Speech by Richard Burrows, Chairman, at the British American Tobacco 2011 Annual General Meeting

Good morning ladies and gentlemen and welcome to your Annual General Meeting.

Let me start by thanking you for being here today. Last year and today I had the chance to meet many of you and I am impressed by your loyalty and support for the company.

2010 was a very good year for your company. Although the effects of recession were still being felt in many countries, we again proved that our tried-and-tested strategy is robust enough to deliver in some of the worst and not just the best of economic times.

Put simply, our worldwide reach across emerging and developed markets, our broad and balanced portfolio of brands and consistent focus on innovation continues to deliver impressive results and sustained shareholder value. I will say more about innovation later.

So the 2010 figures speak for themselves – adjusted profit from operations up 12 per cent, Global Drive Brand volumes rose 7 per cent and we increased our market share in our top 40 markets. We also achieved significant productivity savings, ahead of target.

And you will be voting today on a final dividend of 81 pence, taking the total for the year to 114.2 pence per share – an increase of 15 per cent and maintaining our target of paying out 65 per cent of sustainable earnings in dividends.

I’m also pleased that 2011 sees us restart our share buy-back programme of up to £750 million – a vote of confidence in the sustainability of our results. We had suspended the buy-back for two years to preserve our financial flexibility in uncertain times.
 

Looking further ahead

But what of the more distant future, way beyond the next few sets of annual financial results?

It was nearly 50 years ago your company began to add non-tobacco interests to its portfolio. Then in 1998 we turned full circle and became a focused tobacco business once again, fully confident in the growth that tobacco offered.

That confidence was well placed, as our on-going success demonstrates, and that confidence is undiminished.

Rapid growth in the world’s population, coupled with growing prosperity in developing economies, is creating ever more consumers of all kinds of products and services – from cars and computers to air travel, mobile phones and, of course, cigarettes.

Regardless of flattening or falling smoking rates, the universal knowledge of the health risks associated with smoking, and the faster pace of regulation, it is likely there will be more smokers in the world in 2050 than there are today. The World Health Organisation has the same view.

But we are not complacent and are as determined as ever to achieve our vision of leading the global tobacco industry.

This means placing an ever greater emphasis on growth – and by that we mean taking market share from our competitors and giving consumers reason to trade-up.

We do that with really strong brands – our Global Drive Brands, other international brands and very strong local favourites such as Winfield in Australia and Free in Brazil.

And we strengthen our brands with industry-leading innovations – giving consumers good reason to stay with us or to switch to us.

Dunhill, our most prestigious brand, is growing thanks to Reloc, a clever and exclusive re-sealable pack.

Smokers of Kent, our most innovative brand, are enjoying Convertibles, a menthol-flavoured capsule that can be crushed at any time when smoking to release a refreshing taste. Click & Roll in Lucky Strike uses similar technology.

In our business responsible marketing is paramount but doing the right thing comes in many guises. For example, we are investing for tomorrow by developing lower-risk tobacco products.

And you may have seen in the news this month that we are also interested in the development of regulatory-approved nicotine products without any tobacco at all.
 

Milestones in reporting

This year’s Sustainability Report, published for the first time on the same day as our Annual Report, is something of a milestone – our 10th such publication.

Back in 2001 we were the first tobacco company to begin social reporting. Talking with stakeholders was nothing new, but reporting to international standards involved structured dialogue to better understand expectations of a responsible tobacco company and then transparently reporting on our commitments.

Along the way we developed our international marketing standards, our business principles and partnerships such as in biodiversity and combating exploitative child labour in tobacco growing.

By 2007, in line with shifting best practice, we began the transition from social to sustainability reporting and with it more focus on the most important issues for stakeholders.

External recognition is welcome. For example, we were the first tobacco company in the Dow Jones Sustainability World Index and have been included now for nine consecutive years.
 

The menace of illicit

Of course, all businesses face multiple challenges. For us, the biggest threat is probably the ever growing illegal trade in tobacco products – globally hundreds of billions of fake and smuggled cigarettes every year.

We lose valuable custom and governments lose tax revenues and control.

The black market is populated by criminals who don’t care if they sell to children. It thrives on sudden and steep increases on cigarette taxes, usually coupled with weak law enforcement that is quickly overwhelmed.

Many governments act too late to deal with illicit and there are examples where lack of enforcement results in up to 40 per cent or more of the markets being illegal.

In Ireland, my home, one in four cigarettes is illicit, often counterfeit. People haven’t quit smoking, but they have turned to the black market in their droves. In response the Government froze cigarette taxes last year.

In the UK last month tobacco duties were increased by two per cent above inflation which we predict will encourage illicit trade.

But the problem does not stop with tax. There’s no convincing evidence that banning the display of tobacco in shops, requiring generic packaging or banning cigarette ingredients will cut smoking rates and help public health.

But forcing cigarettes under the counter, making packs easier to counterfeit or changing the taste of consumers’ favourite brands are likely to drive smokers to the unregulated market, possibly forever.

And I think governments have forgotten that the more tobacco is driven underground, the more smoking may appeal to the curious.

Rest assured that we are taking every opportunity to engage with law makers on these issues, allied with worried retailers, tobacco farmers, trade associations and others who strongly share our concerns. Collectively we will not be deflected from our task.
 

People

The Board’s biggest single task last year was to ensure we got exactly the right person as CEO when Paul Adams signalled his intention to retire.

Paul served as Chief Executive for seven years and we all wish him well in his retirement.

In Nicandro Durante we have extensive tobacco industry experience, great drive, energy and a steely determination to succeed. As one of its architects, he is fully committed to continuing our successful strategy and driving growth.

British American Tobacco’s career development ethos is stronger than I have seen elsewhere so it was no surprise that the role was filled by promotion from within, though we also looked at external candidates.

John Daly has joined the Board as Chief Operating Officer and Ben Stevens, our Finance Director, was appointed Chief Information Officer in addition to his finance role.

I’m sure you will join me in welcoming all these people to their new roles.

Apart from Paul, we are also saying farewell and thank you to Ana-Maria Llopis who retires from the Board as an independent director today after eight excellent years.

And I invite you to welcome Kieran Poynter who joined the Board as an independent director in July last year. Kieran was Chairman and Senior Partner of PricewaterhouseCoopers.

Of course, it is to the great credit of all 60,000 of our people worldwide that your company continues to be a success and I warmly thank everyone, everywhere, for their energy and hard work.

And once again, a thank you to you, the shareholders in this auditorium, for your continued loyalty.
 

Today’s trading update

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

In our interim management statement this morning we said we have made a good start to the year, with organic revenue growth of 5 per cent at constant rates of exchange.

Our innovations are enabling us to take price increases and grow our share in our top 40 markets, our Global Drive Brands grew 9 per cent and our rate of organic volume decline is slowing.