I ILI I CHAIRMAN'S ADDRESS The Chairman stated the objectives of the conference to be to review the opportunities for SAT Industries' tobacco activities in the medium and long term and to recommend to the BAT Co Board, and to the Boards of other Cc Groups with tobacco activities, revised strategies where appropriate for their consideration and adoption. He referred to recent organisational chances affecting BAT Industries' tobacco activities. There is a danger of a weakening of cohesiveness and there must be a conscious and determined effort to strengthen the links between the tobacco companies. He expressed continuing and increasing confidence in the fut-ire of the tobacco industry. The rate of decline in the incidence of smoking in developed countries seems to have aba--ed and the potential for growth in developing countries remains enormous. Both competition and the attacks on smoking have continued to .ncrease and it will be even more important for us to be lea (I in such matters as market share, product technology, productivity, and management. Finally, the Chairman outlined the role of BAT Industries, in particular the Group objectives find strategies, and the challenges and opportunities disclosed by certain key ratios, particularly when compared with Philip Morris results. He emohasized thar- tobacco remains the principal source of profits but, in order to ccmoete in the allocation of BAT Industries' resources, we must ensure a continuing real growth CD of profits. CD BATCo document for Province of British Columbia 23 April 1999 its SMOKING ISSUES Action Mr. Stewart Lockhart outlined the attack and its results and the action being taken by the industry to achieve an international response and regain industry credibility. The following points arose in discussion:- Government Activities Governments appear to be directing their CAC attention more towards companies rather than TDs consumers. More action must be taken to resist Pub. A increasing government interference designed to restrict comoanies freedom in such matters as advertising and sponsorships. The following action will be taken:- 1. Arguments must be developed on the basis of the freedom of companies to compete, as well as the arguments about advertising not increasing consumption and the need to advertise low delivery products. 2. Companies will pass to Public Affairs at Mil lbank, for circulation to all other companies, more information on action taken and arcuinents developed. 3. Millbank will develop a paper on strategies and tactics used by Grouc cc in resisting advertising and sponsorship restrictions. 4. Companies will also, through Millbank, ensure better circulation of favourable reports by respected bodies or indi,!idua,'s. Receivina companies might be able to Use such information C= directly or initiate local studies which would yield the same BATCo document for Province of British Columbia 23 April 1999 6 Action S. Allies must be recruited, e.g. advertising associations, businessmen's associations, brewers, distillers, retailers, company unions, etc. 6. Independent studies of the economic effects of advertising may assist, e.g. the demise of magazines without tobacco advertising. 7. Corporate advertising on a theme which interests the nation may in some countries strengthen the argument for freedom to advertise. Social Acceptability/Passive Smo!:--nq C The Garfinkel report, due in July, will disagree wit'l the Hirayama and other reports which indicated TDs dan,;ers of passive smoking. Concerted PR action is Pub.Af req fired: - 1. BWT will arrange for the US Tobacco Institute to circulate the report and the press releases to all I and BWT will itself circulate these direct to CAC companies and to Millbank for all other companies. 2. Companies must take the initiative and use all available information to prepare an immediate response or, better still, to use in preparatory information flow to press, etc. 3. Any other reports by respected bodies will be circulated, e.g. Millbank -will circulate the New Zealand report to all companies. Other, discussions at this conference indicated CAC tha-: social acceptability is the greatest long-term TDs threat. Here a--ain comoanies -all feed all available Pub.AL I information to Millbank -who -eill ':rteE) all co mra inf,)rmed. BATCo document for Province of British Columbia 23 April 1999 7 Action Tar Levels When once a company has accepted the principle CAC (if an upper tar delivery limit, there is a danger TDs that the limit can subsequently be reduced by Pub.Aff - government action. The danger may not be great so .;.ong as the trend is to lower deliveries but that cannot always be assured. Agreed tactics are:- 1. Companies should resist any restriction, on the argument that it should be allowed to have a range of brands for all consumers. 2. If necessary, companies should agree that no new brands be introduced over 20 mg tar but existing brands with higher deliveries be retained. 3. SWAT (Sales Weiqhted Averaae Tar) limits must be resisted because, although they do permit higher delivery brands, there may be difficulty in achieving the figure if consumers do not accept lower deliveries. It is in our own Iona-term interest to have an objective to reduce deliveries and it may be an advantaae to be able to show a SWAT decrease. However, this may contain dangers in some countries and, in any discussion with governments on SWAT figures, companies must emphasize the need for freedom of choice to the consumer. NJ CD BATCO document for Province of British Columbia 23 April 1999 Action Carbon Monoxide CO is considered a threat to be taken CAC seriously. Companies must muster the arguments to Ms resist showing CO contents on packets and in Pub. Af advertising. R D There is reduced activity in medical circles in connection with CO and R&D will circulate evidence to aid resistance. MIT will, through Millbank, circulate a st idy of the sources of CO in the environment. CO figures on packets etc could lead to renewed attempts to produce a common index figure for tar, nicotine, CO and others. The possibility was suggested that Putting as much information as possible on a packet would lead to the information ceasing to have any meaning and would defeat the objective. This was not generally endorsed but further consideration should be given to studying the effect of listing all known caistituents. Manufacturers' Associations Infotab will be encouraged, particularly the CAC activities of working parties. The work of such TDs parties must be speeded up and action must be Pub. A delegated to them. tMA3 (National Manufacturers' Associations) must be formed or improved wherever possible. Joint action is difficult but must be pursued. Every support and effort must be given to make them more ef:2ective. BATCo document for Province of British Columbia 23 April 1999 9 Action Depending on the ability and standing of the NKAs, they should be the best vehicle for finding the allies listed earlier. Action bv NMAs aives the industry the best standing. However, although every effort must be made to push them to take their own initiatives, that does not in any way absolve comoanies from taking their own actions and initiatives. Personal contacts and visits remain a most important means of educating company and NMA personnel in Smoking Issues. Encouragement will be given both to Infotab meetings of NMAs and visits between NMAs . Other Industries There is an increasing danaer of other CAC industries taking action against smoking, sometimes TDs to deflect attacks an their own industries. Examples Pub. AL E. -ire asbestos, aluminium and insurance. If such activity is detected, Group ccmoanies concerned must immediately contact those companies at the highest level. Employee Education Some companies have taken action to educate Pub. A and/or inform their own employees concerning smoking ..ssues. Such activities range from seminars ..ncluding outside experts to information sheets, and ,:Over management and other employees, especially sales forces. Z:2b Such activities can a130 lead to information "lowing up e.g. government or local author-4tv :-ntentions. BATCo document for Province of British Columbia 23 April 1999 10 Action Consideration also needs to be given to education of others, perhaps wives or employees of cther connected industries e.a. retailing, home improvements. Public Affairs in Millbank will arrange a Pub. Af meeting of experienced companies plus R&D to exchange R&D information on experiences and techniques. Third Party Discussions The meeting endorsed the greater willingness of CAC c=panies to talk to governments, departments, press, TD9 medical authorities and others. In SDite of some Pub.Aff. disappointments, and other dangers which must be recognised, the more open policy must be pursued on the basis that discussion is better than confrontation. There is now a greater tendency for governments to consult with companies before taking action - It is not possible to negotiate with WHO but d-,screet personal contacts are possible. Discussions with press and with scientists and the medical profession is better carried out by the NMA, if possible, as there can be dancers to individual companies. Industry Credibility Dr. Blackman described the current platform; the CAC experience of visits to --RI. DC by Sr 4- t ish Medical TDs Association and similar association representatives Pub-Aff. and the talks he is giving within the Grour) which R&D 4h. will soon be videotaped and offered to companies. He ---4 stressed that the industry cannot retain credibility without a positive platform. BATCo document for Province of British Columbia 23 April 1999 Action Legal attitudes within the industry have eased aid progress has been mad 3 in resolving the legal restraints in publicising product developments. Our present stance is that while we note the v:.ews of several scientists and medical researchers who see lower risks with low delivery cigarettes, we must be careful not to be seen to be adapting these v,,.ews as our own. Thus, we are not saying that cigarettes have been scientifically established as good or bad. What we can say is:- 1. the product of today is different from the product on which all the adverse epidemiology was based; and 2. a fair number of scientists a red medical researchers who deplore cigarettes nevertheless say that they are finding that a low-yield product is safer. If the Surgeon-General and others, including medical authorities., begin talking about lower delivery products perhaps being less hazardous, the industry with suitable restraint can call attention tc such views. Dr. Blackman also discussed a booklet. based on his talks, which will be sent to all companies. It may be used at comnanies discretion, but in a careful and selected way to third parties. Great care must be taken over translations. A covering letter will give the release date and additional information recruested by the meting. BATCo document for Province of British Columbia 23 April 1999 12 Action Some companies, especially in UK and USA. are planning prospective epidemiological studies and other conmanies were encouraged to consider such studies. R&D will circulate a paper on methodology. Any company considering such a study must involve government. Such studies involve considerable difficulty and cost. A prospective epidemiological study in a third world. country could be very valuable. Doubt was expressed as to the ability to organise such a study but Brazil will consider this further. BWT, and perhaps other companies, are also considering research on the benefits of smoking, in addition to that carried on at GR&OC. Because there may be competitive advantages in the results, benefits research must, at least at the start, be initiated by companies rather than by the industry. Other Items 1. Companies must monitor covernment activities in CAC schools. Some governments aim to eliminate TDs smoking from the total peculation. There is Pub. Af evidence of some propaganda being counter-productive but this may not be so if the propaganda starts at the earliest possible age. It may be difficult to discover the effects for some years. Companies should study government propaganda films and, if necessary, take court action to prevent screenina. 2. As each company makes important contacts -dith CAC individuals, they will inform I who -44-11 TDs in tu rn inform other cc;npanies and will also Pub -A ff. CZ= maintain an index of Such contacts. 3. The meeting endorsed the initiation of social CAC and economic co3ts of studies as bqina TDs useful and important, nart ict., la as tar and Pu nicct BATCo document for Province of British Columbia 23 April 1999 13 PRODUCT DEVELOPMENT Action Dr. Blackman outlined some of the work at GR&DC in relation to foreseen future trends and needs. Poi -its arising from the discussion:- 1. Indications are increasing that nitrosamines may R&D become important. Most can be removed bv filtration but there are other methods, e.g. water extraction of nitrates. R&D will increase the research programme and set a target reduction figure. 2. A reduction in specific biolocical activity is R&D also likely to become more important. The first requirement is an agreed satisfactory test protocol, including additives. A meeting of CAC companies has been arranged to devise a programme to be recommended to the next Research Conference. 3. Members generally are satisfied with the results R&D of the Diet process. It was considered that the loss of nicotine and sugars can be accommodated but we should have a better understanding of the influence of different process conditions on the losses. GR&DC have a prograrme of work for a better understanding of excansion processes but have not undertaken engineering work to develop second generation processes. A second generation expansion process -nay be required in 5-10 years time and a programme of work should be considered for the 1982 R&D programme. 4. GR&DC are currently concentrating their work R&D with BAT(UK&E) on developing a corinercial product with a HEE (high efficiency) filter. GR&DC are also considering other ways of achievina a controlled and 2,3uol r!e I iverv with each puff. Considerable work is being carried BATCo document for Province of British Columbia 23 April 1999 14 Action out on filters but R&D will consider enlarging the programme for this imvortant area in order to increase the understanding and development of other novel filter possibilities, e.g. involving turbulence. S. companies are becoming wary of further additives R&D and are looking to natural enhancement of flavours. A great deal of work is being done in GR&DC, Germany, Brazil and elsewhere. The conference agreed that natural flavour enhancement is a high priority subject. 6. Cigarettes designed to offer social reassurance R&D will assume greater importance, e.g. reduced sidestream. 7. Carbon monoxide levels will become increasingly R&D important and commercially viable means to reduce them must be established. B. A better understanding of the consumer Is of R&D great importance through such work as consumer awareness studies and behavioural research. This work could have considerable effect on future product development. 9. The latest information on the link between R&D :11 nicotine and smoking behaviour does not support the theory that low tar facilitates quitting. 10. Information on product innovation in our own and CAC competition new brands should automatically be R&D circulated to GR&DC and to comnanies' R&D centres. Conference members will check if adequate informaticn is being rqceived and whether any improvement is required. NJ BATCo document for Province of British Columbia 23 April 1999 15 Action 11. Other subjects discussed included:- (a) Brazil could experiment and coordinate the development of specialised tobaccos for the Group. (b) Questions are being asked about cigarettes in connection with the flammability of furnishings and similar fabrics as a cause of hotel and other fires. MIT is doing work on flammability and the need for a self-extinguishing cigarette. GR&DC support for this work should be considered. (c) A better understandina is required on how ventilation changes a the smoking qualities. (d) More work is also required an understanding 'how tobacco processing affects the final product. The new GR&DC and Brazil programmes were felt to be relevant. CD BATCo document for Province of British Columbia 23 April 1999 16 GR&DC Action Dr. Blackman proposed that in future the GR&DC budget should differentiate between:- 1. Innovative work agreed with CAC companies to increase technical knowledge for the future of the BATCo Group. This can be called the Group R&D programme and is essential for the Group and for all companies. 2. A technical service to those companies needing support or the introduction of an existing technology. Of the 1981 total budget of 48.9 million, the Group R&D programme comprises 46.8 million or 77%. The present levy allocation on companies of 0.21% of turnover does not cover costs. A revised allocation formula for 1982 onwards was proposed:- Cost of Group Turnover of participant X R&D programme Total turnover of participants Turnover would be net of excise and other duties. The conference supported the R&D management and the GR&DC programme. The revised allocation formula was also agreed CAC C7:@ in principle although some comp-nnies may have R&D problems of approval by their govqrnment authorities. BATCo document for Province of British Columbia 23 April 1999 17 Action The principle was also agreed for annual three R&D year programmes and budgets. The proposed three year budget for 1982-4 shows R&D real costs slightly declining. R&D must ensure this does not increase. Any new projects should if possible be carried out by individual companies. R&D will in future supply to all companies R&D actual figures achieved against budgets. BATCo document for Province of British Columbia 23 April 1999 MACHINERY Action Mr. Pritchard outlined the current and future trends in production machinery develooment. Foreseen trends include:- 1. Increased commitment of capital to primary CAC manufacture, partly for upgrading and partly to TDs permit new developments, e.g. drying techniques, Production filling power and process control. 2. The trend to increased secondary machine speeds will decline. Cigarette makers are already large and expensive. On machine ventilation and printing will both increase. 3. New machines, with more electronics, need CAC different ooerator skills and effective TDs selection processes are required. Product Person Mr-, I 4. Improved factory design, including modernisation CAC of existing factories, giving particular TDs attention to materials flow. This may in some Production cases involve primary and secondary plants in different locations. S. High speed machinery requires careful planning CAC in product design including rationalisation of TDs brands and packings. Productior 6. Flexibility and efficiencies incorporated into Productior the machines are as important as higher speeds. BATCo document for Province of British Columbia 23 April 1999 20 LEAF Action Mr. Pritchard covered the supply situation and fu-:ure development. The following points arose:- 1. overall forecast requirements for the next five CAC years can be met but reduction in densities TDs through expansion processes may lead to no Leaf increases in purchases. Liaison with governments may be required to avoid over production. 2. World wide stocks of flue-cured have decreased temporarily due to a crop shortage in China. 3. Increased quantities required will be achieved Leaf largely through increased yields, rather than expanded areas, but this must not be at the expense of quality. However, more stringent specifications may be a constraint in achieving increased yields. 4. Increasing shortages of Burley are expected; TDs sources other than USA are being developed and Leaf this must be a high priority. Other sources are also being developed for Maryland tobaccos. An objective is to become less dependent on others for future supplies. S. Dealers are becoming fewer, bigger and stronger. Leaf We will try to retain close relations with at least two dealers, probably Transcontinental and A. C. Monk. Purchase of a dealer was considered and rejected. CX:) BATCo document for Province of British Columbia 23 April 1999 21 ENERGY Action Mr. Pritchard discussed the energy problem and act-on taken to improve energy management The following points arose:- 1. A lot has been done towards better energy management but the cost of energy will continue to increase in real terms. 2. Companies should reduce dependence on oil and CAC electricity on grounds of both cost and security TDs of supplies. Energy 3. Materials including filters are highly energy CAC intensive. Cigarette package designs should TDs take account of future materials price rises. Marketini Waste should be reduced and, where inevitable, Energy recycled. 4. The necessity for air-conditioned or Leaf refrigerated leaf storage will be investigated. Energy S. Companies should consider energy cogeneration. CAC TDs Energy CD C=) BATCo document for Province of British Columbia 23 April 1999 - 22 MARKETING Action Mr. Bruell outlined the new Organisation of Marketing Department in Millbank, the Internaticnal Brand Strategy Committee, and world trends, threats ard opportunities, particularly in the international brand and low delivery segments. The following pcints arose:- 1. The main purpose of Marketing Department in CAC Millbank is to establish Group primary marketing TDs policies, objectives and strategies, and to Marketim7 observe the performance of lead companies. Also a role in coordinating international brand strategies of operating companies with those of brand owning companies. Support was given to seconcbnents to Marketing Department after discussion and agreement with companies. 2. The principal marketing emphasis must be on:- CAC TDs (a) international brands, which are increasina Marketinc much faster than the total world market, and (b) the low delivery segment which is a sector in which we must lead. In some companies their share of the low delivery segment is less than their total market share. 3. 7he development of those segments is vital and CAC it was -agreed that we must be prepared to invest TDs I C=) more in the long term future cn the key brands Marketing in accordance with the agreed priorities. N-) BATCo document for Province of British Columbia 23 April 1999 23 Action 4. International brand priorities on a regional Marketing basis, as seen by BATCo, were presented and will form the basis for discussions with the brand-owning companies. Financing of advertising and promotional support Marketing for international brands will be discussed with the three brand-owning companies, to establish levels of support from brand-owning and operating companies, to ensure that brand support is better coaLrdinated within the Group. 6. There is a need for an improved exchanqe of Marketina marketing intelligence including brands, packaging, advertising and competition activities. It is intended to i3sue special supplements to the Marketing News; these would be technical and confidential supplements for restricted distribution and some might be written by operating companies. BATCo document for Province of British Columbia 23 April 1999 24 PEOPLE PRODUCTIVITY Action Mr. Pritchard outlined the people productivity Planning improvements achieved and forecast. The followina points arose:- 1. The BATCo Group in 1980 would have spent some 130 million more if no action had been taken since 1977. However, if the targets set in 1977 had been achieved, the saving would have been L70 million. 2. A key factor in improving productivity is a CAC realistic sales forecast. Sales forecasts have TDs generally not been achieved but the number of Marketing employees has increased as forecast. 3. In the light of past experience, there must be some doubt about the achievement of the ambitious improvements forecast. 4. The increasing costs of ' actnini and CAC Omiscellaneouso cause concern and must receive TDs particular attention e.g. Organisation structure, administration systems, information flow, mechanisation. 5. Marketing costs are also increasing but this must be viewed in the light of increasing competition and advertising restrictions. 6. Materials and product handling, the totality of CAC movement within a given area, deserves greater TDs attention. Productior c::> C=) r11j N.: BATCo document for Province of British Columbia 23 April 1999 25 Action 7 Lean manning is particularly applicable to low CAC skill tasks. Future management and supervisory TDs skills must be assured through recruitment and Personnel training. :3. Consideration might be given to management CAC bonuses based not only on profitability but also Personnel on people and asset producti7ity. 3. It was noted that, in Canada for example, the tobacco industry is .well above the industrial average in value added per employee. CD -,j C=:) Nj BATCo document for Province of British Columbia 23 April 1999 26 ASSET PRODUCTIVITY Action Mr. Goddard outlined improvements achieved and forecast and methods of further improving asset productivity (improved utilisation of assets to increase the return on funds employed). The following points arose:- 1. A company's record in asset productivity could CAC affect decisions on further investment in a time TDs of increasing competition for funds. Finance 2. Forecast improvements are largely based on a CAC projected volume growth - which may be TDs optimistic - and on reduction of stock levels to Marketing target durations - which may not be achieved. Realistic forecasts and sensitivities are required for both people and asset productivity decisions. 3. 'Accounts Receivable' assumes increasing CAC importance in a time of high interest rates. An TDs increase in trade credit can have a substantial Finance effect on cash flow. 4. Leaf stocks can comprise 50% of all assets. CAC Efforts will continue to reduce duration targets TDs and progress in achieving target durations must Leaf be monitored. 5. Manufactured goods stock levels depend on CAC efficient production planning and the TDs warehousing of optimum stock levels at desired Product -' locations. -@J, r,%J C,---) N..) BATCo document for Province of British Columbia 23 April 1999 27 Action 6. Companies must develop criteria on stock levels CAC after analysing the risk of stock-outs. TDs Marketing Leaf 7 . Managers should be made aware of -their CAC responsibility for the management of assets by TDs specific allocation of assets to the managers FDs concerned. 8. C--mvarison with competition in the use of assets CAC and their strategies will assist in measuring TDs performance. 9. Principal operational measurements (e.g. target CAC durations) should be reviewed periodically TDs taking financial implications into account. FDs C:) rNI-) BATCo document for Province of British Columbia 23 April 1999 28 CORPORATE AFFAIRS Action Mr. Stewart Lockhart emnhasised the key role CAC companies have in the corporate reputation of a multinational company, manufacturing products with a health concern, partly in developing countries. Points arising from the discussion:- 1. CAC companies have a role in understanding the CAC issues concerning developing countries and being Pub.Aff. prepared to argue the Group's case. 2. The forthcoming UN code of conduct for CAC transnational enterprises will be a basis for TDs legislation. Millbank is preparing briefing Pub.Af papers. All companies must monitor and seek to influence government attitudes. 3. All companies must also monitor discussions an CAC the Brandt Report and be prepared to out the TDs industry view. Pub-Aff - 4. Infotab will monitor a possible UN code for the Pub -Af tobacco industry. S. All companies must work towards achieving self TDs sufficiency in Public Affairs. Pub-Af 6. To moderate the wood Problem, comoanies in TDs developing countries must procress with Pu alternative fuels, including use of waste materials, and with re-afforestation. C-D BATCo document for Province of British Columbia 23 April 1999 29 Action 7. Problems arising from the BAT presence in South CAC Africa are likely to increase. 7hey are being TDs monitored and all enquiries should be referred Pub.Aflf. to BAT Industries who are preparing a paper reviewing the situation. 8 A Millbank working party is preparing a paper on CAC the issues facing us as a multinational, TDs particularly in developing countries. It will Pub.A!f be important for companies to be aware of the issues and policies. Although feeling against multinationals is generally less at present, it could arise again at any time. CD r%-) BATCo document for Province of Brifth Columbia 23 April 1999 - 30 MANAGEMENT DEVELOPMENT Action Mr. Stewart Lockhart discussed the process of ascertaining future management needs, identification of potential managers and planning their career development and the need for continuous improvement in all these areas. The following points arose:- 1. The Individual Development Programme (IDP) (a Personnel selection board exercise but for existing employees) is being used for UK and expatriate staff. Millbank will circulate dates of future sessions so that operating company representatives can attend if they wish. 2. Secondments to gain experience have been CAC increasing and should be encouraged in both TDs directions. FDS Personne' 3. The appraisal system is still not fu 11V CAC effective in some companies and this needs the TDs commitment of senior management. Personne 4. The conference expressed support for Chelwood. CAC A secondment from a tobacco company would assist TDs in keeping the correct balance among --helwood Personne tutorial staff. Companies are requested to again review the possibility of such a secondment. Millbank will circulate a job C=> description. ----4 INJ CC) BATCo document for Province of British Columbia 23 April 1999 31 NEXT MEETING Members were unanimous that these conferences were valuable and should be continued. opinions varied concerning the time span but it was agreed that the next meeting should be in not less than one year and not more than two years. in particular, if it is felt that there is any loss of cohesion then the next meeting should be brought forward. In the meantime, delegates were requested to write to the Chairman with any views on this conference: the subjects discussed, any subjects omitted, the time spent on each subject, the methods of discussion, and any other matters. C=) NJ BATCo document for Province Of British Columbia 23 April 1999