Guidelines for Souil Cruz :-TuIv IM
General
1. The prime objective for Souza Cruz should be to develop and improve the
profitability of its Tobacco activities in a way which will permit the payment
of dividends at the maximum level allowed.
2. Subject to this over-riding requirement to achieve regular and increasing
dividend payments, Souza Cruz should also consider how beg to invest any
surplus funds, selecting strategies which will protect the value of the
Company's assets and which will enable it to achieve self-funded growth and
increases in profits in a form which qualifies for funher increases in dividend
payments.
3. The strategies for developing the Company should also be consistent with the
B.A.T Industries' aim to seek to concentrate the Group's resources in Tobacco
and Financial Services.
4. Souza Cruz will work on projects as required by the Tobacco Strategy Group
and it will also assist the New Business Development Team of B.A.T
Industries in that body's evaluation of proposals to invest in new markets and
to make acquisitions and disposals.
S. Souza Cruz is expected to participate in the process of developing best
international practice in respect of its environmental policies. There should be
specific plans to ensure compliance with these policies for all Souza Cruz
companies.
Financial Guidelines
6. Souza Cruz should aim at 20% per annurn growth in trading profit on the
1992 forecast of at least USS193 million on an inflation adjusted basis,
excluding the negative impact of the loss from the sale of Maguary. Profit
before tax. should also grow from the 1992 inflation adjusted basis of USS231
million by 20% per annum.
7. There should be a continuing aim for the level of remittances to the UK to
be increased as rapidly as possible to the maximum allowed.
8. Souza Cruz should also aim to be a leader when judged against other major
Brazilian companies, both in terms of return on equity and the rate of growth
in earnings per sham
9. Souza Cruz should aim to achieve in overall return on equity of 16%. 77iis
measure is to be based on local published results, with the neces;sary
adjustments to avoid inflationary distortions.
10. Souza Cruz should aim to have no borrowings at the year end apart from,
those resulting from the beneficial use of subsidind minor borrowings.
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11. Mm inflation accounting system should be used as the basis for the 1993- :Z
1997 company plan. A final decision on the adoption of the new system for %O
published UK reporting will be W= in the third quarter 1992.
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12. Cigarette Export Margins : (defined as contribution as a percentage of net
turnover on a management replacement cost accounting basis) should be
increased to 50% by 1995 and d= maintained at or above this level.
13. In view of the: increased emphasis on Leaf exports and the Group project
referred to in paragraph 25, the growth in the management trading profit for
Leaf should be accelerated to 20% p.a.
14. The trading profit on an inflation accounting basis for Piraby should recover
to Plan levels by 1993 and should then grow at 20% p.a. in order not to dilute
the total profit growth for Souza Cruz.
15. Souza Cruz should use its management influence to ensure that the recovery
potential for Aracruz consequent upon refinancing and improving pulp prices
is fully exploited. Aracruz should return to profitability in 1993 and profits
should then grow sufficiently to achieve the Souza Cruz target relturn on
equity ona locally published basis of 16% by 1995.
Soda Priorities
16. CigarettestDomestic Market : The key priority is to progress cigarette price
increases without weakening the strength of the market sham. A provisional
target price of SO.80/pack should be reviewed as to whether it is the
appropriate level, and the competitive effects of this objective should be
estimated.
17. P@ticing and Costing Model : A model should be constructed replicating
insofar as is possible the cost structures of competitors, which will be used to
better estimate the most Ukely strategies of the competition.
I 8 Market Share : There should be a continuing aim to maintain the current
dominant position in Brazil, based on a market sham of 80% backed by
associated strength in distribution.
19. However, options for increasing profitability by withdrawing from selected
segments of the market should also be kept under active consideration.
20. International Brands : Them should also be a continuing aim to increase
share in the International Brands segment of the market, aiming, to compete
mom strongly with Marlboro through Lucky Strike and other Group brands.
21. Exports : Opportunities for increasing cigarette exports should continue to be
pmued in line with the &dclim agreed through the Tobacco Strategy
Group. The long term objective is for growth of 17.5% per annum.
However, in the early stages, growth should far exceed this.
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22. QwWty : There should be continuing emphasis on the need to achieve and
maintain smoking quality superior to competitors and to maintain overall
quality at a level such that it constitutes a competitive advantage. A mom
measurable indicator of progress in smoking quality must be developed and
progress measured against it.
23. Brand Valuation : 'Tbe recently developed brand valuation tool, which
monitors the effectiveness of the enhancement of brand value, should be
instituted for 1993.
24. Production Facilities : Increased emphasis should be given to upgrading the
production facilities in Brazil in order to be able to produce cigarettes of high
quality at good levels of productivity and low COSL There should also be a
plan to ensure that them is sufficient capacity available to satisfy the existing
sales forecasts and contingency plans should be in place to meet demand 15 %
above those which have been forecast. An accelerated programme for
updating Uberlandia should be included in the Plan.
25. IA&f : Souza Cruz will participate in the team formed to plan and implement
the establishment of the Group as & leading supplier of Leaf to the world
market by the year 2000. Within Souza Cruz itself, there should be a plan to
consolidate the management of the Leaf operations, to improve productivity in
processing, and to expand exports, especially of Burley.
26. Support Activities : Tbere should be separate plans for the activities covered
by SC Pluximarca, SC Florestal and SC Trading. Plans submitted to B.A.T
Industries should be summary plans, showing the justification, objectives and
planned results from these operations.
27. Pirahy : The aim for Pirahy should be to concentrate on the production and
sale of cigarette piper, aiming to maintain dominance of the Brazilian market
and also to upgrade quality so that Pirahy can increase exports to overseas
markets open to international competition. There should also be a continuing
aim to introduce Tobacco-related activities to Pirahy and to reduce the range
of non-Tobacco activities where this can be achieved without damaging
overall profitability.
28. Pulp : Souza Cruz should continue to seek to influence the strategy for
Am= in a way that maximises the income to Som Cruz from the
investment in the Company, whilst continuing to seek a satisfactory disposal
of the invemnenL
29. Polo : A strategy for divesting Polo should be agreed and implemented.
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HCE/djs
23rd July 1992
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BAT Industries document for Province of British Columbia 23 April 1999