Transcript British American Tobacco Group ADR (BTI)

BRITISH AMERICAN
TOBACCO GROUP
ADR (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
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
International tobacco company that manufactures,
distributes, and sells cigarettes, cigars, leaf and other
tobacco products
Produce mainly under Global Drive Brands
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Dunhill
Kent
Lucky Strike
Pall Mall
Large Diversification
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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
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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
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However there are many promising and
recovering opportunities that can serve as a
defense for well managed tobacco companies.
THREATS
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Illicit Trade

Smuggling of tobacco has taken off
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Increased taxation makes it very profitable to cross
boarders undetected
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This effects major tobacco companies tremendously, it
hurts their revenue streams so they must make sure
not to ignore boarders
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Empirical evidence shows that illicit trade has led to
an increase in teenage smoking and it harbors
terrorism
THREATS
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Litigation
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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
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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
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THREATS
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Anti-Tobacco Campaigns
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Significantly increased as activists see declining
returns from litigation
Research shows that tobacco education is making a
difference
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Increased vigilance pertaining to ID-ing has sharply
decreased the number of teen smokers
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Laws ban most advertisement and displaying
techniques
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Increase in the Anti-Tobacco ballot initiatives
THREATS
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Increasing Excise Taxes
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Stemming from a decline in litigations potency
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Tobacco is targeted because it is considered a negative
externality
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Increase in taxes in order to “save the third party”
 Number one driver of price hikes
Smoking bans
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New phenomenon sweeping the nation which is picking
up speed
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Becoming a very controversial issue
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How it will affect the tobacco companies?
Businesses are required to ban smoking or face stiff
penalties.
OPPORTUNITIES

Merger Completions
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Many mergers have dominated the tobacco industry’s news
feed
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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
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Increase in excise taxes and litigation costs have
caused discount sellers to hike up their prices
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Major players gaining back a lot of lost market
share
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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
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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 INITIATIVES
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Litigation
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Created a consolidated litigation force
Anti-Tobacco/Smoking Bans
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Embrace this movement
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Illicit Trade
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Increased Excise Taxes
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Seen as a positive
BTI’S INITIATIVES
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Have taken advantage of mergers and acquisitions.
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Acquired
Reynolds American
 Skandinavisk Tobakskompagni (ST)
 Tekel
 Ente Tabacchi Italiani
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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
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At least half of the Main Board, excluding the
Chairman, is comprised of Non-Executive Directors
who are independent.
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Jan Du Plessis, Chairman
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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.
MANAGEMENT

Ben Stevens, Finance Director
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Nicandro Durante, Chief Operating Officer
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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 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 nonexecutive directors.
CEO BACKGROUND
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Paul Adams has been Chief Executive of British
American Tobacco PLC since January 2004. He
is currently 53 years old.
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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
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BTI has taken multiple steps to cutting costs
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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
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Reinvests cost savings back into the company
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Primarily into R&D
SPECIFICS ON COST
CUTTING
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In 2007 shut down operations at five excess factories
Transferred to Mexico for the production of the Canadian
market
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Own less tobacco stock while still being able to produce
efficiently
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Cheaper labor costs
Product complexity reduction
Continue to focus on the leveraging of their global
purchasing power to drive down costs of indirect purchases
PRODUCTS OVERVIEW
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Portfolio of approximately 300 brands including
international and regional brands
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Focus on four Global Drive Brands:
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Dunhill
Kent
Lucky Strike
Pall Mall
Brands include ready-made cigarettes, cigars, rollyour-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
Growth (in billions)
Global Drive Brand Volume Growth
180
160
140
120
100
80
60
40
20
0
2001
2002
2003
2004
2005
2006
2007
Year
Source: BAT Comp. Filing
• 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.
OTHER INTERNATIONAL
BRANDS

Vogue
International Premium Superslim brand
 Gained importance in global portfolio
 Meets needs of female consumer
 Big player in Eastern Europe
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Viceroy
International low price brand
 Achieved high growth in 2007 at 21%
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PRODUCT INNOVATION
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Menthol capsules
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Allows consumers to choose when to enhance menthol
experience.
Introduced in Japan with positive response.
Swedish-style Snus
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•
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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
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Company recognizes and embraces nature of tobacco
industry.
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Concentrated on cost reduction, and organic growth
through GDB’s.
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Diversified Brand Portfolio.
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Targeting key growth markets/Geographic spread
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Innovation Pipeline.
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Only Tobacco Company to be listed on the Dow Jones
Sustainability Index.
REVENUE BREAKDOWN BY
REGION
America- Pacific,
6.2
Asia Pacific, 21.2
Latin America, 22
Africa/Middle
East, 14.8
Europe, 35.8
Source: BAT Comp. Filing
VOLUME GROWTH
300
In Billions
250
200
150
2006
2007
100
50
0
America- Pacific Latin America
Europe
Africa/Middle
East
Asia Pacific
Source: BAT Comp. Filing
REVENUE GROWTH
4000
3500
3000
2500
2000
2006
2007
1500
1000
500
0
America- Pacific Latin America
Europe
Africa/Middle
East
Asia Pacific
Source: BAT Comp. Filing
PROFIT GROWTH
900
In Millions
800
700
600
500
2006
2007
400
300
200
100
0
America- Pacific Latin America
Europe
Africa/Middle
East
Asia Pacific
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
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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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THE END
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