23 February 2012
Results and performance
Q: Are you pleased with these results and the way the business is performing, and have they matched your expectations for the year?
A: Yes, I’m very pleased with the results in 2011. We have met or exceeded all the strategic criteria that we have set out for our business. We have grown organic revenue 7%, adjusted earnings per share 11%, so it was a very, very good performance. If you bear in mind the current economic climate, it was indeed a very good performance as I said.
Q: Volumes have improved in the year, but do you see this trend continuing given the challenging economic backdrop?
A: Well we are coming from two years 2009 and 2010 in which we have drops in volume of around 3% per annum despite gaining share at that period of time. If you look at 2011, the volumes are almost stable, 0.4% decline.
We had a worse first half of the year in which volumes were declining 1%. When you look at the second half, it was stable. So the volume decline is moderating and it looks actually in a better shape now than we were one year ago. And this has been driven by our Global Drive Brands. That had an outstanding performance in the year.
Q: We are beginning to see some FMCG companies struggling to make price increases stick. How is BAT faring on this front?
A: We came from 2011 very strong with a very good pricing momentum. Organic revenue growth was 7% and I see no reason for not keeping the momentum going. We have to consider as well that BAT is market leader in more than 50 countries around the globe which always helps. And the other big impact in terms of price increase is always excise shocks. But I have to say that looking at the last six months, governments in general have been very measured in the way they apply excise. So I think that we will keep the good momentum going for 2012.
Q: How have BAT’s markets performed across your four regions?
A: We had as well a good performance in 2011 growing share in most of the markets. We have grown 40 basis points in 2011, one of the highest growths that we have in the recent years and it has been across the board. If you look at our Global Drive Brands, they are the main drivers of the share growth.
Q: You mentioned Global Drive Brands. Didn’t the growth start to slow slightly in the second half of the year and how are each of your Global Drive Brands performing?
A: The Global Drive Brands in 2011 had a very, very good performance. The growth was 9%. We had a better performance in the first half of the year because the additional volume that we had to ship to Japan due to the tragic events in that country. But it was 11% in the first half, 7%, 8% in the second half, 9% for the year, which is extremely good. Global Drive Brands now account for one third of our global volumes. There’s a huge growth in the last five years.
Brand by brand, if you look at the performance of Dunhill, that was a slight growth year last year, but if you exclude South Korea where we had price led competition, the growth was 8%. Kent grew 10%, Lucky Strike 14% and Pall Mall grew 11%, so it’s a very strong performance across the board.
Q: What has the impact on sales been of your innovations and how is your pipeline looking?
A: Our innovations is the cornerstone of our strategy and it is very clear that the only way to grow in our business is through delivering additional value to the consumers. Not only additional value in the whole portfolio but also giving them a reason to trade up.
If you look at innovations in the whole portfolio now, they are 12% of our global volume and they are 35% of our Global Drive Brands’ volume, so they are important and become even more important. But the most exciting part is that we have a very exciting pipeline of innovations to deliver to consumers in the years to come, so I’m very optimistic about that.
Q: How have your most recent acquisitions been performing?
A: Well Protabaco, we acquired Protabaco in the middle of last year. The integration is underway. Now we have around 50% of the market. We are very optimistic about our company over there and Columbia is an exciting market for us in Latin America.
If you look at Indonesia, the integration went extremely well. We delivered some small brands in the market, but we had a very good growth in the kretek segment, which is our main target with Indonesia. Cost savings plus additional volume drove a very strong growth in profits.
And in Turkey it has been difficult not only because of the regulatory changes, but because of the excise shocks that we faced in 2010 and 2011. The government even announced another increase by the end of this year and those are the reasons that we decided to impair the remaining of the goodwill.
Q: You’ve also said you still see some scope for acquisitions, so where are the gaps in your portfolio and which geographic areas might you be looking at?
A: Well we keep looking at the market for potential acquisitions. They are part of our strategy, but they need to meet our financial and they have to meet our strategic criteria. You have to consider that we are not so dependent on acquisitions because we have been delivering organic growth. But as I said, if something comes up in the market, if there is a willing seller, we will be looking at the opportunities out there.
Q: You said that excise moves have been more measured. How do you see the current regulatory environment?
A: Well BAT continues to monitor and anticipate the regulatory changes in the market. Most of the change in regulation comes from the WHO Framework Convention on Tobacco Control. Those measures in general do not have our support. They do not have our support because we don’t believe they will achieve its public health goals. In most cases, they cause a reduction in the legitimate industry but this is offset by the increase in illicit trade.
Q: On plain packaging, do you feel the industry is making headway with the authorities in Australia and on your concerns about illicit trade in general?
A: We are very disappointed that the Australian government has decided to press ahead with this legislation and has declined to listen to the arguments of the industry. We do not believe that you achieve the public health goals of reducing the smoking incidence. I think that at the end of the day you distort competition and you happen to increase the level of illicit trade in the market. Now we are challenging this legislation in the Courts.
Q: You announced quite a few Management Board changes towards the end of the year. How is that transition going?
A: I wouldn’t call it a transition. This is a normal step in terms of development of our strategy which is science-based business development and this is part of our winning strategy that promotes the responsible use of tobacco and also meets the consumer needs.
Q: The Board hasn’t changed the payout ratio although cash generation continues to be strong. What’s the Board’s thinking on the use of the balance sheet?
A: The current policy has been 65% dividend payout ratio of adjusted earnings per share and we think this is the right level for the business. This meant for 2011 that we increased by 11% the dividends for the year and also we are coming from a year that we have a share buyback of £750m and we are increasing this for 2012 to £1.25b. I think that is the right level for the business. We keep getting our cash back with shareholders at the same time that keeps some flexibility inside the organisation for any opportunity that may arise.
Q: You’ve recently presented a pretty confident outlook. What’s the outlook today?
A: Well I’m confident with the future of the industry. Nothing has changed in the last 12 months. But of course, if you look at 2012, we are facing some challenges. The first one is the current economic climate. It has not changed as well when you compare to one year ago. The second one, we have some currency headwinds because Sterling has appreciated against some of our key currencies. We didn’t face the same challenge in 2011, which was currency neutral.
But I really believe that we have some very powerful strength in our business. We have a winning strategy, we have a geographic spread and we have powerful brands and outstanding people and for those reasons I’m very confident for 2012 and the years to come.