SFCRFT
RATCo. OPFR-ATYNG GROt?
KFY ARFA - FINANCF
Major changes from 199-1 Ke, Area Paper are
indicated by double lim in right hand
maryin.
BXCKGROL-N-D
Durine 199-4 BATC,) Finance Depa =.cnc adopted the
Mission SmEemenc
With %vorlt class peopic and sicandards. to
proactively manage the BATC.)
Group s profi:s and cash zo erisure our individual
market and o,-erall financial
per-f-mancts are at a tc%-cl of definite
competitive advanmee.
A common se, of -=ncial Kv- .Result Areas were
developed for all Finance Direccrs
an.' RL-,onal F~na--! ~he drive for more
consistent ,oc= and prionisaucri
of -naier iSSL~!S
7-ic F;nanc~ se:!i~s :o add iluc to the business
process by underszanding the ke,
I 'fecriveness of the allocation of scarce
fuuncial
usiness issu::s. zh2ilcr2ing the e,
b
,;:sour-;:s ar-1 pia,Lng a leadmg ole in the
achic,ement of
both the short and lone term
profic, and cash of BATCo
TN7ROT)T,CTTON
This paper seeks cc establish the fiu=cial
prionEiCS oC BATCo. and to confirm rl~.e
nunimwn le,e!s of ~nancial performance acceptable
for BATCo- and its operadons. It
tricorporates Lhe June 199-L Fuunc:al guidelines
from BAT Indusmes and ttie financial
issues arising f70M =0 B.-kTCa. 5 year plan 199; -
1999. together -ith the expectations
from the B.-\TCo operaucirs to be :c-lected in
thc~r 3 year 1996 - 1998 plans.
The K;:, .-\r;:.! Pa.:e- ~-3,,:.s -~e fol.lo-ing
areas-
, I I G rc -,. Ln Lri Pro ~. u b ii i c,
(6) Return or. Net Operating Assets (Historical
only)
(iiii Inieres, C-er and Debt Man3etmerc.
M~r.32C'UM.
Re= ~,i 5harehol,!es Equi~--
(% i, Ca3n N[a:-.azt-nen:. Manaze-able Cash F!o-
and Cast, Gent-i-iticri ca BATCa
111, Export Busxess FLnaric:al Performance.
,,iij, UK C,,sLs and Southarripton operations.
iX - Scaridard F.P-ancc PLiic:,:s ApphcablC EO
operatioas and Fif=c,- Directors'
Chezid'SE.
B T C,) s Fir-~~:al P,cit,,(,- 19'01 - IQQI is
summarised in Appenclux 1.
C711
BATCo document for Province of BritiSh Columbia 23
April 1999


M G'o.th'.
The revised Group profit budget for 1995 should be
used as the basis for growth
euidehries for rurure vears- as the original plan
profic for 1995 was not acceptable.
Ho-e,er. for c"ain companies: markets. the re,ised
1995 profit base is probabl,
unacceptabl% low and individual profit growth
guidelines need to take this into
account Overall profit growO in constant terms or
at least 12-57c p.a. in line
with BAT Industries expecraticias is :cinsidtrel.
to be ac'L.-%able based upon 1995
- 99 plan projezooris and the opportunities r .or
profit enhancement a,ailable.
Prioritisacion ZJ . MOUNZZ allOCUIOn berNe-Cri
-narkets and brands, is if te
profit grow-th targets are going cc be achieved.
In practice BATCO_ seeks to
achte%e the profit growth targets )n a publishec
quanerly basis. These pro6t
grow-rh expecrAtions exclude any supf-canc
resiruciirmg- costs and the local
results of te new busmesses in Russia 2nd
Unek-istan.
ihe prLsen( z:2s- st:,jcri% of 3.-~TC_- group.
.-.L;cs BA7Cj at a competar-c
disad,a-rica2t and mor: r3dicai -a~s or .
3mucnuing and managirg the business
netd !o be eelcoed.
In tarLe~tmz indi,i~luzl _cmpany and !xpcr.
rriarkzr profit growth and attributable
brand eirnings grc,Lt. -onsideraticr. shcu:d be
zren to Lbe follo,ina -
1) Consistenc, with ve-raucinal trand and marke,
share objecri,es.
12) Corrimirniern to the implementation of the
Pink Book which should provide
a ke,. mechanism for the uncro,ement of profit and
manaer-ment of the
tradt.
t A major d.-Eei-7runarit of prc~'Eabihry is the
level of selling L,!-,c:s Expen
Ntanagtrs and compames shcul~ !nsurc t!iar as a
general rule -igirerces do
noc become zheaper m real Eerms. irid -ith
iric-easing leaf and W"Nis pnc:s
and pressurt on brand sup7orE costs. realistic
cosrnz and forecasting Ls
essential in deermarane furar: prcing levels.
141 Those operations that have the pctential to
produc.- cost savings. bener asset
urilLsation ind -fficiencies. and disposal of non
or under performing assets.
(5') Excise is the largest smele ;ctm of cost az:
-_xcLs'e systems in all markets
snould be kept under :ons=E re, ic, :o !nsur: the
key objecciv es of all
Licertsced parties a.-! btTg B.-\TC,) should
ne,!.- I-e at .1
ZOMPeE'111% e Jisad, amig.-! beca-ze cf L-i txzise
strucrur:
-6) The -Lranc,al position ind rnuxeiing acri,
ines of the zompenuca and how it
:s like!, to umcaz, on mdi,idi.~al ma,ket
forecasts and pricing le,eLs
(ii) Re~- ~n Ne, C-er3r,n- F =:,, ,,is)
The June 199-1 Guidelines eceived '-Or. BAT
Industnes stated Lhal:- 'BATCO.
should aLm to achieve a hisconc zost re:L,.-n of
at least 40% for the Operating
Group ii a whole ~iLti eac!i individual ousmess
achieving at :east 25~c
C)
1 `111~
O\
U-4
C)
BATCo document for Province of British Columbia 23
April 1999


-kpperdix It high!ights those companies where the
historical RONA is below 25%
and where die forccast 1996 return is lower than
the 1994 2crual or 1995 revised
budget. Appendix III highlights those areas where
the Trading mar2in is below
group average or jechrung.
It is suszecsted Re2ion3l Directors and Finance
Controllers Earitet. indi,idual
company historical RONA's and export markets
contribution to admin based upon
current forecasts and known improvement
opportunities.
Those operaticris x, -.e.-Tiiones prone to
iralaiion and devaluation must continue to
consrand-.- montror :heir performance so that
there is no o%erail deEcriora'tion of
the busin ess in rcal terms. Cur-renE Cost
Accounune mav need to be conrinued in
ctrtain circurnsuuric:s and other mirustement
measurvnent and mortiroriniz
techniques ;Pc'uzf !ffectnz use of replacement
costing for mariaging prict!
inc-ea5es and riz'-i cash contol and cash flow
manaev-nenl. Re2jonal Direc-cirs
and Financ:! Conirollers shcuid urzet :hose
operations tat art %-ulnerable and
eri.surz proper mar-3gLm:mt ccmrols are in place
The rreLhc,:cion -or ande.-sundmg and enhancing
Brand 'Value should be
LrnplemenEec and resulLs zvaluated. Howe%er. alus
is a jecara:e management
exercise to nPrc%e our uncitrstanding of brand
%,al,--:! and is rot intended to form
par-, of te Satiric: 3het~-
(iii) ImerLst C,-v.!- ird De~( kfiri-:rneni
SAT InausLnes are !L,,oK;ng to BATCo. -,ci reduce
;ts de~Cr-.-cuir% ratio over the
plan penod - ao szeciec Largets are set - except
to Lhe :xrent tat U.K. income can
be enhanc:~~4 via mc.-eased local bor7owines.
Appenc[Lx r%" h.--z~.:RnEs zomparues with interest
zo%er falling widun the following
bands -
31 Be!o. 7 ur-ies
b) In of I -' times
In the case of the a, tand the profi:abilir, of he
end rriarkei and structure of the
debt ihould '-e Lxarnined :c ensurt %e ar:
tulanciall, zeared m the most effective
mariner from a at ard L: K. income anz~e-
Camparues "allme -j6;thin the (bi band can be
classified as ba%ing surplus financial
rc,sourcts irid 0 sNs of improving U.K. income and
group tax efficiency m"c
be expi,~reu
There mav- ',e irrou-j = advariLazes if borrowines
can be c~uianelled via Harribure
Invescrnerj Trust or (he Belzian Co-ordination
Centre and these opporruiarties
should be etplortd te.,ore ne, local borrowings
are Liken out or when existing
facilities ar: jue for enc,ai. Discussions -1Lh
both Treasury and Taxaficia are
required ter such 'aci.lit:es are used.
L,,cal remi-tanc-- problems stculd not prohibit
mammum perrrLissible dividend
declarations
ON
L-4
BATCo document for Province of BritiSh Columbia 23
April 1999


(i,, ) T,xavon Min---renr
In 1995 the BATCo Group :i! suffer corporate taxes
Of i 14 1 mn of hich onJv
26-~ arises on UK profits h:cn represent 48q ofthe
Group total prori,
The Group effe:-r-e tax rate --as impro,ed from
-'-f 2'~ in 1991 ro in 199-1
rid 24 - -,
and is torecasE at arou. - -- or 1995.
The UK has ForL:2n Income Dividend (F I D )
le2islaiion
which can reducz Lhe LX a, .,-ayable on dividends
paid b% BAT Industries -her.-
the Ji,idends at,: funded ~T-m ci%eseas earrunes.
The Lntroduc-.~ori of this
'e2islation does nor alter the Dbjeca%es of
reducing the LL-cation paid b,, operating
carriparues and of ma.-Lm.LsLcz the oppor-.Lnities
for increasLng L-K income - the
L-K -narzinal r3-x ate Ccr '.9Q` and lbeond %mains
31 1,
Tax -nanagtmeir papers is;-;:Z :o all ccmpanies
remain rtltanz kr---nuori is
p3 r7:c--Jar!, dr:i-i :o
a. T"ne UK tr~and' Re,enue ~ --,,mencicr: ---1ac
BATCo :s iezo,er:n2 ---zuff-.c;en:
,:~s3 from its operarL:=: iuCs:di3r:ts and. more
Lmocrrznrl% associated
zcmpanics. in respec: if -.&A fees az,1- R&D
recoveries. All efforts should
e made to increase dirtc: income O.,),s co the U`K
and reducz: Millbank
b
I
:!~posurt in :h.,~ area.
b) 'Fne marginal UK tax :-a:: if 13.0'c Ln 1995
means that the GrOLO 5 overail
ux effic;ency improves :% dhe maxLrusatton of
local borrowings and the
rninimisacion of snarehoid;!:-s funds thr.-uzh
high di, idend disu,.:u::cr-s and the
~orsiderawr of zapital rtz~.,cucn sc`emts
ci The lo- U'K :ax rate als,- =tans that BATU-KE
is a e-%- Eax efficient velucle
~or exports. 3% .carefully mrucruring over-3ang
company exWrt )PC.-adons; via
B -kTi r--K&El- che Grou; :.= zapitahse on this
smiatior.
Lin Sh3re~olde- Ftir%rz
The BATC,) Group hzioncal rtrurn on P-Z)f'IE After
Ta., w Sharehoiders Funds
is forecast at 31 4 ~~ in 1995 i-k! :o 36.2 7c m
1996.
To -nable the G-cuv s :as,- itneracion cbiecn%es
cc Ce mer. Lh4! -,e-all ke-,
~Lnanz:al :r1rCr:3 must be c2z----e-J as pror -it
arer Eax rearum on shar.-noiders funds.
This aiso encompasses debt. and mxaccn maaa2emeni:
fror- the :~rceits anizlc
and the quanru;ns or zapital red,.:z:ioris and
retentions in business
from -% shareho!.'.-r3 funds
The ibjecive mLL;-, te for the on sh2rtnolders
funds to wz7;!3.-:,- iz a faster
rate ifian RON.-k. .-kppendLy % iiets out tose
zompanies L~ar ha--d -
ai a stauc. rallinz return -:i -hareholders zqui~,
b, a recurn be!o- -'Oq
C' a rerjrn on equiry gr,--ng slo-er ciari RONA
io,er the period 191.11' - 199-7)
LF--
CD
f, -1
ON
BATCo document for Province of BritiSh Columbia 23
April 1999


Appendix %, highlights that most companies fall
under z, abo,.c and strategies
must bc dc--e!oped %i(h the 1perating companies
that o%er a 'period of zime reverse
the declininz 'rends and mpro%e the rerum on
shareholders -. unds bou: in quantum
terns and a( a f,istc, -jre than RONA. The !e,cl
indicated PC= Q diiidend
deClaf3cioris being EOO IC",'
i,ii Ca,~ 1-lariaitmen( Cih Flo- -4nd C.30
Gtne-avon r,, 3 \T(-.).
Our polic% rtokes around sound cash managernent.
,-ztEher -:sk a%crse
Treasurv manazement and the maximum eener3ijon of
cash ',, operating
companies and emictancts o BATCo
.-~ re, Tre.-Lsx-, pLIic-. is due o be :ssued in
uie first iail" of this --cai This ill
combine all L~e ,arious c-irrew polic:es diac are
at present x(Itained in numerous
guidelines and insEn.-ccions.
Banktn2 R~:Zuonsni-s. -'-'C2: FL"-.-:= Curnmcv
Manage-ren: and Nemng art four k;!,, arz2-s here
,.;! iil be to Ra .Ln
VK:73 laILI: :1-r che Grou: dt.17:ni :-.C%: [_i
!2,:h ~~f :~I.-sd ar.,as.
stouid be pa:d rior ~rj' '- to tn~! nc, and
prz,,~-~~urzs. but
aiso cne ar-4 Jtre:*,:cn Lha( has :~ezn and ~!l 6e
e:r-L--2iine from ~-ie BATCo
G,,,-L;p Juring mt nexi fe, months.
The Nlanapa6le Cash F*~o~~ figures b% oper3noms
are Jetaaed in Appezidu VL
These shou.d form Lhe bisis (;f La.N.It's for
iridividual ove-inorts and should be
monicor--d or. a quaned, b" via the QPR and QBS
lu.-:--z ~hc budect car to
improve o,e7all cash management. BAT Lndusrnes
ha,e set a Large, or .
manageable :ash tlo~ ero,-Lh i exc!uding capital
expendin-,re, incre2smz- at 2
abo, - tradinz ~rcfia ero,vi to rvlez: zontrol of
-orkme zacital
-k. Fr,r-, -)-e-anr- ~o B-kTCL)
T~,js s reflec(ed in the rrunmium dividerid
declaratiors mquired by
BAT :zduvnes from BATCo. in 1996 to 998 %~ucn
mcrease b% 15% p.a.
The uie RO.N,-% rmrris. :.~e ase of Jett within
d3e majorirv of
BATC.- businesses and the trends in te re7x--s on
sbareWIders ftu3ds
irdica:: subsmritiaJ amowiLs of cash %it:im
coMP211jCS that are
basica;l.% surplus zo -equiremems :'or the
crtgoLog size of the exisring lobacco
FL)[!,,-., -~::e ~he BATCo. di, idenc requir.-m
c-.Ls and wuque mx posizion of
L-K -rzcrne. guideiines to operail" corr:-anies
sbculd enipbasise the aced
for r-.a-xnLsLne L-K remirunczs vla the UK
compartics. i.e. BATCo. or
BAT , L-K &- E). The follo-irz ic,-zific :ssues
should oe addressed -
'I Di-.Aends should L%e m;-~ruused and local
:crisrr3mu zhallenized.
St;zrpius cash and under-ii(dised bor-.z),Lre
pcerr:al -id" zornpazues
basicall, ruiancialk Ll 'fic:
.5 . e, 'enr -om an ),.-rail BAT Group
pci:Eion In panicular an, for--cast cash bu:!,, up
should be Iddreued
-,:.i ~Ihe guidelines.
CD
f".:
CP\
N-1
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BATCO document for Province of BritiSh Columbia 23
April 1999


(b) Pa%ments b, Operating Companies for specific
and anms
lenath expenses such as rovalty. T &- A Fecs. R &
D. insurance
placed with TIC. tic. are high1v LLc. efficienE as
the'. a::: eenerall,
allowed for E&x in the operating compar*, and
sublec-, :o ic,- Lix in the
UK. Purchase of operating company trade rnarizs
t,, *-~e zent-re could
be firarciailv attractive where it provides tax
-~,5::-= L-K royalty
income and prod ides the companies %tith czsn
%~:zn -an :!%enrually be
repair:ated as Jividends.
1 c) The -rise of capita! reducion schernes.
(d) Concinum.2 efforts should be made to release
BATCo -i,:,:k--d funds
B. W;ihin Ooerarm- Cimpanies
WiLh he incta~dd emphasis on cash and asse, i: may
be
appropr!aLe. in high milaucri it-r-itones. :0 4--!
-t tnd cash
balanc-- Manageabie cash flo, -zrc-t~ s~,-.~,:
tradLri-2
proC,E Z!70-[I~
Companies MLS*, t.-T.2 ElICU C-,pen:SC in cash
:',c, ==.a2emenc and
fore--asung :o the iarne general level of
accurac-- as rc~e:.ed in profit
management. The moruEoriniz of the Nlaruzeabie
Cas~- Fa% via the
Quarterly Cash Flow reporting should be used :o
er-surt Lt-,s hac
.Tcas and to
identify irrirriediate!y those comparues chat have
a ne2211N,: Lash flow or are
generating less cash than budizeced so that
carrec:rve a,:-:cn zan be Laken.
Guidelines to Op-eniiing Companies should mak,-
rcifrra-z! to Lte *asset
rurnover ratio' rquired as an overall measuremezi
-f of asset
mam=-emenr and Lareets et where rates are
uaazz!TL31,.:! r declinine.
Appendtx Vn bighlights those areas where the ksset
nurrio,er is b-clo. the
group average or declininiz.
%WiLh volume zrot.,Et oppornLrities. largely
Ehroueb ::T.-.c-z %-tuch ut3cl to be
more volatle. emereing 'in many ma.-keLs. e.K---2
-,iz~aau is recuired to
2 uard aeainst aver stocking and subsequent asset
mimo~er r2zo decclines.
[n,eszment levels in RTed and CurTerE Assets are
larzel,% 2o,emed b%
~oiu.mes. and so the accur-acv of sales forecasung
in all raarkets is very
re!e%inc. It may be appropriate to emphasise that
-ber! sa;M forecasts 3.re
not beiniz achie, ed a is important cc reac,
quickl-.- to a,~= izz~ !e, t!s.
There art mar,,- remauicing disposal 0ppCrr=[ies
for ric: an,! ~~ode-
pert.orming assets tat should be taken as soon as
praz%cai.
Proposed capital expendinire shculd be revie,ed b,
Rt,.7,~C31 Direcors
before inclusion in the BATCo. Company Plan. and
t~e pt-mc-p!cs outlined
in the paper 'Financial Rerum on New Investment'
ihculd fcdog-ed in
operating comparues when evaluating proposals.
shotdd ilso be
made to the Group manufacrunne capacity data bas,-
he;d PP&D befort
recommendine or aeree= a new Lrivestment-
CD
Use should be made of post audit re, iews co,ering
ill Lr=, -2f the business
e g investment appraisals. pric-- increases. new
brand tic with a
view to improving controls and Icaming from past
tXPNC-1C71:eK- 10 aSSLsE the
quality of future decision making.
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BATCo document for Province of BritiSh Columbia 23
April 1999


C'.11, Fcpciri Ru~iness Fir-incial P-rfrs=-cf
Appendix VIII sho-s contribution to admin from the
major markets and ?ro~th
rates The same principles for the operating
companies are relevant - maintaining
price leveis and margins consisienE viEh costs and
international brand and market
share objecti% es: cost. cred,., and stock
control. and cash man3ge.,rierr.
Complexiv, costs. the !e,el of unalle-zated
o%erheads and financing costs must be
taken into account -hen fixing prices and
considenne c,,niribution :o admir
fieures As bell as absolute zurrenc:. values
rele,anE ratios ror each marke!. e.8.
~ontrflbunon to admin as ", of ne, urnover and
contribution to 3drru:: -e7 mille
also need to be considered for tazh market.
Southampton site costs %ill be allocated to
exports on 3 budgeted per mi;!e cost
,hich -ill be determined heri the impact of the
Project Stem (COs[ - 10%
(ormula is full%.e-aluaied
r'K an-4 Sou:1-1--r,
The managerrient of ail LIK zcszs is Ltcominz a
majo, issue Icz SCL:L:-.a:..P1or
;Zihne to meet :is ,rieinai P7Z'.iec- Test
zome.-sion cost le,,-is and Lhe ma-cnry of
Scaines and Wokini depa=ienc zost c!ntrcs lookine
for zosi inceases a% . ahead
rate o' inflation ant: the zen cost inc7cases
acze--Eed in the
or the era] leel of
)1 erseas operations. Southampton should pursue
its C!ass A st.3nis. ooJectives
,hile Head Off~ct costs are unlike!, to be
3eerrsswel, rac.Ued unrJ the ~uxome
of ProjecE Banalior. is kno,-i.
I lx) SEandard Priance Pclicies Apphcal,fe ro
Oe-arivr-L, i~d P-4nC2
Checklist
In , ie,, of the high profile of the group. its
acuviry in , arious financ:al -arkets
and as 3 pre-requisite to BATCo being 2 well
managed group of comparjes a is
,irai that these disciplines are a&.er-.d to a:
a.U times. Regional D4----tors.
Revonal Finance Controllers. Company No. l's and
their Fi=nc,: Dirzc:crs and
sra~ must ensure. parficu~arly where "sEaff
changes cczur. that awarenesss and
mplemenEation of these poiicies is maintained at
ail =es. There ha%: been
qerio- in rhe ma_~r and cornpiraf-c: xith these
pmced---e-c it ail m-~r
~e re-erriphwscd ccnvn-i(%. Coverage of such wLes
as dividend levels,
tot-rowing arTzrigerrients. ne- company
formations. etc. in Pl3m does not -trnove
the requirement fer specfic 2ppro,al pricr to Lhe
time oi .un2ierncruaiticr..
Marc!l 1995
Uri
C)"
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BATCo document for Province of BritiSh Columbia 23
April 1999