DRAFT 14/1194 SECRET BATCo OPERATING GROUP FIVE YEAR PLAN 1 9 9 4 1 9 9 8 Ln CD C-) CD BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 BATCo 1994 - 1998-COMPANY PLAN INDEX Pass Me SECTIO.N I SUMMARY 11 Tobacco Industr% De%tlosiments 1 1.2 SATCo's Kn StrenjOs and Wwtknesseb- 3 L.3 BATCo's 0b)ectises and Stratcgics 4 1.4 Critical 1994 Action PointS 11 1.5 BATCo's Ptrformaiwe in 1993, 9 1.6 1994 Budget Projec-tions 10 1.7 Surninary of Fi, e-Year Prq)ectioris 11 18 Sensimittes 11 1.9 Companson %, Ith Lau Year's Plan 12 SEMON 2 : BATCo'sMARKETING QBJECTIVES, & BR.A.ND STRATEGrES 2.1 BATCo Marketing Objecti%cs 13 2.2 Kc% BATCoMarketinj Strategies 13 2.3 Tr3d0-tarketing &- Distribution 14 4 International Filter Brinds 14 2.5 IN International Brinds 15 2,6 LIS International Brands - 15 SECTION31:COST CONIVETITI'VENESS 31 Ob)wi%,cs 22 32 Competitive Positior 22 13 Kc% Strategies 112 SECTIO-S 4 - PRODUCTIM-4 CAPACITY, PROOUCT SIDIURCING & EM-TRO.NMENTAL 5104DARDS 41 Ob)ectwes 23 42 Strategies and PTojecttons Z5 43 Enworiment 26 SECT10,N 5 : PRODUCT OUALITY S I Objectives is 3 2 strategic$ 28 5 3 Group Rewarch 29 SECTION 6: LEAF UPORTS 61 Background 30 62 Market Situation and Outlook 30 63 BATCds Position and Performance 30 Ln CD C) C) CD BATCO CONFIDEl"AL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 Pan No SEC110N 7: HUMA.N RESOURCE ISSL ES 7.1 Objectives 32 7.2 Njanngement Qtrth I% 32 7.3 Hcafthand Sarct% 32 SECTION 9: REGIO.NAL ISSUES, STRATEGIES PROJECTIONS S. I Continental Ettrope 34 S 2 Asiaj?lci@.'c 33 S,3 The Stib-Continew 36 S 4 ArricaMliddic East 37 U Latin Anicrirzatc--l At+e@ 39 SECTION 9 -. i4ON-TOBACCO ACTIVITIES 40 SECT1014 10: PROJECTED FINANCIAL PERFORMANCE 10.1 Cliinges in Corpornic Stnicturc 41 10.2 Overill Financial Position 41 10.3 Turno% er 4.1 10.4 profits 4.1 10.5 Cipiml E-xpendtturc 42 10.6 Return on Net Asscis 41 W 7 UK Income 43 10.8 Cash Flom, 4.4 11) 9 Manngenicni OF BAW Busilicss 44 10 1r) E.,cchnnitc-Rat.- Scnsimoics 45 APPENDIX I - TABLES Table A @BATCo ProM and Loss Account Table 8BATCo Bahvicc Shm Table CBATCo, Inicrcst in Prork Afici TaN Table DUK Cash Flou Table E:BATCo, Ratio% Table FVohinic/Value Shafes B% %Inrkct U'l C--.) CD BATCO CONFIDENTIAL - CATEGORY 1:.MINNESOTA TOIBACCO, LITIGATION. BATCo document for Province of British Columbia 23 April 1999 Table 1.1 World CitaretteMarket - Reeitninal/Se-gritent Trends Growrth % CGR % p.a. tlz UW 1994 1993 - 1994 199A Jul--LgLk 1993 - 199A North ;'rrenca 543 5.111 513 -3 6 JA6 tj -2 6 Latin A:nenca 1@7 342 @tv. I I 16 I 1 4 Europe EUL Central 663 66A 671 4) 4 696 .0 2 %Ve;-@orth 75) '711 7,ii 4) 5 719 -u 6 -0 4 To:3! 141( 14112 1401 4) 1 14115 .0 4 Affica.@-!ijdle East 314 316 321) 1 3 333 0 1 1 0 Indian 5-::1-C0ftt1nc11 139 13.q 147 6 X 160 0 .3 3 0 Asw-Pa- ",c China linports 71, 6 1 67, 10 0 104 17 3 11.4 Chn., Other 1-554 1536 1 @Z'19 (I 9 1661 0 6 0 9 O:hcr R73 R-15 9f)3 2 0 940 1 9 1 2 T,,:a; 504 2532 2569 1@5 2705 1 1 3 Tutai 47 74 5262 @296 0 6 5429 a i 9) 6 lnt-.M3.;7nal Filter Brat-.d% 611 64 5 6 ', 9 5 2 766 6 9 3.5 Excluding ilit US. LK and Ircland Table 1.2 World Cigarette Market - Maior iNlanufacturers .S.1les (Whis I Share 1%) Crom-th Rate (% p a.) I 111,Z I 9V 1 1994 L2Z =-1 1991 1994 199i 19R11. 1993 1993-19911 TOTA L " 0.11. D BArC2 3W 29.4 3115 36; 5 7 3 6 5 8 6 2 5 4 5 BAT .1 so @11 4 -111 -2L, 5 " 4 9 6 0 .! .3 4 9 B A T C.-: 5Rr) 543 586 699 11 0 10 -4 11 I 12.11 0 6 4 7 Philip Mcnis 6 i 5 650 672 11 511) 12 0 12 -1 t2 7 13 9 .3 .3 3.1 R I ReNnoids 290 299 290 290 5 3 7 5 5 5 3 0 8 -0.6 Renbrzn.", 1-6 163 10 16( 3 1 3 0 3 0 .1 6 -0 3 Total 1:@ af,@j @296 Z29 0 1 0 6 WORLD EXCLU`DVqG USA, CANADA, BRAZIL & GERMANY BATCo 300 294 315 365 6 7 6 5 6.7 7.7 2 5 4 5 BAT Enjustries 65 64 87 _ "I 1 4 1 9 2 9 15 6 16 1 BAT Or--up 364 359 391 301 8 I A 0 3 6 10.6 4 2 7.0 Philip MCM3 352 3X0 401 4R4 7 9 X 4 A A 10 3 8 3 5 a R I Rcvnrlds 131 135 137 15.: 2 9 3 0 3 0 3 3 12 ! 16 Resnt@rx:-" 159 14A [.I.% 149 3 6 3.3 3 2 3 2 .1 0 0 1 Total 74 1 =9 E4j 0 3 I 0 U1 C:) 2I- 13ATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO, LITIGATION. BATCo document for Province of British Columbia 23 April 1999 BATCo FIVE-YEA R PLAN: 1"4 - 1998 SECTION I - SUMMARY 1.1. Tobacco Industrv Developments IAJ Market Trends I 1.1 I Tables I I and 1 2 highlivht a number of smnificant features within the overall 2ro%vth of the,%orld cigarette market and (he sharc performances of BATCo. BAT Industries and the Group's principal competitors. %%hich are important to BATCo Tlicse include:- (i) The overall rate of growth of the world cigarette market o%er the Plan period is lower than prc@.iousl% projected (O 61"o p a v I W'.. p a ). with that for the aggregar@ of markets in %%hich BATCoc orripcies (i.e excluding the USA. Canada. Brazil and German%) also slightly lower (I 0% p a v. 1.4% p.a.). (ii) Rapid rates of growth expected in the Sub-Continent (3.011,1V p.a.). which is stronger than previousl\ projected, (iii) Reasonably strong gro%%ih in the Asia-Pacific region. albeit at a slower rate than previously projected (1,6-) \lodcratc rates of izro%\ih in Latin America (1.0110 p.a.). AfricaltNfiddle East (O V1. p.a ). and Easteni, Europe (O :1 --n P a fv) Conimued decline in %citirne in the developed economics of WesLcm and Northern Europe. i) Growth in (he International Filter Brand OFB) segment, of about 3 3% a -.car (with the seszment's share rising from 12.3% in 1.993 to 14. 11110 in 1998), a slower rate of growth than the 4 7'13 p a previously projected ii) Continued market share growth for Philip Morris. but slight declines for BAT's other major privatc-sector competitors (viii) 0\ er the forecast period. BATCo's volume is projected to rise at an average rate of4.5% p.a. EXClUding t;ie BAT Inclustrics'dornestic markcits ofthe USA. Canada. Brazil and Germanv. BATCo's o%erall market share. after havinct declined by 0 2 percentage points in 1993 to 6 30-4'. is e\pectcd to rise prouresswcl\ throughout the Plan period to 7.7% b\, 1998. I I 1 2 Another si2nificant trend in the market is the dwcloping Lights segment. in which BAT is currentl,. under-represented This segment accounted for 25". of world IFB volume in 1992 and is gro%,.ing significantl% faster than the full-navour IFS scgmcnt I 1.1.3, The international tobacco inclus-m. .has become increasingly competitive in recent years. This situation is expected to intcnst&- during the Plan \cars. with incrcas@d pressure from both tihe major international cigarette manufacturers and rcgional/local operations. and will affecc the levels of performance which can be expected. 1.1.4 These pressures are reflected in - (i) Downtrading in some markets. in rcsponsc to relatively weak economic conditions. and uptrading in others where prices are licing held down. (ii) A2itresswc pricing moves by the major manufacturers, for example by Philip %lorris in Aritentina and Costa Rica and RJ Revriolds in parts of Europe and in the.%fiddle East. (iii) Connnucd pressures on domestic market performance and profitability ansing from border business and. in some markets. from cxcisc/tax evasion. In 1-303. it is estimated that nearly 60,10 ofthe total world cigarette sales of 5 3 trillion were DNP sales Eastern Europe and the Asia-Pacific region (cS5blln each) accounted for the ni,k;orit%-ofthis%oltitiie.tliotigliWcstcmEuropc(c5Oblln)%vasalsosignificant Inrclationto total market sales. DN P % olumes are largest in Eastern Europe (c 1 31;) and AfficaINI East (_n (cl:@'o).btitarcalsosianiricantinLatinAnicrica(c9"/n)andWcstcmEuropc(c7%). Ak..-% C:) CD CD BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo, document for Province of BritiSh Columbia 23 April 1999 issue for BAT is 10C11SUrc that the Group'ss%stcm-%%j&- objt;cti%cs and performance arc givcn the nec.-ssar% priority through the :icti%e and effectivc manastcment of such business. (iv) The effects of continued up%%ard pressure in cxcisc rates on consumer demand. (v) The anticipated increase in industr%. capacity (particularly in Eastern Europe). significantly ahead of projected dernand le%,cls. (vi) The trend to Larger and more efficient plants 1.1.5 Iliesc factors are likeh- to mean that there will be little or no scope for increases in rcal cigarette prices (e.g. the Plan projects average real per-mille prices. including mix changes. for BATCo's sales falling by about I% p a ) and. possibly, greater variability in performance in terms of profit. cash flow and voltimrs This %will put a prcimura on securing substantial and sustained improvements in efficiencv. both to ensure that BATCo is capable of competing effectively and to counter do%%mward prcssure on profitability 1.1.1.6 There are. ho%tever. significant industry developments %which offer BAVBATCo major opportunities for improving both shar: and profits These include@- (i) The openine.-u-p of new nuirkc( opportunities. including the privatisation of state cigarctte monopolies). particulark in EastenvCentral Europe, the Far East and Latin America. 6 0 The continuing trend to,.%ards lo-acr-deliven products (m) An Und;:r1% ine ;hift in dcmand to International cigarette brands at the cxpense of local/rcgion2l brands and. %%:-,?-:n that. dit fastct o%crall ratc of arowth of USIBs Compared to that for UKIBs 1 1.2 Competitor Strategies I 1-2.1 In mid 1993. flit Tobzcco StratC2%. Group carried out a thorough review of the strategies likarly to be pursued by die in3jor tobacco companies and BATCo supports the general conclusions of that review In summary these were as follo%%s I 1 2 2 Philip Morris wall continue to be the primary competitor of concern to BATCo The primary focus %%fll be on Marlboro full-flavour as long as gro%-.1h is attainable. but lighter extensions and other brands will also be used (targeting low-tar, female and VFM seements separately PM's central strategy will be to protect mid drive Marlboro. seeking to secure brand share leadership in as many markets as possible Other key strategies include:- . The development of pricing on a market-by-market basis Whilst Marlboro will generally be positioned in the premium-price seyment, pricing wall be used where necessary as a toot to maintain Marlboro's momentum. Tactical brands, such as L&M and Chesterfield. will be priced to attract %alue-canenied consumers. - Thecontinuedlo%%cringofproductioncosts.%,6itiifL-%verandiargcrfacilities-. dedicatedfacilities for the production of Marlboro and regional production of other kay brands-. and lower tobacco densities in some markets . Aggressi%e use of direct distribution. using the strength of Marlboro to pull other products through the distribution chain. and alliances with food-relatcd operations. . Disproportionate spend behind NInrlboro Spend will focus on traditional media where possible. re-criforced through dominant POS presence. sponsorship of events %6th global/regional exposure. and T%ID advertising 1. 1.23 PM is expected to continue to protects its strong position in Europe (particularly Geffnany. Italy and France), focusing on Marlboro but building other brands in support roles in grc@wth segments such as Lights and VFNI (with Chesterfield and L&M being used in the laner category). Whilst they are unlikeIN- to initiate a pricewir in the region. minimal price adjustments will be used to gain competitive advantace In AsLa-Pacific. PM will continue to seek dominant share positions in all C:) markets- thefocus"illbeonL%Iariboro.withincreasingcmphasisonNiariboroLights InLatin C) CD CD BATCO CONFTDENTTAL - CATEGORY 1: MINNESOTA TOBACCO EITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 3 America PM is seekine to crod.: BAT's position. both by tvablishing Nlarlboro and positioning tactical U.S[Bs fe.2 UM) to capitalise on downtrading from other international brands and uptrading from mediunt/lower priced bran,-4s P.'%l is focused on becoming the lowest-cost producer and marketer of cigarettes in the revion and has shown its willingness to use price as a tactical weapon (c g. Argentina and Costa Ricaj I 1 24 R I Re-molds' international tobacco stratcgy is to expand rapidly in existing and emerging tobacco markets. exploiting individual brands based on regional preferences, RJR's international brand portfolio has shown signs of faltering Ithough Salem is reasonably successful in the Far East), and RJR is willing to promote these (other than Salem) and local VFM brands aggressively on a price basis to 2encrate %clume Althouah RI R will invest disproport-enat.-!% lichind. its premium brwids in an attempt to re,. azilisc them. this is unlikely to be successful and. as a result of the financial pressures on RJR. ma% not bc sustained RJR %% ill continue to emphasise lo%%,-cost manufacture. in order to be in a position to coniretc -:ffrcti%tl% in VFM segments. 1.1 2.5 RJR will focus on new markets through joint ventures in Eastern Europe and else-where. In Western Europe. where Camel is still an effective contender, RJR will focus on price competition to secure growth. In the %fiddle East. RJR will also continue to compete aggressively on price. However, in the Asi3-Pacific remon. although lower-priced brands will be used, the primary focus %%ill be on supporting Salem and building share in Japan. I 1 2.6 Rothrr.,-,,sisre-e-nervinstasist2niricantfictoriiithe2lobiltobaccobusiness Althoughitsbrand portfoh: contains some Significant international brands. their kev weakness remains the USIB segment. where tht% ha,..-,.mu:iil% no prescitcc at the premium-price level. There will be increased focus an the ke% international trademarks and drive national brands. The two global UKIB brand priorities wili conunuc to bc Rctlirnans and Pctur Stu%%csant. Dunhill will remain a secondary international brand tv.ith an Asia-Pacific focus plus selective markets in Europe), with Cmvcn used as a tactical brand and Cartier. Vcaue and St Moritz as niche premium brands targeted at selected export anddut%-freeniarkets Rothm-.nsRo%als.GoidenAmcricanandHolidav%villcontinuetobcused select1% el% as VTNI propositions I 1 2 7 Western Europe %%. ill continue to be the most important region for Rothmans. focusing on its three kev international brands supported b% VF.\l entries such as Golden American and Rothmans Royals. Rothmans is. and %%ill remain. a kc% competitor in the Asia-Pacific region. where there is a willingness to invest heavil% behind the prcmiu in brands (panicularl% Dunhill) and to exploit growth opportunities Rcithmans:Rembtandt. which is the largest of the major international tobacco companies in Africa. has recenth demonstrated a willingness to invest and could pose a fteat to BAT. 1. 1 @2.9 ITTs priorities arc expected to be to defend its position in the domestic Japanese market and to seek volume growth internationally It's international focus will continue to be on Taiwan. Korea and China. though it will also tarect Wier markets with good opportunities for volume gro%%Ih. Mild Seven Jwhich is premium priced other than in Korea and Hong Kong) will be the primary brand focus intcma,,ion,iliv.%%ithdisproportiaiiatespcndinthcFarEast. Outsideoflapin.ITT%vilialsocompete %%'Ith nr nd promotion in the lowur-pricc segments. as is e% odcnced by its expons to _Srcssive pricing a the '%bdjl.- East I BATCo's Key Stren2ths and Weakiiesses 1 21 It is BATCo's intention to build on its key strengths and eradicate %weaknesses in order to take advantae:! of the main ondusim trends an@ to st@ngthen the business in order to withstand and overcome the anticipated increase in industry competitiveness. I 2 2 The ke,'L business strengths which BATCo will seek to re-enforce inclu&- C) (1) A compctlMe UKIB POnfO110 CD CD co C-) BATCO CONIFIDE11MAL - CATEGORY i: MINNESOTA TOBA CCO 1.11TIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 4 (ii) The product qtial&@ ofthe Group'sLKIB brands is comparable %%tth (or posslbl% slightly superior to) that ro r the nimn UKIB comp--nitor. (iii) A selection of strong rcgional.'riancrial br--nds (iv) Dominant positions. in ternis of corporate share. in Latin America/Canbbcan. pans of Africa: the Sub-Continent and the Far East (v) Competitive le%cls of production costs in most markets. (vi) A strong position %,.ith regard to Leaf supply (vii) Barclav in Western Europe 1.2.3 Action taken in recent years has also ensur6d that BATCo is now more competitive %vich regard to Consunicr Marketinit and Leaf Blendine. %%lulsr action is in hand to establish a position ofcompentive supcnorit% in Trade Nlarketing 1 2 4 In contrast. there are a numbur of of poi@:,rmal %ulnerabdit% These includc:-' 0) The %weakness of parts of the --astin2 L'S I B portfolio (partictilarl% v% ith regard to the pr3cc positioning. product and communications For Luckv Strike and the positioning of and communications for Kent) (ii) The need to strengthen BAT's posiion in thc IFB Lights segment outside of Wcstcm Europe. (m) Personnel capable of providing the Group's future needs for top management. (i v) Lack of adequate share positions in most of the major markets in Western Europe Tlic ernerucrice of trading blocs. particularly. in Europe and Latin America/Caribbean which. throu2h tl@ic mductioniabolmon of Eariffs ar d quotas. threaten to undermine BArs traditional compentive ad%antages arisinSl from locall% -based operating companies and production units. in (vi) The reliance on nationalircitional brands rather than international brands. parficulafl% Central and South Arnerica (Vii) The lack of a clenr BAT Industries Grotip strategy with regard to second-line VFNI international brands 1.3 BATCo's Obiectives And Strat-e-ies -1.3.1 BATCo.'s Objectives 1 3.1.1 The primam objccn%cs %%hoch BATCo is sctking to achime are.- I To improve the qualm. of BATCo's %olurneand, markct share: incrcasc BATCo's value share at a faster rate than volume share. a-id build brand cquit% for BATCo's ke%. brands. ii To achic,6e progressive increases in BATCo's share of the world IFB scgment (e%cluding the USA. Canada. Brazil. German%. UK nnd Ireland). In particular. in 1994 BATCo will seek to raise its share of the IFB seement front 12 6% to at least 14.8%. BATCo will also seek to increase its o% crall volume at the Guideline rate of 3% p.a. on average iii, To 3chieve and maintain 3 position of mcegnised superiority with regard to product quality and to devise and create new product opportunities iv To achieve and sustain a position of lo%--est-cost provider of quality products v To achieve sustained above-wcraire erowth in profits, with at least 1602m PBIT being achie-.ed in I QQ4. BATCo,@% ill also scek -,o improve the quality of earnings in terms of UK income and to increase manageable cash flow at a faster rate than trading profit over the Plan period as a "hole vi To improve the capability' and effl:cti%cn-.ss of management and staff to industry-leading levels of performance 1.3 2 Key BATCo Strategies Q -) cr/ 1.3.2 1 BATCo will s-,-,-k to dc%clop ind cNploit conipcrimc advantages in all the kcv areas of business management. including the de%clopincrit ofartractive, high-quality. premium-priced international] brands. modern. industr% -1cading distribution and sales org.-inisations. cost-efficient production and Ln C) a) CD N.) 4I.A. co BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO. LITIGATION. BATCO document for Province of BritiSh Columbia 23 April 1999 business systcnis. aggressi%i: product and proc-.!s d;.--.;:lopmcnt. managcrial cxccllencc.@ and cffectl%c promotion of die Group's interests le Z in rclation to ;.,xcisc structures and rates) 1.3.2.2 In particular. the main thrust of BATCo's effort %-.ill be to support share growth in the key grotith markets in the Far East. to -.%in share in the ftill-r.%.-nue IFB scament in all markets and dc%clop BAT's position in this wenicrit in Latin America. and to idcntif@ and effect opportunities for ma)or cost savings. including radical chanizes in stricture where appropriate. 1.3-2.3 Marketinag!Sales Key spccific Marketing StMIC21':S InClUdc a) Giving priorit% to plans for building sustained improvements in kev individual brand shares. concentrating on premitim-priced international brands. b) Concentrating marketing resources behind the following key international drive brands (with particular emphasis on the designated rcitions) - SE555 Asia. combined %%ith the aggressive dimelcipment of new markets B&I H Whcre o%%-ned PGL Sub-Contincrit. Africa, \Iiddle East. Far East Luck% Strike Worldwide Kent Far East (and sJected Latin America markets) B a r c!a Europe Support %%ill be focused on no more than three drive brands per market in the short-to-medium term Thisis-.inesscntials(cpantiteprocesso(bothlinprovingmarketpcnctrationandin improving profitability b% building brands %%hich have the nccessar% critical mass. The primary focus will be on SUii and Luck\ Strike land possibly PGL) in the full-flavour segment. with Kent and Barcla\ competing in the Lights sector Lucky Strike is the Group's numbcr-one brand ci%tr the longer term as its success at building share as a full-revenuc brand in the key 1:5113 sc2incent is critical to the Group's longcr-term success It is essential that the product is impro%ed to secure superiority over Marlboro and that a distinctive communications package is devised which appeals to the key group of young adult male consumers. c) Key regional or local brands %,ill be supported where such brands are capable of sustaining significant consumer franchises o%cr the long term. and where this cannot be adequately covered bv the Group's key international brands le iz Belmont in Latin America) d) Directing brand resources at full-rc%enUC market segments in order to drive value share at a faster rate than volume share e) Improving product qualm and securing consistent brand management across all aspects of the marketingmixtosupporttliebtitidingo(sustainablebrandvalues. Wherepossiblethcrewilibc greater emphasis on above-the-linc rather than below-flic-linc support. Developing strategies profitabl% to exploit emeraing VFM segments. primarily to complement and protect BATCo's full-rc%enue focus BATCo's recent emphasis on improved trade marketing %%ill be continued and targets established to ensure procressi%c improvements in both performance and competitiveness h) BATCo %% ill continue to %%ork closcl% with BAT Industries and the other Group Tobacco oper-.itionstotiiipro%ethcman,-icemenEo(Grc)tipTradeNtarks. BATCowillcontinuctotakcan aggrcssi%e stince with rcizard to counterfeit products. 1.3 2.4 New Business Opportunities a) BATCo will continue to seek new export market opportunities nnd to increase its penetration of existing export markets. benefiting also from the recent structural changes which provide clear crid-market responsibilities and the attendant abilih to manage a focused brand portfolio. C:) C=) C:) r%.) co BATCO CONFIDEIMAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Chart 1.1 PORS Results for Kev El KIBs: 1990 H2 - 1993 H2 PQRS 7C. 60- so- ago= 40. 30 20- SE555 B11SF PGL Chart 1.2 BATCo Weighted Productivity (cpmhl cpmh 14000- 12000- 10000- 2000- 329( 6000- 087 20r, 9532 lays 4000. 7341 $141 6211 $469 2000- LVL- U1 ow 1"I 1929 1990 1"I 1"Z 1"3 1"4 1995 1"6 CD C) CD co BATCO CONFIDENTIAL - CATEGORY I- MINNESOTA T013ACCO Lrricknom BATCo document for Province of British Columbia 23 April 1999 6 b) BATCo will continue to develop its position as an exporter of tobacco leaf In -.1-: light of the changed market conditions and the effects of the recent US legislation on leaf -\:crts BATCo has implemented significant rationalisntion and efficiency improvements. The of this activitv %vill thus be markedly Icss than %%as previously expected. and @% ill no%@ '.-t focused on six priority operations L3 2 5 Product Qunlitv BATCo is committed to enSU ring that its products both meet consurricr expectations and provide a significant competitive advantage by being recognised by consumers as being supenar to competitor products. Chart I I shows how BATCo's product quality (PQRS) has improvcd sn:e 1990 for the three key UKIBs. Kt% actions being taken to achieve. maintain and improve this pznaion include:- a) Targeted improvements in. and regular monitoring of. the visual. physical and smoking quality of our products relative to key competitor brands. b) The development of a core International Virginia product that has superior srrzkmg qualities to key competitor products C) The development of products %hich are capable of providing the Group %%ith a :-..3jor competitive advantage. d) Effective control of product standards and modifications. c) Improving leaf quality through assistance to farmers. investment in and better rn=gement of GLT units and the use of imported tobaccos. f) Ensuring that BATCo's blending capabilities are at world-class levels. g) Focusing on qualit% stwidards and the introduction of standard production tes: :.-ocedures marv. S-.:.-ndarv and Filter through tha implementation of qU.-dit-C011CrOl protocols ror GLT. Pri Rods operations I -1.6 Cost Competitiveness With market and competitive pressures expected to restrict the opportunity for real price increases in future vcars. substantial and radical improvements in BATCo's cost base are essenzial if BATCo is to secure sustained profits growth and be in a position to compete ciTectively in the Increasingly competitive international tobacco market It is BATCo's aim to became the lowest-cost provider of quality cigarettes in each :f the markets/markct sectors in %%hich it operates. This will require action across all of BATCo's business systems. The primary strategies being pursued with regard to achieving such improvements in cost. Competitiveness include:- a) Investment in key existing factories to achieve both scale economics and productivity gains. b) Continued implementation of the'Sest Practices' techniques identified from the European Manufacturing study and the specific targeting of low-productivity companies against Best Practice Performance standards. Following the 59% incre2se in cpmh achic--ced since1996. BATCo. is targeting a further 33% improvement bv 1996 (see Chan 1.2). c) Identifying Further opportunities for factory rationalisation. Consideration %-.ill also be given to the possibility. of collaboration with competitor companies where significant -.fficicricies or other business benefits might be achicvcd %vithout endangering the Group's long-term Interests. d) Securing sustained targeted improvements in rcal unit F&SV costs of at Icaj-, .5% p a. on averave. c) SimphNIng manufacturing complexit% through reducing the number of lo@%-%olurrie. low- marein products which are produced. f) Taking advantage of Group negotiating strengths with regard to machinem. W"VIS and Leaf purch3sing and rationallsing materials specifications. g) Achieving sustained. targeted improvements in real crop and GLT expenses (_n CD C:) co BATCO CONFIDE.4TIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 7 h) The development. where appropriate. of regional structures that will enable BATCo both to eliminate senior management posts in operating companies and to take better advantage of rcitional svnergles. 1.3 2.7 Production Capacity BATCo's overall capacity objective has been for installed capacity to be sufficient to meet sales volume projections plus an overall contingency of 100/6. with specific provisions for Southampton factor-, and for Hilton Volumes (based onThil-saWforecasts). Latest projections indicate that there is adequate overall Group cnpacity to meet this objective. BATCo will seek opportunities to improve operating Costs through the rationalisation of production facilities. so long as quality standards can be safeguard. Options planned or under revieu. include the closure of the factorv in F1 111and. consolidation of the manufacturing sites in Central America. rationalisation of production facilities in the Caribbean: the possible closure of the Cyprus fac-,cr-.,. andthepositionofBrus!icisasaflexiblemanufacttiringlocation, Consideration%-.-illalsobegi%-.nto contracting out the manufacture of lo%%-price brands in limited circumstances. BATCo %%ill revicw. during 1994. the overall vision for the mediurn/longer-term production structure of BATCo (relating this to possible developments elsewhere in the Group) with a vie%v to secur= material improvement in conversion costs BATCo has tightened-up compliance with its policy that all third-party requests for contract manufacture are charuielled through BATCo HQ in order to ensure that the most efficient sourcing can be arranged (taking account of production costs. BATCo's shareholding and tax efficiency) Action is in hand to establish a manufacturing disaster recovery plan. This will take advantage of BATIndustriesGroupfacilities%vhereavailable Considerationisalsobeinggi%-cntoestablishi-ist mutual Arrangements with UK manufacturers for volumes where'Made in England' is critical 8 Quality of Nlanagerrient and Staff It is recovnised that BATCds future success is critically dependent on BATCo attracting. developing and retailing people at all Icvcls who are of the highest calibre and who consistentiv deliver industry- leading standards of performance Actions being pursued to improve BATCo's position in this regard include:- a) Ensuring that the most able and effective managers am focused on those markets. brands and operations .%hich have the best potential for producing sustained. high-quality profits b) Selective recruitment at all levels. particularly for young managers of the very highest qualin (in excess of current requirements) in order to support the anticipated future development needs of the Group. c) A review of remuneration and incentive schemes to ensure that BATCo's total package is sufficiently competitive to attract the top-class managers that BATCo is seeking. d) The use oi Bench-marking in order to raise standards of recruitment and promotion. e) The development of person-specific training and development plans for identified high-potential staff f) The creation and implementation of new functional training programmes. g) Continue with the appointment and development of high-calibre local (non-1:K) managers. including those %who are internationally mobile 1.3 2 9 External Affairs BATCo %%ill seek to achieve more focused and effective lobbying of governmental. quasi-zo% ernmental and other bodies (both national and supra-riational). together with support for C) C) C:) C:) rl.) XI. co BATCO CONFIDEPMAL - CATEGORY 1: MINNESOTA TOBACCO LI[TIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Chirt 1.3 B kTCo Number or Lost-time Accidents too,,-, 9"7 ton 09" W" 1"I 1"I WS CD CD C) C:) co C.,- BATCO CONFIDENTIAL - CATEGORY U MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 appropriate coalitions. in order w- (i) promote the Group's interests with reg.-..-i both to possible changes in excise/txx rates and/or systems and to the application of such ::!-. its. seeking to achieve competitive advantage where possible. (ii) protect BATCo's fight to make and man..'.t., tobacco products: (iii) limit the spread ol'smoking rcstri .ctiors. (iv) counter negative vic%vs of the inclusin and smokers. BATCo will review effectiveness of the Tobacco industry in the UK and Europe at securing UK/EU support for opening overseas markets to Tobacco imports and seek to identiS- wav% in which such support can be ma@e more effective. BATCo vvill also "crk with BAT Industries a,---' other Group companies actively to defend the Group against product hab!lity litigation Progressive impro% -seems will be sought %% ith regard to the use of materials. processes and procedures in order to minimise advQrsc civ, irzninental impacts and to ensure that BATCo meets its police.. of applying thc best imcniationil stancz:ts of practice in all aspects of its operation which relatetoconservati.-noftliccn%:ironmcnt BATCo%%illalsoensurethatapproprialcaudiencesare aware of the Group s environmental record and nchicvernents and seek to influence the actions of relevant pressure VOLIPS in :)rdcr to avoid 1priate environmental performance requirements being imposed on the Group. 1.3 2 10 Other BATCo. vvill continue to implement reductions in its involvement in non-tobacco activities. BATCo %vill continue to .give the highest prio.,,% to health and safety issues in all parts of the business. with the 2un of securing fiirthcr siam".- nt and sustained reductions in the number of accid.-nts which occur to BAT employees and non-company personnel %vhilst on company premises (Chart 1.3 opposite shows the marked impro% enient over recent years in BATCo.'s lost-time accident record). I BATCo will idcntif@ and assess options for implernienting the longer-term development of the Group's opportunities in China. BATCo %will continue to appl%, the highest standards of financial management and control, both to and the Group's assets and intcgrit% provide competitive advantage and improved returns to shareholders through innovative financial management 1.4 Critical 1994 Action Points 1*1 The critical areas for s access. and where BATCo is focusing its efforts in 1994 are:- (i) Securing improvements to the product and communications package for Lucky Strike and the communications package for Kent such that they are capable of providing an effective challenge in the key full-revenue USIB segment (h) Developing competitive products to ties advantage of the growing international brands Lights scerricrit. and achieving an understanding of the Menthol segment in order to develop a response to the segnictit's growth in the Far East. (iii) Continticd in%cstrricrit in support of the Group's longer term Priority international brands (iv) Establishing a position of clear comPNIM e advantage with regard to Trade Marketing. (v) Delivering superior product and smoking quality across all of BATCo's key international and (-.n regional brands C=) (Z> C:) C:) rQ _c::. co __j BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Table 1.3 1992 1993 Variance Variance v. Budget 1992 Budect LAE % % Sales volume (tins) .196.5 307.8 290.6 -i7o - Excluding Talisman 291.3 -5.4 .1.8 PBIT (1m) 51-9 1 711.3 -34.4 - Excluding Talisman 6141 5SI.5 -51 -9.9 Trnding Profit (Lm) 523 1 708 7 -3 5.0 - Excluding Talisman 611,5 578.8 -5 3 -10.2 Prorit Before Tix (Lm) ;44 i 706.0 -29 7 - Excluding Tilismin 603 2 5-73.8 -5.2 +5.4 Attributable PAT (frn) 332-6 516.3 -34.9 - Excluding Talisman 435.2 393.1 -9 @2.7 Dividem d (Liril 243 301 301 USS/L exch. rate (average year) 1 765 1.765 1. 50 CD CZD CD CD co co BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 9 (vi) Ensuring that the transfer of responsibility for those markets prcNiousl% managed by B&W is achieved smootlilv and without loss of market momentum. (vii) Identifying and. Miere appropriate. implementing opportunities for radical improvements in the cos t base. for example through factory ritionalisation (Central America: Finland). downsizing.ind the dcvc1opment of structures which eliminate senior management posts and take maximum advantage of regional synergies (viii) Bringing the price war in Costa Rica to a satisfactorv conclusion (Ix) Stemming. and implementing plans for %versing. the share loss in Argentina. (x) Dctailcd r;:viei% of options for implementing the longer-ternt development of the Group's opportunitic-, in China. (xi) A review of the attractiveness of. and options for. a major effort to pentrate the Japanese domestic market. (xii) Resolving the excise difficulties in Pakistan. (xiii) Securing majority central of ITC (xiv) Divestment of Willards and the Cistar Group. (xv) Continued selective. recruitment ofmanagers of the very highest qualit%. supported by focused training and development of key innovative and effective personnel. 1.5 BATCo's Performance in 1993 1.5 1 Table 1 3 opposite suminariscs the kc% fieurcs relating to BATCo's 1993, perficrmance compared %%ith both 1992 and the 1914' Z budsict 1.5 2 The 1993 Figures are distorted b% the effccts of Projea Talisman. On a comparable basis, (i.e assuming ftill-%ear sales to the Talisman-affected markets). PBIT (including share of Associates) is estimated to be f52.4m-(9 9'!/o) abo--@. the 1992 levcl. but 02.7m (5.3%) below budget, 1.5.3 The shortfall against budget is more than accounted for b% the effects of the difficult trading conditions experienced for Combined Exports (443- 4m). Profits .%ere also ad%erscly affected by the price war in Costa F?jca (49 9ni). increased transit volumes in Spain (45 5m). the markedly %weaker conditions for Leaf exports (47m): and exceptional costs (excluding Talisman) of around 0-im 1.5 4 BATCo's trading margin (on subsidiaries only and excluding the benefit from Talisman) is estimated at 21.3% for 1993. compared to a budget of 23.7% Asset turnover (1.68 versus 1.63) is better than budget. but RONA (at 35.7% v. 39 7%) is slightly do,.,,n on budget. i @5,5 Despite these shortfalls against budget. BATCo perforated reasonably %%ell in 19933, Significant achievements bv BATCo during the %ear includee Marketint/Product Quality (i) The successful launch of Barclav Number One in Switzerland, re-launch of BHSF in Malavsia and lumaround of B.&HSF sales in Unit I (it) The strengthening orour position in %Ioscow. including the launch of SE545. (iii) Impro%enictits in BATCo's lFB share in nian% markets. including Holland. Spain. Hungary, Finland. Australia. Malmsia. China. Taiwan. Pakistan. Ar entina d Venezuela. g an (iv) Continued improvements in both product quality and smoking quality (v) The development and successful tcst marketing of a new communica tions and pack design for PGL, (VI) Tlie de%-clopmcnt and twing of proposals for replacing the Ro%ai Warrant on SE555. taking advintaec of the 100th birthda% of SE553 in 1995 (vii) The development of -,I sccond Virginia brand for the China market 0x) Re-building share in Venezuela from 65% to 73%. Ln C:) CD CD C-3 00 BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Mable 1.4 1993 1993 1994 Growth 1993/940) LAE LAE (Excl. Talisman) Guideline Estimate % Volume - total (bns) 291 290 3030) 303 +4.4 - excluding India (bns 1 229 228 235 +3.0 Trading Prorit (Lm) 1109 565 66 t(z) 598 +5 a Profit Before Tax (im) 706 560 598 +4.9 Attributable PAT (Lm) 516 381) 390 +2.8 USS/L exch. rate 1. 50 1.494 (I)Guidt!fine is c,,;rtsscd as achieving, a mimmuns ol'3% p.a. volume increase on 1993 base (7)Gutdclineise\;-;:ssedasochicvtn&12.5%p.a.gro-.vthona 1992hmorL49$mnatconstantl992ratesof C) exchange. C:) M1993 base excl--l-ne Talisman C:) C:) 41- BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCO document for Province of Brit!Sh C01UMbia 23 April 1999 10 Efficiency (i) Development of P!ans for [lie integration of the Central American operations. and implementation of an integrated lcaf operation. 60 Do%vilisizing in Brussels. Argentina and Guatemala. (iii) Further gains in productivity. timpite lovLcr-than-budgeted volumes. and the introduction of best-practice nianning, targets in Europe. 6v) A reduction in BATCo's overall rcal per mille F&SV costs (excluding depreciation and market support expz-siditurcl of Ni"'. WN'. excluding tht. effect of exchange-rate movements), Sccurine substantial reductions in procurement costs for both BATCo and other BAT Industries opt:rai:;.-ns Or.-nnisation (i) The successful irrclierncritaucin of (lie new rcutonal structure. integrating export markets. Ili) Establishment of the Competitor Rcscarch Unit to counter counterfeiting. with significant eark success (Ili) Increasing the number of branch offices Ili China from three to seven. (W) -niedisposilofANIEABin.%Iala%sii: est.-Lblis)imentofplansforthedisposaloftheagri- businessinIndonez:.i. aizreenicnttoclosctheSiotechopcrationinVcnczuelainl994. and preparation for d:-,posing of Willards in South Africa. (v) Succcssful neeot:.aion and impicnictitation of Project Talisman. Human Resources W Improvements in BATCo's marketing personnel resource. through recruitment and training. (II) Substantial further impro%crilicnits in BATCo's safety performance (Ili) Upgrading of BATCo.'s blending capabilities through the development of a formalised career development programnie and tnipro,.cd training. (m) Continued strong support for tire B A T Indkistries New Business Development Team. Supporting the nc%% Group functional traming programmes and implementing the Finance prolzramnic. Finance (1) Strong performance in the quality BATCo domestic markets. including Australia, Malaysia. Indonesia and Chile (ii) Establishment of the Singapore warehouse. to the benefit of PAT and UK incomes (ill) Securing a deal %% ith Tabacalcra ending the IS% fee and transferring brands to BAT Espana. (iv) Significant progress %%ith regard to blocked/suspcncled funds. IV) Establishment of the LASU concept for Latin America. 1.5@6 In contrast. the performance of BATCO US [B portfolio was disappointing, with total volumes clown bv- 2.lblln (9 9%) :ompared vith 1992 and share of the USIB segment down from 5.8%to 5.1%. This weaker-than-expected performance is primarily attributable to the persistent weak trading environment in the Combined Exports markets (wh;rc Kent volumes are down 39116 comparedwi&. 1992) and the need to achieve the correct price positioning for both Lucky Strike and Kent in those markets. together with the adverse impact oF transit sales in Spain 1.6 1994 Budeet Proiections 1 6 1 Th- prclinilinam %olutricand Financial projections for 1994 arc shown in Table 1 4 opposite. For this table. end all other comparisons with future-,car figurcs. the 1993'excluding Talisman' figures have been expressed as BATCo's actual estimated performance less both the net downsizing costs of (Jrl Talisman and the ict benefit arising from the B&H sales to the Talisman-affected markets during tid-ID C) C-) BATCO CONFIDENTIAL - CATEGORY L MtNNESOTA TOBACCO LrrIGATION. BATCO document for Province of Brit!Sh Columbia 23 April 1999 Table 1.5 COR CGR % P-3 %pa 1992 Ind Talisman E\cl Tilo-tri,-.r. 199-3 1995 1996 1993 - 96 1997 1998 1993 - 99 Market Share 6 6 5 6 - TO 7 3 7 @ 5 7 7 Volume - total (bns) 296 29 1 2911 W 319 335 5,0 349 365 4 7 . excluding India (kins) 234 229 221-1 2@5 246 259 4 2 268 282 4 3 Net Turnover 2501 2856 30.19 3294 3595 8.0 3894 4237 81 PBrr (Lmn) 5 21. 9 711 j6% 601 697 920 13 0 915 1037 12 a Trading Profit (Linn) 52; 71)9 M5 599 694 917 13 0 912 1034 12.9 PBT (Lirrin) ;.4.3 71A r.A) 5RA 694 816 13.1 914 1041) 13 2 Attributable PAT (L= 39i 516 M 390 454 545 13.0 615 708 13 3 Dividend to BAT Um) 24q @01 N) 1 2157 410 461 15 3 517 595 14 6 UK Encome Flow (Em i UK Cash Flow (Lm) 273 41 5 %62 @12i i59 441 6 8 514 614 11 I Trading margin 22 1 it) 7 2( 5 '21 2 2 23 9 24 9 26 0 RONA (%) 39 0 33 1 @S 3 39 7 45.2 49.1 55 2 USS E exch ratec@) 1 765 1 50 1 ;0 I 4R4 1 484 1.494 1.494 1 484 Guideline Trading Profit 661 743 $36 941 105R 12 5 ("1993 Base excluding Tahman (PAveme-vear rate for 1992 and 1993. Period-end we ror 1994 - 1999 Table 1.6 UK Exports Dutv Free CTA 1992 t993 1994 1993 - 94 i995 1996 1993 - 96 (LMJ Law CLMJ Change) UDI Urn) (% VA.) Europe 16 6 19 -1 21.4 8 6 24.5 27.4 11.6 Latin A mc rica/C a 0.5 0 -, 0,7 -4.2 0.8 0.9 27.1 Africa/Middle East 1 7 1 5 1.5 +2.0 1.7 2.0 10 7 Asin Pacific 24 7 10 6 11 4 +2 6 35 9 ill 12.1 Un Total 43 5 JU 51( +4 & G_9 73 4 1 1.8 C=> C:) Xh- BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 period before the deal with American Brands Thus. the"cluding Talisman' figures in table 1.4 differ from those shown in table 1 3 1 @6.2 Sales. BATCo total sales volume's projected to grow by 12.7blin (4.4%) in 1994 on the 1993 base excluding Talisman. though about half of this projected increase is attributable to the Indian associate companies. Net exports are projected to increase by about 4.5blin (6.4%) to about 75biln, with export sales by the Indian Associate companies accounting for about Alln of this rise, Combined exports in Asia. Pacific are projected to rise by about 7%. L6 3 Profits. The forecast 1994 trading profit of L598m is 3 9% above the expected out-cum for 1993 (excluding the net benefit from Talisman). but below tire implied Guideline target of i66 11m. Apart from Talisman. the primar% reason for this shortfall compared with Guideline and last vear's Plan projection is the difficult trading conditions in mony parts ofthe -world. Specific and significant elements contributing co this veaker-than-cxpected performance include the assumption of continued difficulties in the Asia/Pacific combined export market. which adversely affects the Asia/Pacific North, BAT Hong Kong and BAT China profits by about L70m. plus increased marketing support expenditure to support nature growth in these rttarl@ets (ci7m), the effects of Project Talistnan (cXl3m). rationalisation provisions in both Finland and Central America (a7m); do-wrisizing/severence costs in Argentina and the Sub-Continent (cl5m)-. the cffects of severe competition in many mark-em notabiv in Costa Rica (c.E9m): transit levels in Spain (CL4-5m); ,.weaker leaf exports (c0m). and decreased contract manufacture in Cyprus (cf3m). In the absence of these costs. the projected trading profit %%ould be ibout 9% (E62n0above Guideline in 1994. 1.7 Summarv of Five-Year Proiections 1.7.1 Based on implementing the abovc strategies. the preliminary BATCo projections (including share of Associates) for the period 11 994 - 1998 are sho" n in table i 3 opposite. 1 @7.2 Sales. Projected sales volume gro%vth over the Plan period is 4 7% p.a., close to the Guideline target - of 5116 p a. This rate of arowth derives primarily from net export sales. which are forecast to grow b,,- about I 0% P a. on averaue to I I 2blin bv 1998. with the AsialPacific Combined Exports total volume prcjected to rise from 36.3blin in 1993 to 67 4blin in 1999. UK exports to Latin America are expected to rise sharpb. from I 9blln in 1993 to 8.9blin by 1998. Domestic sales increase by about 2 7% p a. on averaie. over the Plan period (about 2116 p a. excluding India). 1.7.3 Profits. On the 1992 base of L498min (i e. "eluding the one-off benefit ofthe Westminster House sale and the contribution of brands transferred under Project Talisman), trading profits am projected to grow over the Plan period at an average rate of 13. 1 % p.a. At constant 1993 exchange rates. the projected average rate of growth o%,er the period 1992 - 1998 is 11.2% p.a. (below the 12.5% pa. Guideline target). 1.7,4 Over the Plan period. PBT growth averages 13 2`16 p.a.. slightly faster than the growth-in PBIT. Attributable PAT is project;d to grow at 13 3% p a over the Pian period. The overall tax rate rises slightly from its 1993 level of 24 Y% (excluding Talisman) to about 25. 1% in 1994 because ofa rise in the 4ectivc rateorUK taxation. but declines slightly over the rest ofthe Plan period. 1 7.5 The BATCo guideline tareet of a 40% historic RONA is achieved. as the ratio rises from 35% in 1993 to 55% in 1998. Despite heavy capital expenditure in the early years of the Plan, asset turnover rises from 1.68inies in 1993' to 2 12 times in 1999 The tr@dtng margin improves from 20 7% in 1993 to 26 0% in 1999 1.7.6 BATCo's Duty Free business (based on UK export sales) made a contribution to admin. of L53m in 1993. equivalent to 9% of BATCo total profits (excluding Talisman). with 511% ofthis being secured in the Far East and 39% in Europe (see table 1.6). Over the Plan period profits from this activity are expected to grow at an a-, cruise race of nearly 12% p.a. and the anticipated changes to single C:) C) C:) Z-4 @10 BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Table 1.7 Grout) Cash Flow (Lnj) 1993 1994 19% 199- 1999 P81T 650 533 615 718 804 916 Other (pnrrtarilv depreciation) 74 94 9- -1-01 Net Cap. Exp. & Change in Working 724 617 71.1 922 913 1023 Capital -.') 73 -205 -192 -192 -@.M .143 OPERATING CASH FLOW 350 412 320 639 730 915 Net Int. & Fin. Charges .2 .5 .2 7 Q 17 Tax Paid -93 -108 -128 -150 -173 -194 Other i 13 3 12 15 10 MANAGEABLE CASH FLOW 255 311 397 509 584 709 Dividends Paid to BAT Ind. -412 -476 -3@ 1 .608 -709 -815 Divs & %v/h la.% to Minontv -48 -42 .54 -54 -66 .74 Dividends received 15( 162 IS' 200 24.1 278 TOTAL CASH FLOW .35 45 47 54 9R Tnble 1.3 Sensitivities Incl i221 Excl CGR % P. a. Volume fbn j Talism.-in Talisman Im 1995 1996 1997 1993 - 97111 This Plan 291 24)11 file 319 333 349 4.7 Last Plan 308 121 334 343 356 3.7 Tradinz Pro(it (Emn) This Plan 709 56; 9 694 917 912 12.7 Last Plan 6i2 841 947 1053 14.7 POT Uninj This Plan 706 360 583 684 916 914 13,0 Last Plan 605 728 35 3 976 1109 16.3 Attributable PAT Umn) This Plan 516 3180 390 454 545 615 12.R Last Plan 430 325 60 710 812 17 2 I 1 @Gru-Alh raic on 1993 3 bmw c%cluding Talisman C.-) CD C:) BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 12 company management of -vach DF Territom (or DF account) should result in further improved Group ocrformance 1.7 7 As sho%%m in Tab Ic 1 7 (opposite). both operating cash flow and manageable cash flo%v are pmjected .o increase strongl% over the Plan period (20'k' p.a and 23% p a. rcspectivcl%). prurnaniv because the level of net capital expetyliture at the end of the period is currently projected to be lower than that in 1993 and 1994. UK cash flow before dividends x B.A.T Industries also rises strongh averaging increases of 16% pa The clubt/ccluity ratio (gross debt to shareholders' funds) of 22.9 % in 1992 rose sharply in 1993 to 28 7`6 hecause of the cfrect of loans to finance capital expenditu re (primarily Project Test) It rises to 32 I @141 in 1995 and is then prqlcctcd to fall to 24 4% b@. 1998 as the b encl'its -if this in%esunent accrue 1.7 8 It should be noted that thcsc projects take no account of the potential impact on profits or cash now arising from either the potential divestment of Willards. the Cigar Group and STK. or of the effccts of securing majority ownership of ITC. 1.8 Sensitivities 1.9, I A critical fentur-: cf the projected pcrforniance. and a significant sensitivity for BATCo. is the robustness of the projcLucins for the Asia/Pacific combined export volume. It is BATCo's view that such sales are likely to experience further periods of significant %olatility. though the timing ofsuch periodsandtheirsc%crtt%,caiinotbeforec-.tst UKexportsalestothismarketha%-eamarsinaI contribLItICti(grosscontribti(ioiiiessprodtictione\pcnscs)ofaboutilO.5Opermillcona%cragein i 994 rising to E I 3 per mille in 1998. thus a -variation in volume of I blin p a (on the currently forecast mix) %%ould affem BATCu's PB IT b% about E I 0 5mn in 1994. rising to about f I _Irrin bv 1998 1 8.2 In addition the projections %%ould be sensitive to - (i) Variation in the US Dollar-Stcrfing exchang-c rate. The forecast cxchan-2e rate is based on an a% erace ratc of USS 1 48.1 Everv one cent variation in the average exchange rate assumed for Sterling against the US Dollar %% ould affect BATCo's PBIT by about E I 5m in 1994. rising to about E2.4m bv 1998 (on a translation only. basis). (I 0 An ir:rcase ofcompetitive pressures. particularly in Central and South America and Europe. (iii) The possible critry of Philip Morris into Chile, which could adversely afFect profits by about LI Im in 1994, and possibly more in later ycars. (iv) A devaluation of the Argentinian Peso If a 20% devaluation took place in late 1994 such that there was no time for corrective action (i.e. a price increase) to be implemented, then BATCo's profits would be adversely affected by about 13.6m. 1.9 Corrivarison with Last Venr's Plan 1.9 1 Table 1. 8 opposite compares the projections (including share of Associates) in this Pla-i with those in last ycar's Plan. The Plan projcc-ions benefit from the effects of a lo%%cr USS/f "change rate than previousiv- assumed (S.1 I 4X4 compared %vith SIE 1. 763) The pnniarv reasons. %vhv the Plan projections are lo%%cr than last %.car's arc - 0 Weaker Combined Exports (VOrn in t 994. rising to f 144ni bv 1997) u) ne etTects of clowntrading and competitive pressures on both the mix of BATCo's business and the ability to secure anticipated price increases. iii) The effecEs oi the Project Talisman changes (LI 3 m in 1994). iv) Weaker prospects for Leaf Exports (about LI 8-20m a year). v) exceptional costs. %%hich in 1994 are projected at about 0 Im. vi, The price %-.at in Costa, Rica (cf9rn in 1994). The effects orcontraband sales in Spain (cf7m in 1994) C:) %-0 BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Table 2.1 Volume/Value Shires (Domestic DP Shares) L99 2 1993 1994 1995 1996 Europe - Value 110 22 9 22.8 23.3 23.2 12.7 - %volume 19 1 19.3 19.2 19.5 19.7 Asia Pacific- Value % 29.0 29.9 30.0 30.8 31.5 - Volume 29 8 31,5 32.4 312 34.1 Africa - Value % 36 6 153 8 36 5 35.8 36.1 - Volume 16 44 6 44.2 4-; 0 45.7 46.4 Sub-Cant. - Value 1,; 74 o 72 5 72 1 72.5 72.2 . Volume 67 6 67 4 67 77 68 3 68.7 Latin Am. - Value % 58 7 56,1 54.4 34 7 54.0 - Volume I'm 63 4 63.0 6 L.9 61.6 61.3 Total BATCo Domestic Markets - Value % 32 4 32.6 32.7 32.5 32.2 U-I - Volume I a .16 7 37.2 3S. 1 38.8 39.7 CD CD CD BATCO CONFIDENTIAL - CATEGORY I: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 13 SECTION 2: BATCo's MARKETING OBJECTIVES & BRAND STRATEGIES 2.1 BATCo Marketing Objectives 2.1.1 The main BATCo Marketing objectives are a continuation of those agreed in last year's Plan. The key objectives art:. i. To improve the quality of OATCo's volume and market share. by raising the Group's share of the premium-priced segments and, in particular, of the faster-agrowing IFB segment in order to build value share ahead of volume share. ii. To seek an overall volume growth rate of at least 5% p.a. iii. To achieve progressive increascs in SATCo's share of the world IFB segment (excluding the USA, Canada, Brazil. Germany, UK and Ireland) to over 141/:% by 1996. N. To build a world-class ConsumerfTrnde Marketing Organisation. 2.2 Key BAICO Marketing Strate2ies 2.2.1 BATCo's overall marketingisales sLratcg%- is based on developing those kev brands. markets and market segments with the best prospects of long-tcrm profitable growth concentrating particularly on international brands. focusing on brand shares but balancing this with the need for critical mass and /001111 coverage of all price segments: and building brand goodwill (particularl% for the key international drive brands). 2.2.2 Marketing resources will be concentraEed behind BATCo's key intemaLional drive brands. This will be SE555 primarily in Asia. but also aggressive development of new markets; B&H in those markets %%here it is owned: PGL in the Sub-Continent, Africa, Middle East and Far East; Luckv Strike worldwide Kent in the tar East. Barclay mainly in Europe. In each operating company and export market these brands will be developed as the basis for achieving market leadership for tl@e key BATCo international brand in each market. 2.13 Support wi II be focused on no more than three drive brands per market in the short-to-medium term, though over the longer term. it is 8 AT Cc's objective to secure worldwide market leadership on the back of one or two dominant brands, The primary focus will be on SE553 and Lucky Strike ( and possibly PGL) in the full-flavour segment. with Kent and Barclay competing in the Lights sector. 2.14 Local or regional brands will be supported and developed where they are capable of sustaining significant consumer franchises over the long term. and where they complement international brands. 2.2 3 The stratcgy of directing brand resources at full-mvenuc mark-et segments (in order to drive value share at a faster rate than volume share) will be continued. Table 2.1 shows the projected progression in BATCo's volume share and value share by region and appendix G shows the shares relating to individual subsidiaries' domestic markets. 1@hese indicate that in most markets this objective is not expected to be achieved over the next three years. the 2.2.6 Brand values will be built through improved product quality, sustained and consists management across all aspects of the marketing mix. and. where available, a greater above-thc-line rather than bclo-.%-the-line support. As much as possible of mark spent against the consumer 2.2.7 BATCo will also develop strategies which will enable profimb rging, VFM segments, International and regional VFM brand tried for doing this and they will be developed on a consistent basis CD C) C) r'.1) r,%TFrORYI:MINNESOTATOBACCOLITIGATION- BATCo document for Province of British Columbia 23 April 1999 Table 2.2 Internationni Filter Brands") GCR p.a.) 1992 1991 jj!jj 1@L 1996 1993 .1996 Total lFB Segment I tns) 546 566 96 6-' 1 649 4.6 [FB Share of World 12 4; 12 9 % 4 I a 14 2 BATCo Share of IFB 13 3 116 .1 I.: 2 14.9 else,, Total UKIB Segment (bns) 133 12S 33 1 16 139 2.8 UKIB Share of lFB 24 3 22 6 .1 9 21.5 BATCa Share of UKIB M 36 & 38 8 4 4) 9 46 1 Total USIB Segment (bns) 413 433 -162 4Ss 509 5.1 USEB Share of lFB (%) 75.7 77 j -- 6 -8 1 79.5 BATCo Share or USIB 5.7 5@O ; I 6.2 "Excluding the '-'SA, canala. Brazil, Germany. the UK and Ireland Lrt CD CD CD CD a %-rr-n rormnF-14TIAL CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province Of British Columbia 23 April 1999 1 4 2.3 Trade Marketine & Distribution 2.3.1 The objectives of BATCds Trade %larkciing and Distribution Plan are to Provide consumers %vith higher value by improving the cost effccievcricssand service levels of the distribution process. The physical flow of products from the finished product %%arehousc to the point of sale %vill be optimiscd in each market in order to pro%, ide BATCo %% ith a strategic advantage o%cr its competitors. 2.32 A retail outlet census and classification is being carried out in all established markets and in kev areas of nc%% markets The information will be used to determine call rrcquenc%, trade marketing rep proffics, merchandisinS and promotion investment stratepy 2.3.3 Value added bv BATCo's trade marketing field forces will be improved significantly in the areas of sales and share growth in dcrined priority trade channels: in the sham of shelf space secured for our international brands in defined pnority trade channes. and in the share of in-store merchandising activities achieved for our international brands in defined priority trade channels. 2.3 4 The productivity and ctTccti%,cness of trade marketing and distribution orizanisations will be improved significantly. Nicasures arc in the process of being developed covering regular retail outlet coverage. the dailv call ra-e. and orders per call 2.3.5 The quality of trade mtkcting and distribution organisaLions %@,ill be improved significantly through both training and recruitment 2.3 6 Studies to anal@sc cost. servic: levels. product freshness (stock W. cis) in the entire supply chain from BATCo's finished product warehouses to the consumer are being under-taken in Chile. Switzerland and Taiwan In these thrcc test markcts. distribution cost per mille %vill be rediced by 5% in 1994 compared with 1993 Performance critctia rot the proccss will bc established covering the total cost of distribution (logistics) in Vnidic (from BATCo warehouse to customer). the total investments in f/mille. and the cost of tire total suppiv chain both in X/mille and in 16 of RSP net of taxes and excise A studv is also bcmg undertaken to analvse cateizon. and brand profitability to the trade in petrol foreccurt outlets in seven BAT m3Tkcts around the world. 2.4 International Filter Brands 2.4.1 The International Filter Brand 0FB) segment is expected to grow at a faster rate than the total cigarette market. The total [FS segment (conventionally, .defined to exclude the USA. UK and Ireland) is forecast to grow at 3 511a p a o-.cr the Plan pcriod. from 645biln to 766blin. reaching 14. 1% ofthe world market in 1998 Table 2 2 shows the projected growth of IFBs excluding also the BAT Industries domestic markets of Canada. Brazil. and German% and the relative arowth rates of the UKIB and USIB segments 1100@ 2.4.2 BATCo's key objectives for this sector are.- i, To achieve progressive increases in BATCo@s share of the world IFS segment (excluding the USA. Canada. Brazil. Gerrnan% the UK and Ireland), and in particular to secure a share of over 1411e@'a bv 1"6 ii. To increase he attributable brand earnings from BATCo's total lFBs from L504m in 1993 to at least 0 I Om by 1996. with that from t;e six drive brands reaching at least E647m in the same year <-- 2.4 3 A critical issue for BATCo for success is whether the Group's key existim Luckv Strike and Kent) arc currcrith. competitive enough to secure and sustain the desired levels of profitable market shares in the kev full-'revenue USIB segments BATCo will work closely with the brand owners to ensure that the products and communications packages velopcd to the levels necessary to compete effectively in this sec C:) or L C:) i^T j, CN Fe_. &A 4L S. FJ N.-Tt/r1@4Z' 0"4 X,- BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Tstile 2.3 BATC9 IFS Drive Brands Cro%ih % CGR (14 a) Volume (bnil L922 I 993 1904 93 - 94 1221 1993 -1996 SES55 21.3 22 2 25-R 14 5 31.2 11 5 8&911 14 4 14.0 1.1 7 5 5 15 9 4 j PGL IU 4 11.2 11.9 6 1 13 9 7 2 Lucky Strike 6.3 5 0 6.1 22.2 R.9 21.3 Birclav 3 3 33 3.6 a 5 4 0 6 1 Kent 4 3 1) 3-11 Total 64.1 61 1) 67 1) 9 a S" 9.5 Aunbutable Brand Eaminrs@!) Ern SES53 199 8 230 I 269.3 116,7 335@2 13 3 B&K11 III 5 128 3 00 5 1 a 154 .1 6 3 ?GL 36 2 45.5 44.i -2.7 51.9 91) uck-% SLnke I 3.9 -1) 2 a I &a. 19 4 n a. Barclav 26.3 26 4 24) 1 1 I I 13 6 R 4 Kw 28 2 27 6 34 9 26.1 39 2 12 .1 Totai 421.9 45a 3 516 2 12.7 640@6 11,8 "'ExchuJing German% and Talmium Gross cownbution less M.'jTkC11nj SUPPCn d1,PCnd1%%LTe plus atmbutabig tc%a.:,,s Table 2.4 BATCo VKIB Volumes/Shares," Growth (%) CGR 1-0 P a 1221 1M 1 )1)4 993 - 94 096 1991 -1996 'Volurnt (blins) SE-555 21 3 22 5 2; S i4 5 3 L2 I I B&F 14 4 14 5 5 13.9 4 4 PGL 10 4 It 2 1 1 9 6 1 1 3 8 -7 JTS n 2 6 1 9 2 7 40 6 3 I ISO Othcr`13 0.2 1) 2 6.5 0,2 Total 48 9 49 8 Si 3 11.1 64 2 8.8 SIVIT- ., Of UKIS SCRM-.nt SE333 16.0 17.6 19 3 22.4 B&H 10.9 LU.9 I I U I I 4 FGL 7.8 3 7 3 9 9.9 jps(z) 1.9 1 5 2 0 2 3 Ot heel) (I 2 0 1 1) I 0 1 Total 36 8 3S 3 41 4 Airributable Brand EaMipM Lm - SE553 199.8 230 7 269 3 I& 7 333 2 13 3 - B&H 117 5 129.3 130 3 1.9 154.3 6 I - PGL 36.2 45.5 44 3 -2.7 58.9 9 0 - JPSCU 12.1 7.3 10 4 42.5 15.1 2-, 4 - Other(") L31 3 1 2 9 -6.5 1.7 .4 5 Total ] &2 414 9 457 4 to.2 L&I IO 9 1 txchodins USA. Canada. l3twil. Gcm%any. the LIK and Iretand (:'Lncludinit 511S (IS-blumd "'Craven A- %at Australki Uq CD ['IQ Ln C) BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LrrIGATION. BATCo document for Province of British Columbia 23 April 1999 2.4.4 It should be noted that the lFB share target is lotiver thin projected in last year's Plan, and the Guideline, (14 8% by 1996 compared with 16% previously) principal]% as a result of the price re- positioning of Lucky Strike. the loss of B&-H saics in Europe (Projcct Talisman) and the %%eakcr performance of Kent Comb land Exports 2.4 5 Table 2 3 summanscs ilic volumes and attributable brand earnings k%hich are projected for BATC6s international drive brands covz.'@J f4.6 rJ_-0cASCb% IN st"-%@- Cgo-irk (,o,,j -rh-,:-r 2.5 UK IntImation-il Brands 2.3 1 The pnmary BATCo objective P4 i To secure total product international brands. with Pla, cts Gold Leaf achieving sup loc3l brand in the market ii. To increase BATCo's share ofthe UKIB segment from 38 8% in 1993 tb 1996 iii To incrmse the total attributable brand earnings from BATCos UKlBs fr 1993 to about 065m b% 1996 2.5 2 Table 2 4 sumniarises the recent and projected volume. share ol nt and artributable brand earnings figures for BATCo's UK18s. 2_4 I T'he pri-nam focus will be on S E, hich. as BATC only trademark capable of being global. mll play the lead role in the UKIB premilaw BATCO CONFIDENTIAL CATEGORY 1: MINNESOTA TOBACCO LMGATION. BATCo document for Province of British Columbia 23 April 1999 Far East. ]PS r=ains a tactical 10%% hI2h-V0JU MC Oftf Walaysia. and from mid 1994. Thailand). 2.6 VS Intern2tional Bcands 2.6.1 BATCo's pnmary focus in the USIB itsinicat %,.it[ be on Lucky Strike in the dortunant full-flavour segment, supported by Kent and Barc!a; in the growing Light@ segment Ho%-.ever. as nwtd above. a major concern is %vhcEhcr the existing product and communications packages for Lucky Strike and Kent are capable of securing and sustaining the desired progress in the all-important full-mvenue USIB sector BATCowilithusgivcthehii....gprioritvto%%.-orkingwithB&Wtodevelop%vorld-class marketing strategies and programmes for both Lucky Strike and Kent. 2.6.2 8.%TCo %will focus resources behind na more than mo USIBs per market. 2.63 BATCo's key ob;cctivcs in this sector are - I To raise BATCo's share of the USIB segment from 5.0116 in 1993 to at least 6 0% bv 1996 11 T o increase the total anrlbuta@_-i: brand earnings front the USIBs from E79m in 1993 to about I 130m bv 1996 2.6 4 Table 2 8 surninarises tire, olume. share of the USIB segment and attributable brand eam.rigs figures -,or BATCo's USIB ;,infolio. Luckv Strike 2.6 5 Luckv Strike Filter is the Group's mimlter ctic priont-, brand and is crtical to the Group's Ion-,tr-tv,ni ;ucccss 2.6 6 The vision is to establish the brand as -.h-. itadine US international fuil-flavour brand acrcss all BATCo mark-cts The brand is positioned -.is the top quality, American original blended c.2ir.-te for independent --ouniz adult rnales. and the main thrust is into the key young-ad.lt. urban smoker scSnic'm iarm pricing with Marlboro is a strategic objective ove, the lonize. term 2.6.7 The key issues facing LSF in BATCo s markets are. i. Lack of sustained product SU-trLOMV vs Marlboro. it. Need for an integrated through-ttic-Itne communications package %which is distinctive and @as a greater-a-ppcal than Marlboro among young adult male consumers. 2 6.8 Specific objectives for the brand arc - i, To outperform the kvorld-wide growth in the USIB segment, with USIB sham rising from 1.3146 in i993 to at least I 8% by 1996. it. To Increase the price of Luck-. Strike relative to the k;y competitor brand (I'Variborti). with the fonger-termgoal of rn:ttching Marlboro's price. iii. To secure rapid and sustained increases in gross contribution and to increase attributable bruid earnings to about Ellm in 1 "4 and about L20m by 1996. IV To re-establish LSF III China v To consolidate the position of LS F in Spain and the rest of Europe. ,,-I. To build on the initial share base that his been established in Latin America. 2.6 9 The recent and projected volume. share. gross contribution and attributable brand earnings performances for Lucky Strike arc sho%%n in table 2 9. T11C main rcasons for the significant decline in Volumes last vc.%r arc the revised price positioning of Lucky Strike. Qn C=) C:) Lrl C:) BATCO CONFIDE NTIAL -CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 r all Table 2. 1 0 Barclav Growth COR (% t992 1993 IL9_4 iLLB 1993 -19% Volume (bn) 3 !l 3 2 3 6 5 4 0 6 1 Share of TB (116P D.6 0 6 0 6 0 6 Share of USIB 016y" 0 R n g n.9 0 a Gross Coninbution (Emn) 41 3 43 3 -W I I 8 49 2 3 7 Altr Stand Eaminp (Lm) 21G 3 1(.4 29 i I I n 33 6 4 Key BATCo I - Netherlands Vithime (bn) I I I I 2 5.3 1.2 3.3 Share (v.) 6 2 7 n 7 4 & I Bel /Lu-4 Volume (bit) I 0 ( 9 0 0 2 I 0 9 0 7 Share 1%) 5 6 5 6 5 .4 6 1 SvntzcdanLl- Volume (ba) U 9 0 9 10 $ 9 1 0 3 I Share M.) 3 2 S 7 6 ( 6 4 Finland Volume (bn) 114 3 n ]1 .2 7 0 3 5 2 Share (11.) 5 2 x sit 5 9 ExclaWing the I IM. Canada, Bruil. Germativ. the UK and Ireland CD C) CD CD PQ VI C) RATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province. of British Columbia 23 April 1999 19 the cffects of transit volumes into Spain and the withdrawal of the brand from the Combined Exports market in anticipation of re-launching at a higher price. 2.6 10 The primary strategies which will be followed to achieve the objectives are, I The current results of Project World Wide Best will be applitii in markcs %%here this improves the currant product performance Once Project %V'*VB ach:eves product superiority vs Marlboro (on consumers outside the US). the spec.,kations will bc uscd as the basis for furthcr product irnprovcment in all markets ii. BATCo v% ill assist the brand owners in thc dc%clopmcnt of a distinctive communicaticris package %%hich is relevant to. and outperforms. Marlboro among key young adult malt consumers. iii. The price advantage versus Marlboro will be narro%ved. iv. LSF will be re-introduced in China in 1994 using the impro% ed mix (product and cornmunications) at a price position close to or equal to Marlboro. v A LSF Wides variant (at a price premium over the standard KS producti %will be developcd and tcsted in Spain. Chile and Argentina Vi A LS F Ultra Lights line e\tcnsion will be developed and testtd in Switzt,!and in 1994 @ vii. LSF will remain the strategic prioritv across Central and South America. %khere it is identified as the Group's ionger-tertri challenge to N\11's current succ:ss m the USIB segment. The kcy to success in the region will be the development. of a superior product and a revised communications mix - which are vital to zustain the brand. The brand will be heavily supported. recognising the long-ten-ri irn,-es,,mcnt nature of the brand Wild. Lights will be developed as a means to expand :he brand's franchise in the region. The successful Team Luckv Strike Suzuki sponsorship will be heavily -N;'olted in 1994 to build brand awarcriess among @oung adult mal: consumers. M. Luckv Strike iOs (in the standard HL and min r4cs forman kvill be marketed in rrian% BATCo's markets to enharict: trial ecrieration end inc--.Zse shclr-P. !Stncc in restricted communications eii%iromiwnts Barclay 2.6.1 i The vision for Barclav is for it to be the leading firce-suinding ultra lo%v-tar international brand, initialiv in Europe but longer-term an a global basis. The brand is positioned to appeal to sm@kors of fidler-flavour USIRs who want to switch to a lower-delivem product. Target consumers are predominantly discerning. urban dwelling, younger (21-35i professionals,witharnalebias. Barclav%villcontinuctobepositioncdatpnc-.pant%-to full-mvenue mainstream US corripciltion brands (principally Marlboro) 2 6.12 Specific objectives for the brand are - i. To out-perform the world-vide gro%vth in the ultra low tar 13113 segment. at least maintaining overall share of the USIB segment whilst securing improved USIS segment shares in the brands existing European markets. ii. To increase attributable brand earnings from L26m in 1993 to about L34m by 1996. iii. To further develop the brand in France in 1994 and launch in Spain in 1993. 2 6 13 Volume. share, gross contribution. marketing support e%penditurc and attributable brand earnings for Barclay arc sho%%n in table 2. 10 2 6 14 The strategic priorities for Barcla% include - i@ To continue to grow share in all existing markets in Europe. Chile and Argentina' to implement a national launch in France. and to test the brand in Spain in t995 CD CD C:) C:) P.) un BATCO, CONFIDEPMAL - CATEGORY 1: MINNESOTA TOBACCO LMGATION. BATCo document for Province of British Columbia 23 April 1999 Table 2.11 Kent Grow-lb CGR (% p a.) 1191 129-1 19Q., 93 - 94 1996 1991 -1996 Volume (bn) a -4 j 9 5 1 .0 9 7 5 3 Share or 78 (%P@ 1 5 1 0 i 1 2 Share of USIB (%f 1) 2 0 1 3 1 1 5 Gross Coninbution (Lmr.) 38 6 MI ) 41 S 14 .1 54 0 14 2 Atlf Brand Eanunp (Lm) 28 2 27 6 @-l a 26 1 39 2 12.4 Kev BATCc %forkets- Hong Kong Volume (bn) 0 5 U 4 0 4 -5.8 0.4 -1.4 Share t %I In 6 1011 11 0 12.2 j6falM I II volumcibril 0 3 0 4 0 5 14@ 1 0 6 Share *if 2 6 3 2 3 3 3 7 BeIg /Lux volume (M) 0 61 n 0 1 -9 4 0 1 .8 2 Share t6si I I 41 9 9 0 8 Chile Vol Itme I h" I 0 2 0 2 1 9 n 2 3 5 Sharc '4i I 7 21) 2 1 2 2 HK C%Pof&-" Volume I t," 1 6 1 @ 9 ) - -4 1 4 A 1 2 111-4cludint 11S. Cootoda. Brazil. Gennany. UK and Ireland " b,ciuding SAT China CD CD CD BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO L[TIGATION. BATCo document for Province of British Columbia 23 April 1999 ii. To increase brand and advertising awareness by building upon the 'Couch' carripmen and firther evending it to all BTL activities (assurtune that quantitative rcs=rch confirms its success) iii. To implement the newly devised brand logo in all BAT Co markets. iv. To develop a mcdifled mix for markets %%;here there is little awareness of deliveries and!or S&H issL::s. A strong product claim (such as 99% tar-free) %vill be utilised. V. To idenn&, the pcotenual of the successful 'Number One" variant in each existing Barc4a-. niarkc- Kent 2.6.15 BATCo's %ision for Kent is that it should become the leading Lights brand family. The brand is uniquely positioned to c2pitalise on the growing demand for Lights cigarettes by offering a satis@.ing and 'pure' taste The nc-.v strategic is designed to attract current smokers of FF USIBs %%hom are discerning younger professionals (under 30). Kent pricing %%ill be at p3ritx to full-revenue mainstream US compention brands (principally Marlboro 2.6 16 The kcv issues f-ciniz Ktnr in BATCo markets are- i. The current "percv,. -d Lights" positioning creates confusion among consumers given the brand's FF de!j-..-r,. ii. The ne-.d for a Supt.-lights variant to replace the red Lights variant which created confvs.on about its 1-1-:fi% Cry le% el among consumers. iii. The current cop@ -.:-:ds to be -.-% zsed. It is seen as aspirations] in BATCo markets but no( pirticularb. distinctoc. compelling or relevant to the target consumer. 2 6 1 7 A new communication p',aform and cop@ strateiz% hns been de-, eloped by BATCo and recommended to the br.-.:,.d o%%n.-rs It i%dl icsicd along with BWI's proposed improvements ofthe current plafform !.-. China. Hong Kone. Japan and S%%azerland in Carly 1994. BATCo's obi_-zti%cs and srntezes assunic t1hat on,: ofthe t"o nev. packages' %kill prove successful and can be im;itmen(ed in 1994 2.6.18 Theprimar%:obiectivesforthebrandarc:- 1. to re-budd share in the USIB segment. 6. to increase annbutable brand earnings from Mm in 1993 to Mm in 1994 and to E39m b% 1996 2.6 19 The strategic priorities for Kent are to - -Pure To test the Taste" communications package and stratep- developed by BATCo in China. Hong Kong. Japan and S%,kimcriand in carly 1994 ii. To %%ork " ith the brand owners to reduce the deliveries of the Parent variant in markets %%here there is a%%areness of dclivem levels or tar bands. iii. Develop and launch a Superlights variant ir@ conjunction with the brand owners in Hong Kong and China. The variant should have a delivery level of 7m& and offer significantly more taste than competitive 7m8 products. iv. The Kent Leisure Holidays programme will be continued in 1994 as a mcans of enhancing core brand values outside the tobacco tradernark. 2 6 20 Volume. share. eross contnbution. mtrkcting support expenditure and attributable brand earnings for Kent arc sho%-.n in table -1 I I CD BATCO CONFIDE11MIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 Chart 3.1 BATCo Wriphted Productivitv (cnmhl pinh 14000. 12000- 10000. SOU0 - 3204 6000 "39 "71 011`7 6449 6211 2000 0 - i9gs 1999 051.1 1991 !991 1993 1994 1995 I"6 CD CD r"i BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 2 1 SECTION 3: COST COMPETITIVENESS 3.1 Obwectives 3.1.1. BATCo's key objective is to be the louest cost pro% ider of high-quality products in the markets in vihich it competes. both to optimise the funds mailable for investment in the future growth Sind development of the business and to strengthen BATCo's position in the event of increased competitive pressures. 3.1.2 Within this overall objective BATCo has a rumber of subsidiary objectives. including:- i. Sustained impro%cmcnits in producti%.r%. %%ah the weightcd-averaSe cpmh figure for BATCo (including associates) rising by 35!@ at I.-ast ' 1200cmph by 1996 (see Chart 3. 1). ii. The reduction of real con% ersion cost :,.r m4le in all BATCo's plants. with average real per mille costs dechnin g from E I 17 in 1993 to ;O 97 b% I 996 (6% pa). iii. Sustained inipro%,cments in machine !"@ciencies and utilisations and in wastc levels. IV Reducing the weighted-a% trage BATC a crop expenses from USSO 19 per kg (green %veight) in 1993 to @SSO. 16 per kg b, 1996 V Improving real. per unit F&-SV costs 1 txcluding depreciation and marketing support expenditure) by at least 5"a p a. on a% eraize o% cr fl--t Plan period. 3.2 Competitive Position 3 2 1 Unle reliable infionnation is a%ailable %%an -!zao to BATCo s productivity and cost-efficiencies compared %vith kev competitor plants. zhouc@-, it is tithoed that in the European area overall BATCo productivit% falls shot of the bes, comp%niw. t !e% ef As a result of Im&-cr-than-expectcd volumes, Southampton Plant is now likeN to bc behtn@ Philip Morris'Bcrgen Op Zoom factory in terms or productivity (35 million cigarettes per ernpi:,\--e per \car %ersus 44 million for PM in i994). Howevcr, because of differences in ]about rates. Sout'-ampEon con\ ersion costs arc likely to be only slightly hieher than those Bergen Op Zoom 3.3 Kev Strateties 3.3. i Action %%III be taken across all of BATCo's 'z--,sincss s%stcrns. including production. distribution. trade marketing, administration and HO support W@hilst seeking to achieve economics in such areas. BATCo will resist the temptation to implement short-,erm cost-cutting measures which could endanger produce quality and the building of brand and thus undermine the longer-term prospects and profitzbility of the Group KC\ stratcizics %%h:,:h a. c being pursucd to improve BATCo's cost competitiveness arc set out W- o%% 3 3 2 Continuous improvements in producti% itL %% ill be sought throu3h improved working methods, contracting-out services (%with p3rantecd de!:% ercd sea ice quality) and the installation of high-speed machinery where this is cost-eiective 3.33 Specific emphasis will be placed on low -predict&% it% companies Only five companies will be below 4000 cpmh in 1996 (these arc %en small fac-,oncs producing significantly less than Ilan. ciprencs per aftnum) 3 3,4 The concepts of "best %%orking practices" in poduction areas %%ill be implemented. After vcnfication at Southampton of the currLnt stud% bm%ccn BATUNE and BATCF, they will be implemented at other companies in BATCo 3.3 5 Capital expenditure for expansion will be concentrated at Southampton. Elsewhere capital expenditure will be for quality improvement, machinem replacement or for cost savings based on improved productivity and working practices High asset utilisation for new machinery through three shift %working %will be pursued,60crever this is possible and Financially advantageous. CD C:) CD t1i U-1 CCO LITI[GATION. RATCO CONFIDENTIAL - C.4TEGORY 1: MINNESOTA TOBA BATCO document for Province of British Columbia 23 April 1999 Chart 3.2 BATCo Wei2hced Machine Efficiency MI U. - 74 - 72 7n 66 14! I-)%4 1 7" I 9N I I 911! 1993 1994 1995 1 ell;i Table 3.1 Mannino Annual % Change % Change IM PL91 121-M 1993 - 94 IM9 1993 - 96 Administration 4 191 11)4.3 JIM 3692 -1.2 N I arkct 5 314 3398 WIS 5116 A I Production 15455 1 4663 IM14 .4 5 1.1676 -4.7 Lcaf (Permanent Ernpl i - Tob Gro%% Co -,1(15 1231) IMS 2 2R82 -3.9 - othus -,I)( I o It - 311 0.5 Total 2S62 2 2 7 5.14 I 26496 8 4S97 fioncv ToNacco fislims ba%t been it) In to 3id Ln C:) C=) C=) V1 Xz. BATCO CONFIDENTIAL - CATEGORY 1: :MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 22 3 3 6 Production expenses. particularly relating to the cost of spare pans and the disposal of obsz:c-e azscts. will be reduced Sparm costs ., Ill be rcduced b% negotiating consignment or -on demand" arrangements %% ith suppliers and arraniting for iiirccit sourcing for ccrtain common items 3.3.7 Machinery installation will be optimised b% concentrating production on higher-spced and investigating longer production hours %%hem this is bc=ficsal. such as ft seven-day three-s@-.IA manufacture currently planned for both Chile and Venezuela. 3 3.8 Tobacco and material waste will be reduced through improved machine performance and mat-.nal quality, from 5 6% to 5 2% for tobacco and from 3.3% to 2.8114 for wrapping materials 3 3 9 Efforts continue to -mpro% c energy cfric-cricics by close control of its use and inst_,!l_,,;o:i cf cnerirv-cfficient machincrv. 3.3 10 Machine performances will be improved through properly structured training. improved rnairimnance and replacement OfOW-of-datc machinery by more productive units where this is cost Wnfied I see Chart 3 2). -,,3 11 More regional training resource will be introduced to train operators and technicians to higher efficiencies, particularly. on older mnchlner%,. 3 Spec:fic cost-rcduc-ion and dot%mizine e%crciscs 6%ill be undertaken in factories %%he,.- ha%e I-ttn (or will be) reduced. such as Brussels Hong Kong, and Argentina. I In order to reduce imentorics and optimise the ability of the production process as a %%hci: -,o respond to m3rket demand. NIRP11 (a manufacturing rcsource planning tool) will be introduced. initja;;, in the UK and Asia Pacific. I. lmpo%,cd Priin.@rvproccsscsdcs;izncdioenhancctobaccoutilisation(andproductqualitNI %%i'lbe developed and. implemented %Oiere appropriate The following items are currently under _-s: HTD in Singapor: %% herc the bcncfit to STC is estimated to be 1900.000 per %car Cliff in Bangladesh. %%-here the benefit would be avoidance of the need for investment in a GL7 plant. Cliff is also under review in other companies where significant investment %%Ould b- required Improvements to the DEER process to improve yield and consistency. Simplified casino application in Brussels. whem the bencfits would be more consistent casing application and reduction in process complexity. I _3 Manufacturing complexity %%ill be simplified through reducing the number of low-volume. 10--%-M3rSin products which are produced 3 3 16 In 1993, the aggregate number of emplo%ccs declined by 3 7110 (1072 people) building on the sustained 1010@ downward trend of recent vcars The major decreases %-.,crc achieved in Sri Lank-a. Zaire. Nigeria. Bangladesh, Australia. Hungar% and Pakistan. There will be sustained pressure to secure further significant improvements in manning lcvcls [is particular. BATCo .%ill rcvtc%% opportunities both for extending the concept of 'best working practices' to administration manning and for improving GLT manning. Table 3.1 compares the aggregate average-year employee numbers in BATCo subsidiaries and Head Office 3.3 17 As projected in last year's Plan. there was a sharp reduction in administration numbers in 199' 0 91,18) and a further improvement of 3 It' is anticipated in 1994. reflecting BATCo's focus on this issue The decline in Production manning in i"993 was sharper than previously projected and continues the sustained and significant reductions which have been secured in this area in recent vears Production mannin g is projected to decline even further, at an average rate of nearly 5% pa , as best-praz,..ze techniques are implemented 2CrOSS the Group The increase in Marketing maw .Ing in 199-- mlects the deliberate polic% of strengthening BATCo's Marketing and Sales functions. Permanent Lea, manning in the tobacco-growing companies improves sharply in 1994. with further improvements in the !3ter C:) CD CD C:) BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 Table 3.2 Wei2hted-Aver-m Group Crop & GLT Enenses Crowl) Exj-.;.ncs GLT Expews Grccn-%%ci-,,h( basis Packcd-weight basis USJK-, chant-,y 13,;Ko % Change 199t; 1) 24 -16 ( 25 -55 1991 1123 -1 o 25 -7 1 99 Z il 2( -13 1; 22 -1: 1991 11 19 -5 0 2 109. is -9 t994 16 -11 0 21 0 1996 16 0 0 11) -10 Un CD CD C) CD RATrn CONFIDENTIAL CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 23 vears. It should tt noted [ha, 8 kTC a has started to rccrun and dcvclop high-quality votinger Fingers that %%ii! @,. ricc-.ssar% Lf:h: Group is to be in a position to release senior L@ middle - maoiagers at shor notict to maing nev, acquisitions. but this pool of talent %,%ill have to be extended if BAT is success& @ :n its new programme. 33.13 BATCo has a clea-1v established coal to securc rcal rccluctions in input costs. to the benefit of both BATCo ajkd the ovitir 8 AT Industnes Operating Groups. Significant benefits ha%,e already been secured. primank .hrough sup-.4tir rational isation with rciard to Tow. Board. Cigarette Paper and Plug Wrap. Furthtir bencrits.2r: anticipated for Film. Foil. Tipping. Adhesives and Casings & Flavours and thresh the identification of opportunities for material rationalization It is estimated that to date Group cocaine proc-iremeni opportunities havc been identified and negotiated %vorth about L20m Pa. (of %-.h!ch Eli-tin relates to BATCo). mth these benefits flowing through to companiC3 during 1994 Further sznificant Sa%;'.IJS We 3111LICipatad in 1994. rw both BATCv wid the other BAT Industries0perat-.neGroups BATCo%vilialsocontinuctoseeknetbenefitsfortheGroupthrough machinery orders and leaf purchasing 3.3.19 Last N car's Plan ;rcijectcd a%@:@av: OLT expenses in BATCo of USS0.23 per kg. (packed %weight) and crop expenses of L,Sso :0 Pe, ke (erwn %%cight). In the event. the OLT expenses target was met. and that for crop ex-ptnszs inipro@ to u-,,,.% with an out-turn of USSO 19 per kg. (a real improvement of about 8%) In s '::-c of reduce crop size. both crop and GLT expenses are budgeted to reduce further (see Table 3 2). :%mank bL '.'Z;usinz on improvements in the morc expensive producers. stimulating the adcption of reduc ng t%-astige of green tobacco in field. upgrading GL-f target quala% and OLT expertise in (lie buying team, In real terms. per mille crop I z d . o de,,.: 6@, aciout 241". b% I expenses are Pr,. 996 mind per millc OLT expenses by about 26%. 3.3.20 In 1993. despite %OILIMCS. BATCo subsidL-ir% companies secured an average improvement it. 7i.- mille real F&S costs (excluding depreciation an d marketing support expenditure) Theiatestprojections iiidicat-.tliatsuc.@-7:alpt.mti:;:F,i,-:N'costs%%illinipro-..cb%-afurilicrXI"ooverthePlanperiod (averagirigX"o;z) I-ac@.i:@-.td.s-.chiinpro%-cmcnts%vilimakcasignificantcontributiontoBATCo's competitive pos;::.,n 3 _3 21 Despite the shon-7211 in -=;rst budgets in IG93 BATCo's %weighted average cigarette conversion cost (it. pounds s::rjiniz per trial -,-s.: b% onl% 3 5% in real wirms compared with their 1992 level. Significant imprc--cments (of 5'.. cr more) in real conversion costs .,.are. however. achieved in Argentina. El Sa:%ador, Costa R@c;. Barbados. Trinidad@ Hungary; New Zealand. PNG ' Sri Lanka. Sierra Ltcne, Cameroun. %falawi. Mauritius: and Uganda. In real terms BATCo's %weighted average convcrs.,:,-, costs pet intill: a..- expected to improve by 7146 in 1994 and by a further 4% in 1995 and 71'a in 1996 an improve emcnt cif 17% over the 1993 level) Ln C:) C> C) INQ nA,rrn rnNFjnFjVnAL CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 all Table 4.1 Southampton Factorv DemindiCapacitv (20s HU Mr-, 121)4 1996 1997 MS Compiny Plan Forecast 28 31 I 31 3 41.1 45.9 BATUKE other-& 10% 13 4 14 6 1 LIF 3 18.6 M9 FESU (f2il safe) i 7 21 1 2 25 8 29.3 32.0 Hilton 4 a 7.9 9.9 Capac3ty Requirement 31 1 35 47 9 55 8 61.8 Capacity (Normal) 12 5 33 8 31 49 S 56.2 62.S Un C) C) C:) C-- BATCO CONFIDENTIAL CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 24 SECTION 4: PBODUCTI VIRONMENTAL -ON CAPACITY, PRODUCT SOURCING & EN STANDARDS 4.1. Ob*ectives 4.1.1 Key objectives in BATCo's Manufactunrl; strat-..-,. are - To ensure that market dcmand. particularly -..-r premium brands. is mct . To ensure market-critical sourcing requirement are always possible. . To produce products of a higher quality than -he compet ition. . To be the lovvcsz cost producer of quali ty products. 4. L.2 BATCo's production capacity objectives to be a@:t to new market demand at the required quality level. with a minimum of 10% spare ca;acirv. to ir.-.:t surge demand. Ho"ever. production capacity for Hong Kong exports is based on 'fadsafc- forccas',s Ithe maximum volume achievable if tile outrum for each of the assumptions affecting volume %%crc fxcurablc to BATCo) 4 1.3 The objectives for product sourcinS arc to rise soti-::s %%hich pro,. id.- tile best overall return to BATCo at the required quality level Where ap-propriatc- n,-n BATCo sourcing will be considered. where facilities are not avadablc in BATCo or vdierc ther! is specific o% trail SAT Industries Group benefit. 4.2 Strateeies and Proiections 4 2.1 Each BATCci operating company is pro:-.c:-.d to hx-ce at least IO" a spare capacity in major product groups. The key BATCo product-sourc-mg corisid!ration is to market demand for Hong Kong exports from the most cost-effective and ;narket-z:MprLaEC SOU-C.-S 4,2 2 Southampton is being expanded Undcr Prc 'icct Tcs, to meet the d-e-nand for all LIKIB exports and to act as the third sourc.- for Hilton Table 4 t sununarises the demancl capacity position for Southampton over the Plan pcnod. 4.2.3, ne mission for Southampton is being re-txarnine@j -.a determine %%hether it should be used as a manufacturing source for Europe 4 2 4 The strategy for Hilton was to soufcc Soft Cup lesions from Hone Kon& Hinge Lid vcrsions from Singapore and Southampton (wlicn blended capacit, is available in 1996) and suree capacity from Nlalavsia. This strategy is now undcr re% ie%%. dri\tn b\ the lciv,,er projections for Hilton volumes and further strategic considerations of the future of Hone Kong sourcing. It is now planned to down-size the Hong Kong factory to singic shirk operation as a prelude to transfer of manufacture to another site in Hong Kong or even to a JV in China. and to re\ i:\% the alternati% es to Southampton. 4 2 5 In Europe, production strategy has been t\amincd external consultants using 'failsafe" and Financial forecasts. This studv recommended incremental in%esiment in Ba%reuth and Southampton. pre- pianning for a Green Field site and (assuming EC membership allows) closure of Finland and Switzerland. This study has been rcvit%%ed based en revised sales forecasts. with the following consequences- . Due to rapidly deteriorating sales and profit3bility. Finland is likely to close in the short term rather than %-.ait for the EC membership issue to be resolved . The position of Brussels and Berlin = flexible manufacture locations is stkil under review. . C)pruswilicontinueforthenextt%%o-.ears%%h-.IstB.L-Wcontracisremain. Dunngthispcriod. the future of the Cyprus plant v%ill be rccurrined taking account of the possible withdrawal of B&-W contract business t-n CD RATrO CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LMG-k'nON- BATCo document for Province of BritiSh Columbia 23 April 1999 25 i In other arms. BATCo's strategy is to rationalism production facilities %herevcr qua":-,.L standards mid tariffs allow. or where there is clear economic or strategic benefit. The folllo%%ing op:;ans are under consideration. but have not teen included in the Plan. (i) In Central Amen= a studv has identified that there is potential. subject to changes to the political environment. to consolidate the six manufacturing sites. initially into :@rtc over a three-to-five-year Wiriescale. This is being progressed wW can be expected to improve performance as the benefits flow through. (4) A study is being carried out to identify die feasibility and possible benefits of rationalisation of production facilities in the Caribbean %with the report scheduled for completicri in early 1994. (iii) In Africa and thL Sub-Continent. it is unlikeiv that therewili be sufficient tariff reductions during ft Plan penod to allow any cross-borricr rationalisation Opporiuaw.-cs are likely to be limited to closure of plants in Akora Khamak and Zaria. though local condiamns maY mean that these cannot be achicvcd in thL vnrlv %cars of the Plan. Other cost-saving pos;1bilitles which will be examined nclude %%Iicthcr it would be beneficial and acceptable in sornc insEances to contract-out some malliffhWirt: c S. lo%%-price brands or GLT 77 Consolidation of production and/or increased levels of plant output increase the risk zc BAT of business interruption In ordcr to minimise such potential adverse effects. BATCo Pians to:- Rationalise product specifica(ions and production processes bet%-.e-.n factories @,%hvever possible Inc, case the nexibiht% of the production processes in operating companies to reac.. to changes in dcmand Ensure flint confinecric% plans -are in pince for each production facilav (the conmmency plans for rna)or facilities or. beans ptit in place in con)unction with other Group CDmpal;.-4;) A specific risk-assessment and conEineenc% plan process is being put in piece for SOUEharr.,-,,,)n this is likely to involve contingency cross-manufacturing agreements with other UK manufazz-urers. 4.3 Environment I BATCo and its subsidiaries nre committed to achieving the best international standa. 4 rds ot practice in all aspects of their operations %Ouch relate to conscr%ation of the environment. Althcugh recopised as a lonScr-term coal. since it is unrealistic to expect companies to achsc%c the overall C@ ';tcmes iminrdiatelv or at the same rate. actions to improve environmental performance ahead of legislation are required in all companies A central BATCo environnicotal-nianagumcnt programme has been developed. sense realistic goals for operating companies to help them establish cIfective management arrangements ind programmes for technical solutions on environmental issues The on-goinS management of key lss-ies e 8 agro- chemicals. afforcstation. odours. energy. noise. etc. has been integrated into this programme. S igntficant achievements of the programme so far have been: - Ob)cctivcs and targets have been set for 311 main issues. A BATCo Environmental Manual has be= prepared and issued to all companies An audit team has been trained and ctivironmrical auditing initiated in Europe Tight central control of a&ro-chcmicals has been established for leaf Srowing and pest control. Participation in BAT Industries' managcnient Systcm and 'Road Maps' 3 Technical initiatives have Focused on providing new materials or technologies for solutions on key issues and includes developments on:- . Packaging and product materials to meet nc%v packaging laws and litter concerns . Meth;dologics for monitoring air emissions. including dust and effluent . Techniques for assessing odours for improving the design of odour filters UII C:) C:) CD U-1 C:,. BATCO CONFIDENTIAL - CATEGORY 1: MIMESOTA TOBACCO LITIGATION. BATCo document for Province of BritiSh Columbia 23 April 1999 26 4 3 4 Future actions we ainittl at helping BATCo assess am improve its overall environmental p::,.ormancc and reduce risk fwors associated %% ith impacts up-strcam and down-sircarn or the operatiens under its -ct control (e.g. suppliers) are - Extension of the audit progranime to Latin America, Self-usessment of environmcnml pejfom=r-l b) all operating companies The introduction of a ,6-aste management stratcg@ including %waste contractor controls Positive leadership ofgrowcrs and materials and machinery suppliers. to""'N Un CD CD C:I C) r"i VI BATCO CONFIDENTIAL - CATEGORY 1: Mir4NESOTA TOBACCO LMGATION. BATCo document for Province of British Columbia 23 April 1999 Table 5.1 Kev UKI 8 POR5 Ra ines (%i I 99 1 1992 t993 H 1 F2 H I H2 H I 47 2 41.4 -5 47 9 54 9 54 I 39 33 56.3 54.5 59.0 65@1) 41 S FGL 46 n a -'6 5 48@11 49.( 57.2 n a Tible 5.2 PORS Ratings' GATC0 vs. Cqmpetitors 1992 191)2 1993 H I H2 Hi SAT v Phthp NIMIS -2 .4 +6 BAT v RJR .3 -LU +12 BAT v Rothmans -1 .3 awram A -'4ign -dxi%%q that BATCo had m superior PQRS ratio$ The akermes 3.,t @:istJ on 21 cottunan%ountm c%ahiaumas fix Philip Moms. on 7 for RJR, and an 15 for Rzmunns Un C:> t.Jrl 0 4rt-r% rnVrTnFNT1A1. - rATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 27 SECTION 5: PRODUCT (CALM 5.1. OWectives 5.1.1 Product quality (includinr smalung quality) continues to be one of the highest priorities for BATCo. BATCo is committed to ensuring that. in each market in which it competes, RATCo's products will both meet consumer expectations and be recognised by consumers as being superior to competing products. 5.2 Strategies 3 2.1 BATCo has no%% irn;I.-mcn-:_-:n;: PQRS s%stcm for measuring product quality and specific targets are being implemented for cae, :z.-azinj compan@ hlontlik rormalmwitsmcnts are carried out by c2ch company on their o%,,n ke% 6-:nds and 'he comparator competition brands in order to assess qualltv progress, 5,2.2 Though PQRS has not .el 4-t:n in operation long enough to establish completely reliable trends, it is emerging that for interruiticn:: '-rands BATCo'i product quality has improved (see table 5, 1) and is now generalk, on -, oar %% it.n zzmp.-tition or shightiv ahead, For national brands. BATCo quality is generally significant;% ahe.--- ::'-ompetition Table 5 2 compares BATCo's PQRS performance %%ith that of its major ccnnptntcri ;t% here a plus score indicates BATCo superiority). Relative to Philip Morris. BATCo's has improved progressively This s uperionty is attributable more or less equal% to the %:@-. dic ;ack and cigarette quality. SATCo's position relative to PJR has also improved prc2r:ssi%.-:-- _-.ra is no%@ significantly superior, with this superiority.. being artribut2bic to cigarette qualit% BATC: s quality is broadly at parity with that of Rothrrians, though some improvement WaS achie% e-d :r-. " 9 93 .2.3 A global revic%% of BATC: :-:@@Liv. ;ualit% as measured by PQRS. will be measured bi-annualk: in order to track qua!,.-.% and to identify tire 3reas for improvement. 52 4 Specific stratc2ics -z; rn3t.-.,-, rronicriturn of improved quality are - - The issue of Standard %;-.ine P-c@:dffcs to ill operating companies to ensure proper on-floor qualitymeasurerner., T-n;!s.-"QCProtocols'iia%ebeenprcparedforGLTandUK[Bcigarette manufacture and at-. r: -reparation for USIB cigarette manufacture, DEER and DIET. - Increased emphasis onqualit\ training as part of technical training in operating COMP311 .ICS - Improvement in quaht% s% items in line with the principles of ISO 9000, in co-operation with other BAT Group Compan!,.s Southampton plant is being used as a role model in this exercise and results will be applied -,- other opetating companies Better feedback on ci:nzinner reaction through analysis of consumer complaints or through consumer panels such as PDA i Problem Detection Analysis) %%here consumer complaints are not a reliable source of nine Appropriate product and process research will be based on identified product weaknesses. A programme to impro% r Smite E-,pruss quality is in hand and results will be shared with other Group companies Co-operation with m-,zhntr% suppliers to develop automatic on-line quality measu ement and rejection of out-or-spec-.6cation product. 5 2.5 Systems are also in place for monitoring smoking quality through the operation of MASQ. NIASQ allows products to be asscss.-J b% consumers in mspect of scnsorv and product attribute profiling in the context oracceptabilkr%. and superiority to competitive products. This information is bang used bv BATCo -4 dcsier ed products %%hich wad consumer needs. C:) C) C:> Ln BATCO CONFIDENTIAL - CATEGORY 1: MINNESOTA T013ACCO LMGATION. BATCo document for Province of British Columbia 23 April 1999 3.2.6 Leaf and i=f ble-Aing is recognised as a n-a- @r determinant of product qual ty To support this. action is being taken to - Ensure that BATCo's leaf managemen, and blinding capabilities are at industry-leading levels. through training. improved career struzures and the de%tlopment of regional." r9enise. - Ensure that stock durations are appro;nate A re%-ic%v is to be undertaken of atte=tive duration policies %%;th a view to identi R in% pat.-mal quality benefits and. possibly, coping better with fluctuations in price and avail abilm - Ongoing iniplenientation of the records dc%cloped global Standard Grading System for domestic tobaccos over the Plan penod. - Continua!1% improve the assistance p. idcd to farmers. - Raise clunitt% levels through in%csun;,n', in.and better management of. GLT units. %take later use of imported tobacco,--. Wicreappropriate. BATCo %%-ill continue to encourage operating companits to influence Go-. trnments both to permit the importation of tobaccos wid to reduce terminate import dUtICS on then Impro% ed training end qualitk caturc! ;rocedkircs. 5.3 Group Resegirch 5 3 1 BATCo concin-jes to be responsible for inanagine the scxncific aspects of smoking and health issues, biological and :oXicoicigical C%alulljon o::r;- product and the related regulatory issues in support of the BAT Indusu:.-s Group A scientific rcsou-:.- is maintained %%schln. and an independent rcsmrch proararrin--c -.n:---agcd b%. BATCo P&D D-Tartnictit in rcspc.-t of discharging smoking and health and product said. rtsponsi bilities The Group 4t% eloped end funded programmewill continue to be co- ordinates b% BATCo and communicated t,, :hc Group through the Scientific Research Group (SRO). 5.3 2 In ord.-r to in-.pro%c and quantify the effec-;--tness of R&D. a series of key projects are continuing to be identified the-, hav: defined and aarced corr.,nicrcial objectives together with a project management svstem that @%;:l allo%% costs and progress --, berrianitored towards defined project goals. A proportion of the k.-%. prcl;xis hi,.-c the potential for Z-7.-atine new product opportunities as opposed to achieving incremental - -.duct benefits A rc% ic%% of@utrcnt projects will be undertaken in early 1994 with the gene.-at ob@C-.-L',-. of focusing resources or. higher-patential activities. 5 3.3 Kev produc, projects under N%ay include - World Wide Best Virginia. to produc: Virgunia-based products superior to competitor products in terms of smoking quality in defined markets Product Cost Reduction to produc.- -,n intmationai-quality finished product from Southampton at 50% of current costs Development of Dcgradable Filtrs Irritation todcvclopccehntqticsfor:-.ductionsiiiproductirntation%%-tthoutiossofkcysmoking attributes Control of Aftertaste Product Social Acccptabilit% to cna.@lt control of unacceptable odours generated from sicicsircam and cigarette butts C:) C:) Ln N) T%ATrn roNFIDE-N71AL CATEGORY 1: MINNESOTA TOBACCO UTIGATION. BATCo document for Province of Brlt!Sh Columbia 23 April 1999 Table 6.1 Re-.il Leaf Prices 1990 - 100 CGR % p.a. ,)g I 122Z 1M 1994 1291 1996 t993 - 1996 Argentina 100 126 123 112 92 9. 98 -4 4 Bangladesh 100 101) I(,, 97 94 9@ 91 0 B ml ion 117 )II 92 34 36 91 -0,4 Canada 100 94 99 94 91 91 Ss -2.2 China too 115 III 36 S) 35 90 L.5 India NLS too L44 120 98 9( 92 94 .1.4 SLSfrrad. 100 L46 121 99 91 9@ 96 .1.0 Mysore 10( to& 77 74 @11 73 0.4 Malawi too 113 103 84 16 Ss 90 2.3 Thailand 100 121 123 111) 90 92 94 -5.1 USA too 99 99 9%) 97 9-, 97 -(.7 Zimbabwe Wo 94 94 7$ 79 U Si 2.9 Budgy Argentina 9 4 a 1 6 2 60 6 4 .7 6 Brazil 117 t ( is 9 3 7 1 - , 76 -2.9 China I 00 113 lip) 9 2 x 9 8 9 93 0.4 1110 III I(S 99 36 Ss 414 India 3 1 0.4 Malawi Ion 115 105 8 2 79 9 Thailand - EC too 108 114 94 76 76 St -4.8 - MC I(A) L46 127 IL7 91 91 95 .6 7 USA 100 Ino LOO Ion 98 98 97 .1.0 Ln CD CD C:) LTI Co CONFIDENTIAL - CATEGORY 1: MINNESOTA TOBACCO LITIGATION- BAT BATCo document for Province of British Columbia 23 April 1999 29 SCICTION 6: LEAF EXPORTS 6.1. Backirround 6.1.1 BATCo wrill cofflinuc to develop its position as an "poncr of tobacco leaf However. the changed market conditions and the effects of the recent. US legislation on leaf exports mean that the scale of this activitv will be markedly less than %vas pmvioush. expected. Lau veaes preliminarv assessment of the size ar@d nature of the perceived opportunity to c%pand BATCo's Leaf Export business suggested thu BATCo!s le-if exports could rise to 912th tomies bv 1996. with a trading profit of about USS62m. The latest assessment assumes that BATCo mll export 87.9th tonnes in 1996. with a trading profit of about USS26m 6.2 Market Situation and Outlook 6.2.1 'Mere is currently a situation of ovcrsuppl% in all types oficaf. Demand remains weak for all styles of tobacco leaf except top-quafiv@ offerings of flue-cured and good-quality fire-,cured. High farmer prices in 199 I and the increased use of high-vielding 6arienes in some producing countries has resulted in excessive stocks of low-to-madium qualim tobaccos. Prices paid reflect this supp)videmand situation, with most manufacturers making abrupt stock adjustments and taking ad% ant3ee of the overstock situation. 6.2.2 BATCo continues to expect a shift in the %%orld trade demand towards triedium-to-low quality (low cost) tobaccos and current unsold stocks %%ill sausN much of this demand in he short term. However, the need for good qualitv tobaccos %@ill coritinue mind therc ma% ever be a shortage of top-quality styles in 1994 as the severe reduction in sevcral of the major exporting countries lo%%.-rs the quantity available. 6 2.3 BATCo anticipates that %%orld leaf stocks %%JI return to'normal' le%cls b% 1995,96 Real leaf prices (in US Dollar terms) are expected to decline through 19144 and to firm slightly in 1995196. though the%. will still be below 1990 levels (see table 6 1) 6.3 BATCo's Position end Performance 6.1 1 It remains BATCo's view that if the Group is to dcvciop a significant. and prcfimble. Leaf Export business then it will have to be on the basis ofhaving a significant and sustainable competitive advantage as a producer of low-cost. good qualit% Tobacco. BATCo is well positioned in a few countries as such3producer of low-cost. Rood quality Flue-cured and Buricy Tobacco, 6 3.2 In order to ensure that BATCo's lc;kf export actik itiesare effective and efficient. a Leaf Export Policy has been esmblishcd. The key elements of that policy arc- There must be sufficient export volume tat least 1.000 tonnes p a.) to attract meaningful end customers and to have cost-cf'rective GLT throughput. There must be resources (both managerial and financial) available to support profitable growth; The operations should be capable of securing a 301'. trading margin (in LIS Dollar terms) in a 'norrnal'@ncar (excluding subsidiesItax rebates). vi-ith a PBT of 150,6-2006 or better The tobacco must be of a qualit\/desiratitfity which would be in dcmarid %whatever the world situation-, The operation must be either the cheapest producer of 1`111cr tobaccos or the most competitive for quality tobaccos 6 3 3 Based on these kev criteria. the BATCo pnontv operations am ITC. Zimbabwe. Chile. East Africa (Ugarida and Ken) a). Central America tGuatemala and Honduras) and Argentina. Based on 1992 results. then operations account for 86116 of BATCo leaf export volume and SS% of PSIT. These operations will be the focus of BATCa's c5orts. particularly with regard to investment in up-to-date (-n c::) C) C) i_n NJ RATrn rn-,Fjj)E-4T S IAL CATEGORY 1: MINNIE 0rA TOBACCO.LrrIGATION. BATCO document for Province of BritiSh Columbia 23 April 1999 Table 6.2 LEAFEXPORTS ',I PROJECTIONS % Change COR % p-3- '99: La! L994 1993 - 94 1995 1996 1993 - 96 Volume (th tonnes) 6 1 5 9 74.9 2.7 77,7 37.9 6.5 Market Share 36 5 41 43 4.7 -1 - .1 -12.7 U0 5 176 4 1.2 Turnover (USSM) [43 7 Trading Profit"' (USSm)M 16 1 6 1 i-4 -47. L 19 2 26.1 6.3 It@Misrefer-.,2:ra,!ir.z7-:'-;.-nical'opemtior.swhichissaielvdcnvedfromexPartsales(ie 'incremenUl' tr3dint ':s 1::@--.I,:..jtsailrevenut-.ttarnedfroins3lesAithin the domestic market and takes into account Cn., Jose -:-`1 can be Jirccilv related to the C.N Po operation. lu .::L-.c Jinj 3A, C: of ITC'sand VSTs traJtrg profits Tible 6.3 BATCo Leif Exports Trading Profits W Sm) % Change CGR % P.a. 1= im 29-4 1993 - 94 1995 1996 i993 - % - I Last Plan 28 9 46.9 *23 1 56 4 61.7 + [B. I Latest Plan 26 1 2 1 6 It 4 .47 1 w +6.5 Change -2 3 :D-5 -38 2 -35.6 U-1 (D C:> (D 1`11.) BATCO CONFIDENTIAL CATEGORY 1: MINNESOTA TOBACCO LITIGATION. BATCo document for Province of British Columbia 23 April 1999 30 GLTs and ensuring that dicy am staffed by the best and most effi:ctive people. T'he India and East Africa operations focus on beire Jo%vcst-cost producers of filler tobaccos. with Zimbabwe and Chile concentrating on competitive Production of quality tobaccos. ne evaluation of future business prospects for Argentina and Central America will take @ace in 1994, ahead of =y crop plans being implemented for 1994/5 Invesirmcn, in management and GLT resources in the non-priority leaf- producing countries %,.ill be discouraged unless the relevant domestic market justifies such invcstirrient. 6.3.4 A summary of the key volume and financial projections for BATCo total leaf export business is shown opposite (table 6 2). The effects of the revised outlook for world I=f demand on BATCo's projected performance is shown in table 6 3 Ln C:) CD C=) Ln r%J SACCO LMGATION- BATCO CONFIDErMAL - CAMGORY 1: MINNESOTA TO BATCo document for Province of BritiSh Columbia 23 April '1999 31 SECTION 7: HUMAN RESOURCE ISSUES 7.1. Obiectives 7.1.1 BATCo's primary objectives with retard to human resource issues continue to be:- . to ensure that management effectiveness and capability throughout the Group is at world-class levels; - to continue the process or focusing the most able managers in those markets and in those runctions where they can have the greatest impact on BATCo's overall performance; . to provide a safe and healthy Working environment including safe systems of work. for all employees and non-company personnel %hilst on company premises. 7.2 IN11anaetment Quality 7.2.1 To ensure that SAM emplo% s the best peopic a%aflabic. operating companies are required to seek to rccrutt the best voulig graduates in the: countr% and high-calibrc experienced managers to fill the gaps created bv the release of loneer-serving managers unable to meet rising performance standards. A similar polin. is being pursued with raising management standards in export markets. BATCci is also cook, continuing its policy of seeking to inc..-ase the number of high-calibre local Mana2ers. 7.2.2 BATCo is currently completing an international re% iew of remuneration and incentive schemes to ensure ihat the level of BATCo's tom! packa-ge is sufficitntly competitive to attract the top-class manazers that BATCo is reciting. 7@2.3 Du riniz L993. BATCo initiated major bench-marking surveys in Switzerland. Malaysta and Chile to identify the factors operating in best'-practic.- comparator companies that createmtruning Management teams The initial , esults of the first of these studies (Switzerland) are expected to be available in cariv 1994. 7.2.4 Person-specific roiling training and development plans are being developed for identified high-potential staff and. via the PACE svs-em. traintnit plans developed to build key managerial and technical competencies in all niantl2erS 7 2 5 BATCo will continue to participate in (as "ell as coordinate) the Group scheme of inter-Operating-Group transfers in order to promote and extend the experience of high-potential youngermanagers. BATCoisalsor-.,.ic%,tnizthcopportuniticsto%vidcnthecxperienccofsclcctcdkcv managers through their taking on non-executi%e posts with companies external to BAT. 7 2.6 The principles for the establishment and implementation of an incentive scheme for sales personnel have been agreed. Test schemes ha%.- been initiated in Cyprus and Europe DF and a further test will commence in Holland in Januarv 1994 7 2 7 During 1993 proposals were agreed with the TSG for the new scheme of Management Training and Development. writh BATCo assuming responsibility for Finance functional training. Two Finance courses were held during the %car (one each at Level I and Level 11) and. whilst both programmes were successful. 'improvements will be introduced for the programmes scheduled for 1994. 7.2.8 BATCo will replace the Chelwood general management courses with two shorter. mom focused, programmes. The first will be aimed at managers with Operating Board potential. addressing key Company issues. objectives and strategies. whilst the second will be for more junior managers within each region covering key functions and focusing more on regional issues and objectives. 7.2.9 TbctntcgrationofthcnianagcmcntsofBATCoandBATUKEandtherestructuringofthecombined operations on a regional basis was successfully completed in 1993, bringing significant improvements c-n C) C:) CD rI%J Ln BATCO CONFIDENnAL - CATEGORY 1: IMMESOITA TOBACCO LMGA'nON. BATCo document for Province of BritiSh Columbia 23 April 1999 Table 7.1 BATCo 54f Record % Change I'm in 199 1 1992 1993 :-:St., 1992-93' Lost tisne accidents 2339 1606 1741 1393 1166 960 660 -31 Accident fr eq U., 2611 2243 1519 1496 1 Nn 95( Accident incidence 4859 3473 3a76 w'S41 23 33 1921 Serious accidents 23 2( 1-1 9 1 5 2 is -22 of which. Deaths 3 3 1 1 Ycuf to LkIte Ln CD CD CZ) Ln Lr4 BATCO CONFIDENTIAL - CATEGORY I., MIMESOTA TOBACCO LMGATION. BATCo document for Province of British Columbia 23 April 1999 32 in focus and effectiveness. Action plans have bccn established to Secure fiinhcr manninst improvements. A new imi1ing structure. reflecting the needs of the new organisational St.-.;:,ure. %%ill be introduced in BATCo HQ in early 1994 7.3 Health and Salletv 7.3.1 It is BATCo policy to give the highest priority to the