Guidelines for Souss Cruz ; July 1989
1. The first priority for Souza Cruz must be to maintain the profitability
and growth of the Tobacco business and to generate a flow of funds from
this activity which is sufficient to support the dividend payments and to
provide surplus funds for investment in other businesses capable of
providing long tars sustainable growth.
2. Tz determining the strategies and action programmes for these other
businesses, Souza Cruz will need to be rigorous in ensuring that they can
meet the Group's criterion that each activity should have the potential
for fast races of self-funded organic growth through achieving competitive
leadership in a def i=ed market or Market seg=amt which is growing rapidly
or where ar w-, can be achieved through gz-'=& La =arket share.
so-: -n c:%1Z --Iso ::_tke in::o a cc: Dun: t@le 0--n-Z's fc-
FL@_-nciai Ser----ces, a=.-- Z, -I SZu
71ve s-pee" &I consideration to the 7atential !or develo-oi=g ?aper/PulD
the other =a]cr azt-4vity i= Brazi' , comple=entary to 70hacca.
4. As a preca=iarury measure, ia view of the growing dif f iculties that the
Brazilian government is facing to control inflation and finance its
domestic public deficit, Souza Cruz should prepare a contingency plan
aimed at minimising the effects of a hy,perim.f la economy on its
financial assets and operations.
The plan should describe the proposals for proactively protecting the
value of Souza Cruz's financial assets and should also identify the key
criteria for establishing when each of the proposals should be activated.
Financial Guidelines
S. Consideration should be given to developing 3TN inf lation adjusted
accounting (decreed method based on indexed Government bonds) for possible
use in the 1990 Budget and 1990-1994 Plan.
6. Uturns an 1,quiry: Souza Cruz should aim to achieve an overall 16%
return on equity with tobacco providing higher returns than the other
businesses. The measure should be based on local published figures
'adjusted by fixed asset and stock revaluations.
As a minimum, Souza Cruz should maintain its comparative position when
judged against the other major Brazilian companies, both in terms of
return an equity and. also in earnings per share.
7. Dividauds: The overall dividend objective continues to be
distribution of the maximum allow" under the foreign registered capital
regulate*=. Tailing this, Souza Cruz should aln to distribute at -least
602 of attributable profits on a Brazilian accounting basis.
The dividends to be paid by Cautab (gross of 25% withholding tax, before
blockod funds reductlan and valued at estimated exc.ha rigs rate at date of
receipt) should be " follows:-
1989 19" 1991 1992 1993 IM
N;
US$(milliaus) S4 57 66 75 57 100
Where possible, dividends should be monetary corrected, with the rate of -%4
distribution speed in the light of the prevailing Inflation.
Since the level* are considerably below the maximum, permitted under FIC CX%
regulations -ways co enhance these payments should be sought. 00
BAT Industries document for Province of British Columbia 23 April 1999

2
S. Debt/ZquitY Souza Cruz should &in at having no borrowing at the
year-end ocher than those resulting from the benef Icial as& of small
subsidised short-term borrowings.
Specific Priorities
9. ?or Tobacco, there should be a continuing &In to maintain the
current dominant position in Brazil, based an a market share for
cigarettes of 8OZ and associated strength of distribution.
10. ?&Circular emphasis should coattnue to be given to negotiating with
:he @;cver-enz, to =i'-=ta.'= cigarette prices at levels where it is
;cost za ear= aad cazh ficA@, auff@cle=z to suoporz tn&
payment of dividends at the more mta rate po rid a sab le .
SC-
of :he interzationall Fraud* St Pkent aiming to reauce ttit curre-a.-
szren&:t- c4 @iarl':orc- A rav'Lew shlov.-Id be prepazed showfz'; th-- rtsti-:s
or the 'initiatives already in place to extend the market for Lucky
Strike, tarc lay amd Capri.
12. rn view of the increasing importance of the lower price market sector
and the expected market downtrade, Souza Cruz should give further
consideration to possible vays of increasing share at this end of the
market.
13. Opportunities for increasing cigarette exports should coatianie to be
pursued In line with guidelines agreed through the Tobacco Strategy
Review Team.
14. There should be continued emphasis on innovation and on introducing to
3razil now products and processes developed elsewhere in the Group.
IS. There should also be continuing emphasis an applying resources to
improving product quality ahead of any increase in media spend. Thera
should be tight control on promotional expenditure ensuring that tests
produce unequivocal results before committing to a full launch.
Consideration should also be given to the potential for reviving
brands with a residue of goodwill (&.S. Minister).
16. Leaf Stocks should be held at the minimum level needed to ensure that
the required volume and quality of cigarettes can be maintained,
taking into account any improvements which occur in the availability
in Brazil of high quality Leaf.
17. There should be increased emphasis an finding an alternative source of
acetate tow in order to reduce the dependence on a single supplier for
a key componeac of the company's major product. Souza Crux should
pursue this matter vigorously and become more knowledgeable about the
whole acetic* tow market In order to be able to consider different
options for overcoming the problem.
18. Plans should be prepared for a smoothed ton year programme for
updating and replacing ageing assufacturing equipment. rIQ
CD
19. Plans f or a now factory should be prepared Ln pod time to react
quickly if a favourabla sales trend should become established.
Now*var, capacity should be mcpanded only to meet demand for volumes %O
which can be sold at acceptable levels of profitability.
all-
co
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3
20. For Laa Uporcs, a high priority should be given to Increasing
the Souza Crux share of the world market.
21. Plans should be prepared for the supporting activities covered by
SC ?Iuriuarca, SC Florestal and SC Trading. *having the
justification, objectives and planned results from these activities.
22. For Paper. the first priority should be to prepare plans for
accelerating the rate of expansion for Pi and for improving the
performance to a level where the business has a cash flow sufficient
to pay a dividend and co support its own growth. Options for further
expansion of the ?aper/?ulp activities to a size comparable to that of
70,oacco a-SC) @e a ;Ossi@@ le =im
strategic development for the company.
access to an appropriate share of the output from the mill and to
easu:e zna: :'-,e '=s;.=ess prrcvlde@ am appro?riazt: coazzibuticr Z:n ..:Gus
profits.
Souza Cruz should also continue to evaluate opportunities for further
investments in Pulp as profitable v*ctures which will also ensure the
Group's access to pulp supplies.
24. For Fruit Juice, the I-adiate priority is to prepare a complete
strategy review of the business, considering whether it is possible to
improve performance to acceptable levels or :if not, what options are
*pan to divest either the whole business or the straight juices
element.
25. For Sioplanta, the central objective should be to reach broakoven
by 1990, after which the business should become profitable and a not
generator of cash. The strategy for the business should be reviewed
and proposals made for its future development or disposal.
26. For Polo, the ultimate aim continues to be divestment, once
multiple sources of supply for polypropylene film have been developed
u Brazil. Souza Cruz should also seek additional partners to reduce
the commitment to the business.
ILS/DJA
14th July 1989
NJ
CD
co
BAT Industries document for Province of British Columbia 23 April 1999