I thank everyone, everywhere, for their energy, vision and hard work.

There are many individuals I should pay particular tribute to.

There’s the Executive team of Paul Adams, Ben Stevens and Nicandro Durante together with the Management Board.

And there’s Jimmi Rembiszewski, our outstanding and long-serving Marketing Director who retired last year.

He joined the business in 1991 and played a major role in its transformation – developing our Global Drive Brands, our innovation and our world class trade marketing.

He will be a hard act to follow but we have the right man for the job in Jean-Marc Levy who was previously Regional Director, Western Europe.

I also extend my warmest thanks on behalf of all shareholders to my predecessor Jan du Plessis who led the Board so skilfully over five years and set an exemplary standard of Chairmanship.

I know I speak for everyone in wishing Jan continued success.

And I thank my fellow Non-Executive Directors for their help and support in my new role. They play an important role in continuing to constructively debate our strategy and ensure that the Group is very well governed.

Finally I want to mark the passing of The Honourable Patrick Best who retired as a Director of B.A.T Industries in 1984. He had worked for Wiggins Teape and became a member of the Board in 1976.
 

Conclusion and outlook

Before we move on to the Resolutions, an update on how the Group has traded during the first three months of this year.

Earlier today we published our interim management statement and Paul Adams commented that our consumers are clearly finding economic conditions difficult and volumes suffered as a result of market size declines.

However, there was continued pricing momentum and good growth in market shares, leading to solid revenue growth and we remain on track for the year.

Ladies and gentlemen, I want to conclude today by saying that we are going forward with momentum as a well established business driven by a winning strategy with excellent management and committed employees.