no COPIES NAr BE Has
Tobacco Strategy review TO&IR
A meeting of the Tobacco Strategy Review Team was held an 30th November
1990.
Present: Mr. P. Sheehy, Mr. M.F. Broughton, Mr. B.D. Brumley,
Mr. R. Pritchard, Mr. U. Harter, Mr. P.J. Rombaut,
Mr. J-L. Mercier, Dr. R. Salter (Secretary)
Mr. A.L. Heard attended for items 35-51.
1. The minutes of the meeting held on 17th September were agreed.
2. Inter-Company Transfers : It was noted that opportunities to
broaden managers' experience and to transfer expertise through
movements of staff between Group companies were being pursued
actively. A seating to review existing secondments and to review
progress on the identification of new opportunities and new candidates
will be arranged by Mr. Brumley in mid-I 991. The results of theme
reviews will be reported to the tam in September 1991 -
3. Representation in Overseas Markets : It was noted that in was
markers where more than one Group company vat represented.
insufficient advantage was being taken of opportunities to reduce
costs and Improve efficiency by sharing office facilities, market
information, market research, etc. It was agreed that Mr. Brumley,
Mr. Pritchard and Mr. Barter would review the arrangements for their
overseas representation and would report back to the next meeting an
specific action being taken to Improve co-ordination.
4. US International Iran" : Mr.. Pritchard reported that sales of
US13 for the year would show a significant (13%) increase on 1989.
The rate of increase In the second half of 1990 would be lose than In
the early part of the year but there were specific factors expl&4-4-
this (e.g. the timing of the Chinese New Year; of launches in Japan;
and of the opening of East European markets). Thus, it did not
represent a slackening in the underlying momentum of growth in US
International Brands. brown 4 Williamson were committed to the
objective of achieving 15% p.a. volume growth through identifying and
fully exploiting market opportunities as these &rose, worldwide.
5. For sent, It was noted that a first evaluation of the Total Offer
Tests in Europe would be sade in aid-December. Assuming that this
evaluation above encouraging results, cast markets are planned for
1991 with a past-European launch in 19 9 2. It was also noted that the
launch in Brazil bad been brought forward from 1992 to 1991.
6. Lucky 3tri1sa Lights was considered to have a good growth potential
and would be available in 15 countries in 1991. A possible la--h in
Venezuela was being considered and Lucky Strike was making good
progress In Brazil. Prospects in Europe were considered to be
particularly good with significant progress in Germany and further
launch** planned for 1991. The Chairsast underlined the importance of
mounting a really effective sales drive for this brand, commensurate
with its exciting prospects In the market. it me also important that
the guidance on pricing and on blends vas followed In each market to
ensure the ri&bt positioning raUtive to Marlboro.
7. Mr. Brumley was asked to review the 'blends. pricing and distribution
in Spain and to report back to the next meeting au action taken to
improve quality. raise prices and strengthen distribution in this
market. 00
PO
%4
%-O
OD
BAT Industries document for Province of British Columbia 22 April 1999

- 2 -
8. The Chairman stressed the Importance of conforming to the approved
blends for Kent and Lucky Strike Worldwide and asked for reports for
those markets where other blends were being used, outlining action in
hand to change to the approved recipes.
9. For Barclay, it was agreed that it would be critical to avoid
damaging the Image of Barclay as combining full flavour with low
deliveries. It was important, therefore, to be in a position to
launch Barclay Ultra Lights (2ag) ahead of any change in the tar
rating of the existing product. Revised strategies should be
considered for those markets where it bad been intended to launch a
5ag rated product ahead of the 2ag version. The revised strategies
for Barclay will be reviewed at the next meeting.
10. It vas agreed that Capri and other superalis products would
continue to be significant an niche products but, in future, progress
should be reviewed at 6 monthly intervals rather than quarterly.
11. It was Noted that Viceroy and Zool continued to be progressive
in selected markets and it was suggested that further consideration
should be given to the potential for expanding sales of Menthol
cigarettes in the Africa/Mlddl* East region.
12. It was uoted that Fell man was Important as a leading low-priced
brand for Eastern Europe and for Gars=y- The Chairman stressed that
it was important for the brand owner to control the bland*. Rovever,
provided this was done, the markets should be supplied from the lowest
cost source, subject to the further condition that the business must
be profitable on a full cost rather than a marginal basis. SperAfic
consideration should be given to supplying Fall Hall from Brazil.
Details of the bland to be used will be supplied by Mr. Pritchard.
13. The 1991 PlAns for the major 93 International Brands will be
reviewed at the next meeting. In addition, Mr. Pritchard will also
provide a note explaining the differences between the methods used to
calculate the figures for US International Brands as presented by
Ircim 4 Wil Umsou and 1ATCo. respectively.
14. UX International Brands : Mr. Bromley reported that although
domestic sales of UX later-national Brands, &part from ?layers Vold-
Leaf (PGL), ware static or declining, export sales of SE 555 and PGL
vote progressive and the declines In Benson 4 Sedges and JPS appeared
to have been belted. Overall, sales of UX International BrarAs ware
continuing to expand.
15. Tar laws& 4 Badges, it was noted that there had been good
progress In France (0.9% market share) and the position in West Africa
appeared to have stabillsed. The evaluation of the -Po toutial for
launching a Benson 6 Badges Amricim Lights had not been encouraging
but was being looked at again la the context of the Malaysian market.
16. State Xxpreas continued to do wall in the Far East. There was a
need to redesign the pack for the Low Tar variants bur It we agreed
that the brand In&&* was sufficiently strong to allow considerable
latitude in design.
17. Smoking Qual1ty was a continuing concern and it vas agreed that in
order to maintain the Image of the International Brands, it was
Important that these were based on international blends. Every effort C:>
should be made to negotiate an end to any restrictions (e.g. in Spau
and Mala;sia) requiring the use of local leaf. co
PQ
---4
%-0
co
BAT Industries document for Province of British Columbia 22 April 1999

- 3 -
18. Eastern Europe : Mr. Herter reported that even excluding East
Germany, which is now part of the German domestic market, 1990 sales
to Eastern Europe up to the end of October were 2.5 billion, which was
over $02 ahead of the corresponding period in 198 9. However, market
conditions were becoming more difficult due to political uncertainties
and a worsening economic situation. It was also noted that Philip
Morris was still more successful in penetrating the markets and in
expanding sales to duty free and hard currency outlets.
19. The USS& was being visited during the weak and out purpose of the
visit will be to set up the Moscow office. The Group had already
established a range of contacts in the USSR and in addition to offers
to the Central Import Agency, enquiries were also being received from
traders who were believed to be supplying the market through
counter-trade arrangements.
20. In Poland, increased taxes and punitive duties on Imports were
severely restrict'-mg business, especially in the hard currency
outlets. Although there were some opportunities for Imports from
Brazil (which attacted lower rates of import duty), longer term
expansion was likely to depend on manufacturing in Poland.
21. Mr. Berter had had talks with the works council of a factory in Poland
which could be privatised and the next stage would be to send a fo
proposal for a joint venture. Although the factory was smaller than
the two leading manufacturing plants (which are In negotiation with
Philip Morris and RJR), it appears to be reasonably efficient and has
room for expansion. If the Group proposal were to be accepted, the
likely level of investment would be around 14.5 million, which night
be in the form of machinery.
22. The Chairman suggested that it would be helpful for Mr. Harter to seek
assistance from a company in London which was known to the Group and
which had experience of negotiating joint venture *rrangements in
Poland. Mr. Barter said be would do this ahead of sending the
proposed letter of intent to the Polish Minister for Foreign
Investment. In addition, It was noted that the Group should also be
prepared to advise the Polish Goverment on excise structures, which
appeared to be rudimentary at present.
23. Hungary : Mr. Bramley reported that a proposal for an investnent
in a factory at Pecs in Nuugary we@ currently being considered by the
State Property Agency. Although their response on this bad been
delayed, it was expected with-in the next few days. However, the
change of Finance Minister in HmSary night cause a further delay.
24. Bulgaria : Following a visit to awaluate 3 factories in Bulgaria
as potential Investments, it was intended to send a letter of intent
which Mr. Wattertom hoped to discuss with the Bulgarian authorities in
January. Mr. Watterton would also seek to identify export
opportunities during his visit.
25. Lea Advi"ry Team : Mr Iramley reported that the Leaf Advisory
Tom had been set up along the II=" previously agreed and the team
planned to visit Sungary, Poland and Bulgaria during January. It was
hoped that by April next year, the tam would be In a position to
provide useful advice on Leaf growing In each of theme countries.
co
00
BAT Industries document for Province of British Columbia 22 April 1999

- 4 -
26. Vietum : 4r. Bramley reported that Mr. Wattertom had visited
Vista= and would return in January for further discussions on the
potential for investment there. In the meantime, it was thought that
there could be opportunities to promote exports of SE 555.
27. Burma. : BATCo. had sent in an adviser to help the Burmese
Government act up an excise structure. Although immediate
apportumicites for increased trade or investment appeared to be
limited, contacts with this market would be maintained.
28. S'UTL : It was noted that BAT had been wall known in Vietnam and
Burma through SUTL and the Chairman suggested that a formal agreement
with SUTL might be considered as a way to build on these contacts.
29. Mexico : Mr. Bramley reported that the Group's brands had been
registered in Mexico and an import licence had been applied for. The
potential for setting up a secondary manufacturing plant was also
being investigated. Attempts were being made to buy back the rights
to the Viceroy trademark but the currant owners were resistant to this.
30. Turkey : Mr. Bramley reported that a meeting would be held early
in December to progress the negotiations on a potential investment in
Turkey. This project had nov been handed over to Mr. Wacterton and
his tem.
31. Brazilian Exportx : It was noted that following a significant
increase in 1990, the target for exports from Brazil its 1991 would be
3 billion, which was over double the volume achieved in 1989. The
Chairman stressed the need to upgrade the staffing and expertise in
this activity and it was noted that Souza Cruz are obtaining help from
Brown & Williamson in this respect. It was asked that Souza Cruz
should report progress at the next meeting, considering the price and
profitability of exports as well as the volume.
32. Maw0acturing Capacity : Pollowing discussion of an initial survey
of the present and potential capacity of the Group's main
manufacturing facilities it was sugSested that further work was
required both to establish vbera shortfalls might occur and also to
establish where there was a potential for expansion to Improve the
overall ptoducitivit'i. ciii;:effictlveoess and tax-efficiency in
sourcing the Group's markets.
33. It was agreed that Mr. Kohnborst should be asked to arrange a meeting
of the Group's production directors and that he should produce a
review for the May meeting; of the toma; showing the currently planned
capacity and output of the Group's manufacturing facilities;
identifying potential probless; and considering options for specific
expansion& to provide extra capacity and opportunities for sore
cost-effective and tax-efficient ways to most overall Group demand.
34. The Chairman noted that Mr. Bannister at 3=XZ had produced a good
appraisal of the potential for expanding Southampton and suggested
that a similar appraisal should be carried out for Bayreuth. Be also
stressed the need for each company to ensure that machinery would be
available to meet planned expansion and rafurbiebmut up to 1995. 'It
was also suggested that Souza Cruz should contact machinery
manufacturers to try to encourage Improved availability La Brazil of r1%)
the equipment needed co update their manufacturing facilities. C)
on
00
BAT Industries document for Province of British Columbia 22 April 1999

35. Yundmental Joseareb Programme Introducing the proposed programme
for Fundamental Research, Mr. Heard said that there had been a change of
emphasis with greater priority now being given to providing the
scientific basis for improved product design. As a result. less priority
was being given to regulatory issues and to speculative work on
innovative products. The proposed allocation of of fort was:-
(a) Smoke Quality Improvement 35Z
(b) Innovative Products 20%
(c) Regulatory Issues 2B%
(d) Environmental Issues 17%
36. Af ter discussion, it mat agreed that the proposed allocation of effort
and the total budget of L3.885 million plus LO-296 million for the
Scientific Research Group projects were acceptable. The proposals for
the contributions from each company to funding the programmes was noted
but before agrating these it was asked that there should be a further
check by Mr- Broughton to ensure that the allocations are made in the
most tax-efficient way.
37. 31ological Activity : A specific issue discussed in the review of the
research programme was the Group's position an testing for 'biological
activity' by the Ames test and by other methods. It was noted that there
is a continuing programm to monitor trends in the emergence of new
bioassays and to develop expertise in those which may have relevance to
tobacco products. It was also noted that despite the uncertainty
associated with current in vitro tests and their applicability to coapLez
systems. they could provide information both as to bow people wbo use
these tests may characterise Group products and as to whether further
research is required. However, this does not imply acceptance of the
validity of these tests.
38. Technical Liaison : Reviewing the current arrauSemonts for technical
liaison, it me noted that the interchange of information on R&D avid
product development appeared to be working well but there was less
confidence in the effectiveness In sharing Lufarmation and expertise an
aanufactur@4 'processes.
39. It was agreed that, wherever possible, technical liaison should be an an
ad hoc basis and regular liaison meetings should be avoided. It was also
suggested that it was better for the person responsible for an activity
to be involved directly rather than having one person responsible for
liaison over a range of subjects. Wile it was accepted that secondments
we-re a very effective memo for sharing experience in depth, these should
be restricted to cases wbere tbare was a specific purpose related sitber
to the transfer of specific expertise or to manager development.
40. The Chairman asked Hr. Bromley to arrange for a paper to be presented to
the next meeting, detaLlIng the technjas.L liaison mestings which had
occurred in 1989 and 1990, ShMNS the location of each and the names of
the people who had attended. UNA on this, the tem would then be asked
to decide whether there mu* a cam for reducing the umober of meetings
and whether the attendancit at future meetings ought to involve a vider
spectrum of people.
C)
NO
co
its.
SAT Industries document for Province of British Columbia 22 April 1999

- 6 -
41. regulatory Issues - Smoking on Aircraft : Mr - Bramley introduced a
paper suggesting approaches which Group companies might take when faced
with the possibility of airlines introducing bans an smaking. It was
agreed that the paper would be useful as general guidance for use by
individual companies and should be made available to then for use in this
way. It was also suggested that an additional point to be made was that
the airlines gained from smoking bans through reduced administrative and
cleaning costs. Bence they would not be judging the issue entirely from
their customers' point of view.
42. US Environmental ?"tactics Agency : It was noted that the US
Environmental Protection Agency had produced two draft reports an Health
Effects of Passive Smoking and Environmental Tobacco Smoke in Workplaces.
Mr. Pritchard reported that these were now being considered by the
Goverment's Scientific Advisory Board (SAS). Re will report the
reactions of the SAB at the next meeting.
43. sidestrom Smoke : Objectives for reducing sidestram make will be
reviewed in February 1991.
44. Smoking Compendiums : It was noted that the Sucking and Health
Compendiums will be reviewed and updated in January 1991.
45. The Additives Register will be completed in the first quarter of
11991.
46. Green Issues : It was noted that the main issue likely to be of
significance to the Group was the attitude to packaging and the related
work In the European Commission which could la" to a Directive, based on.
proposed German legislation, to ask& retailers responsible for the
collection of packaging used an products which they sell. It was agreed
that developments in attitudes to packaging would be a key issue to be
monitored by the Group.
47. Valdez Charter : It was noted that there was increasing pressure In
the USA for major companies to sign an environmental charter based on the
'Valdez Principles'. The Secretary was asked to report back on the
possible significance of this to B.A.T Industries.
48. Products 'Incorporating T-1 Tobacco : Mr. Pritchard reported that
products incorporating Y-1 Tobacco were undergoing tests, the results of
which would be reported at the next meeting. Mr. Harter reported that
tests of BATCF products were due in 1991 and 1ATC*- also reported that
T-1 was being evaluated.
49. The Blenders Handbook had been completed and Mr. Pritchard would
arrange for this to be circulated throughout the Group. The handbook
would be treated as a high security document and this would be reflected
in the way In which it was distributed and subsequently held.
A
50. Ammonia Technology - Decomposition Products : It was reported that
the projeci to characterize the decomposition products of cigarettes
containing materials subjected to ammoula treatment La due for completion
by aid-19 91. Usults of tests to date have not given cause for concern.
51. Use of Reconstituted Stem : It was &&road that the project to
evaluate the benefits of incorporating stm in the form of reconstituted
sheet should be completed as soon sa possible. Assuming that this shown
that the use of sheet is beneficial, plans should be prepared for meeting
the requirement fo; sheet in Europe, drawing on the crperience of Brown &
Williamson who have sheet made for them by Kiaberly Clark.
... co
%-0
co
V1.
BAT Industries document for Province of British Columbia 22 April 1999

7
52. Leaf Supplies : It was noted that reviews of the likely
availability of tobacco in 1991-1992 had suggested that shortages
could develop, especially In Burley. It was agreed that all companies
should ensure that orders were placed as early as possible In 1991,
sufficient to cover the total requirement for 1992. If there are any
shortfalls, action should be put in hand Immediately to expand
supplies within the Group (a.&. in Brazil and Nicaragua).
53. Grade lationalization : it was noted that the working of the Leaf
Grade rationalisation scheme was due for review In May 1991.
54. Car-rent Trading : Reviewing the results for the Group's tobacco
businesses up to the end of the third quarter, Mr. Broughton draw
attention to the increase in volume which, for the full year, was
expected to be 14 billion higher than in 1989, despite an assumed 3
billion reduction La trade loading in the USA. Trading profits were
also expected to show an increase compared with 1989 despite an
adverse movement in exchange rates.
55. It was noted that RATCO. ware hoping for a significant increase au
1989 despite adverse effects due to exchange rate movements and an
economic downturn In Africa. Spain had performed better than
expected. Market share and profits ha increased in India in local
currency but this had been offset by the devaluation of the Rupee.
56. Brown A 11121susan were also hoping to meet their profits budget
but volums could be slightly below budget. The results were adversely
affected by the expected intention of Philip Morris to increase trade
loading as the pressure grows for their tobacco businesses to
compensate for reduced growth in their food businesses.
57. NATCY profits before tax were DM5 million below budget at the and
of the 3rd Quarter but were expected to meet the budget for the full
year.
58. Souza Crux was expecting to achieve a market share of 81Z for the
full year but there mould be a negative variance an profits due to
price controls on cigarettes and the adverse affect of an overvalued
Cruseiro on 1Aaf exports. The current trend me for the Cruzairc to
devalue which would be good for exports but would have an adverse
effect on the translation of profits.
59. Isperial's market share had increased to 60% and Operating Profits
were expected to be Cau$11 million better than budget. Rowever.
industry volumes were dawn 4.5Z on the year and this trend was
expected to continue.
60. Nawsewmt Development : Mr. Broughton reported that the project
to review the arrangements for management traiaLog and development bad
been set-up and would be co-ordiustod by Mr. Xt3eath. The main part
of the work would be carried out by two **Wad***, one from Tobacco
and one from Financial Services but it was also intended to use
consultants to collect data on current practices both within BAT =4
In other companies.
61. It was noted that it van likely that the consultant to be used would
be Bill Laidlaw, who had worked for lotbmans and we now a partner In
Mosaic, a suall Independent consulting firm speciallsing In this
field.
BAT Industries document for Province of British Columbia 22 April 1999

6Z. It was agreed that the person seconded to the project should be a high
potential manager in 30-40 age Stoup and should preferably not be a
personnel specialist. A specific nomination was made which will be
followed-up by Mr. Broughton.
63. The Chairman asked that the tesm should be provided A th progress
reports as the project developed.
64. Marketing Direcrors SeaLuar : The Chairman thanked the ==here of
the tem for their suggestions for issues which Might be considered by
a future marketing directors' seminar. The arrangements for this
seminar will now be progressed from the Centre.
65. Dates of Future meeting FlectLogs in 1991 will take place on
Wednesday, 27th February; Thursday, 30th May; Friday, 6th September;
and Monday, 2nd December.
RS/DJA
12th December 1990
C:)
co
00
BAT Industries document for Province of British Columbia 22 April 1999