CAC XI : RIO DZ JANEIRO
Conference Programs*
Introduction
The purpose of the Chairman's Advisory Conference is to provide an
opportunity for the Board of B.A.T Industries and the Chief Executives of
the major overseas operations to discuss key Issues relating to the Croup's
objectives and strategies.
It is not a decision making meeting but it does have an important role in
shaping the thinking that goes into the formal reviews of these objectives
and strategies, which are discussed by the B.A.T Industries Board in July.
These reviews will be particularly significant in 1959 since they come at a
time when there is a need for a critical review of strategy in- the light of
the overall situation of the Group following the Farmers' acquisition.
In carrying out the reviews. there will also be a need to assess the likely
impact on the Group of significant changes in the economic and political
environment which may be triggered by the US Presidential election or which
may result from the moves towards a Single European Market and from recent
political trends and events in other countries important to the Group, such
as Canada. Brazil, Chile and Venezuela.
At the same time, it will also be necessary to take Into account possible
implications of the developments In RJR/Nabisco and Philip Harris.
Although the overall a'tructure of the programme for CAC XI is similar to
that for previous conferences, nor* emphasis has been placed on providing
delegates with the opportunity to discuss specific issues selected as being
of particular relevance to the current situation of the Croup.
To put these issues into context. it my be helpful to restate the Group's
objectives and strategies and the assumptions on which these are based.
B.A.T Industries' Objectives a" Strategies
B.A.T Industries aims to provide its shareholders with an above-average
return on their investment through dividends and capital growth sustained
over the long term.
In order to achieve this. there is an objective to increase earnings per
share at a minimum rate of 15% P.&. (112 P.&. in real terms, assuming
average inflation of 4% p.a.).
The key assumptions underlying the Group's strategies for achieving these
objectives can be summarised as follows:-
I. The Tobacco businesses will continue to operate at levels of
profitability such that they will generate a substantial cash
surplus for investment in growth.
2. Although the Tobacco businesses can provide ease profits growth,
the overall growth of the Group will depend an the ability to
identify investment opportunities in other businesses which-.-
(a) can operate in such a way that they can both PAY &
dividend and support their own growth at rates in line
with the objectives for the Croup as a whole, C)
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(b) have a potential for rapid growth;
(c) are positioned to sustain these characteristics over the
long term.
3. There Is an implicit assumption that there will be sufficient
opportunities within Paper/Pulp, R*tail and Financial Services
for the Group to be able to concentrate Its main strategic
thrust within these activities.
4. It has also been agreed that development should be concentrated
in the North Atlantic region where the economic and political
environment is likely to be favourable and where opportunities
for developing profitable growth businesses based on the Group's
existing strengths are likely to be soce accessible Ithan in the
faster growing Pacific Basin region where it vould be more
dif ficult for the Group to establish a viable now activity.
S. The other main concentration of the Group's competitive
strengths is in the Tobacco businesses In developing countries.
especially in Latin America. Although the immediate economic
and political prospects for these countries are uncertain, it is
still thought worthwhile to maintain a presence there both for
current profits and for their longer term potential.
6. In some countries where diversification Ls necessary either to
support the Tobacco business or to make the optimum use of
blocked funds, investzunc in the Group's other major activities
say not be feasible. In these cases, investment in other
activities (*.S. Agribusiness) say be considered. However, in
these and other countries where there are investments outside
the Group's main interests, the ultimate aim should still be to
concentrate resources in the four major activities.
Issues for Discussion
It Ls suggested that the conference should concentrate on identifying MA
discussing the major issues Which need to be resolved in determining the
optimum strategies for each of the Group's main activities, taking into
account the contributions required from each if the overall objectives for
the Group are to be achieved.
A kay factor to be discussed will be the management and financial resources
required to pursue these optimum strategies, bearing in mind that there is
an aim for the I -A. Industries' debt:equity ratio to be maintained below
5OZ. Whilt it Is accepted that It my sometimes be necessary to exceed
this over a limited period, proposals to do this should include a defined
plan to return to 50% within 3 years. In addition, interest cover should
be maintained at at least four times.
A draft programme for the conference is attached and the notes which follow
indicate the specific issues which it is hoped to cover in each session-
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U= 'A' : Chairman's Introduction
The Chairman will review events and developments since CAC X and will
expand an the aims of the current conference.
Item 131 : Operating Group/Company Reviews
This session will provide delegates with an overview of the activities,
current performance and key issues for each of the Group's operations as
background to the discussions to be hold later in the week. The suggested
form and content of theme reviews is the subject of a separate note which
to attached.
Item IC, ; Groav Financial Forecast
The Group budget for 1989 and outline forecasts for the next five years
will be sumarised and Issues &rising from these forecasts will be
discussed. relating these to the Group's objectives.
Item W : Analysis of Strategic Issues
The main strategic Issues for the Group will be outlined with particular
emphasis an the contributions required from each activity in order to
achieve the overall objectives for B.A.T Industries.
Item 'El 1 Hamster Development
A first Issue to be discussed will be the extent to which business
development is being or is in danger of being inhibited by limitations in
the availability of managers with the necessary levels of ability and
experience.
Following an from this, delegates will be asked to consider the extent to
which any problems which are identified am be related to specific
weaknesses in recruitment development or the ability to retain and
motivate the best people.
Specific issues to be considered will be the proportion of senior posts
which it has been necessary to fill from outside and the apparent
limitation in the Group's ability to recruit and retain outstanding people.
Item I?I : Tobacco
Delegates will be asked to consider the prosp"ts for the Tobacco industry
and to discuss the optima long term positioning for the Group's businesses
within the industry, bearing in mind the objective to maintain its ability
to generate cash and to grow profits an a continuing basis.
issues to be considered will include likely developments in attitudes to
smoking, developments in taxation and *=I" credits, the possible impact
of recent developments in RJR/Nabisco and Philip Morris, opportunities
presented by the opening of monopoly markets and the impact of the European
Single Market Initiative.
Specific consideration should be given to the action which needs to be
taken within the next 2-3 years in order to position the Group's businesses
for the Longer ters.- Also, to the sbOVtOr tom implications for profits
and cash flow of following the strategies which szo proposed.
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Item IC' - financial Services
Delegates will be asked to review the prospects for the Group's existing
Financial Services activities in the Context of the prospects for the
relevant sectors of the markets in UK/Europe and North America, taking Into
account actual and prospective changes in the regulatory environment.
Specific issues to be discussed will be%-
The extent to which the businesses are able both to fund their
own expansion and development and to provide surplus funds which
can be made available for investment in other activities.
M The extent to which expansion, changes or extension* to the
range of activities will be required in order to maintain the
viability of the existing activities, taking into account
expected changes In the competitive environment.
(c) Opportunities for expansion into now markets (e.g. in Europe)
and the levels of investment which would be required to pursue
these developments.
(4) Opportunities to expand into now activities.
Item 'El : Retail
The results to date of Project Exchange will be discussed. This project
was set up following CAC X to review current practice. to share experience
and to upgrade the application of Information Technology, Consumer Research
and Training within the Group's Retail businesses.
The delegates from BATUS, "TIC and Imasco will be asked to review the
current position, prospects and objectives for their respective Retail
businesses.
Specific issues to be discussed will be the Group's record in retailing.
the ability to add value to its retail businesses. the prospects for the
market sectors in which they are operating, the prospects for using the
existing businesses as a base for sustained, long term, profitable growth,
the levels of investment that would be required for this and the degree of
risk that would be involved in making the** Investments.
Item IV : PaRer/Pulp
A key strategic issue for Appleton and for Wiggins Teage is the need fat
business renewal In order to be able to continue to achieve the combination
of high rates of growth and high returns which the Carbonlass business has
been shown to be capable of. The delegates from Wiggins Teape and BATUS
will be asked to discuss the options for business renewal and the levels of
investment that would be required to r '*position the businesses in such a
way that they have good prospects for meeting the Group's requirement.
The delegates frois BATUS and Souza Cruz will also be asked to discuss the
contribution which they see the Paper activities making to the overall
development of their respective Operating Groups.
For Pulp. the delelates frn-Souta Cruz, wining Teape aJA &MO., will be
asked to outline the existing and potential levels of Investment in pulp
making and forestry and to consider Whether this can be justified In Its
own right or, It not, whether it should be justif ied on the basis of the
need to &%CUT% pulp supplies for the Group's Paper activities.
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Item V : Conference Overview
Following discussion of the issues relating to each of the Group's major
activities. there will be an opportunity to consider the implications for
the Croup an a whole.
Key factors to be taken into account in this overview are likely to
includ*:-
(a) The implications for cash and profits of taking -action to
position the Tobacco activities for the long term.
(b) The additional investment required to position the Croup's other
activities in such a way that they can meet the criteria for
maintaining acceptable levels of profitability.
(c) The identification, quantification and approximate ranking of
opportunities for investments which are capable of providing
long term profits growth at acceptable rates of return.
(d) The options open to the Group and the implications of trying to
reconcile any mismatch between the availability of resources and
the levels of investment required to pursue the development
opportunities which have been identified.
Alternatively, if the opportunities identified are insufficient to meat the
Group's overall targets for growth, it may be necessary to consider how
dditional growth night be achieved.
:t= IL' : Chairman's Sunning 09
In the final session, the Chairman will sumarise the main conclusions from
the conference and will comment on the implications for the future.
RS/WA
-20th December 1988
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