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BAT Industries document for Province of British Columbia 22 April 1999

CAC X C.A.,L
ITM 0 t CROUP STRATEGY REVIEV
if
a'l MA SW=W%Y 11 I
I . My incaution in. this session is to review the current thinking an the
Group's strategic direction and to identify the issues which I think we
should consider in deciding What action we need to take now to ensure
that we can achieve sustained profitable growth continuing into the
longer car= future.
2. The Group TimarAcial Forecast, outlined in the first session this
morning, shows that if the existing operating Group plans are
implemented successfully, B.A.T Industries will enjoy profits trowth
over the next five years which is adequate to maintain a record of
earnings per share and dividends growth comparable with the results chat
have boon achieved over the past five years. There is also forecast to
be a substantial net generation of cash which will be available for
investment in now activities, to boost the profits performance La the,
short term and to lay the foundations for sustained growth in the longer
term future.
3. Of course, we cannot gmaraute* that the levels of performance that have
been Projected will actually be achieved and it has already been
Indicated that we will have to work very bard to achieve the results
that have boon forecast.
4. 1 am very conscious of this requirement which will be reflected in this
year's Guidelines to the. Operating Groups. What I would Ilka to do mm,
however, is to assume that we will achieve a reasonable degree of
success in implementing our agreed plans and to concentrate an
identifying what additional action we need to take to ensure that we
invest whatever resources we have available in a manner that Vill give
us the best chance of achieving our longer term objectives.
5. The first slide show the pound that X Lucend to cover in my paper.
I. T. will start by recalling our objectives and the strategies that
have been previously agreed for the Group.
2. 1 will then go an to discuss our performance relative to these
objectives and strategies, over the period 1981-86 -
3 14 . Following a review of our business environment and the way in
which we might expect the environment in the future to differ from
out experience over the last few years, I will go an to suggest
changes which I think we ought to make in out objectives and
strategies.
5/6. 1 will then *--risa the action which is already In hand on the
strategic development of the Group and conclude by considering
what additional action we need to take to accelerate the Group's
progress towards achieving our objectives.
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BAT Industries document for Province of British Columbia 22 April 1999

SLIDE I
I.RESTATE OBJECTIVES AND STRATEGIES
2.RZVILV PROGRESS 1981-56
3.REVIEW OUR BUMIMSS ENVIRONMENT
4.CONSIDER NEW OBJECTIVES/STRATEGIES TOR, 1987-91
5.REVIEW ACTION ALREADY IN HAND
6. CONSIDER WSAT NEEDS TO BE ADDED
00
BAT Industries document for Province of British Columbia 22 April 11999

2 -
B.A.T Industries' objectives
The main headings for the Group's objectives are sumarised on the second
slide -
I. Growth : The long term objective is to achieve sustained growth in
Dividends per Share, Profits and Sales at a rate greater than AZ p.s.
above the rate of Inflation.
2. P/E and Dividend Cover : The P/E of B.A.T Industries' shares should be
75% of the average for the FT 500 and, in order to achieve this, the
rate of increase in Dividends may coed to exceed the rate of Increase of
Profits. However, Dividend Cover should be maintained above 1.75 based
an the CCA prof Its, equivalent at current inflation rates of 'around
4.--5%, to a cover of about 2.0 based on the historical profits.
3. Returns : Each business within the Group should achieve a return such
that it generates sufficient cash both to cover the cost of servicing
the funds employed in the business (through dividend and Interest
payments) and to fund growth at a minimus rate of 42 p.a. in real terms.
It has been calculated that this Implies a minimum CCA return on equity
of 9% p. a. for 3-A.T Industries.
4. Debt/Equity : B.A.T Industries should sla to maintain a Dabc/Equicy
ratio below 50.. However, this cm be exceeded over limited periods to
take advantage of investment opportunities provided that there are firm
plans for returning to 50% within a defined period.
5. Leadership : The Group will aim to have a high proportion of Its
businesses La leadership positions In growth uarkots/uarket segments in
order to provide the basis for sustained long cam organic growth.
6. focus : B.A.T industries will sock to focus the Group's developments
within a limited range of activities in Tobacco, Financial Services,
Retailing and Paper/Pulp in order to ensure the most effective use of
the Group's management and financial resources.
7. Risk : In determining the optimum industrial and geographical split of
the Group's activities, the degree of inherent risk, particularly to the
a cur of the Group's assets, will also need to be taken into
se cur
Whac strategies have as been following in order to achieve these objectivesT
CD
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BAT Industries document for Province of British Columbia 22 April 1999

SLIDE 11
OBJECTIVES
I. DIVIDENDS, PROTITS AND SALES GROW13G FASTU TUN
4% P.A,. ABOVE IJULATION
2. P/T RM-ATIVZ 75% OF IT 500
DIVIDUM COVER MAINTAVID ABOVE 1.75 CCA
3. RZTUUS ADEQUATE TO 31JSTAIN SELF F=ZD GROWTE
4. DZ3T/WTY BELOW SOZ
5- LZADZISRIP IN GROWM MARKETS
6. FOCUS ON TOBACCO, MIANCIAL SERVICES, RETAIL. PAPEX/PULP
7. CONTROLLED RISK
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BAT Industries document for Province of British Columbia 22 April 1999

3
Agreed Strategies and Progress 1981-1986
1. Our current strategies ware largely set in place as a result of the
Group Strategy Review carried out in 1982. In this review, the results
for 1981 had been analysed, leading to three main conclusions:-
(a) The f irst of these was that of our principal activities (which
were then Tobacco, Retailing and Paper), only Tobacco was earming
a return La line with the Group objective.
(b) Secondly, an assessment of the growth potential of the existing
activities showed that this was inadequate to form the basis for
sustained 4Z p.a. real growth for the Group an a whole.
(c) Thirdly, it was clear that an excassive amount of management time
was being spent an businesses outside the mainstream.
2. As a result of this analysis, priority was giv*n to improving
performance or divesting businesses which either bad substandard returns
or were outside the Group's mainstream activities. At the @am rim.
the search for new growth activities was stapped up and Tinancial
Services identified as a sector which the Group should enter.
3. During the period 1982 to 1986:-
(a) The performance in Paper/Pulp and in Retailing in the UK has been
radically improved.
(b) Several businesses which Vero either low performance or outside
the mainstream activities have been divested.
W There have been successful entries to Tinancial Services in the UL
and Canada.
(d) The financial results brave comfortably exceeded the Group's
objectives. As a result, the shareholders have done very wall
and, combiming togecher capital appreciation and dividends, have
obtained an outstanding return on their Investment.
4. Slide III shows the changes from 1981 to 1986 in the proportions of the
Group's assets and profits accounted for by the different industrial
sectors in which the Group operates.
5. In interpreting these tables, it needs to be noted that Retailing in
1996 Includes Horton and is before the sale of receivables in the USA.
Also, that Pagulan and Group charges are both included in 'Others'.
6. However, what is clear is that the good returns La Tobacco have been
more that maintained, the returns in Paper and Pulp have beaft
transformed and Financial Services now makes a very significant
contribution. ?4rhaps the biggest disappointment is in Retailing but
there is action in hand to eff act significant improvement in this
sector.
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BAT Industries document for Province of British Columbia 22 April 1999

SLIDS III
CHANCES IN GROUP 1961-86
PROPOITT011 01 GROUP TOTAL M RETURNS M
TOTAL ASSETS PROFITS
1981 1986 1981 1986 1961 1986
TOBACCO 51 33 74 51 22.2 16.0
FINANCIAL SZ&VTCES - 19 - 19 - 17.7
RETAIL -21 26 11 13 8.3 8.6
PAPn/PW 13 13 a is 8.6 19.8
OTHERS 15 9 7 2 7.5 3.3
TOTAL 100 100 100 100 LS.3 17.1
(X=luding Associates)
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- 4 -
7. Slide IV summarises rho Group's overall financial performance since
1981 showing the growth rates achieved La each year to 1996 and the
compound growth rates over the period.
S. The first point that needs to be made about these figures Ls that they
have been significantly affected by currency exchange rates with the
precipitate fall in the value of the US $ in 1985 being the prim reason
for the setback that year.
Taking a view over the entire period, comparing exchange rates at and
1981 and and 1986 shows that the $:Z rate moved from (an undervalued)
1.91 to 1.48 whereas if it had moved only in line with relative
inflation, it would have been 1.74 at the and of 1986. Similarly, the
OM would have moved from 4-.29 to 3.74 rather than to the actual figure
of 2.85.
Assuming approxiaataly 6OZ of Group sales and profits to be $ related
and 102 to be DK related, the relative weakening of sterling over the
period accounted for a 13% extra lacrosse over the period. equivalent to
acompound growth rate of about 2.4% P.A. Allowing for this affect and
for UX inflation, the compound growth rates in real terms for sales,
operating profits and earnings have been 4.4%, 7.8Z, and 8.7%
respectively, ahead of our 4% p.a. objective but, in the case of sales,
Only just.
9. Looking at the way in which earnings have been achieved, it is
significant that the Operating Profits have increased such faster than
sales. Since these figures are made up of a amber of disparate
components, it is not possible to draw direct conclusions. However, the
relativicias certainly suggest that much of the profits growth may have
been achieved by margin isprovaments rather than by underlying organic
growth.
10. Considered from the UX shareholders' point of view, the dividends and
earnings growth has been 2OZ and 16.5% respectively or 14.7Z and 11.4:
in real terms, allowing-foc UK inflation.
11. These figures are comfortably in excess of our objectives but before we
become complacent about this we also used to compare our performance
with the average rate of growth for the earnings of the companies imakiag
up the Industrial sector of the IFT 500 (i.*. excluding the Oil and Gas
companies). This comparison shows SAT's growth at 16.5% p.a. to be
about 3 percentage points ahead of the average of 13.3% p.a. or not much
more than the gain due to the changes in the exchange rate over the
period.
12. Thus, although we have exceeded out objectives by a wide margin, we have
not done particularly well in relation to other major UK companies.
This suggests that out objectives may be inadequate, an issue that I
will return to later.
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BAT Industries document for Province of British Columbia 22 April 1999

SLXDZ IV
B.A.T MUSTRIZS' PEkIPOMU= 1901-86
ANNUAL INCREASES (Z) 1962 1983 1994 1985 1986 1981-86
SAUS 22.2 3.5 31.5 (6-3) 12.4 11.8/4.4
OPERATING PROFITS 22.7 10.3 50.1 (12.2) 15.2 15.5/7.8
EARNINGS 25.0 20.3 42.5 (14.5) 17.0 16.5/8-7
DIVIDENDS 19.6 20.0 24.8 17.5 18.2 20.0
M CM TIMES AFM ADJUSTDC FOR
4.6% ?.A. UX MAMN, 2-4Z P.A.CURRENCY WN
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BAT Industries document for Province of British Columbia 22 April 1999

5 -
13. One positive trend over the period has been that there has been some
improvement in our market rating. Over the period from 30th June 1982
to 31st Harch 1987, UT's share price rose from 106.5p to 538p (over
4002), while the I.T Index moved from 324 to 1026 (217%). As a result,
the total return to our shareholders, shown in the next slide, was ons;
of the highest in the market.
14. The Improvement in our share price has also lad to an improvement in our
P/E buc because the average P/E for the Industrial sector of the FT 500
has also improved from 10.4 to 17.6, there has been a lass significant
move in the P/E relative which at 0.59 on 31st March was stiu
significantly below our 0.75 target.
15. Running through the rest of the comparison with our objectivei, more
detailed analysis shows that although there are still some parts of the
Group where RONA objectives are not being set, the overall return for
the Group has been sufficient to preserve a strong balance sheet and the
Debc/Equicy ratio has set the objective in that, while it exceeded 50%
in 1984 and 1985, the cash flow has been sufficient to bring it down to
41.2% la L986.
16. There has been an Increase in the proportion of the Group's activities
in the four major activities selected for development and although it Is
difficult to put a precise measure an the proportion of businesses which
are in leadership positions in growth markets, the prograwn of
divest=uts (including International, Gimbals and parts of Wiggins
Teape) has certainly eliminated a number of businesses which did not
meet this criterion.
17. Similarly, the risk factor has been diminished by the build-up of
now-Tobacco activities and by an increase in the proportion of the
Group's assets concentrated in Europe and North America, as illustrated
In Slide VT-
18. Taking an overall view of the comparison of the performa=* in 1981-86
with the objectives I think a fair Conclusion is that progress has been
reasonable but that our objectives may not have been sufficiently
demanding.
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BAT Industries document for Province of British Columbia 22 April 1999

SUDE 7
SRARUOLDZ3LS UTMM - SMM TOP UK COWANXIS
(COMBZM SHARE MCZ AND DrV'DZNDS UXNVESTED)
(AVERAGE OVER SIX YEARS)
FISOINS 57%
B.A.T. n=STRIES 49Z
RANSON UUST 47%
PEARSON 42%
TRAFALGAR HOUSE 31Z
BTR 35Z
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BAT Industries document for Province of British Columbia 22 April 1999

SLIDE 71
CRANGE IN GROGWRICAL Sam 1981-1986 (EXCLUDING AS30CIATES)
TOTAL ASSETS la PROFITS La
1981 1986 1981 1986
UY 862 (2L) 2244 (29) 46 (7) 353 (26)
EUROPE 706 (17) 1907 (24) 77 (12) L70 (13)
NORTZ AMERICA. 1626 (39) 2500 (32) 283 (45) 562 (42)
SUB-TOTAL 3L94 (77) 6651 (55) 406 (64) 1085 (91)
LATMI AMERICA, 4" (11) 676 (9) 131 (21) 148 (11)
ASIA 228 (5) 317 (4) 59 (9) 57 (4)
AFRICA 198 (5) 176 (2) 35 (6) 43 (4)
AUSTRALASIA 27 (1) 22 (-) 3 (-) 9 (1)
TOTAL 4133 (100) 7842 (100) 634 (100) 1342 (100)
(MURES IN PARENTHESIS SUM % Of GROUP TOTAL)
(TUMCIAL SERVICES ASSETS ALL INCLUDED IN UK)
BAT Industries document for Province of British Columbia 22 April 1999

6
The Business Zaviroment
1. So much for the past, let us now look at the future and consider first,
what changes we can expect in the business environment.
2. In the developed world, the period 1981-1986 has been a favourable one
for business- Following a slight downturn in 1982, OECD growth in the
four years following has been 2.22, 4.5%, 3.0% and 2.5%. At the "me
time, inflation has fallen from 10.5% in 1981 to under 3% in 1986.
3. The ez;arience La the developing world has been loss happy with the
pressures emanating from the debt crisis and from falling prices for oil
and commodities leading to uneven growth and periods of recession.
4. Within the Group's markets, Tobacco has continued to be under pressure
both in the developed world and in the developing countries where
economic pressures have been as important as anti-smaking lobbies in
curtailing consumption. Howover, there have also been volume increases
where economic growth has been higher, most significantly for the Group
in Brazil. Profitability has generally been under pressure with the
important exception of the USA where despite the volume decline, the
overall profitability of the marker has improved to what is now a very
high level.
5. 1986 was also favourabl* for Paper/Pulp with the increase La sales and
profits for the US Paper and Forest Products sector averaging 9% and 25Z
raspeccively compared-with 1985.
6. US Non-Food Retailing was less buoyant, averaging 10Z growth Ln sales
and 13% growth in profits compared with 1985. Rowever. many of the
leading store chains were showing increases above 20%.
7. In Financial Services, Life Inimrance continues to show above average
growth while "neral (Property and Casualty) Insurance finally appears
to have recovered from the very poor underwriting experience of the
early 198012.
S. Thus, we have had a relatively good environment in which to operate over
the past five years and this was especially true in 1986 when market
trends were firmly La our favour.
9. Looking to the future, the prospects are slightly less favourabla. The
consensus view Ls that OECD Srowrh Ls likely to be somewhat lower and
inflation rather higher than in the immediate Wt. There is also a
continuing danger of a recession triggered by a breakdown in the
financial system. although it is still hoped that this can be avoided.
10. Although Japan in under some pressure at present, we still take the view
that the Pacific Basin has above average growth prospects and we must
continue to seek opportunities to increase our involvement in this
region.
II. The outlook for the developing countries remains uncertain and it is
likely that the uneven experience of the past few years will be extended
itica tha futura.
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BAT Industries document for Province of British Columbia 22 April 1999

7
12. Currency exchange rates will be important from a Group point of view mid
it is likely that there will be a further weakening of the Dollar
relative to both the DM and You. However, it is probable that
purchasing power parities will be restored in the longer tera either
through a recovery of the Dollar or by higher levels of inflation in the
USA. The movements in the Sterling exchange rare are expected to be
intermediate between the Dollar and the DM and 'fen. unless there is a
change in political sentiment, in which case the expectation of a
lef t-wing victory at the next election could result in a significant
fall in the value of the Pound.
13. At the end of 1986, both the US Dollar and the D.4 were probably
overvalued relative co Sterling and this means that future profits
growth will be adversely affected as puchasing -power parities are
restored. However, this will not be a regular movement and current
indications are that we can expect a significantly adverse affect in
1987 and possibly 1988 due to the weakness of the US Dollar, followed by
a more favourable trend in succeeding years as its strength is
restored.
14. Taking an overall view of 1996-91 compared with 1981-86, it seem likely
chat it will be harder to achieve similar rat" of growth In sales and
profits. Economic growth is likely to be lower and there will be no net
gain from currency translations.
15. Within Tobacco, it Ls likely that the pressure from the anti-smoking
lobby will continue and there =&at always be a chawA of an adverse
product liability judgement. Even without this, profitability is Likely
to be tinder continuing pressure.
16. Paper/?ulp profitability is also likely to be under greater pressure but
the situation may be more favourable in Retailing and La Financial
Services where the growth of Life Insurance should continue and where
the Underwriting Cycle may still, have some way co go before it peaks and
again begins to decline. On the other hand, the profits from the
appreciation of the investment portfolio are likely co grow oore slowly
than in the past, affecting reported profits.
17. In summary, therefore, although the Group's business environment is
still expected to be reasonable, it is unlikely that it will be quite an
favourabla as has been the case in 1981-86. It is against this
background cut our future prospects, our objectives and our strategies
need to be assessed.
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BAT Industries document for Province of British Columbia 22 April 1999

Raview of Objectives
I indicated earlier that I thought that we need to consider whether the
objeccive to grow Dividends, Profits and Sales Turnover at a rate of at
least 4Z p.a. above inflation was too modest.
2. Certainly, the growth of dividends and earnings per share in the market
as a whole suggests that we should be aiming for real growth rates of
the order of 8% p.a. cc greater, even allowing for the more difficult
conomic environment which Ls, in any case, offset to some extent for
economic a companies operating mainly in the UK by the fact that the UK
Ls currently one of the star performers in the OECD growth league.
3. The more dif question is the rate of sales growth that we should
be aiming for since we have In the past managed to achieve our prof Le
targets despite growing sales at way about 4% p.a. in real terms.
However, this involved substantial Improvements La margins in a zmumber
of businesses which are am ac levels where it would be unrealiscic to
xpecr the same degree of improvement in the future. I therefore
a
believe that we should be looking for real rates of growth in sales of
greater than 6% which, assuming a IZ-22 growth rate for Tobacco,
represents a growth target of around 92 p-a- in real terms for our other
activities. (SLIDE VII).
4. Those are da2andL--S targets but I am sure that we need to be thinking in
chase terms if we are to meet our longer term objeccives for growth.
review of Strategies
I. Considering our current strategies, I believe that we are still right to
be aiming to use the sunlus cash generated from Tobacco to build up
growth businesses in Financial Services, Retailing &M Paper/Pulp.
2. A review of the Group's Goographical Priorities has suggested that the
optimum strategy for B.A.T Industries Ls to continue to concentrate
investment in Financial Services, Retailing and Paper/Pulp in North
America and Europe, allowing some increase in the relative proportion of
the Group's "sets which are invested In these regions. The review took
inco account that the Pacific Basin offers better growth prospects but
it was not thought that *scablishing a leadership position La the
relevant markets is lammadLately feasible. ReSardiuS the rest of the
world, it was not thought that the immediate prospects in the countries
where I-A.T Industrits is active are sufficiently attractive to Justify
increasing the levels of investment except whore there are projects
which can be Justified on an individual basis. On the other band, the
current income from these countries and the potential for future
developments when the economic environment improves are sufficiently
attractive to juarify maintaining these investments rather than seeking
to withdraw the "sacs for reinvestment In Europe and North America.
3. & consequence of the decision to maintain a base in the developing
countries is that the Gcoup WAS be ready to undertake local
diversification in countries where Financial Services, Retailing and
Pap*r/Pul-p may &IL be Inappropriate. It has therefore been necessary to
Siva further consideration to Agribusiness developments as being the
most suitable mv activity in which to enter in these countries. B.A.T
Industries already has technology agreements with and iaveltas= im two
companies specialising in Biotechnology applied to Agriculture, chis was r1%j
oan as providing an opportunity for setting up businesses in a number C)
:f countries round the world, using the technology to assist in
establishing a leadership position in the relevant market-
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4. The agreed plans !or the Operating Groups. Amatil and Imasca are
consistent with these strategies and they also reflect the continuing
need to give priorit7 to either achieving Increased levels of
performance or divesting those businesses where the current performance
is inadequate to zaac the Group's cricaria.
5. The forecast outcome of these plans is reasonable growth in profits but
based more an improved performance than an sales growth.
6. The key issue for the Group, therefore, is how we can use our surplus
funds to accelerate the underlying growth of our business. It is on
this issue thac we need to concentrate our attention, satkiag the
optimum investment opportunities for the Group.
7. The criteria for 4 dging these investments will be that they should:-
,u
(a) Rave a good potential for sustained growth.
(b) Establish or build an a defined competitive advantage in the
relevant market sector.
(c) Preferably take advantage of existing Group strengths.
(d) Be of a size to make a significanc contribution to Group profits.
(a) Preferably be capable of being quickly brought to a stage where
the viabilic.7 of the concept ran be establish" and the business
start to earz a us: profit after allowing for servicing the cost
of the Investment.
B. In considering how we can increase our growth race, I believe that
priority should be given to seeking opportunities for accelerating
organic growth in chose busiaesses which are performing well and which
are in a leadership position in their market.
9. A aec@oad priority should be to consider Investments In activities
complementary to our existing businesses where we can use our strengths
to the best effect.
10. This does not man that wa should reject proposals to invest in
completely now activities or to acquire other companies where this in
the only feasible route either to establish a now base for growth or to
renew a business that has clearly run itself into a situation where It
has become narrowly focussed on a product or in a market which is
approaching the and of the profitable growth phase of its existence.
11. What we must not lose sight of , however, are the inherent risks of
acquisition. This means that unless we have the management resource
available to turnround a badly run business, we are likely to want to
buy a leader id the field which we wish to enter. This in turn means
paying a Premium which we will used to justify either in terms of the
additions we can MAKe to the business or by selling parts of the
business at a sufficiently bilh premium to book value to reduce the
effective nec cost of the part of the business we wish to retain. NJ
12. With this in mind, I would like to look now at each of our major C=)
activities La turn and to indicate what I think we should be looking for
La particular during the industry sessions later in the conference. -J
--.0
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BAT Industries document for Province of British Columbia 22 April 1999

10 -
Paper/Pulp
I. There has been good progress in improving the performance in Paper and
Pulp and, although soma racionalisation still, remains to be completed in
Wiggins Teape, the key strategic issues are generally concerned with
business expansion and removal.
2. In the UK/Europe, Wiggins Tespe are developing a plan based act the
continuing expansion of a broadly based business consisting of Pulp.
Fine Papers, Carliattless and I with options for further
expansion both geographically (e.g. into Turkey) and La products (e.g.
by the possible addition of coated paper).
3. In the USA, the business is more narrowly based on Carboaless and a
priority is to formulate options for business removal.
4. In Brazil, Pirshy provides a good base for development and from a
technical point of view so does Aracruz. Rowever, the shareholding
position in Aracrux is unsacisfactary and a priority for Souza Cruz is
to consider other options for developing Pulp/Paper operations in
Brazil.
5. Elsewhere, 1ATCo- and Wiggins Teape are together seeking to resolve
the situations In Argentina, Kenys. and India and other countries outside
the UK/Europe and USA. In addition, there is a project at the Centre to
identify other options for becoming established in Pulp/Paper elsaw4ro
in the world.
6. Key strategic issues which wil.1 need to be resolved are:- (SLIDE VIII).
(&) Whether we can take wider use of our existing expertise in
Carbon-loss and Fine Papers to add value to product ranges outside
UK/Europe and Worth America.
M 'ahat are the short, mod.Lus and long term prospects for Carbonless
and can we establish a wider base than Carb,onloss in the USA,
similar to that which QLgSLns Teape are developing in Europe.
(c) Should we be seekiag to establish new Paper/Pulp businesses in
countries where we are not operating at present but where there
are good prospects either for a growing domestic market or.
especially in the case of pulp, a competitive source for supplying
international markets.
7. Factors which have been Ldentif Led as limiting the attractiveness of
Paper/Pulp as an investment include the inherent cyclicality and the
high quancun of investment required not only to become established in a
leadership position in a chosen market but also for individual projects
such as peonf ield pulp mills costing anything up to $ 500m.
B. The risk implied in the high quantum of investment am be reduced by
investing with partners but this obviously introduces now problems. An
important issue to be resolved in the session later this maruLng
thartfort Is wheth4er the opportunities in Paper/Pulp can be shown to be
sufficiently attractive to justify the level of investment and Implicit
risk that is likely to be involved.
all,
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In RataLliag, there Ls a sharp contrast in the positions that have been
reached im Germany, USA, Canada and the UK respectively.
2. In Germany. the performance of Borten is unsatisfactory and RATIG
are formulating plans for a complete restructuring of the business.
Until chase are complete, it will not be possible to determine the
extent of the Group's opportunities in retailing in Germany.
3. In the USA, there is a firm bass on which to build in Saks and both
Marshall Fields and Ivey'* have a good potential for growth. trounars
Retail and Brouners Rental are recovery situations but Thimbles will
naked to be studied further to determine whether the concept has a viable
future.
4. Thera appear to be good growth prospects for Rardess but further
consideration will need to be given to the cash characteristics of the
business to ensure that the returns being earned are sufficient for at
least moderate growth to be salf-funding. The plans for Shoppers Drug
show &reasonable growth prospects but Peoples Drug will need further
attention to bring ic back to accepcable levels of profitability.
5. In the UK, Argos is operating efficiently, and has existing plans
which include real sales growth of over 12% P.&. and pre-tax profits
forecast to reach gloom by 1991. They are currently considering whether
it is possible to further accelerate this rate of expansion. It the
same t1=, they are also considering whether there are other concepts
which might be launched or acquired and developed. Jewellers Guild is
at a scale where the concept will be fully tested during 1987 and where
a decision whether to comit to the longer term expansion of this
business can. be taken. in 1968.
6. A characteristic of retailing in that it can be clearly split into three
elements; property owning. tradin and customer credit. Businesses
which cover all three elements typically have low returns and growth is
associated with a significant aboarbtion of cash. However, businesses
where there-is neither a property owning element nor au in-house
customer credit operation typically have returns of 4OZ-501. and should
be particularly attractive In that growth should not only be effectively
self funding but should also produce a significant cash surplus which
will be available for use on refurbishment pro@ec:s or for testing now
concepts.
7. Key issues that we will need to consider in our retailing session
(SLIDE IX) are--
Opportunities for increasing asset productivity wd releasing cash
for investment (e.g. through selling receivables, sale and
leaseback, etc.).
(b) Opportunities for accelerating the growth rate of existing
activities.
(c) Means for identifying promising new concepts which can either be PQ
tested 1greenfield' or acquired at a relatively early stage- CD
S. Finally, I think we should also consider again whether we might obtain
more benefit from co-operation within the Group either tbrough the
transfer overseas of concepts or through technical exchange, especially C11
on IT. CZ
Lr-
BAT Industries document for Province of British Columbia 22 April 1999

SLIDS IX
XXTAILga
STRAMIC 13313ES
L. ASSET PRODUCTIVTTY/CAM GENERATTON
2. ACCZLZRATUM GROWM OF EXISTM BUSINESSES
3. IDENTIFICATION AIM TESTISO OF NEW CONCEPTS
4. nalk GROUP CO-OPERATION
- CONCEM
- IT
all
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BAT Industries document for Province of British Columbia 22 April 1999

- 12 -
Financial Services
1. For Financial Services, it is convenient to consider Canada first and
then the UX before going an to consider the rest of the world.
2. In Canada, the acquisition of Canada TrustCo. has provided a pad
base for future development and the key issue to be determined is the
direction that this development should now take.
3. In the M, Allied Dunbar is a high growth but relatively narrowly
based business wners. the main issue. now that the Immediate impact of
the caw UK investor protection legislation has been absorbed, is to
formulate plans for extending the business Into now markets. -A paper
considering options for this extension is due to be presented in Juns.
4. Also in the UX, Eagle Star has a good basis for expansion In 'Life
Insurance and the Rainbow concept has proved to be successful both in
itself and as a bass for further extension.
5. 'In General Insurance, Eagle Star's growth record has been outstanding
but there are still problems with the levels of underwriting losses
which are greater than most of their main coWecitars. Rowaver, this is
being tackled and provided that the good returns an investment cm be
maintained, the improvement will provide an additional source of profits
growth.
6. In this context, it should be mentioned that from the poiat of view of
our reported results. It is particularly Important that we do achieve
above average results from the trading element of our General Insurance
activities as, part of this is likely to be needed to offset the expected
decline in the rate of profits growth contributed by the capital
appreciation of the Investment portfolio as the curranc stock market
boom tails off.
7. In addition to Cha existing activities In Life =4 General Insurance,
Eagle Star is also considering options for entering new areas of
activity through the recently formed Finance and Credit Division.
Proposals developed by this division are due to be presented to the CPC
during the current year and this could provide an important extension to
our existing activities in the UK.
8. Outside the UK and Canada. the main financial services interests are
associated with Eagle Star and finding ways to expand these, using B.A.T
industries' connections where it is relevant to do so, is a priori" ty
concern.
9. There have been small scale developments in Malaysia and Sri
Lanka, while in Chile we art ready to move an to the next state of
evaluating specific opportunities as soon as the new Government
regulations far the market are clarified.
10. Eagle Star have also been asked to sake recommendations for the future
expansion of their interests in Australia and these proposals should
be ready for consideration in October. N;
NC
BAT Industries document for Province of British Columbia 22 April 1999

13
11. 3owever, the main priority for Eagle Star's overseas development is
Continental Europe and progress has already been made an thLs in a
number of markets within the EEC. 7me has now been asked for are
reco=endations for an overall strategy for European development
bringing the individual developments into the coat*= of a total plan,
an important element of which will be to ensure that the Organisation
and management resource is adequate to support a major expansion of our
activities in Europe.
12. It is expected that UTIG will also have a contribution to make to this
strategy but at a later stage, once the critical issues regarding their
existing businesses have been resolved.
13. Taking an overall view of the potential for developments it 7inancial
Services, there are four sajar issues that need to be resolved (SLIDE X)
(a) The first of these is to establish the expansion potential of our
existing activities
M A second is whether we should seek to extend oar base of
activities beyond rbose represented by our existing businesses.
This is the subject of a project at the Centre which is due for
completion in June and who" preliminary results will be
incorporated in the Strategy Review paper presented to the Board
La July.
(c) A third, related issue is the extent to which we should look an
our financial services operatican as essentially fret-standing
businesses rather than attempting to have an integrated global
strategy for financial services worldwide.
(d) Last, but not least, we oust decide how we will enter the US
market.
'These four issues will be at the core of the discussion to be hold on
I
Wednesday.
%-C
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BAT Industries document for Province of British Columbia 22 April 1999

201796049
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- 14 -
Tobacco
I. Let us now tura to Tobacco. Although the prospects for increasing sales
must be limited, it is essential to the success of the Group that our
Tobacco interests continua to provide increasing profits and a strong
cash flow for investment in other growth activities.
2. The key issues for Tobacco are that, (SLIDE XI):-
(&) We should play our part in opposing the anti-smoking lobby and in
defending the industry posit-on in relation to product liability
legislation and litigation.
(b) We should continue to work towards establishing ourselves as the
lowest cost producer of quality cigarettes.
(c) We should seek to improve our market shares, especially in the
full price sector.
(d) We should put a high priority on developing and marketing
innovative naw products which will enable us to strengthen our
position in the high value added segment of the market.
3. Although there has been progress an each of these issues, such remains
to be done and I believe that the discussion of Thursday morning should
concentrate on considering how we can be sore effective La relation to
these four issues.
4. Out "pact that may be worth further emphasis Ls the question of growth.
There Is little doubt that the Tobacco market as a whole 91,11 be low
growth and this makes it particularly importanc that we should seek to -
at least hold and preferably increase our market share La the top and of
the aarket.
5. We must also seek to take full advantage of the opportunities presented
by the libstralisation of monopoly markets and from this point of view
Japan apd China will be particularly Important.
6. Another "pact to be considered is the extent to which we can becoue
more effective La transferring skills and expertise from on* part of the
Group to another, especially in respect of now product developments.
110-1 7. A key factor in transferring expertise will be the movement Of People
between businesses and bar* again it say be worth considering whether
there is room for planning to do more of this than we do at present-
S. There are already a range of projects which are being progressed through
the Tobacco Strategy Review Team including Expanded Tobacco, European
Manufacturing RatLonalisacion, Geographical Expansion, European Tax
larmonLsatLon, Barclay and additional action that might be taken to
combat the antL-smaking lobby.
9. What we will be looking f or this week are further ideas for now
initiatives that might be taken to improve the profitability and cash PQ
flow for Tobacco and to extend this improvement into the longer term CD
future.
CD
( .411
CD
BAT Industries document for Province of British Columbia 22 April 1999

SLIDE Xi
TOBACCO
STRAITEGIC ISSUES
1.DZIMLIC SMOKIYG RRODUCT LIAB=TT)
2.COST MMUCTION
3.HUM ULM (N.B. FULL PRICE SECTOR)
4.PRODUCT INNOVATION
5.119107M INTRA. GROUP TRANSFERS
-OF PRODUCTS
-OF EXPERTISE
-OF PEOPLE
BAT Industries document for Province of British Columbia 22 April 1999

15
Other Activities
L. Finally in this review of our industrial activities, let us look briefly
at the activities outside the mainstream.
2. Outside Tobacco, Paper/Pulp, Retailing and Financial Serrices, the Group
has significant interests in Biotechnology, Agribusiness (especially
Fruit Juice), Moulded Car Parts (turoplasc) and Scientific Instruments
(VG Instruments). There are also a wider range of interests In the
Associated companies, especially in Amatil, ZTC and Skandinavisk.
3. From a strategic point of view, only the Biotechnology and Agribusiness
activities are significant and It has been agreed that although we will
continue to pursue the development of Europlast and VG Instruments, both
of which are exciting growth businesses, it is likely that these will be
disposed of in the longer torm to provide resources for Investment in
opportunities to expand our mainstream activities.
4. Agribusiness is a rather different proposition since, as has been
indicated earlier, there are a number of countries where it is necessary
to pursue diversification strategies in order to secure our earnings
from Tobacco but where there are no opportunities to develop businesses
in the Group's other mainstream activities.
S. It was with this in mind that B.A.T Industries made an Investment in
Biotechnology in order to provide technology and skills which could be
mood to establish high value &Uod Agribusiness La a nuaber of countries
round the warld.
6. The current situation an both Biotechnology and an the existing
Agribusiness activities in Brazil and elsewhere is that a major
re-evaluation is required to ensure chat we do bave the capability to
establish and manage efficient and profitable businesses in this sector.
7. A report by UTCo - rec @ - ading how this eight be achieved for
Agribusiness is due to be considered by the CPC early in June.
S. At the same time, we are also carrying out a major re-appraisal of our
involvement In biotechnology and will present recommendations to the
Board on this early in 1998.
9. Thus, the key issues for our other activities are (SLIDE XIZ):-
(a) Tirstly, whether our Biotechnology development has real value far
the Group.
(b) Secondly, whether we mood a stronger orSanisation to support our
Agribusiness activities.
(c) Thirdly, whether and when we should be planning to dispose of our
other activities - &M what we used to do to ensure chat they are
managed effectively while they are still in the Group.
BAT Industries document for Province of British Columbia 22 April 1999

SLIDE X11
ACTrVrrlZS
STRATZGIC ISSUES
1. RZVM BIOTECMIOLOGY
2. REVIEW AGRIBUSINESS
3. DECIDE FUTMtE VG.T, 11MOnAST
ALSO KLMAGEMM IN Toz inum
Fall
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BAT Industries document for Province of British Columbia 22 April 1999

16
Conclusions
I - A first conclusion free this review is that we should consider
modifying our objectives and strategies (SLIDE XII1):-
(a) To increase oar growth objectives to at least 8Z p.a. for
profits and at least 6Z p.a. for sales which, after allowing for
the expected low growth in Tobacco, represents 9Z or more for
the other activities.
M To add Agribusiness to the preferred directions of strategic
thrust, but only in developing countries where it is noc
feasible to introduce Retailing, Financial Services or
Paper/Pulp.
2. Although there are clearly surplus resources available, proposals for
investments in growth have not yet been developed to a stage where it
is possible co allocate priorities for implementation.
3. Similarly, although the studies of geographical priorities led to a
recommendation that the main esiphasis should be given to invesclog in
UK/Europe and North America, further work will be required to allocate
priorities between the different countries within this North Atlantic
bloc.
4. Based an this analysis, our immediate priorities must be:-
(&) To consider with the Operating Groups, Amatil and Imasco, how we
can accelerate the clearer definition of investment options In
each of our major are" of activity so that we can then discuss
priorities for implementation.
(b) At the as= time, we will, also need to continue our work at the
Centre to determine our Geographical priorities more closely,
particularly the relative priority to be given to investments in
the USA, Canada, UK and Europe respectively.
5. The discussions to be held in the other sessions this week should
bring out the major issues for each activity and should help in
identifying some further options for expansion.
6. In considering these options, I would suggest that priority should be
given to options far accelerating the growth rate in the existing
businesses. The next options after this should be options for adding
complementary activities which are sufficiently close to the existing
business to be able to draw extensively an existing strength$.
7. This does not mean that opportunities for acquisitions of new
businesses should not be considered but, if they art, it is essential
that the difficulties in developing and justifying a proposal should
not be underestimated.
S. AC present we have a preponderance of projects which are at a
relatively early stage of development and unless we select & limited
number for priority treatment, there Ls a danger that none will have
reached a decision point within a reasonable tize scale- It is
essential therefore that we should try to identify which projects hold
the most promise so that we can make the right choice on priorities. PQ
9. The discussions this week can be very valuable in helping us towards
making this selection.
RS/OJA $ch Uy 1987
all
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SAT Industries document for Province of British Columbia 22 April 1999

SLIDE nil
CON=SIONS
L. WE SHOULD:-
- UPGZADZ GROWTH O&MCTTVES
8% P.A. PROFITS
6% P.&. SALES - 92 ?.A. NON-TOZACCCO
- ADD LIMITED AGRIBUSINESS STRATEGY
2. WE MM T0:-
DZFINE OUR DEVELOPMENT OPTIONS MORK CLOSELY
- nwsTRx=y
- GEOGRAPHICALLY
3. GIVING PRIORITY To:-
- ACCELERATING MM GROWTH OF EXISTING ACTIVITIES
- ADDING COMPLEMENTARY DEVELOP4ENTS
- SELECTING DEST OF OTHER OPTIONS
C:@
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BAT Industries document for Province of British Columbia 22 April 1999