British American Tobacco Group ADR (BTI)

1. BritishAmericanTobacco GroupADR (BTI) Vincent M. Boccio Analyst, Consumer Staples October 22nd, 2008

2. AmericanDepositaryReceipt? • BTI is traded on the AMEX as an ADR • ADR stands for American Depositary Receipt • Helps to reduce administration and duty costs that would otherwise be levied on each transaction • In BTI’s case one ADR is equal to one of its foreign shares

3. CompanyOverview • International tobacco company that manufactures, distributes, and sells cigarettes, cigars, leaf and other tobacco products • Produce mainly under Global Drive Brands • Dunhill • Kent • Lucky Strike • Pall Mall • Large Diversification • Over 300 brands sold in over 180 different markets

4. Key Statistics • Price: 52.64 • Market Cap: 56.40B • 52 Week Low: 48.02 • 52 Week High: 81.04 • Average Volume: 237,223 • P/E: 14.30 • F P/F: 11.97 • Beta: 0.69 • PEG: 1.19 • EPS: 1.11 • Dividend: 1.76 • Yield: 3.00% • Outstanding Shares: 998.16M Source: Yahoo Finance

5. Industry • Recently all tobacco companies have been effected by declining sales volume. • Many threats do lye within the industry. • Illicit Trade • Litigations • Anti-Tobacco Ad’s • Smoking bands • However there are many promising and recovering opportunities that can serve as a defense for well managed tobacco companies.

6. Threats • Illicit Trade • Smuggling of tobacco has taken off • Increased taxation makes it very profitable to cross boarders undetected • This effects major tobacco companies tremendously, it hurts their revenue streams so they must make sure not to ignore boarders • Empirical evidence shows that illicit trade has led to an increase in teenage smoking and it harbors terrorism

7. Threats • Litigation • Biggest hurdle that tobacco companies face is the omnipresent court battles. • Class action suits, third party reimbursement, and punitive damage threats are all very real dangers • Fortunately, tobacco companies have been “winning” • The “light” litigation not an issue as the Supreme Court just wants to get it off the table • Another positive aspect is that the judiciary make-up of the foreign market is not very strong

8. Threats • Anti-Tobacco Campaigns • Significantly increased as activists see declining returns from litigation • Research shows that tobacco education is making a difference • Increased vigilance pertaining to ID-ing has sharply decreased the number of teen smokers • Laws ban most advertisement and displaying techniques • Increase in the Anti-Tobacco ballot initiatives

9. Threats • Increasing Excise Taxes • Stemming from a decline in litigations potency • Tobacco is targeted because it is considered a negative externality • Increase in taxes in order to “save the third party” • Number one driver of price hikes • Smoking bans • New phenomenon sweeping the nation which is picking up speed • Becoming a very controversial issue • How it will affect the tobacco companies? • Businesses are required to ban smoking or face stiff penalties.

10. Opportunities • Merger Completions • Many mergers have dominated the tobacco industry’s news feed • These mergers are now starting to take shape • Industry as a whole is a lot stronger • Synergy is the key word in the industry as companies continue to add to their repertoire • Biggest trend for mergers is to attain a consolidated litigation service

11. Opportunities • Narrowing Price Gaps • Increase in excise taxes and litigation costs have caused discount sellers to hike up their prices • Major players gaining back a lot of lost market share • Better advertising strategies play a role as well • Tobacco companies are learning how they can bend the advertisement laws favoring the big players

12. Opportunities • Globalization • Tobacco companies are expanding just like everyone else • Capitalization that these companies used to see in the US has gone global • Industry looks to benefit • Simplicity of global judiciary requirements allow tobacco companies freedoms that are strictly prohibited within the US

13. Opportunities • The biggest opportunity that the Tobacco Industry has is to address their threats • Certainly attainable while there has already been quite a bit of work done to make this a possibility

14. BTI’s Initiatives • Litigation • Created a consolidated litigation force • Anti-Tobacco/Smoking Bans • Embrace this movement • Illicit Trade • Increased Excise Taxes • Seen as a positive

15. BTI’s Initiatives • Have taken advantage of mergers and acquisitions. • Acquired • Reynolds American • Skandinavisk Tobakskompagni (ST) • Tekel • Ente Tabacchi Italiani • Results of boosts in growth and credibility. • Management says this will be the basis for achieving their future targets and will continue to acquire profitable companies, when the timing is right.

16. Management • At least half of the Main Board, excluding the Chairman, is comprised of Non-Executive Directors who are independent. • Jan Du Plessis, Chairman • Jan du Plessis joined the Board of British American Tobacco as a Non-Executive Director in 1999 and became Chairman on 1 July 2004. • Paul Adams, Chief Executive • Paul Adams has been Chief Executive of British American Tobacco since January 2004, however has been in with the company since 1991 and has risen respectfully through the ranks.

17. Management • Ben Stevens, Finance Director • Ben Stevens joined the Board of British American Tobacco in March 2008 and assumed the role of Finance Director at the end of April 2008 • Nicandro Durante, Chief Operating Officer • Nicandro Durante joined the Management Board in 2006 and was appointed to the role of Chief Operating Officer in January 2008. • The rest of the board members (7) are all non-executive directors.

18. CEOBackground • Paul Adams has been Chief Executive of British American Tobacco PLC since January 2004.  He is currently 53 years old. • Paul joined British American Tobacco in 1991 as Regional Director, Asia-Pacific. • In 1999, he was appointed Regional Director in Europe. • Then in March 2001, he became an Executive Director on the PLC Board.  • Paul was Managing Director from January 2002 until the end of 2003, where he was then appointed as the CEO.

19. Cost Cutting • BTI has taken multiple steps to cutting costs • Over past five years have saved more than 1 billion pounds • Projections for next five years • Achieve further annualized savings in areas such as supply chain efficiencies, back office integration and management structure • Approx. 800 million pounds by 2012 • Reinvests cost savings back into the company • Primarily into R&D

20. Specifics on Cost Cutting • In 2007 shut down operations at five excess factories • Transferred to Mexico for the production of the Canadian market • Cheaper labor costs • Own less tobacco stock while still being able to produce efficiently • Product complexity reduction • Continue to focus on the leveraging of their global purchasing power to drive down costs of indirect purchases

21. Products Overview • Portfolio of approximately 300 brands including international and regional brands • Focus on four Global Drive Brands: • Dunhill • Kent • Lucky Strike • Pall Mall • Brands include ready-made cigarettes, cigars, roll-your-own, pipe tobacco, and smokeless tobacco • Important consumer segments include international, premium, lights, and “adult smokers under 30”

22. Global Drive Brands • Dunhill • Premium Brand • Sells in over 120 countries • Offers range of premium and super premium cigars and cigarettes • Key markets: South Korea, Malaysia, Taiwan, South Africa, and Australia • Kent • Modern Premium Brand • Introduced in America in 1952; now sells in over 70 countries • Largest growth brand of four GDBs • Key markets: Russia, Eastern Europe, and Chile

23. Global Drive Brands • Lucky Strike • Premium brand • Oldest brand with an iconic trademark • Sells in more than 90 countries • Key markets: Germany, Spain, Japan, France, Indonesia • Pall Mall • Value-for-Money brand • Sells in over 60 countries • Offers a range of cigarettes and make-your-own products • Key markets: Germany, Italy, Russia, Uzbekistan

24. Global Drive Brands Source: BAT Comp. Filing • Since 2001, the four GDBs have increased combined volume by 73%. • Over the past year alone GDB sales have increased 10%, and BTI’s Premium volume grew by 3% in contrast to a 1% decline in the overall industry volume.

25. Other International Brands • Vogue • International Premium Superslim brand • Gained importance in global portfolio • Meets needs of female consumer • Big player in Eastern Europe • Viceroy • International low price brand • Achieved high growth in 2007 at 21%

26. Product Innovation • Menthol capsules • Allows consumers to choose when to enhance menthol experience. • Introduced in Japan with positive response. • Swedish-style Snus • Currently more than 95% of world’s smokers consume ready-made cigarettes, but other forms of tobacco are gaining popularity. • Form of smokeless tobacco placed under the lip. • Reported by independent health experts as being less harmful than cigarettes. • Hugely popular in Scandinavia. • Sold under Lucky Strike brand and two other international brands.

27. Competitive Advantages • Company recognizes and embraces nature of tobacco industry. • Concentrated on cost reduction, and organic growth through GDB’s. • Diversified Brand Portfolio. • Targeting key growth markets/Geographic spread • Innovation Pipeline. • Only Tobacco Company to be listed on the Dow Jones Sustainability Index.

28. Revenue Breakdown by Region Source: BAT Comp. Filing

29. Volume Growth Source: BAT Comp. Filing

30. RevenueGrowth Source: BAT Comp. Filing

31. ProfitGrowth Source: BAT Comp. Filing

32. FinancialConcerns • Net decrease in cash flows in 2007 • Attributable to financing cash outflows • Operating cash flow has been increasing • Current interest ratio: 8x

33. FinancialHighlights • Revenue growth: 5% increase • Operating profits: 11% increase • Dividend/share: 18% increase • FCF: 11% increase • S&P credit rating: BBB+

34. The End Questions or Concerns