Note to: D P Allvey
E E Enedgui
cc~ D C Porter
Fronr D W Surdeau
Date: December 12, 1994
Subjec,: BATCo Profit Target 1995
Fol-lowing the discussion of the B ATCo Plan this
note seeks to summarise the issues
in respect of the B ATCo profit target for 1995.
1. Grouv Plan Preview
The consolidated Preview of 1995 tobacco trading
profit gave 10% growth on a 1994
base off I 176mn. Exchange rates used were
forecast average for 1994 as follows:
US$ 1.530
DMK 2.481
CANS 2.080
2. BATCoTraffing Profit Target
At the meeting between the CEC and the BATCo Board
to consider key issues arising
from the BATCo Plan for 1995-1999, guidance was
sought on the acceptable level of
tradi-ng profit for 1995. After subsequent
discussion a target of E620mn tobacco
trad:ng profit was set being BATCo's contribution
to the attainment of 10% grow-th on
the revised 1994 base off I 194mn. for the Group.
"Me new base reflected the October
Update, on an R&A basis. with exchange rates as
above.
3. Grout) Plan
In the appendix to this note the latest estimate
is presented based on the foLowin-z:
3.1 Latest forecast for 1994 being the November
Update on an R&--% basis.
3.2 Forecast average exchange rates for 1994 of:
USS 1.542
DMK 2.483
CAM -,.()99
C)
Co
EA7 INDUSTRIES CONFIDENTIAL- CATEGORY 1: MINNESOTA
ToBAcco LITIGATION
BAT Industries document for Province of British
Columbia 26 October 1999


3.3 1995 figures from Company Plans with
adjustment for BATCo, which was
based on a USS rate of 1.63, on the basis of the
USS sensitivity identified in
the Plan for both traasact~on and translation.
3.4 Other tobacco trading profit in line with the
Preview.
On the basis of the above assumptions -,obacco
trading profit growth in 1995 is 5%.
Attainment of the 10% target would require
anothcr:E54mn trading profit.
4. Underiviniz BATCo Profit Growth
In my note commenting on the BATCo Plan I analysed
how BATCo arrived at their
estimate of 5% underlying profit growth in L995.
Many of the reconciling items could
be challenged since BATCo is a holding company
with a portfolio of businesses
which will require continuing review involving
restrucniring of existing operations
and investment in new markets. Nevertheless the
figures provided could be
instrL;cz.ive in understanding the challenge
represented by the E620mn profit target.
Tobacco Tradi,,L, Profit:Emri 1994 1995 IS bz
Company Plan 578 521 - 10%
Exchange (1.63 to 1.54) 36
578 557 -4%
Stretch 6 3
578 620 7%
Special Costs 25 -1 _3
fKa ~L- 15%
The table above assumes all rabonaL&ation costs
relate to tobacco. Using the BATCo
methodology the underlying profit growth is 15%
which is clearly very challenging
and, in view of the updated figures from other
Operating Groups, may not be required.
Possible improvements to 1995 profit = likely to
come from the following:
cuts in brand spend
review of price increase assumptions
additional cost cuttmg
BATCo are to review each of the above categories.
However with a cut of 10% of
brand support expenditure providing ----,5mn and
the need to protect spend on national
and regional brands the ;E63mn profit enhancement
required to deliver the f620mn
target looks unrealistic.
5. Attainment of ProritTar--et
Three alternatives are identified on the attached
appendix which give some indication
of how profit growth could be improved at
consistent exchange rates. These are:
CZ)
co
r1 Q
cr"
SAT INDUSTRIES CONFIDENTIAL- CATEGORY 1: MINNESOTA
ToBACco LITIGATION
BAT Industries doCUrnent for Province of British
Colurnbia 26 October 1999


5.1 Alternative 1: Other Operating Groups remain
as they are with BATCo's
underlying rate increasing zo 10%. In view of the
comments above this could
be seen as a stretched but obtainable target.
Tobacco Trading Profit -~-rin i2L4 12K asu
Company Plan 578 521 -10%
Exchange M
578 557 -4%
Stretch 2i
578 590 -)%
Special Costs i~ _72
0 i !~L; 10%
This alternative generates a growth in tobacco
aiding profit of 8% in 1995 for
the Group.
5.2 Alternative 2: Other Operating Groups remain
as thev are wi th BATCo's
underlying rate increasing ic 12% as follows:
Tobacco Trading Profit `~n 12L4 1995 a-CL-
Company Plan 578 521 -10%
Excharte, h
578 557 -4%
Sa-etch 12 5-0
578 60'. 2%
Special Costs _2~ 7 3
~Ql 1"i 0 LR:~' 12%
ito
This alternative generates a T-rowth in tobacco
trading profit of 9% in 1995
for the Group.
5-3- Alternative 3: Underlying ?rOfiE gmwth at 12%
for BATCo and stretched
profit targets for the re-aining subsidiaries as
follows:
B&W Additional S- Omn giving a total growth of 10%
on the present
1994 base.
BATCF Additional DNI 24mn from cost cutting and
intemadonal spend
as discussed at Plan review meetings.
Sou.za Cruz No change ~ue to continued volatility
of Brazihan economv.
.A-ssuraing no adjustment fc-. Imperial this would
provide tobacco grading prof-it
of --: 1303mn representing ! 1 % growth on 1994.
3
BAT INDUSTRIES CONFIDENTIAL- CATEGORY 1: MINNESOTA
ToEACco LITIGATION
CD
r1 J
co
rQ
a\
C-1
BAT Industries document for Province of British
Columbia 26 October 1999


6. Conclusion
The above suggests that a target of uinder:T-mg
growth of 12% for BATCo (equivalent
to:E45mn additional profit) using consis---E
exchange rates will be required together
with stretched targets for BATCF and B&W in order
to deliver the required Group
performance. 'Me incremental profit on =s basis
will be derived as follows:
L=
--~ 0
BATCo 45
B&W 6
BATCF 10
Total L
nus the above measures, if achieved, -ocid
del.iver:E7mri in excess of the
requirement which offm some limited p~_tection to
the forecast.
Please advise wbat further work vou -to=t.
D W Surdeau
-7
Li 'n
CD
CD
Co
GIN
BAT INDUSTRIES CONFIDENTIAL- CA--GORY 1: MINNESOTA
ToeAcco LITIGATION
13 AT Industries document for Province of British
ColUmbia 26 October 1999


Tobacco GrouD Tradnq Profft 19,95 (Smn) Secre
Gro- Plan F'reAew Ac~ual Fstmlnp F~eye- ILL[r-
I QQ3 12E-A LW-1 95 vs 94
S&W 205 365 4r 10%
BATCo 559 5W t:4 6%
aATCF 58 51 4,t -10%
So- C"La 143 62 -19 44%
Mnw 92 109 i 19 9%
Cther 153 -11 1 .109%
Tooo= -FQcN Prot 1210 1176 ~21;1 10%
USS :.502 1.530 1.~.x
DMK 2484 Z481 2-4A-1
CANS 1.938 zow 2-05C
Latee E3"rroft AMC Ncvuod&e am XJ=
L922 1224
i
R&A B L~O_~ 95 vs 94
saw
205 as
s
390
M 4z2
8%
BATCo 559 578 ,%~ ---, -4%
aATCF 5a 51 -7 T2 5: -3%
So,= Cuz 143 62 47%
v-csc_- 92 108 11%
-nref 153 -12 .108%
7 oooczo 7rctiN Poft 1210 1177 "24~ 5%
L;Sz 1.502 1.542 1~~
C-MK Z484 2-483 2-4PZ
CANS 1.938 Z099 2-1;-
Lkftrnaftye I Actucil Nov Undorle E= I-Icr-
im 1904
R &A Bgsis 11
9
B&W 205 390 8%
PIATCa 578 2%
SATCF 58 51 5- -2%
So,= 143 62 ;, 47%
L-nc:sco 92 108 z 11%
15-, -12 -108%
Totn=c Trodog.Ptolt 1210 1177 z7z 8%
,kftrrkcffve 2 Ac'uol Nov Uodate Pl= xmr_
19 Q3 MA J-22-- -~5 vs 24
Mw
205 R&A B=
390
4 _-
8%
E,A7C. 55Q 578 6L:2 4%
SATCF 58 51 5C -2%
So,= Cuz 14-1 6,2 P~ 47%
V,,=co 912 108 12C 11%
O,t,er 153 -12 - .108%
To-DcCC_o 7rCd:rg Proft, 1210 1177 1227, 9%
6 nerr,ahlye 3 Ac,,',,c] r4ov Ur>date 2= ir'.
IM JD4 im :5,,s 94
205 R&A. Bow
390
4-~:
1 ()%
42 C
BA TC 559 578 6C2 4% 6o2
BATCF 5a 51 6c 17%
14 ~1 62 9~ 47%
Ir, 108 1~ 11% P0
i a, -12 -108%
,~Dcc= pcf-.1
T
121C 1177 13c--
11%
IZ/ I 2JQ4
BAT INDUSTRIES CONFIDENTIAL- CATEGORY 1: MINNESOTA
TOBACCO LITIGATION
c0
f1 j
(jN
th
BAT Industries document for Province of British
Columbia 26 October 1999