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Review 06

Annual Review and Summary Financial Statement 2006
About this Review
The format of our reporting has been changed to accommodate the inclusion, for the
first time, of an Operating and Financial Review (OFR). In preparing the OFR, we have
sought to take into account, when considered appropriate, the best practice set out in the
UK Accounting Standards Board’s ‘Reporting Statement: Operating and Financial Review’.
We have responded to the spirit of the OFR by offering shareholders a balanced and
comprehensive analysis of our current business and describing the significant industry
trends that are likely to influence our future prospects. For the first time, we have published
our Key Performance Indicators, some other important Business Measures and the Group’s
Key Risk Factors.
We have also attempted to avoid having too much information in one publication. Our
corporate website has a wealth of material about the Group and, in May 2007,
we plan to publish our latest Social Report, detailing progress during 2006 on a range of
commitments and actions.
We will carefully consider the structure and content of our future reporting in the light of
developments in the field and the advice and comments we receive about this publication.

 The full content of this
Review is under this flap.
Leave it open as a reference
to find your way to the
different topics covered.

Cautionary Statement: the Operating and Financial Review and certain other sections of this document contain forward looking
statements which are subject to risk factors associated with, among other things, the economic and business circumstances
occurring from time to time in the countries and markets in which the Group operates. It is believed that the expectations
reflected in these statements are reasonable but they may be affected by a wide range of variables which could cause actual
results to differ materially from those currently anticipated.
Overview Summary corporate governance
01 An introduction to British American Tobacco 33 Summary corporate governance
02 Chairman’s statement and financial highlights 34 Board of Directors
35 Management Board
Business and strategic review
36 Summary remuneration report
04 Chief Executive’s industry overview
06 Our strategy Summary financial statement
(including Key Performance Indicators) 41 Independent auditors’ statement
10 Our strategy in action 42 Group income statement
(including Business Measures) 43 Group balance sheet
44 Group statement of changes in total equity
Regional and financial review
45 Summary financial statement and notes
20 Regional review
26 Financial review Additional information
26 Profit from operations 48 Shareholder information
26 Interest cover ibc Contact information
26 Effective tax rate
27 Adjusted diluted earnings per share
27 Dividends per share
28 Cash flow
28 Treasury operations
29 Changes in the Group
29 Changes in accounting policies
30 Share buy-back programme
30 Key Group risk factors
This Annual Review and Summary Financial Statement for the year ended
31 December 2006 is intended for investors who do not require the full
detail of the Directors’ Report and Accounts, which is produced as Part 2
of a combined report (see ‘About the Combined Report’ below). The Annual
Review comprises an Operating and Financial Review (OFR) and a Summary
Review 06
Annual Review and Summary Financial Statement 2006
Corporate Governance Report, a Summary Remuneration Report and a
Summary Financial Statement.
The OFR has been prepared to a standard which fulfils the requirements for a
business review in accordance with section 234ZZB of the Companies Act 1985,
taking into account, where considered appropriate, the best practice set out
in the UK Accounting Standards Board’s ‘Reporting Statement: Operating and
Founded in 1903 by Albino Souza Cruz with just
16 employees, Souza Cruz is today the undisputed
Financial Review’.
leader in the Brazilian cigarette market and is among
the largest companies in the country.
Souza Cruz employs around 6,000 people and sells
The Annual Review does not contain sufficient information to allow for a
over 78 billion cigarettes a year. It also provides more
than 117,000 tons of tobacco leaf for export to more
than 50 countries on five continents.
full understanding of the results of the Group and of the state of affairs of
This special feature focuses on how our global
strategy of Growth, Productivity, Responsibility and
the Company or of the Group. For further information, reference should be
Winning Organisation is working in Souza Cruz, a
company contributing significantly to the success
of British American Tobacco.
made to the Directors’ Report and Accounts 2006, which incorporates the
full accounts, the Report of the independent auditors on those accounts, the
Directors’ Report, the Remuneration Report and the Corporate Governance
Statement. The Annual Review is issued to all shareholders.

Special feature
Special feature
As part of the OFR, we have produced a special feature on our Brazilian subsidiary,
Souza Cruz, to highlight how our strategy is working in a key market.

This year, for the first time, British American Tobacco has produced a combined
report which amalgamates in one bound document, the Annual Review and
Summary Financial Statement together with the Directors’ Report and Accounts
of British American Tobacco p.l.c. for the year ended 31 December 2006. The
Annual Report combined report is bound together as the ‘Annual Report and Accounts 06’.
and Accounts 06 The Directors’ Report and Accounts is produced as Part 2 of that combined
Annual Review and Summary Financial Statement and Directors’ Report and Accounts 2006

report. By reference to the Annual Review above, it incorporates the OFR as
part of the Directors’ Report on page 49. The Directors’ Report and Accounts is
issued, as part of the combined report, to shareholders who elected to receive it
together with the Annual Review.
Annual Review 2006 British American Tobacco 01
Operating and financial review


British American Tobacco was ‘born’
international over 100 years ago. We now
employ over 55,000 people and are the
second largest stockmarket listed tobacco
group in the world.

We are also well positioned in all regions
of the world, operating in over 180 markets.
This geographical balance provides stability,
while our presence in markets where volumes
and profits are expected to grow gives us
confidence for the future.

We produce and market a wide and diverse range of brands Our vision is to achieve leadership of the global tobacco
to suit consumers’ preferences, with a particular focus industry through strategies focused on delivering growth,
on our four Global Drive Brands (GDBs) – Dunhill, Kent, improving productivity, demonstrating responsibility and
Lucky Strike and Pall Mall. Offering consumers choice and developing a winning organisation. These linked strategies
innovation in our brands sets us apart from our competitors are working well, as we continue to build a business that is
and is contributing to the continuing growth of our GDBs. sustainable and creates long term value for our shareholders.
02 British American Tobacco Annual Review 2006
Operating and financial review


“These strong results based on excellent organic growth
continue to provide a solid platform for a sustainable business.
Our consistent and balanced approach to the four elements
of our strategy for creating shareholder value is working well.”
Jan du Plessis, Chairman

British American Tobacco has had another good year, exceptional items are excluded, reflecting higher profits
with 7 per cent growth in our underlying profit from from Reynolds American and ITC. The contribution from
operations and a 10 per cent increase in adjusted diluted Reynolds American was £285 million, with the early
earnings per share. The improvement in profit was driven results from the acquisition of the Conwood smokeless

by volume growth of 2 per cent and net revenue growth tobacco business being distinctly encouraging.
of 5 per cent. The impact of exchange rates for the year
The improvement in profit from both subsidiaries and
as a whole was not material, although it was significantly
associates, together with a lower effective tax rate and
negative in the last six months, especially in the last
the benefit of the share buy-back programme, more
quarter, and has continued into the current year.
than offset the impact of higher net finance costs and
Our Global Drive Brands were exceptionally successful, minorities. As a result, adjusted diluted earnings per share
growing by 17 per cent. They now represent over rose by 10 per cent to 98.12p, just ahead of our long
21 per cent of the Group’s volume from subsidiaries, term goal of achieving, on average, high single figure
while international brands as a whole account for some growth in earnings.
40 per cent of the total.
By the close of business on 1 March, we expect that
Kent volume grew by 16 per cent to 45 billion, while some 35 million shares will have been bought back
Dunhill improved by 6 per cent, with encouraging since 1 January 2006 at a cost of £500 million and at
performances both in its new and its existing markets. an average price of £14.19 per share. Since 2003, when
Lucky Strike grew marginally and the star, once again, the buy-back programme started, around 246 million

was Pall Mall, up 40 per cent. shares have been repurchased at a cost of £2,191 million,
equivalent to an average price of £8.91 per share. We
There were net exceptional charges of £175 million,
continue to view the purchase of our own shares as an
reflecting the restructuring costs relating to the factory
excellent investment.
closure programme, partly offset by the gains on a
disposal of brands. The annual savings from our supply Following a review of the Group’s capital structure,
chain programme in 2006 amounted to £148 million, the Board has decided that there is scope to increase
bringing the total to £374 million per year since we significantly both the dividend payout ratio and the
started four years ago. share buy-back programme.
We also saved a further £99 million from the overheads The previous policy was to pay out at least 50 per cent
and indirects programme, bringing that total over the of long term sustainable earnings in dividends, with the
same four year period to £355 million on an annualised payout ratio in 2005 being 53 per cent. The Board has
basis. The current overheads and indirects programme decided to raise the payout ratio to 65 per cent by 2008
will be completed in 2007. However, we intend to maintain in progressive steps and is therefore proposing a final
our focus on costs and will be announcing a further five dividend for 2006 of 40.2p, an increase of 22 per cent.
year target, along with the final results from the first This takes the total for the year to 55.9p, an uplift of
five years, in March 2008. We will also pursue additional 19 per cent and raises the dividend payout ratio for
supply chain savings over the same five year period. 2006 to 57 per cent. The dividend will be paid to
shareholders on the Register at 9 March 2007. In line
Our associate companies grew their volume by 4 per cent to
with our current practice, the interim dividend for 2007
241 billion and our share of their post-tax results amounted
will be approximately one-third of the total for 2006.
to £431 million. This represents a 10 per cent increase, if
Annual Review 2006 British American Tobacco 03
Operating and financial review

In addition, the level of the share buy-back will rise FINANCIAL HIGHLIGHTS
from around £500 million to some £750 million per year,
starting in 2007. The increase in the buy-back programme Profit from operations: like-for-like
£ million
is likely to mean that, before the Annual General Meeting

in 2008, the combined interest of Richemont and Remgro 2,607
(R&R) will rise above 30 per cent. Not only is this the level
at which, under normal circumstances, an offer would
have to be made by R&R for the remaining shares in
British American Tobacco, but such an outcome is specifically
prohibited by the existing agreement between R&R and 2005 2006
the Company.
Operating profit, excluding exceptional items and the impact arising
Following discussions with both the Takeover Panel and from the change in terms of trade in Italy, increased from £2,607 million
to £2,797 million.
R&R, the Panel has indicated, subject to final approval,
that it is prepared to waive the 30 per cent rule, if the Adjusted diluted earnings per share

independent shareholders approve such a waiver at the pence
Annual General Meeting. This will allow the Company
to continue the share buy-back programme, despite
the fact that the R&R shareholding will increase above
30 per cent. The existing agreement restricting R&R’s
voting rights to 25 per cent will remain in place.
R&R have given their consent to this proposal and in return 2005 2006
have asked British American Tobacco to obtain a secondary Adjusted diluted earnings per share increased from 89.34 pence to
listing for its ordinary shares on the Johannesburg Stock 98.12 pence per share.
Exchange, if and when requested by them. British American
Tobacco has agreed to this. The proposal will be put to Group volumes
the Annual General Meeting on 26 April for approval and

the Board recommends the independent shareholders to 678

vote in favour.
The Board does not anticipate that it would continue the

buy-back once R&R’s interest had reached 35 per cent
of the issued share capital of the Company. At the current
share price, and at the proposed buy-back levels, this 2005 2006

threshold is unlikely to be reached in the next seven years. Group volumes from subsidiaries were 2 per cent higher at 689 billion.

While the increased level of the share buy-back programme Dividend per share declared
will create value for shareholders, it continues to preserve pence
financial flexibility because it can be suspended in the event of

an opportunity to make a significant acquisition that is both 47.0
financially and strategically attractive in the longer term.
Rupert Pennant-Rea will retire from the Board at the end
of the Annual General Meeting. I would like to thank him
for the significant contribution he has made over the last 2005 2006
11 years, not only as a Director but also as Chairman of
Dividends declared in respect of 2006, were 55.9 pence per share
the Audit Committee. (2005: 47.0 pence), up 19 per cent.
2006 has been a good year and I believe we can look
ahead with confidence in our ability to achieve further
growth and value for shareholders. Over the past five
years, British American Tobacco has delivered an average
annual total shareholder return of 26 per cent, compared
to 7 per cent for the FTSE 100.
04 British American Tobacco Annual Review 2006
Operating and financial review


“Whether new challenges come from our own evolving
standards or from regulatory restrictions, we can grow
if our positioning and strategy are right.”
Paul Adams, Chief Executive

We have reported another good set of numbers for 2006 ‘fourth dimension’, namely, harm reduction, for the
but what is the state of the tobacco industry and how is millions of adults globally who will continue to be
British American Tobacco expecting to fare in the future? tobacco consumers.
Before looking forward, it is worth examining our recent Current and future market
past. Over the last five years we have grown volume, Currently smokers consume over five trillion cigarettes
with our four GDBs leading the way, up 57 per cent a year globally.
against a backdrop of quickening regulatory changes,
China, the world’s largest cigarette market, makes up
excise increases and declines in the incidence of smoking.
35 per cent of global volumes. Outside China, over half
Not all the changes have been external, some are
the global market is held by the six biggest international
self-imposed. Five years ago we pioneered the industry’s
manufacturers which, in 2006, were: Philip Morris, with
first voluntary code, a set of restrictions on our marketing
a global market share of 18.7 per cent, British American
activity worldwide. The conclusion I’ve drawn is that
Tobacco (including associates’ total volumes) with
it is still possible for us to succeed in an ever tougher
17.1 per cent, Japan Tobacco with 7.7 per cent, Imperial
environment. Whether new challenges come from our
Tobacco with 3.5 per cent, Gallaher with 3.1 per cent
own evolving standards or from regulatory restrictions,
and Altadis with 2.1 per cent.
we can grow if our positioning and strategy are right.
Regulation of the industry and its products has
We have a strong and complete portfolio of brands at
increased in recent years, including graphic health
different price points. As well as our GDBs, it includes an
warnings on packs, advertising and promotion restrictions

unrivalled range of regional and local brands which play
and, more recently, restrictions on public place smoking.
a vital role in our success in many markets. We have a full
Future regulation will largely be framed by the World
range of tobacco products and we have a track record
Health Organisation’s Framework Convention on Tobacco
of innovation that our competitors struggle to match.
Control, which entered into force in 2005. Increases
In addition to the opportunities for top line growth, there in excise rates in many of the higher-price markets are
are very significant opportunities to make cost savings leading consumers to switch to cheaper brands and this
through our productivity initiatives. As you can read on trend is expected to continue. However, in emerging
page 14, we are ahead of schedule and the more work markets, consumers are increasingly trading up, so
we do in this area the more we identify further savings. premium brands are growing.
We also believe that we have the right responsibility Over the next decade, we expect the average daily
strategy for both the short and the long term and we consumption of cigarettes to fall in many of the world’s
position responsibility as a key part of our overall business largest markets. We also expect a declining incidence
strategy. Consequently, we have invested significantly of smoking generally, leading to smaller percentages
more in R&D, particularly around harm reduction. of populations being smokers, particularly in currently
high margin markets such as Canada, Germany and
We agree that risky products such as tobacco should be
Japan. However, the number of adults over the age
regulated. Currently, tobacco regulation broadly focuses
of 20 in the world is forecast to grow 11 per cent by
on three areas: preventing people from starting to smoke,
2015. As a result, although the proportion of adults
encouraging quitting and protecting people around smokers.
smoking will probably decline, global volumes are
However, we strongly believe that these prevention, expected to be broadly unchanged at some five trillion
cessation and protection efforts are missing an important in 2015. This future market represents a volume and
Annual Review 2006 British American Tobacco 05
Operating and financial review

profit pool where, for those who are best positioned,
The following section contains:
there will still be a great deal to play for.
06 Our strategy
Unfortunately, the market has also attracted illicit
– Growth
manufacturers and distributors of tobacco. We estimate
– Productivity
that some 6 per cent of tobacco consumption, about
– Responsibility
300 billion cigarettes a year, is supplied by smuggled
– Winning organisation

or counterfeit trade. It is a key concern for us. How
– Our key performance indicators
much of the industry will become illicit in the future?
We continue to work proactively with governments 10 Our strategy in action
and customs authorities to try to stem this rising tide. 10 Growth
– Our approach to marketing
While volumes are forecast to decline in some
– Strategy
markets, mainly the current higher margin markets,
– GDB strategy is working
they are set to grow in others, mainly in lower margin
– Other international brands
markets. Nevertheless, global industry profits are also
– Relationships with customers
set to increase over the next decade. British American
– GDB performance
Tobacco’s broad geographic base means that we are well
represented in many of the lower margin markets where 14 Productivity
volume and profitability are expected to grow, and that – Supply chain savings
we are not so reliant on high margin markets, where – Overheads and indirects
volumes are declining faster than the global average.
14 Responsibility
So, despite a changing business environment, we are – Dow Jones Sustainability
confident that the tobacco industry has a secure future Indexes
and that British American Tobacco has the strategy and – Climate change
products to prosper in it. – Harm reduction
The evidence of the past decade bears this out. Although 18 Winning organisation
the total global volume of cigarettes has been broadly – Employees
static over that time, our global market share has grown – Employee opinion
significantly as a result of both acquisitions and organic

growth, and our operating profit has increased by over
60 per cent. GROUP NUMBERS 2006
Gross turnover
Conclusion £25,189 million
The tobacco industry is mature and all players, including
us, face some big challenges, but we still have lots of Revenue after deducting duty, excise
room for growth. British American Tobacco’s strong brand and other taxes
portfolio and record of innovation, our trade marketing £9,762 million
expertise, our cost savings potential, the global diversity Profit from operations
of our earnings base, our presence in emerging markets £2,622 million
and the future size of those markets: these are all reasons
for us to believe that our business can continue to grow. Net capital expenditure
£419 million
Research & Development expenditure
£76 million
Charitable and community donations
£17.6 million
Global cigarette volumes
689 billion
06 British American Tobacco Annual Review 2006
Operating and financial review


Our vision is to achieve leadership of the global tobacco indirect costs (anything we spend money on other than
industry, through strategies for creating shareholder value leaf, wrapping materials, cigarette making machinery
based on Growth, Productivity, Responsibility and a and labour costs).
Winning Organisation.
We define leadership in both a quantitative and qualitative RESPONSIBILITY
sense. Quantitatively, we seek volume leadership among Because we manage a product that poses real risks

our international competitors. Qualitatively, we aim to to health, we strongly believe that our business must
lead our industry as the preferred partner of key demonstrate responsibility in everything it does. We aim
stakeholders and in demonstrating responsibility. to balance our commercial objectives with stakeholders’
changing expectations of a modern tobacco business.
See diagram 1
Our Business Principles and our Standards of Business
Conduct set out what we require of our companies and
GROWTH employees in terms of responsible corporate behaviour
We aim to grow our revenues and profits and to grow and personal integrity.
our share of the global market. We have two routes to
We support tobacco regulation that balances the
do this: organic growth and mergers and acquisitions.
preferences of consumers with the interests of society,
Organic growth means increasing our market share in
establishes an open-minded approach to harm reduction
existing markets and through entering new markets.
as a policy, and enables our businesses to continue to
To achieve organic growth, we focus on key market compete and prosper.
segments that offer the best long term prospects,
Harm reduction is an important element of our strategy.
including Premium and International Brands. We also aim
For more about our approach, see page 17.
to optimise the performance of our Global Drive Brands
and to exploit opportunities for profitable volume growth
in the Value-for-Money and Low Price segments. We see WINNING ORGANISATION
innovative products that offer consumers meaningful, To achieve our vision of industry leadership, we recognise
value-added differentiation as key to organic growth. that we must continue to have the right people and the
We aim to continue sustaining or developing strong right working environment. We aim to develop leaders
positions in our largest and most profitable markets. at all levels, to foster a confident culture that embraces
change and innovation, to attract and retain talented
Strategically important and financially attractive

people and to ensure continuous improvement
mergers and acquisitions may also provide us with
throughout the Group.
growth opportunities.

Measuring our performance
Our approach to productivity concentrates on smart
We have a wide range of measures and indicators by
cost management, marketing efficiency and capital
which the Board assesses performance compared to
effectiveness; deploying our global resources more
the Group’s strategy.
effectively to increase profits and generate funds to
reinvest in our business. This includes ensuring that The Group’s goal to create shareholder value through
we use our marketing resources and capabilities in the the strategies of Growth, Productivity, Responsibility
most efficient way, reducing unnecessary complexity and Winning Organisation is best measured by the main
and using our cash and other assets effectively. We financial drivers of the business. To ensure management’s
are saving money by turning a multinational business focus is aligned with the interests of our shareholders,
operating in over 180 markets into an integrated global these measures form the basis upon which the levels
enterprise that can really take advantage of its scale. of incentives for the global organisation are decided.
They are described below as our seven Key Performance
Greater integration across our supply chain is helping us
Indicators (KPIs). Some of these KPIs are used to set the
to reduce costs, increase speed to market and improve
targets for the Group’s performance over three years and
effectiveness. We are also reducing our overheads and
some are focused on the short term. These KPIs were chosen
Annual Review 2006 British American Tobacco 07
Operating and financial review

as they are mainly based on published results or can be
Diagram 1: Group strategy
calculated from them. They are therefore reliable and
are not based on subjective measures or interpretations.
A number of other Business Measures, financial and
non-financial, are monitored and assessed on a frequent Achieve
basis to ensure that all the Group’s strategies are delivered. of the global

Although all these are not included in management’s tobacco industry
incentives, we believe that these Business Measures are
all contributing to the success of the Group, particularly
over the longer term.
We have therefore included, in this Review, some
additional Business Measures relating to the Responsibility Growth Productivity Responsibility
and Winning Organisation elements of our strategy. Our
progress under Productivity is, of course, covered by the
Winning Organisation
information we already publish about the Supply Chain
and Overheads and Indirects programmes.
These measures and the performance relating to them,
are discussed on pages 14 to 19.
The Remuneration Committee sets targets at different
levels, based on the Group budget approved by the
Board in December. The KPIs used in 2006 have been
retained for 2007.
Measuring short term performance
1 Net revenue growth

Net revenue for 2006 grew by 5 per cent. The long term
goal is to grow net revenue, on average, by 3-3.5 per cent
per annum.
1 Net revenue growth

The net revenue figure is calculated as the revenue of £ million
the Group after the deduction of any duties, excise and 9,301 9,672 Long term target, on average
other taxes, as published in the Group Income Statement +7% +5%

on page 42.
2 Global Drive Brand volume
A key strength of the Group is its diversified Global Drive
Brands (GDBs) portfolio. The growth of the four GDBs
Dunhill, Kent, Lucky Strike and Pall Mall is therefore a 2005 2006

key driver of the Group strategy and is measured as one
of the KPIs.
2 Global Drive Brand volume
In 2006, GDB overall volume grew by 17 per cent to 146.1 Long term target, on average,
124.9 +17% high single figures
146 billion compared to 9 per cent growth in 2005. Our +9%
target is to achieve high single figure growth.
GDB volumes are calculated as the total volumes of the
four brands sold by our subsidiaries.
More information about the GDBs and their individual 2005 2006
performances, is provided in this Review on pages 12 and 13.
08 British American Tobacco Annual Review 2006
Operating and financial review


3Share of global volume amongst key players The purpose of this measure is to ensure that the Group
The long term goal is to become the leading international generates sufficient cash to fund its operations, pay
tobacco company and British American Tobacco is dividends to its shareholders, operate the share buy-back
currently second. programme and undertake other investment opportunities
that may arise.
In 2006, our share of global volumes amongst key players
grew by 0.2 per cent. Share of global volume is calculated Measuring long term performance

as the volumes sold by Group subsidiaries as a percentage 6 Earnings per share

of the volumes sold by all international players, namely Adjusted diluted earnings per share (Adjusted EPS)
Philip Morris International, Japan Tobacco, Imperial grew at an average of 12.4 per cent per annum since the
Group, Gallaher and Altadis. The information used to beginning of 2004. This compared favourably to the long
complete this calculation is based on publicly available term goal of growing at the rate of high single figures
information and internal company analysis. per annum, on average, over the medium to long term.
Adjusted EPS grew 10 per cent in 2006 (2005: 17 per cent).
In our endeavour to grow global volumes, we assess all
available acquisition opportunities on a frequent basis, Adjusted diluted EPS is the best measure to assess the
but will only make a move when it is both financially underlying performance of the business, as it excludes
and strategically attractive. all significant distortions (one-off and exceptional items
4 Organic operating profit growth
that occur) but includes the potentially dilutive effect of
employee share schemes. The detail of the calculation
The Group’s long term aim is to grow organic underlying
and the adjustments made, are explained in note 7 to
operating profit by 6 per cent per annum, on average.
the accounts included in the Annual Report and Accounts.
For 2006, it was 7 per cent and for 2005, it was 9 per cent.
This calculation removes the impact of the exceptional
Organic profit used in this assessment is the operating items shown as memorandum information on the Group
profit of the Group’s subsidiaries, excluding any exceptional Income Statement on page 42. These items are the
items – the items shown as memorandum information on restructuring costs and impairment of a business, offset
the Group Income Statement on page 42. by gains on disposal of brands. In addition, the calculation
5 Cash flow
also adjusts for certain distortions in net finance costs
arising under IFRS.
The Group’s free cash flow in 2006 was £1,541 million,
marginally below 2005.

Free cash flow is defined as net cash from operating activities
(including dividends from associates, restructuring costs
and taxation) less net interest, net capital expenditure and
dividends to minorities – the change in free cash flow is
described on page 28.
Annual Review 2006 British American Tobacco 09
Operating and financial review

7 Total Shareholder Return 3 Share of global volume amongst key players
The Group’s strategy is focused on increasing shareholder percentage
value which is measured using Total Shareholder Return
Long term target
(TSR), compared to the FTSE 100 Index and also to the
Fast Moving Consumer Goods (FMCG) peer group. The
Group has achieved a top quartile performance in both
these categories since 1999. The goal is to be in the top

quartile of each of the two comparator groups over a
three year average.
4 Organic operating profit growth
Over the past five years, the Group has delivered an £ million
average TSR of 26 per cent compared to 7 per cent for 2,797 Long term target, on average
the FTSE 100 Index (see page 37 for performance graph). +9%

TSR performance combines both the share price and
dividend performance of the Company during the
performance period, as set against the two comparator
groups. The FMCG comparator group is reviewed
annually to ensure that it remains both relevant and 2005 2006

representative and to, as far as possible, reflect the
Company’s financial and business trading environment. 5 Cash flow
£ million
TSR is measured according to the return index calculated 1,582 1,541 Specific target set for each year
by Datastream, on the basis of all companies’ dividends +18% –3%
being reinvested in the shares of the companies. The
return is the percentage increase in each company’s index
over a three year period. The measures and the outcome
for the current and previous years are explained in the
Summary Remuneration Report on page 36, where the 2005 2006
Group’s employee share schemes are described.
6 Earnings per share

98.20 Long term target, on average,
89.34 +10%
+17% high single figures

2005 2006

7 Total shareholder return (annual %) 7 Total shareholder return (annual %)
(1 January 2004 – 31 December 2006) FMCG group (1 January 2004 – 31 December 2006) FTSE 100

Upper Quartile Median – 15.3% BAT – 32.2% 35 Upper Quartile Median – 19.9% BAT – 32.2% 70
Lower Quartile Lower Quartile
30 60

25 50

20 40

15 30

10 20

5 10

0 0

–5 – 10

The FMCG comparison is based on three months’ average values. The FTSE 100 comparison is based on three months’ average values.
10 British American Tobacco Annual Review 2006
Operating and financial review


GROWTH expect both current and long term growth opportunities.
Our approach to marketing We also continue to invest in our regional and local
We recognise that our marketing must be conducted brands, especially where they play a strategic role in
responsibly, ensuring that we communicate our product a particular market’s portfolio.
and brand benefits to adult consumers. In 2001, we
We also take opportunities to invest in brands that show
developed, along with two major international competitors,
specific promise, particularly in the growing segments,
the International Marketing Standards (IMS). They set

such as Vogue, our premium superslims offer, and Kool,
out detailed guidance on all aspects of tobacco marketing
our premium menthol offer.
from print, billboards and electronic media to promotional
events, packaging and sponsorship. In 2006, in accordance See chart 1

with the IMS, we ended our sponsorship of Formula 1
GDB strategy is working
motor racing.
Our strategy is working. In 2006, our Premium GDBs alone
We want to keep our marketing activity responsive to a grew by 9 per cent. Each of our four GDBs grew in 2006,
fast changing world. During 2007, we will therefore be including Lucky Strike which returned to marginal volume
revising our own set of Standards, to include newer media growth and continued to improve its share in most of its
not captured in the original 2001 version (e.g. internet core markets. We grew our GDBs in each of our operating
sales and text messaging), enhanced adult age verification regions, with double digit GDB increases in Asia-Pacific,
procedures and tighter restrictions on promotion and Europe, Africa and Middle East and Latin America.
sampling. These and other changes will help ‘raise the
The 2 per cent overall volume growth is not concentrated
bar’ further in terms of addressing what is acceptable
in one country or region. We saw increases in all regions
tobacco marketing worldwide.
except for America-Pacific, where volume declines in
Our marketing approach focuses on using insights into Canada offset gains in Japan.
consumer lifestyles and values to develop relevant products.
Our investment in consumer relevant innovation is
These insights drive the development of our product and
delivering results in both volume and value terms. 2006
communication campaigns, to differentiate our products
saw a number of highly successful product launches in
from our competitors’ offerings in ways that resonate
which we offered consumers additional value at a higher
with adult consumers. This includes the work of our Trade
price point. Dunhill Fine Cut cigarettes in numerous
Marketing & Distribution teams to place and promote the
markets and Pall Mall superslims across key Eastern
right brands in the right retail outlets for the right consumers.
European markets, such as Russia, were just two specific

Strategy product innovations that drove volume and higher net
Central to our marketing approach is the premise that revenue from our GDBs portfolio. They are concrete
one size does not fit all and we believe a key strength of examples of us meeting the preferences of consumers
British American Tobacco is our diversified Global Drive who, in turn, are choosing to trade up to products that
Brands (GDBs) portfolio. These brands deliver rational deliver higher margins. Innovation is strengthening the
choices such as product, blend and price along with foundations for our future growth.
other perceived consumer benefits like strength and
See chart 2
taste. Our growth strategy is built on the success of our
four GDBs, Dunhill, Kent, Lucky Strike and Pall Mall. Other International Brands
We focus our resources to develop these brands in the While our investment and managerial focus remains
key International, Premium, Lights and Adult Smokers firmly on our four GDBs, 2006 saw robust growth across
Under 30 (ASU30) marketing segments, where we our broader range of International Brands (IBs), with total
Annual Review 2006 British American Tobacco 11
Operating and financial review

International Brand growth at 11 per cent for the year. 1 Strategic segment volume in 22 key markets
Vogue, our premium superslims offer, led the way with billions
an impressive 32 per cent growth due to excellent results
199 208
in South Korea, Russia, Italy, France and Ukraine. Kool 171
156 150 153
grew by 16 per cent, as the menthol category continues 139 144
to expand worldwide. In addition, we saw robust growth
from Benson & Hedges, Rothmans and Craven ‘A’. Our

efforts to appeal to consumers who are choosing to 2005
trade down in price but still want an international brand ASU30 Lights IBs Premium

succeeded with Viceroy, which grew by 19 per cent in 2006. Based on data from the 22 markets, our share in each segment
increased in 2006 to ASU30 (30.2%), Lights (26.6%), IBs (21.8%)
See chart 3
and Premium (29.4%).
Relationships with customers 2 GDB volume growth
The increasingly restrictive environment in which we billions
can communicate with consumers means that Trade 146
Marketing & Distribution (TMD) is a key element of 113 114
our marketing activity. We recognise the importance 93 100

of the retail outlet. That is why we strive to achieve and
maintain benchmark business partnerships with the retail
trade in all the strategic channels where we do business.
2001 2002 2003 2004 2005 2006
To achieve benchmark status, we must operate
consistently in the most effective and efficient manner Since 2001, our four GDBs (Dunhill, Kent, Lucky Strike and Pall Mall)
have increased combined volume by 57%.
to serve our trade customers, both independent outlets
as well as our major account customers. We measure 3 Other International Brands – volume growth
our performance in this area extensively and the most billions
recent external and independent survey carried out in 129 127 133
116 118 122
2006 revealed that, in a majority of countries, retailers
perceive British American Tobacco as having the best
TMD organisation compared to other tobacco companies.

The foundation for this success is our ‘Win Win Win’
strategy. We recognise that in order for our strategy 2001 2002 2003 2004 2005 2006
to succeed, it is imperative that there is a benefit for all
Since 2001, other International Brands (excluding the four GDBs) rose
three participants – our customers, ourselves and, above by 3%.
all, our consumers. All three must stand to win in some
way. This approach resonates with our trade partners,
as reflected in our global deal with Shell signed in 2006,
the first of its kind within the FMCG sector. Our GDBs,
plus two strategic brands in appropriate markets,
now have guaranteed, prominent display space in
5,500 Shell convenience stores around the world.
12 British American Tobacco Annual Review 2006
Operating and financial review


GDB performance Kent
Dunhill Kent continues to play its key role in our portfolio as
Dunhill provides us with a Premium/Super Premium the free standing premium brand for consumers seeking
brand to meet the needs of consumers at the top end a mild and smooth taste. Kent aims to be the leading
of the tobacco market. In 2006, we extended Dunhill’s brand for ASU30 smokers and perceived consistently
geographic reach, as well as the product segments in as the brand that delivers ‘the modern way to smoke’.
which Dunhill competes.

Kent has continued to demonstrate the innovative
2006 saw the successful enhancement of the House of nature of a brand designed for the 21st century
Dunhill via the rapid roll-out of Dunhill Fine Cut cigarettes, through a number of linked initiatives. These include
the relaunch of Top Leaf and the pilot launches of the the introduction of a new global pack and the core
Essence (superslims) and Senses (menthol) ranges. charcoal range’s use of 3-Tek filter technology. A new
These initiatives succeeded in Dunhill’s core markets communication campaign in Russia, Japan, Romania and
such as Australia, Malaysia, South Korea and Taiwan, Chile resulted in accelerated organic growth of the brand
where they supplemented existing Dunhill offers, while in these markets. In Switzerland and the Netherlands,
stretching the price mix to premium plus levels. These British American Tobacco launched the brand via the
developments also helped in the promising launch and migration of Barclay consumers to Kent. Initial results are
roll-out of Dunhill in new markets, particularly in Western promising, with exceptionally strong consumer response
Europe and the Middle East. Furthermore, a number from both existing smokers and those switching from
of key product innovations that commanded premium competitor brands.
plus price points were successfully launched. We believe
The net result of these initiatives saw Kent become the
that the equity of the brand, combined with tangible
number one brand in Romania, as well as achieving over a
product benefits delivered by these innovations, provides
billion cigarettes a month in sales in Russia. Kent delivered
consumers with what they want.
the fastest rate of growth among our premium GDBs,
Manufacture of the Dunhill Signed Range cigars with its fourth consecutive year of double digit growth.
was moved to Nicaragua in 2006. This change will
Lucky Strike
significantly reduce our supply chain complexity, allow
2006 was a milestone year for the Lucky Strike brand,
us to continue to deliver a premium cigar and invest in
as it managed to return to volume growth and achieved
the further growth of the range.
record market share in Germany, Spain, France, Indonesia,
2007 sees the centenary of the Dunhill tobacco brand Argentina and Italy.

and several ambitious initiatives will roll-out worldwide
In 2006, Lucky Strike focused on establishing itself as the
in celebration.
brand that provides ‘a rich tobacco experience’ through
the launch of an innovative pipeline of product and
packaging initiatives.
Annual Review 2006 British American Tobacco 13
Operating and financial review

Lucky Strike’s new premium pack designs add quality,
heritage and product expertise cues and further differentiate
the Original Red from the Original Silver variant. The new
ranges, with Madura, Fireleaf Silver and Mentha Piperita
variants, deliver unique tobaccos to provide a choice of
rich taste and uncompromised smoking pleasure.

Lucky Strike launched new Roll Your Own (RYO) products
in an effort to capitalise on growth without diluting its
premium image. In smokeless products, the market success
of Lucky Strike snus in Sweden and the pilot learnings
achieved in South Africa, are encouraging signs that the
brand’s equity can be successfully stretched into other 33 billion cigarettes sold in 2006
tobacco categories. 6 per cent increase on 2005

Pall Mall
Pall Mall aims to redefine consumers’ experience at the
Value-for-Money price point by delivering on its promise
of ’imagination in tobacco’ with innovative product
and brand attributes. Pall Mall achieved an outstanding 45 billion cigarettes sold in 2006
performance in 2006, driven by good organic volume and 16 per cent increase on 2005
share growth in its established markets such as Germany,
Poland and Spain, as well as many successful launches in
all regions.
Pall Mall’s success is driven by the strong and globally
consistent brand mix, supported by a solid innovation
pipeline, ensuring Pall Mall has a leadership position in
responding to consumer needs in the Value-for-Money
segment. The launch of House of Pall Mall in Switzerland 22 billion cigarettes sold in 2006
included the introduction of four different tobacco 0.4 per cent increase on 2005
products (small cigars, RYO, Superslims and Stix) along

with a range of King Size cigarettes offering more choice.
In Germany, Pall Mall successfully captured consumers
moving from Stix to other tobacco products within the
brand family and achieved its highest ever share of the
46 billion cigarettes sold in 2006
German market by the year end, to become the second
40 per cent increase on 2005
largest tobacco brand.
14 British American Tobacco Annual Review 2006
Operating and financial review


PRODUCTIVITY In addition, we will establish new capabilities for driving
Savings generated by our productivity initiatives are ahead growth through consumer relevant innovations, delivered
of plan. The substantial efficiencies made in the supply through an effective and efficient, integrated supply chain.
chain, supported by savings through our overheads and Improvements in global supply chain operations to date
indirects programmes, are releasing funds for reinvestment were recognised by a European Supply Chain Excellence
in research, product innovation and growth, as well as Award, presented by the magazine ‘Supply Chain Standard’
being a significant driver of operating profit growth. in November 2006.

Supply chain savings Overheads and Indirects
Our focus on primary supply chain efficiencies has The Overheads and Indirects cost reduction programme
delivered benefits of £148 million in 2006, bringing the ended its fourth year and delivered savings of £99 million.
annual savings for the four years of the programme up to Since its inception in 2003, annualised savings have
£374 million. These savings are predominantly the result reached £355 million and are well on the way to reach
of efficiencies within our manufacturing and logistics the £400 million target by 2007.
operations and initiatives surrounding the specification,
Savings are, in part, being driven by the adoption of
purchase and usage of packaging and leaf materials.
smarter procurement processes around the Group, with
There has been further rationalisation of our manufacturing procurement specialists working with key business managers
capacity, with 12 factories closed in the year, including to find mutual benefits. The amount of indirect expenditure
Guelph in Canada and Southampton in the UK, and (those items that are not involved in cigarette production)
cigarette manufacture in Bologna in Italy has ceased. In that is channelled through procurement has increased to
addition, a further four factory closures were announced, a level that now covers most areas of the business and
including Zevenaar in the Netherlands, and a number the processes established are being embedded within
of downsizing exercises have been completed. These the business for sustainable benefit.
initiatives, together with the Group’s ‘Bullseye’ best
The move to shared services in both IT and Finance is
practice audits have increased overall productivity by
gaining momentum and is now delivering real value.
nearly 10 per cent in the year. We have also redeployed
650 individual machinery assets around the Group.
The job losses resulting from closures and downsizings have
Responsibility is a key element of our business strategy
been addressed with care and responsibility. Mitigation
but how do we measure or assess our performance?
activities have included fair redundancy packages, extensive

We look to external benchmarking to provide us with
outplacement support and, where appropriate, community
an objective view on how we are doing and use the Dow
wide initiatives aimed at new job creation. The Company’s
Jones Sustainability Indexes (DJSI) as our primary Business
Mitigation-Plus programme in response to the Darlington
Measure. With regard to our environmental impacts, we
factory closure in the north east of England is one of those
have the data and have been reporting on the trends for
to have received recognition, a best practice award in 2006
several years. On pages 15 to 17, we have included some
from the UK-based Management Consultants Association.
of these measures in a section on the key topic of climate
The Product Complexity Reduction programme targets change. In harm reduction, we can report some encouraging
the elimination of irrelevant complexity across our brand signs of increasing engagement around an area which is
portfolio. Working together, our Operations and Marketing central to our business strategy.
teams have defined standards covering all the key attributes
Dow Jones Sustainability Indexes
of our brands, from packaging design through to product
In 2006, we were, for the fifth year running, the only
specifications and leaf blends. As a result, we have been
tobacco company included in the DJSI. Launched in
able to rationalise and simplify the number of combinations
1999, the DJSI are global indices tracking the performance
and specifications we use in our supply chain by more
of the leading companies worldwide. The indices are
than 30 per cent. We have also reduced the number of
based on a detailed assessment of companies’ economic,
stock keeping units we sell by 24 per cent, leaving a more
environmental and social performance, and on how well
focused, consumer-relevant portfolio.
they integrate sustainability strategies into their business.
The productivity, complexity and capacity optimisation
Externally, these benchmarks are used by asset managers
programmes will continue over the next few years and
to make investment decisions and by other stakeholders
will realise significant savings.
looking at sustainable businesses. Internally, participation
Annual Review 2006 British American Tobacco 15
Operating and financial review

in the indices gives us an objective third party perspective 4 Dow Jones Sustainability Indexes
on how we are managing the business and allows us to
benchmark our performance against the best in the sector Was 2006 score Was score
same or better higher than
and the sector averages. Dow Jones Criteria than 2005? sector average?
Economic Dimension ✖ ✔
The tobacco sector group is based upon an assessment Environmental Dimension ✔ ✔
of 10 tobacco companies, although the names of all the Social Dimension ✔ ✔

companies are not publicly disclosed. In 2006, our overall
score remained equal to last year’s at 79 per cent against Economic Dimension
a sector average that increased significantly to 66 per cent. Corporate Governance ✔ ✔
Risk & Crisis Management ✔ ✔
We achieved the top score in 13 out of 19 categories,
Codes of Conduct/Compliance/ ✔ ✔
improved our score in 16 and scored better than the sector Corruption & Bribery
average in 18. We shall continue to submit ourselves for Customer Relationship Management* ✖ ✖
consideration, with the aim of maintaining our position in Combat Smuggling ✖ ✔
the indices. However, because inclusion is determined by
Environmental Dimension
a third party, we have chosen not to regard inclusion itself Environmental Policy/Management ✔ ✔
as a Business Measure. Chart 4 shows how we report our Environmental Performance (Eco-efficiency) ✔ ✔
performance in the DJSI. Our annual target is to record Environmental Reporting ✔ ✔
a higher score than the sector average in a minimum of Management of GMO ✔ ✔
15 out of 19 categories. Fuels for Tobacco Curing ✔ ✔
Raw Material Sourcing ✔ ✔
See chart 4
Social Dimension
Climate change Labour Practice Indicators ✔ ✔
We consider it to be part of our responsibility to measure, Human Capital Development ✔ ✔
monitor and reduce our energy use and greenhouse gas Talent Attraction & Retention ✔ ✔
(GHG) emissions and report on our global performance in Social Standards for Suppliers (new) ✔
accordance with Global Reporting Initiative (GRI) guidelines, Corporate Citizenship/Philanthropy ✔ ✔
Social Reporting ✔ ✔
publicly on an annual basis.
Responsible Marketing Policies ✔ ✔
We view reductions in emissions as being the top priority, Occupational Health & Safety ✔ ✔
followed by mitigation. Where no further reduction or **TARGET reached ✔

mitigation is possible, we will look to offsetting. *We were previously sector leaders in this category but a change in the scoring
system resulted in a significant fall in our score in 2006.
Reduction – our performance on reducing emissions **Our target is to record a higher score than the sector average in a minimum
We have reduced both the absolute amount and intensity of 15 out of 19 categories.

(per unit production) of our CO2 emissions in recent years.
This has been achieved by energy conservation initiatives,
investment in energy efficient technologies, use of renewable
fuels and through consolidation of our manufacturing
footprint. We also work to reduce waste sent to landfill
and increase the amount of waste recycled.
CO2 is a GHG, a major contributor to climate change.
5 Emissions
In 2000, the Group committed to reducing CO2 emissions tonnes CO2 per million cigarettes equivalent
by 5.2 per cent by 2008, in line with the Kyoto protocol. 1.38
1.26 1.23
This was achieved by 2004. We have set progressively more 1.13
stretching targets each year since 2004. In 2006, the target 0.83 0.79
was 0.78 tonnes CO2 per million cigarettes equivalent and
we achieved 0.79 tonnes, a reduction of 5 per cent over
2005. Over the last five years, our emissions have reduced
2001 2002 2003 2004 2005 2006
by 43 per cent.
Since 2001, our emissions have fallen by 43%.
See chart 5
16 British American Tobacco Annual Review 2006
Operating and financial review


Waste to landfill In terms of reducing GHG emissions, we are working
Waste sent to landfill creates methane, which is 21 times with leaf and material suppliers, through both the SRTP
more potent as a GHG than CO2. and BEST programmes, to achieve further improvement
and we will be establishing minimum environmental
By reducing the amount of total waste generated and
performance criteria for suppliers during 2007.
increasing recycling rates, we have reduced waste sent
to landfill by 59 per cent since 2001. Mitigation activities – The British American Tobacco

Biodiversity Partnership
See chart 6
We are also working with our Non-Governmental
Recycling Organisation partners (Earthwatch Institute (Europe),
Increasing recycling rates reduces the amount of waste Fauna & Flora International, the Royal Botanic Gardens,
that is sent to landfill. Our 2006 global recycling rate Kew and the Tropical Biology Association) within the
was 81.2 per cent. Biodiversity Partnership to avoid, minimise and mitigate
our impacts on biodiversity and minimise the use of
Through proactively seeking new partners and destinations
ecosystem services, such as soil, water and wood.
for recycling, we have increased our recycling rates over
the last five years. There are now 10 companies within We have categorised our projects in accordance with
the Group achieving 95 per cent recycling rates. definitions from the Intergovernmental Panel on Climate
Change (IPCC), splitting the contribution to the Climate
See chart 7
Change agenda into the following:
Working with our Supply Chain
• Understanding impacts, adaptation and vulnerability
Suppliers are increasingly seen as a critically important
• Mitigation
stakeholder group and there are growing expectations
that businesses should use their influence to encourage Of the current 43 projects within the partnership
good standards of corporate responsibility in their supply programme portfolio, 25 address understanding impacts,
chains. We accept this responsibility and work not only adaptation and vulnerability, and 17 address the mitigation
to set high standards for our suppliers but to support part of the IPCC definitions. 14 of the projects address
them in achieving continuous improvement. both and 15 are relevant to neither aspects of climate
change but are relevant to biodiversity conservation.
We see this as particularly important for a very large
business such as ours, with a primary supply chain that Water use
includes some 250,000 farmers who grow tobacco leaf In many areas where we operate, climatic variations

and other international suppliers from whom we buy may cause water to become a scarce resource. In 2006,
other raw materials such as packaging and paper. we have reduced our water use by 7 per cent and over
the last five years it has come down by 41 per cent.
Our major supply chain programmes include our Business
Enabler Survey Tool (BEST), which sets out in detail the See chart 8

standards we expect of the suppliers from whom we buy
raw materials other than leaf. BEST assesses suppliers across
We do not use the information below to formally offset
102 performance criteria, covering, for example, suppliers’
our CO2 emissions, as many of the trees that we sponsor
business ethics; environment, occupational health and
are not owned by us.
safety management; employee rights and the supplier’s
ability to trace the sources of raw materials, including However, since the 1970s, Group companies have
sourcing wood from sustainably managed forestry. promoted forestry programmes to ensure a source of
wood fuel for tobacco growers. The Edinburgh Centre for
Social Responsibility in Tobacco Production (SRTP) is a
Carbon Management has helped the Group to quantify
significant programme that aims to ensure that we only
the CO2 take-up and storage by these forests since 1998.
purchase tobacco leaf from responsible and sustainable
At the end of 2005, the carbon storage associated with
sources, by working to address the social and environmental
the programmes in Brazil, Kenya, Pakistan and Uganda
issues associated with tobacco leaf growing and processing.
was estimated at 400,000 tonnes of carbon, equivalent
We have also encouraged other manufacturers to adopt a to 1.46 million tonnes of CO2. This compared to the
similar approach, an initiative that is gaining considerable 0.85 million tonnes of CO2 emitted from Group companies’
support. Our supplier review methodology has been operations in 2005. This study will be updated in 2007.
adopted by a number of tobacco manufacturers, while
others have adopted similar programmes of their own.
Annual Review 2006 British American Tobacco 17
Operating and financial review

During 2007, we will investigate potential ways to offset 6 Waste to landfill
our emissions, although our first priority will always be tonnes per million cigarettes equivalent
to reduce them as far as possible. 0.056
Harm reduction 0.042
0.036 0.035
We believe that harm reduction, which is a key element of
our business strategy, ought to be able to find common 0.023

ground with the goals of public health policy.
We agree that risky products such as tobacco should be 2001 2002 2003 2004 2005 2006

regulated. Currently, tobacco regulation broadly focuses Since 2001, we have reduced our waste to landfill by 59%.
on three areas: preventing people from starting to smoke,
encouraging quitting and protecting people around smokers. 7 Recycling
percentage of waste recycled
However, we strongly believe that these prevention, 81.2
cessation and protection efforts are missing an important 63.6
69.4 72.3 72.5
‘fourth dimension’, namely, harm reduction, for the 57.3

millions of adults globally who will continue to be
tobacco consumers.
The World Health Organisation predicts that, even
2001 2002 2003 2004 2005 2006
with increasingly strict regulation, there will be as many
or more smokers globally in 10 years’ time as there are Since 2001, we have increased our recycling by 24%.
today, as falling tobacco consumption is offset by a 8 Water use
strongly rising world adult population. cubic metres per million cigarettes equivalent

In public policy, harm reduction is an established concept. 8.73
8.01 7.84
It recognises that positive health outcomes can be achieved 6.61*
5.58 5.18
in ways other than through disincentives, punitive measures
or the prohibition of certain lifestyle choices.
Smoking poses real and serious health risks, but nicotine,
at the levels smokers take, does not. If smokers could take 2001 2002 2003 2004 2005 2006

nicotine from pleasurable tobacco products with far lower Since 2001, our water usage has decreased by 41%.
risks than smoking, we believe that tobacco related harm *For comparison purposes, the 2004 figure excludes data from Peru relating to the use
to health would reduce far faster than current public of irrigation water by farms owned by a company we acquired in late 2003. It is unusual
for the Group to own farms. The 2004 figure, including Peru, is 8.01.
health efforts can achieve alone.
We believe we can contribute to reducing the harm of
tobacco use through innovative products, while also
supporting the long term sustainability of our business.
What we are doing
Encouraged by public health stakeholders, we have
extended some major cigarette brands to Swedish-style
snus, a smokeless tobacco product mainly sold in Sweden
and recognised by health experts, such as the UK’s Royal
College of Physicians, to be much less harmful than smoking.
We are marketing snus in Sweden, have started sales in
Norway and, building on our experience in South Africa,
have begun a pilot in Japan. We plan to extend these
initiatives elsewhere in due course.
We are planning to lobby for an amendment to the EU ban
on snus sales in the EU except for Sweden. We believe there
is no rational justification for continuing to bar smokers
from choosing a less hazardous alternative to cigarettes.
18 British American Tobacco Annual Review 2006
Operating and financial review


We are also developing a scientific framework for are afforded the same opportunities for promotion, training
evaluating the relative risks of different tobacco products, and career development as other staff. Our Employment
both combustible and non-combustible. Currently, there is Principles are available to all staff on the Group’s intranet.
no accepted approach to measuring tobacco consumers’
The Group continues to encourage employee ownership
exposure to the toxicants believed relevant to tobacco
through its provision of employee share plans, including the
related disease. This is vital to enable development of
Partnership Share Scheme and the Share Reward Scheme.
lower risk tobacco products. However, we cannot develop

a framework alone. To ensure that the work and supporting In addition to the global survey (see below), we encourage
research are robust, we are expanding our engagement employee engagement through individual discussions, team
with external scientists. briefings, local surveys, publications and regular meetings
with recognised employee representatives.
Research and development
Our research and development activities are focused on See chart 9

developing new products and new processes, as well as
Employee opinion
maintaining and improving the quality of existing products.
The extent to which our employees, at every level of
Research is also carried out on risk characterisation,
the business, feel engaged and committed to delivering
building a framework to assess the relative risk of novel
superior results is key to delivering our leadership vision.
and conventional products and a better understanding
of how consumers use them. Risk reduction, such as The most authentic way to measure progress is to collect
developing technologies that have the potential to lower views from employees themselves. The best judge (and
exposure to toxicants in smoke, is also a central part of indeed the best influencer) of the extent to which we are
the research and development programme. Research is making tangible progress in what underpins our Winning
also undertaken into aspects of the science and behavioural Organisation strategy has to be our employees, at every
science related to smoking and we continue to provide level and in every part of the business. We therefore work
funding for independent studies. to create an environment where employees feel that they
can speak honestly about their company and the issues
of importance to them, placing emphasis on the role of
employee opinion research.
British American Tobacco will be a winning organisation
when it is recognised by its employees as being a great Our international employee opinion survey, ‘Your Voice’,
place to work, where outstanding people are attracted, is run by ISR (International Survey Research), a leading

challenged and have the opportunity to grow. global employee research organisation, to gather detailed
views from employees to enable regional, functional and
local action planning. Your Voice was conducted as a global
Creating a safe place to work has to be our primary
census for the first time in October 2005, in over 70 markets,
consideration for employees. We measure and track
followed by a further census in November 2006, capturing
performance using a measure of the Lost Workday
the feedback from over 38,000 employees. The survey
Case Incident Rate (LWCIR).
covers all levels of employees and will now be run at
Over recent years, the rate has been reducing, although two yearly intervals.
the acquisition of ETI in Italy in late 2003 had a negative
effect on safety performance in 2004. As British American
To establish how employee opinion within British American
Tobacco’s standards for safety were adopted, performance
Tobacco compares with other organisations, our global
in Italy has improved. In 2006, we aimed to achieve a
employee opinion survey data is compared with ISR’s
further 10 per cent reduction to a rate of 0.44. In fact,
global FMCG companies norm.
the rate fell to 0.42 from 0.49. Positive as this trend
is, we continue to aspire to achieve a rate of 0.1-0.2, Many of these companies (e.g. Diageo, Nestlé,
considered to be a best practice standard for comparable Coca-Cola and Unilever) also appear in the peer group
multinational organisations. of FMCG companies used to assess our performance
in the Long Term Incentive Plan (LTIP) – see page 37.
We are committed to providing a work environment
that is free from harassment, bullying and discrimination. 2006 survey results
There is no discrimination against people with disabilities The overall response rate for the survey in 2006 improved
who apply to join the Group and those with a disability over the previous year to reach 89 per cent.
Annual Review 2006 British American Tobacco 19
Operating and financial review

In all of the 15 categories in the 2006 survey, employee 9 Lost Workday Case Incident Rate (LWCIR)
opinion in British American Tobacco is significantly more LWCIR = No. of lost workday cases through injury or occupational illness
positive than in the FMCGs benchmarked by ISR. to employees x 200,000 ÷ total hours worked by all employees
There were also significant improvements in most of the 0.63
categories compared to the previous survey. 0.55
0.48* 0.49
See chart 10

Using the survey results
Of course, it is positive for us to know that our employees, 2001 2002 2003 2004 2005 2006
for example, understand our global vision and are proud
Since 2001, the LWCIR has decreased by 42%.
to be associated with the Company, but how can the
*For comparison purposes, the 2004 figure excludes new companies acquired. If these
survey be used to improve performance? acquisitions are included, the 2004 figure is 0.64.

ISR research shows that employee attitudes about
leading indicators (e.g. strategic direction, leadership,
talent, customer focus) tend to be significantly more
favourable in high performing organisations. The lagging
indicators (e.g. morale, efficiency, commitment) tend
to follow naturally. As the leading indicators tend to be
10 Your Voice survey 2006
the key drivers of improved organisational performance, British American Tobacco vs. ISR global FMCG companies norm
we concentrate our efforts on these particular areas.
Favourable scores Differences from benchmark
A number of the indicators (e.g. strategic direction, Survey follow up
75 8
morale) are drawn from a range of the categories shown
Pay and benefits
in Chart 10 and do not correspond directly to a single 55 8
category heading. Information and
communication 77 7
We are performing well in terms of many of the leading Leadership
indicators, including strategic direction and customer 72 6
Respect for our
focus. In response to scores that were less positive, we employees 69 6
have committed to put more focus on leading indicators Learning

such as leadership and talent. Recent actions include 64 6
setting clear targets for local representation on top teams Talent
60 6
and in succession plans.
Team working
79 5
The survey results are used at global, regional, local and
functional levels, while the learning from companies with 76 5
good results is captured and shared around the Group. Structure
68 5
The survey results also provide detailed information Corporate
about any areas of concern. If issues have been raised, responsibility 80 4
the companies work with employees on action plans Culture
79 4
to improve in the highlighted areas. Freedom through
responsibility 71 2
The Your Voice survey is a major undertaking across the
Enterprising spirit
Group and is key to the way we measure our performance 67 2
compared to the Group strategy. We will continue to seek Open minded
and respond to our employees’ opinions. 57 2

0 20 40 60 80 100 0 10
20 British American Tobacco Annual Review 2006
Operating and financial review


■ Europe
■ Asia-Pacific
■ Latin America
■ Africa and Middle East
■ America-Pacific
■ Associates

Volumes Revenue Operating profit
2006 2005 2006 2005 2006 2005
bns bns £m £m £m £m

Europe 247.7 244.0 3,545 3,497 781 784
Asia-Pacific 141.9 137.1 1,839 1,758 616 531
Latin America 152.6 149.3 1,791 1,555 611 530
Africa and Middle East 103.3 102.6 1,489 1,405 468 434
America-Pacific 43.8 45.0 1,098 1,110 424 436
689.3 678.0 9,762 9,325 2,900 2,715

Unallocated costs (103) (96)
Operating profit before exceptional items page 26 2,797 2,619

Revenue and operating profit, before
exceptional items, restated at comparable
rates of exchange page 26 9,774 9,325 2,799 2,619
Annual Review 2006 British American Tobacco 21
Operating and financial review

The following section contains:
The reported Group profit from operations was 8 per cent
higher at £2,622 million or, as explained on page 26, 21 Regional review
7 per cent higher on a like-for-like basis, with Asia-Pacific, – Europe
Latin America and the Africa and Middle East regions – Asia-Pacific
contributing to this good result. – Latin America
– Africa and Middle East

Group volumes from subsidiaries increased by 2 per cent
– America-Pacific
to 689 billion on both a reported and like-for-like basis.
– Unallocated costs
The reported Group revenue rose by 5 per cent to
– Results of associates
£9,762 million and also increased by 5 per cent on
a like-for-like basis. This excellent volume and revenue 26 Financial review
growth was achieved across a broad spread of markets. – Profit from operations
– Interest cover
The four Global Drive Brands continued their impressive
– Effective tax rate – subsidiaries
performance and achieved overall volume growth of
– Adjusted diluted earnings
17 per cent.
per share
Kent volume grew by 16 per cent with significant – Dividends per share declared
increases in Russia, Romania, Ukraine and Chile, and – Cash flow
share growth was also achieved in its major market, – Treasury options
Japan. Dunhill rose by 6 per cent, driven by strong – Changes in the Group
performances in South Korea, Taiwan, Australia, South – Changes in accounting policies
Africa and the Middle East, although it was lower in – Share buy-back programme
Malaysia due to a reduced total market.
30 Key Group risk factors
Lucky Strike volumes rose marginally as the growth in – Litigation
Spain, France, Italy and Indonesia was largely offset by – Regulation
declines as a result of lower industry volumes in Germany – Operations
and Japan. Pall Mall continued its exceptional growth – Excise and sales tax
and achieved an increase of 40 per cent, driven by – Illicit trade and intellectual
Spain, Greece, Poland, Russia and Bangladesh. property

– Information technology
– Financial
22 British American Tobacco Annual Review 2006
Operating and financial review


Europe in the other tobacco segments, although overall cigarette
In Europe, profit at £781 million was slightly lower mainly market share increased as Pall Mall and Winfield performed
as a result of very competitive trading conditions in a well. In Spain, despite strong growth in volumes and a
number of markets and the inclusion in the comparative much higher share, the results were adversely affected
period of a one-off benefit in Italy, resulting from the by the significantly reduced market profitability resulting
change in terms of trade following the sale of Etinera. from intense price competition.

Excluding this benefit, profit increased by £9 million,
The impressive performance in Russia continued through
with strong growth from Russia, Hungary, Italy and
strong volume and profit increases, with an improved
France, largely offset by declines in Spain, Poland,
product mix and lower production costs. A higher overall
Germany, the Netherlands and Ukraine. Regional volumes
market share resulted from significantly increased volumes
on a like-for-like basis were 2 per cent higher at 248 billion,
of Kent and Vogue, supported by good Pall Mall growth.
with growth in Russia, France, Spain and Hungary partly
In Romania, the Group continued to grow volumes and
offset by declines in Ukraine, Italy and Germany.
profit, consolidating its leadership position in a reduced
In Italy, profit grew strongly driven by improved margins market, affected by substantial excise increases.
after industry price increases and a successful productivity Volume performance was driven by its premium brands,
programme which has considerably reduced the overall particularly by Kent, which is now the largest selling
cost base. The growth in Global Drive Brands’ market share brand, as well as Dunhill and Vogue.
was more than offset by the decline in domestic brands.
In Ukraine, profitability was adversely affected by
Profit in Germany was slightly down due to excise driven the considerable decline in volumes. However, Kent,
volume declines in the overall market and down-trading Lucky Strike and Pall Mall grew market share. Profit grew
to lower price and margin products after the end of significantly in Hungary, benefiting from the recovery of
Stix production. These factors were partly offset by cost the legal market after improved border controls, efficiency
reductions and the good cigarette market share growth programmes and the strong volume growth from Viceroy
of Pall Mall and Lucky Strike, which led to a higher overall and Pall Mall. In Poland, industry profitability was severely
cigarette market share. affected by increased excise rates and aggressive price
competition. Volumes were down, although Pall Mall
Profit in France grew strongly, benefiting from higher
and Vogue grew both share and volume.
volumes, an improved product mix and lower costs.
In Switzerland, profit was higher due to the inclusion See chart 1

of the vending machine business acquired last year

and despite price competition. The continued growth
In Asia-Pacific, regional profit rose by £85 million to
of Parisienne volume and share was offset by the decline
£616 million, mainly attributable to good performances in
in other brands, resulting in overall volumes the same
Australasia, Malaysia, South Korea and Pakistan. Volumes
as last year and a lower market share.
at 142 billion were 4 per cent higher as strong increases
In the Netherlands, profit was lower due to higher in Pakistan, Bangladesh, South Korea and Vietnam were
excise levels and an adverse product mix, partly offset partially offset by declines in Malaysia and Indonesia.
by cost savings, while cigarette market share increased.
Profit grew strongly in Australia, as a result of improved
Profit in Belgium was affected by intense price competition
margins from a combination of product cost reductions,
Annual Review 2006 British American Tobacco 23
Operating and financial review

price increases and a substantial reduction in overheads. 1 Europe
Good performances from Winfield and Dunhill, and like-for-like information
the launch of Pall Mall, contributed to a higher overall 248
242 3,473 3,545
market share in a reduced total market. New Zealand
also showed strong profit growth in local currency as
margins increased but this was eroded by the weakening

of the currency. Volumes were in line with last year 772 781
despite the growth of Dunhill and Pall Mall and market 2005
share was slightly down. Volume Revenue Operating profit
(billions) (£ million) (£ million)

In Malaysia, profit increased strongly due to productivity
initiatives and higher margins, as well as the absence of 2 Asia-Pacific
like-for-like information
one-off costs which reduced profit in 2005. Dunhill and
Pall Mall grew market share but total volumes declined 1,758 1,839

due to reduced industry volumes as a result of the growth
137 142
of illicit trade and the impact of significant excise increases
in the past two years. In Vietnam, volumes increased 531
despite the higher prevalence of illicit brands. Pall Mall 2005
grew strongly following its launch in the middle of the Volume Revenue Operating profit
(billions) (£ million) (£ million)
year and Craven ‘A’ continued its growth. However, profit
was lower as a result of increased marketing investment.
In South Korea, impressive profit growth was achieved
from higher volumes and strong market share gains by
Dunhill and Vogue, helped by supply chain cost reductions.
Industry volumes increased, reflecting volume distortions
last year as a result of the excise increases at the end of
2004. Volumes and market share grew in Taiwan, but profit
was adversely impacted by higher marketing investment
and down-trading after manufacturers’ price increases.
In Pakistan, market leadership was strengthened with

excellent performances by Gold Flake and Capstan,
resulting in a strong market share increase. Profit was
up significantly with strong volume growth and higher
margins. In Bangladesh, volumes and market share were
higher while profit significantly increased, with improved
margins after industry-wide price increases. In Sri Lanka,
good profit growth was achieved with higher margins
and an improved product mix.
See chart 2
24 British American Tobacco Annual Review 2006
Operating and financial review


Latin America result of an improved product mix and higher margins.
Profit in Latin America increased by £81 million to Peter Stuyvesant’s volumes were in line with last year,
£611 million due to good performances across the while both Rothmans and Dunhill continued their strong
region, coupled with a stronger average exchange rate growth, with Dunhill recording its highest ever sales.
in Brazil. Volumes grew in many of the markets which However, reduced volumes for other brands resulted in a
led to an overall increase of 2 per cent to 153 billion. lower market share. In Nigeria, volumes and market share

grew with strong performances by Benson & Hedges and
In Brazil, volume and market share increased, benefiting
Pall Mall. Improved margins and volumes resulted in a
from marketing initiatives and continuing anti-illicit
higher profit.
trade operations by the government. Profit increased
substantially as a result of higher volumes, improved In the Middle East, volume and profit continued to grow
margins and the appreciation of the local currency. with good results from Iran, Iraq and the Arabian Gulf,
partly offset by the Levant. Dunhill was the main driver
The strong profit growth in Mexico was driven by
for the good performances in the Middle East. Profit in
higher margins, efficiency programmes and synergy
Egypt benefited significantly from higher volumes and
benefits from the contract manufacturing agreement
a reduction in costs.
with Canada. Volumes were slightly down as the growth
in international brands, notably Pall Mall, was more In Turkey, industry price increases led to higher margins,
than offset by the decline of local low-price brands. In which, together with lower production costs, ensured
Argentina, strong volume growth was achieved through a continued reduction in underlying operating losses.
an excellent performance by Viceroy and a reduction in However, the move to direct distribution in this market
illicit competition. However, profit was lower due to resulted in one-off costs which, together with lower
severe price competition. volumes, adversely impacted profitability.
In Chile, profit grew strongly as volumes and prices See chart 4

increased, the product mix improved and the currency
strengthened. GDBs, Kent, Lucky Strike and Pall Mall,
The profit from the America-Pacific region decreased
led the volume and share increases. In Venezuela, higher
by £12 million to £424 million, while volumes were
margins and increased volumes, led by Belmont and
down 3 per cent to 44 billion. The increases in profit
Consul, resulted in an excellent increase in profit and
and volumes from Japan were more than offset by
market share. The Central America and Caribbean area
lower contributions from Canada.
showed a significant profit increase as a result of higher

volumes and margins, an improved product mix, supply Profit in Canada was down £39 million to £280 million,
chain savings and the benefits from productivity initiatives. largely due to lower volumes following the growth of
illicit product and a shift to low-priced brands, as well
See chart 3
as the costs incurred in the move to direct distribution.
Africa and Middle East This was partially offset by the impact of efficiency savings,
Profit in the Africa and Middle East region grew by with the move of production to Mexico, and the stronger
£34 million to £468 million, mainly driven by South Canadian dollar. The premium segment now represents
Africa, Nigeria, the Middle East and Egypt. Volumes were 53 per cent of the total market compared with 57 per cent
slightly higher at 103 billion, as a result of Nigeria, Egypt last year. Imperial Tobacco Canada’s total cigarette market
and the Middle East, partly offset by decreases in Turkey. share was down 1 share point to 53 per cent.
In South Africa, despite the weaker average rand In Japan, volume, market share and profit grew strongly
exchange rate, good profit growth was achieved as a despite the decline in the total market. Market share
Founded in 1903 by Albino Souza Cruz with just
16 employees, Souza Cruz is today the undisputed
leader in the Brazilian cigarette market and is among
the largest companies in the country.
Souza Cruz employs around 6,000 people and sells
over 78 billion cigarettes a year. It also provides more
than 117,000 tons of tobacco leaf for export to more
than 50 countries on five continents.
This special feature focuses on how our global
strategy of Growth, Productivity, Responsibility and
Winning Organisation is working in Souza Cruz, a
company contributing significantly to the success
of British American Tobacco.

Special feature
Home to nearly 30 million smokers, Brazil is the sixth
largest cigarette market in the world. Brazil produces
around 10 per cent of the world’s tobacco and is the
largest exporter of tobacco leaf.
Spanning the full production cycle from ‘seed to smoke’,
Souza Cruz runs three processing plants, two factories
and an internationally acknowledged R&D centre. An
outstanding distribution operation results in 80 per cent
of volumes being delivered in less than 24 hours.

Processing plant, Santa Cruz do Sul
Innovation and creativity remained
key to the company’s early success.

Heritage that resulted in greater output
and further rapid development.
In 1903, at the age of just 32, Innovation and creativity remained
Portuguese immigrant Albino key to the company’s early success,
Souza Cruz and 16 employees with Dalila the first of a series of
began to produce cigarettes using an brands based on women’s names.
innovative rolling machine based in
The welfare of his workers was of
a house in the heart of Rio de Janeiro.
paramount importance to Albino
The machine was the first of its kind
Souza Cruz. In 1910, he introduced
in Brazil and was able to roll five
the coffee break to provide a dedicated
cigarettes simultaneously producing
rest period for employees and, in
Dalila, the first brand from Souza
1951, another trail-blazing initiative
Cruz & Cia. As demand for this initial
was launched in the form of medical
product rapidly grew, it soon became
Albino Souza Cruz – care for staff at the Bonfim factory.
necessary for production to move to
founder of Souza Cruz
larger premises and in 1910, Souza Souza Cruz was listed on the Rio de
Cruz purchased a snuff plant in the Janeiro and São Paolo Stock Exchanges
Rue Conde de Bonfim, with snuff in 1946 and 1957 respectively and
manufacture gradually replaced Albino Souza Cruz continued to chair
by cigarettes. the company until 1962. Two years
later, he passed away in Lisbon, leaving
In order to grow his company still
behind him a lasting legacy of one of
further, Albino Souza Cruz transferred
Brazil’s most successful business groups
stock control to the British American
and top-performing companies within
Tobacco Group in 1914, a move
British American Tobacco.

Packaging from an early Souza Cruz brand
Piola restaurant, São Paulo
Cinema foyer – Reserva Cultural, São Paulo

Hollywood – one of Souza Cruz’s leading brands
Souza Cruz leads the Brazilian
cigarette market.

Growth Global Drive Brands
Although the leading cigarette brands
Local brand strength in Brazil are local brands produced by
Souza Cruz leads the Brazilian Souza Cruz, British American Tobacco’s
Souza Cruz has over cigarette market, with six of the Global Drive Brands also have a
70 per cent of the country’s top-selling brands and growing presence in the market.
legal cigarette market a share of over 70 per cent of the
Kent’s launch in 2002 focused on
legal market. Its best-selling brand
brand innovation and was based
is Derby, which became a market

around its activated charcoal filter
leader in just three months when it
technology – a first in the Brazilian
was launched in 1993 and now has
cigarette market. In 2005, the 3-Tek
a share of around 32 per cent.
charcoal filter was introduced, again
Derby accounts for one out In total, Souza Cruz sells 16 brands highlighting Kent’s commitment
of every three cigarettes sold in Brazil including Capri, Charm, to using new technology to deliver
legally in Brazil Hilton, Plaza and Ritz, with more unique flavour.
than 30 variants. Leading brands
Lucky Strike continues to develop
include Hollywood, Souza Cruz’s
its market share through blend and
oldest brand, which became Brazil’s
flavour and packaging innovations.
best-selling cigarette during the
1980s. Launched in 1984, Free was
the first Souza Cruz brand to disclose
full lists of ingredients and smoke
constituents, an initiative that was
subsequently adopted by all Souza
Cruz brands. Carlton is the market
leader in the premium segment.
It was the first to launch a range
of flavoured new variants in 2003.
Agrega’s volume-based purchasing
power gives it a keen competitive
edge in negotiations with suppliers.

Productivity Agrega’s volume-based purchasing
power gives it a keen competitive edge
Reducing complexity and costs in negotiations with suppliers and
All British American Tobacco Group today, it encompasses over 80 groups
Savings on indirect purchases companies aim to reduce supply of materials and services such as IT,
in 2006 chain complexity and save costs, fuel and medical services.
with Souza Cruz being no exception.
Other British American Tobacco
In 2006, the company delivered

companies have used Agrega’s success
savings of £6 million on indirect
as a template for establishing their
purchases (anything other than
own versions. In Argentina, Nobleza
leaf, wrapping materials, cigarette
Piccardo has worked with Quilmes,
Savings of over £3 million in making machinery and labour).
the country’s biggest brewer, to set
supply chain management Souza Cruz also achieved savings
up a joint venture to reduce indirect
of over £3 million in its supply
costs and the business model has also
chain management through
been rolled out to Cigarrera Bigott in
closer alignment of leaf purchasing,
Venezuela. In 2006, Agrega moved
procurement negotiation,
into Canada and Mexico.
manufacturing and waste reduction.
Efficient distribution
The comprehensive Souza Cruz
Souza Cruz has pioneered an
distribution network directly services
innovative and collaborative approach
more than 200,000 points of sale. At
to delivering competitive advantage
the heart of the system is the São Paulo
through reducing the cost of indirects.
facility, the largest and most modern
In 2001, the company formed a joint cigarette distribution hub in Latin
venture called Agrega, with leading America. With around 1,000 vehicles
brewer AmBev, to identify potential and some 2,000 sales and delivery staff,
reductions in spending on 44 common Souza Cruz guarantees delivery periods
product groups in areas such as office of no more than 24 hours between
materials and travel. Using economies ordering and receipt of the product
of scale and mainly in-house expertise, almost everywhere in Brazil. Souza Cruz
Agrega soon became a benchmark has been acknowledged as a model
for procurement practice in Brazil, supplier and an international benchmark
attracting major clients including for FMCG logistical operations.
Nestlé, Pfizer and Unibanco.
Distribution Centre, São Paulo

Distribution Centre, São Paulo
Tobacco field, Santa Cruz do Sul

‘Available Here’ campaign at Varanda das Frutas, São Paulo
Souza Cruz remains committed to
reducing its environmental impacts
and preserving the biodiversity of
native forests.

Responsibility has been recognised by the RainForest
Alliance for managing these areas
Responsibility takes many forms in line with the stringent standards
at Souza Cruz, from youth smoking defined by the Forest Stewardship
prevention programmes to extensive Council and for its efforts to preserve
environmental commitment and the environment.
efforts to tackle illicit trade.
Tackling illicit trade
Examples include the ‘Available Here’ Illicit trade is a major problem in
Social Responsibility Programme, Brazil, negatively affecting many
which aims to ensure that retailers sectors of industry. Only recently it
comply with national legislation accounted for around a third of the
and do not sell tobacco products total cigarette market. Souza Cruz
to people under 18 years of age. has been working with the authorities
The initiative encourages retailers and other industries faced with similar
to think of the wider benefits to their problems to tackle the issue and
own communities, rather than profit these combined endeavours are
from tobacco sales to the underaged. beginning to achieve results. During
In 2006, more than 210,000 retailers 2006, smuggling was down 7 per cent
took part in the programme and and counterfeit dropped 45 per cent,
activities are set to expand in 2007. bringing the share of the total market
attributable to illicit trade below the
30 per cent level.
Souza Cruz remains committed to
reducing its environmental impacts and
preserving the biodiversity of native
forests. In southern Brazil, it owns
two reforestation areas that together
cover over 5,000 hectares and enable
the company to be self-sufficient
in wood fuel, a source of cleaner
renewable energy for its factories and
leaf processing plants. The company

210,000 5,000
Retailers in the ‘Available Here’ youth Hectares of forest land enabling Souza
smoking prevention programme Cruz to be self-sufficient in wood fuel
The programme recognises projects
that represent good examples of
leadership and adding value to
the business.

Winning Organisation plant are regularly updated to respond
to the needs of the new recruits and
Recruiting and developing talented the campaign has involved raising
managers at all levels remains central extensive awareness among employees
to the continuing success of Souza Cruz. of the relevance of a socially inclusive
The company runs a development working environment.
programme involving academic
Staff welfare is of key importance
centres of excellence in Brazil and
Andrew Gray – General Manager, Souza Cruz at Souza Cruz and the company
also places staff on secondment
was one of the first in Brazil to offer
in other British American Tobacco
supplementary pension funds before
companies, with around 40 managers
national private pension legislation
working abroad at any one time.
came into place. The Albino Souza
Initiatives such as the Souza Cruz Cruz Pension Foundation has continued
Golden Leaf Acknowledgement to evolve to offer greater security and
Programme aim to motivate employees better benefits to its members, making
and create a working environment a real contribution to employee
that fosters and encourages high satisfaction in the process.
performance by teams. The programme
Corporate social investment
recognises projects that represent
Many community-based projects are
good examples of leadership
run by the Institute of Souza Cruz, set
and adding value to the business,
up in 2000, with a particular focus
replicating a similar awards scheme
on education and training for young
held for senior management across
people in rural areas. Its core activity
British American Tobacco.
is the Rural Youth Entrepreneurship
Souza Cruz is committed to building Programme, which operates in the
a diverse workforce. For example, the three southernmost states of Brazil
leaf processing plant at Santa Cruz do and trains young people to manage
Sul launched a pioneering campaign their own lives and businesses.
in 2005 to further the recruitment of
people with special needs who apply
for seasonal work. All facilities at the

Staff welfare is of
key importance at
Souza Cruz
Managers working outside
Brazil, sharing their
knowledge and experience
Distribution in action in São Paulo

Visitors to the sense garden for the
visually impaired at Cachoeirnha
Souza Cruz is one of the most successful companies
within the British American Tobacco Group and the
following awards and achievements reflect some of
the passion, talent and commitment of its employees.

2006 awards 2006 achievements
• In its tenth year, the corporate category • For the second year in succession, Souza
of the Hummingbird (Beija-Flor) Trophy, Cruz was rated the best company in the
was awarded to Souza Cruz. The award Foods, Beverages and Tobacco sector
was presented by the RioVoluntário by the latest Biggest and Best Yearbook,
non-governmental organisation in which offers the most wide-ranging and
recognition of the Souza Cruz Volunteers accurate analysis of business in Brazil.
Programme, which involved most of the
• Souza Cruz was rated the best company
company’s members of staff and benefited
in the Foods, Beverages and Tobacco
more than 5,000 people across Brazil.
segment by the Agri-Business Yearbook.
• Souza Cruz was awarded the Sustainable
• Souza Cruz was voted the Best Company
Enterprise Prize by Meio-Ambiente
in Brazil’s leaf sector by the editors of
Industrial magazine. The criteria for
Global Finance magazine.
entry included meeting standards such
as ISO 14001 (Environment), SA 8000
(Social Responsibility) and OHSAS 18001
(Occupational Health and Safety), as well
as carrying out environmental and social
reporting audits.
• For the fifth year, Souza Cruz won
the Prize for Excellence in Customer
Services, awarded by Consumidor
Moderno magazine.
Annual Review 2006 British American Tobacco 25
Operating and financial review

growth accelerated during the second half of the year 3 Latin America
with strong performances from Kent and Kool. Profit like-for-like information
rose significantly due to the increased volumes, the 1,791
benefit of the manufacturers’ price increase and the 1,555
absence of one-off costs, which more than offset the 149 153
impact of exchange.
530 611

See chart 5
Unallocated costs Volume Revenue Operating profit
(billions) (£ million) (£ million)
Unallocated costs, which are net corporate costs not
directly attributable to individual regions, were £7 million 4 Africa and Middle East
higher at £103 million, mainly as a result of increased like-for-like information
pension costs. 1,405 1,489

The above regional profits were achieved before accounting
for restructuring costs and losses/gains on disposal of a 103 103
business, brands and joint venture, as explained on page 26. 434 468

Results of associates 2006
Volume Revenue Operating profit
The Group’s share of the post-tax results of associates (billions) (£ million) (£ million)
increased by £39 million to £431 million. Excluding the
exceptional items explained on page 26, the Group’s 5 America-Pacific
like-for-like information
share of the post-tax results of associates increased by
£38 million to £427 million. 1,110 1,098

The contribution from Reynolds American, excluding
brand impairment charges and the benefit from the 436 424
favourable resolution of certain tax matters in both 45 44
years, as well as other exceptional charges in 2005, 2006
was £18 million higher at £285 million. This was mainly Volume
(£ million)
Operating profit
(£ million)
due to improved pricing and cost reductions, partially
offset by lower volumes. As explained on page 29,

Reynolds American acquired Conwood on 31 May 2006.
Reynolds American reported that on a US GAAP pro forma
basis, as if it had been owned since the beginning of
2005, Conwood increased margins and profits for the
year to December 2006.
The Group’s associate in India, ITC, continued its strong
growth and, excluding the one-off items in 2005, its
contribution to Group profit rose by £11 million to
£91 million.
Associates’ volumes increased by 4 per cent to 241 billion,
and with the inclusion of these, total Group volumes were
930 billion (2005: 910 billion).
26 British American Tobacco Annual Review 2006
Operating and financial review


From 1 January 2005, the Group is reporting under In 2006, the Group sold its Muratti Ambassador brand
International Financial Reporting Standards (IFRS). The in certain markets, as well as the L&M and Chesterfield
move to IFRS has made the reporting of performance trademarks in Hong Kong and Macao, while acquiring the
more complex. Benson & Hedges trademark in certain African countries.
The transactions resulted in a gain of £60 million.
However, the changes in IFRS during 2006 have not
had a material impact on the Group’s results. The only Profit from operations in 2005 benefited from a

change to impact the income statement is an amendment £72 million gain, principally in respect of the disposal
to IFRS in respect of foreign exchange. This required a of certain trademarks in Malta, Cyprus and Lithuania.
restatement of the 2005 results to increase net finance
Below profit from operations, net finance costs at
costs by £4 million, with a compensating adjustment
£289 million were £61 million higher than last year,
reflected directly in changes in total equity.
principally reflecting the impact of higher interest
Profit from operations like-for-like rates as well as derivatives.
The reported Group profit from operations was 8 per cent
Interest cover
higher at £2,622 million. The table below shows like-for-like
The Group assesses its financial capacity by reference to
operating profit after excluding exceptional items and the
cash flow and interest cover. Interest cover is distorted
impact arising from the change in terms of trade in Italy
by the pre-tax impact of the exceptional items and net
following the sale of Etinera in December 2004.
finance cost distortions reflected in the adjusted earnings
2006 2005
£m £m per share as explained below. The chart shows the cover,
adjusting for these items, on the basis of profit before
As reported (page 42) 2,622 2,420
interest payable over interest payable. The interest cover
Restructuring costs (page 42) 216 271
remains strong at 8.1x (2005: 8.8x), with the lower cover
Losses/(gains) on impairment of a
reflecting higher interest costs.
business and disposal of brands and
joint venture (page 42) (41) (72) See chart 2

2,797 2,619 At 31 December 2006, the ratio of floating to fixed rate
Etinera – change in terms of trade (12) financial liabilities was 58:42 (2005: 55:45).
Like-for-like 2,797 2,607 As explained on page 25, the Group’s share of the
post-tax results of associates, included at the pre-tax level
On this basis, the operating profit for 2006 of £2,797 million

under IFRS, increased by £39 million to £431 million, after
would represent growth of 7 per cent. The overall impact of
exceptional net income of £4 million (2005: £3 million).
foreign exchange for the year as a whole was not material.
The exceptional items are shown as memorandum
See chart 1 information on the Group Income Statement (page 42).
Details of the Group’s operating performance excluding Profit before tax was up £180 million at £2,764 million,
exceptional items can be found on pages 20 to 25. principally reflecting the higher profit from operations.
The Group continued its review of manufacturing Effective tax rate – subsidiaries
operations and organisational structure, including the The tax rates in the income statement of 25.9 per cent
initiative to reduce overheads and indirect costs. Further in 2006 and 26.7 per cent in 2005 are affected by the
restructurings continued in 2006 and on 22 September inclusion of the share of associates’ post-tax profit in
agreement was reached on the closure of the plant at the Group’s pre-tax results.
Zevenaar in the Netherlands. The plant will close by the
The underlying tax rate for subsidiaries, adjusted to
end of 2008 with the production being transferred to
remove the distortions as reflected in the adjusted
Bayreuth in Germany and Augustow in Poland. The total
earnings per share below, was 29.6 per cent in 2006
restructuring costs of £216 million for 2006 principally
and 31.4 per cent in 2005; the decrease reflects the
comprise costs in respect of Zevenaar and further costs for
inclusion of a tax credit in Canada in respect of prior
the UK and Canadian restructurings announced in 2005.
years and changes in the mix of profits.
The agreement to sell the Italian cigar business described on
See chart 3
page 29 resulted in the recognition of a loss of £19 million,
including an impairment charge of £15 million.
Annual Review 2006 British American Tobacco 27
Operating and financial review

Adjusted diluted earnings per share 1 Profit from operations like-for-like
Basic earnings per share for 2006 were 92.08p (2005: 84.34p). £ million
With the distortions that can occur in profit over the
years, as well as the potential dilutive effect of employee
share schemes, earnings per share is best viewed on
the basis of adjusted diluted earnings per share. This

removes the impact of exceptional items which are
shown as memorandum information in the Group
2005 2006
Income Statement on page 42. The main items are
restructuring costs, loss on impairment of a business 2 Interest cover
and gains on disposal of brands and a joint venture. times
In addition, the calculation adjusts for certain distortions
in net finance costs arising under IFRS in 2005, as well as
reflecting the impact of the potential conversion of shares.
On this basis, the earnings per share are 98.12p,
a 10 per cent increase over 2005, as the higher net
finance costs and minority interests were more than 2005 2006
offset by the improvement in profit from operations,
the share of associates’ post-tax results, a lower tax rate 3 Underlying tax rate – subsidiaries
and the benefit from the share buy-back programme. percentage

31.4 29.6
See chart 4

Dividends per share declared
With the recommended final dividend of 40.2p,
the total dividends per share declared for 2006 are
55.9p, up 19 per cent on the prior year. Under IFRS,
2005 2006
the recommended final dividend in respect of a year
is only provided in the accounts of the following year. 4 Adjusted diluted earnings per share
Therefore, the 2006 accounts reflect the 2005 final dividend pence

and the 2006 interim dividend amounting to 48.7p
(£1,008 million) in total (2005: 43.2p – £910 million).
The table on page 28 shows the dividends declared in
respect of 2006 and 2005.
As explained in the Chairman’s Statement, the previous
policy was to pay out as dividends at least 50 per cent of 2005 2006
long term sustainable earnings but the Board has decided
to raise the ratio to 65 per cent by 2008 in progressive 5 Dividends per share declared
steps. Dividends per share declared for 2006 represent pence
57.0 per cent of adjusted fully diluted earnings per share 55.9
(2005: 52.6 per cent).
See charts 4 and 5
Total equity was £189 million lower at £6,688 million.
The profit retained after payment of dividends exceeded
2005 2006
the impact of the share buy-back by £388 million. However,
this was more than offset by a £580 million adverse impact
from exchange movements, reflecting the general strength
of sterling.
28 British American Tobacco Annual Review 2006
Operating and financial review


Cash flow The other net flows in 2006 principally reflect the purchase
2006 2005
£m £m of minority interests in Chile and shares for the Group’s
share-based compensation plans, largely offset by the sale
Net cash from operating activities of Toscano in Italy and the sale of brands. The other net
before restructuring costs and taxation 3,295 3,229 flows in 2005 mainly arise from the acquisition of further
Restructuring costs (220) (143) shares in the Group’s Danish associate and the acquisition
Taxation (713) (762) of Restomat AG in Switzerland, partly offset by the

Net cash from operating activities 2,362 2,324 proceeds of the brand sale to Gallaher.
Net interest (263) (231)
Net capital expenditure (419) (378) The above flows resulted in net cash inflows of £28 million
Dividends to minority interests (139) (133) compared to £122 million in 2005. After taking account
of transactions related to borrowings, especially the net
Free cash flow 1,541 1,582 repayment of borrowings, the above flows resulted in a
Dividends paid to shareholders (1,008) (910) net decrease of cash and cash equivalents of £292 million
Share buy-back (500) (501) compared to a net decrease of £115 million in 2005, as
Other net flows (5) (49) shown in the IFRS cash flow above.
Net cash flows 28 122
These cash flows, after an adverse exchange impact
IFRS cash flow of £96 million, resulted in cash and cash equivalents,
Net cash from operating activities 2,362 2,324 net of overdrafts, decreasing by £388 million in 2006
Net cash from investing activities (315) (292) (2005: £66 million).
Net cash from financing activities (2,339) (2,147) Borrowings, excluding overdrafts but taking into account
Net cash flows (292) (115) derivatives relating to borrowings, were £6,401 million
compared to £7,117 million as at 31 December 2005.
The IFRS cash flow includes all transactions affecting cash The decrease in this figure principally reflected the net
and cash equivalents, including financing. The alternative repayment of borrowings and the impact of exchange
cash flow above is presented to illustrate the cash flows movements.
before transactions relating to borrowings.
Current available-for-sale investments at 31 December 2006
The Group’s net cash flow from operating activities at were £128 million (31 December 2005: £96 million).
£2,362 million was £38 million higher. The growth in
As a result of the above borrowings, net of cash, cash

underlying operating performance was offset by the
equivalents and current available-for-sale investments,
timing of working capital movements. However, a
were £4,996 million (31 December 2005: £5,357 million).
£49 million fall in tax outflows, reflecting the timing of
payments, as well as £66 million higher dividends from Treasury operations
associates more than offset the higher restructuring flows. Treasury is tasked with raising finance for the Group,
managing the financial risks arising from underlying
After higher net capital expenditure and net interest
operations and managing the Group's cash resources.
flows, with similar levels of dividends to minority interests,
All these activities are carried out under defined policies,
the free cash flow is £41 million lower than in 2005 at
procedures and limits.
£1,541 million. This inflow exceeds the total cash outlay
on dividends to shareholders and share buy-back by The Board reviews and agrees the overall treasury policies
£33 million. and procedures, delegating appropriate authority to the

Dividends declared
2006 2005
Pence Pence
per share £m per share £m

Ordinary shares
Interim 2006 paid 13 September 2006 (see page 45) 15.7 323 14.0 293
Final 2006 payable 3 May 2007 40.2 821 33.0 685
55.9 1,144 47.0 978
Annual Review 2006 British American Tobacco 29
Operating and financial review

Finance Director, the Treasury function and the boards of formed joint venture between British American Tobacco
the central finance companies. The Finance Director chairs and Honda Motor Co. Ltd, acquired the BAR business.
the boards of the major central finance companies. Any On 4 October 2005, the Group announced that it had
significant departure from agreed policies is subject to the agreed the sale of its 55 per cent shareholding in BARH
prior approval of the Board. to Honda and the sale was completed on 20 December
2005. As a result of these transactions, a gain of £5 million
Clear parameters have been established, including levels

was included in profit from operations. For the period
of authority, on the type and use of financial instruments
7 January 2005 to 20 December 2005, BARH was equity
to manage the financial risks facing the Group. Such
accounted reflecting shared control with Honda.
instruments are only used if they relate to an underlying
exposure; speculative transactions are expressly forbidden On 21 October 2005, the Group announced the exercise
under the Group’s treasury policy. The Group’s treasury of its pre-emption rights over shares in Skandinavisk
position is monitored by the Group Treasury Committee, Tobakskompagni AS, its Danish associate company, and
which meets seven times a year and is chaired by the the transaction was completed on 12 December 2005.
Finance Director. Regular reports are provided to senior This increased the Group’s holding from 26.6 per cent
management, and treasury operations are subject to periodic to 32.3 per cent at a cost of £95 million, resulting in
independent reviews and audits, both internal and external. goodwill of £69 million.
One of the principal responsibilities of Treasury is to On 25 November 2005, the Group acquired Restomat
manage the financial risk arising from the Group’s AG, the largest operator of cigarette vending machines in
underlying operations. Specifically, Treasury manages, Switzerland, at a cost of £25 million, resulting in goodwill
within an overall policy framework, the Group's exposure of £7 million.
to funding and liquidity, interest rate, foreign exchange
On 10 March 2006, the Group’s Italian subsidiary
and counterparty risks. Derivative contracts are only
signed an agreement to sell its cigar business, Toscano,
entered into to facilitate the management of these risks.
to Maccaferri for €95 million. The sale was subject
During 2005, the Group issued one further bond maturing to regulatory and governmental approval and was
in 2012, which raised €750 million; the proceeds were completed on 19 July 2006. This agreement resulted in
used to refinance maturing bond issues. In addition, the recognition of an impairment charge of £15 million.
the Group’s central banking facility was renewed for an
From August 2006, the Group purchased minority
increased amount of £1.75 billion for a term of five years
interests in its subsidiary in Chile for a cost of £91 million,
(with two additional one year extension options) and on

raising the Group shareholding from 70.4 per cent to
significantly improved terms.
96.5 per cent. The goodwill arising on these transactions
During 2006, the Group issued three bonds (€525 million was £80 million and the minority interests in Group equity
maturing in 2010, €600 million maturing in 2014 and were reduced by £11 million.
£325 million maturing in 2016) and the proceeds were
On 31 May 2006, the Group’s associate, Reynolds American,
used to refinance maturing bond issues. In addition, the
completed the acquisition of Conwood, the second largest
Group’s central banking facility was extended on existing
manufacturer of smokeless tobacco products in the US,
terms under the first extension option to a term of five
for US$3.5 billion. The acquisition was funded principally
years (plus one remaining one year extension).
with debt, and the fair value of assets acquired and liabilities
The Group continues to target investment-grade credit assumed was US$4.1 billion and US$0.6 billion respectively.
ratings; as at 31 December 2006 the ratings from Moody’s
Changes in accounting policies
and S&P were Baa1/BBB+ (end 2005: Baa1/BBB+). The
In December 2005, the International Accounting Standards
strength of the ratings has underpinned the debt issuance
Board issued an amendment to IAS21 on foreign exchange
during 2005 and 2006 and the Group continues to enjoy
rates. The amendment to IAS21 allowed inter company
full access to the debt capital markets.
balances that form part of a reporting entity’s net investment
Changes in the Group in a foreign operation to be denominated in a currency
The Group ceased to be the controlling company of other than the functional currency of either the ultimate
British American Racing (Holdings) Limited (BAR) on parent or the foreign operation itself. This means that
8 December 2004, when BAR went into administration. certain exchange differences previously taken to the
The Group consequently ceased to consolidate BAR from income statement are instead reflected directly in changes
that date. On 7 January 2005, BARH Ltd. (BARH), a newly in total equity. However, as this amendment was only
30 British American Tobacco Annual Review 2006
Operating and financial review


adopted by the EU in 2006, the interim report to 30 June Introduction
2006 contained the first published results to reflect this A description of the key risk factors that may affect the
change. The previously published results have been restated British American Tobacco Group’s business is outlined
accordingly, which has resulted in an increase in net finance below. Not all of these factors are within the control of
costs of £4 million for the year ended 31 December 2005. British American Tobacco and other factors besides those
listed below may affect the performance of its business.
While this amendment was not applicable for Group

This section highlights some of these particular risks but
reporting until it was endorsed by the EU, as this was
it is not intended to be an extensive analysis of all risks
expected in 2006 it was allowed for in the adjusted
affecting the Group. Some risks may be unknown at
earnings per share calculations in the published results
present and other risks, currently regarded as immaterial,
for the year ended 31 December 2005.
could turn out to be material in the future. All of these
The International Accounting Standards Board issued IFRIC risks have the potential to have an adverse impact on the
Interpretation 4 which is applicable for annual reporting Group’s business; its revenues, profits, assets, liquidity and
periods beginning on or after 1 January 2006. This capital resources. These risks should be considered with
interpretation is to determine whether an arrangement, reference to the statement on internal control on page 71
which is not in the legal form of a lease, is in substance of the Annual Report and Accounts (the main aspects of
a lease and should be accounted for in accordance with which are summarised below) and the cautionary statement
IAS17 (Leases). This has resulted in the recognition of regarding forward-looking statements on page 32.
certain arrangements as leases. The previously published
Risk management in summary
balance sheet for 2005 has been restated in respect of
The Company maintains a sound system of internal
finance leases to increase property, plant and equipment
control with a view to safeguarding shareholders’
by £4 million and borrowings by a similar amount but
investment and the Company’s assets. It is designed to
there was no impact on the Group’s reported profit.
manage risks that may impede the achievement of the
In 2005, IAS32 and IAS39 on financial instruments were Company’s business objectives rather than to eliminate
applied from 1 January 2005. This resulted in a £42 million these risks and can therefore provide only reasonable, not
reduction in the Group equity at that date, which is shown absolute, assurance against material misstatement or loss.
as the change in accounting policy on page 44.
The Group uses audit committees at both regional and
Share buy-back programme end market levels to support the Audit Committee (see
The Group initiated an on-market share buy-back page 33) in monitoring risks and control. This framework

programme at the end of February 2003. By the close of provides a continuing process for identifying, evaluating
business on 1 March 2007, we expect that some 35 million and managing the significant risks faced by the Company
shares will have been bought back since 1 January 2006 and its subsidiaries. The Group’s regional audit committees
at a cost of £500 million (see page 45). During 2005, (which are all chaired by an Executive Director) focus
45 million shares were bought at a cost of £501 million. on risks and the control environment within each region
and are in turn supported by end market or area audit
committees. The regional audit committees’ reviews
include consideration of the effectiveness of the process
for identifying, evaluating and managing the risks of the
business and the assessments of internal control and
business risks completed by operating companies.
In addition, the Corporate Social Responsibility (CSR)
Committee (see page 33) is responsible for identifying
and assessing, in conjunction with management,
the significant social, environmental and reputational
risks facing the Group’s business and for evaluating
management’s handling of such risks. In this, it is similarly
supported by a framework of regional and end market
CSR committees.
The Group is involved in a number of legal and
regulatory court proceedings in a number of countries.
Annual Review 2006 British American Tobacco 31
Operating and financial review

These proceedings may be characterised as covering Further, taking into account the significant number of
smoking and health issues and include claims for personal regulations applying to the Group’s businesses across
injury and claims for economic loss arising from the the world, it is possible that there may be allegations of
treatment of smoking and health related diseases. Regulatory breaches of regulations. Even when such allegations are
proceedings may result in a challenge to new regulations. proven untrue, there is often a reputational impact and
In addition, there are legal proceedings and a governmental a financial cost in defending such allegations.

investigation in Canada arising from alleged past smuggling
activities with consequent claims for unpaid excise tax.
The Group has substantial operations in over 180 countries.
A fuller analysis of current legal proceedings to which
The Group’s results are influenced by the economic,
the Group is subject is set out on pages 130 to 136 of
regulatory and political situations in the countries and
the Annual Report and Accounts and pages 45 to 47
regions in which it has operations. Some countries in
of the Annual Review.
which the Group operates face the threat of increasing
While it is impossible to be certain of the outcome of civil unrest and can be subject to frequent changes in
any particular case or of the amount of any possible regime. In others, terrorism, conflict and the threat of war
adverse verdict, the Company believes that the defences may have a significant impact on the business environment.
of the Group companies to all these various claims are Some countries maintain trade barriers or adopt policies
meritorious both on the law and the facts. Nevertheless, that favour domestic producers, preventing or restricting
it is not impossible that the results of operations or cash sales by the Group. There can be no assurance that political,
flows of the Group could be materially affected by the social, legal, economic, trade or other developments, as
final outcome of any particular litigation. well as theft and fraud, will not have an adverse impact
on the Group’s investments and businesses or on the
Group’s consolidated results of operations.
The Group’s businesses operate under increasingly
stringent regulatory regimes around the world. Further Severe disruption to any aspect of the Group’s supply
regulation is expected, particularly as a result of the chain or suppliers’ operations could have an adverse
World Health Organisation’s Framework Convention on impact on the Group’s ability to produce and deliver to
Tobacco Control (FCTC) and increasingly active tobacco customer demands. In certain markets, the distribution
control activities outside the FCTC. It is not possible to of Group products is through channels managed by
predict where, when and in what form regulations will third parties, and often licensed by governments. In
be enacted, but regulation of the tobacco industry these instances, loss of distribution, and therefore a

generally covers: reduction in sales volumes and revenues, is a possibility.
• Product: product design and attributes (e.g. ‘low
The raw materials used in the Group’s business are
ignition propensity paper’) as well as product disclosures
commodities that are subject to price volatility caused by
(e.g. ingredients, additives, emissions);
factors such as weather conditions, growing conditions,
• Packaging: pictorial warnings, rotating warnings,
local planting decisions, market fluctuations and changes
use of colours and size;
in agricultural regulations. Commodity price changes that
• Promotion: communications regarding the Group’s
are beyond the Group’s control may result in unexpected
products at both retail and trade levels;
increases in raw materials and packaging costs for the
• Purchase: the manner in which cigarettes are sold, such
Group’s products.
as type of outlet (e.g. supermarkets, vending machines)
and how they are sold (e.g. above the counter versus The Group operates in highly competitive businesses and
beneath the counter); geographical markets. To maintain a competitive advantage,
• Place: regulations as to the places where adults can it must anticipate and respond to new consumer trends
and cannot smoke tobacco products; through continuous innovation. The Group also seeks
• Price: regulations as to the price the Group can charge to develop and market new products, packaging and
for its products (e.g. by excise or minimum prices). technologies, including products with potentially reduced
harm. Development of these products is an expensive and
These regulations may have an impact on volumes (e.g. as
lengthy process, but there are anticipated advantages for
a result of restrictions on where cigarettes may be smoked)
any manufacturer who introduces these products to the
and profits (e.g. as a result of diminution of brand equity
market first. Competitors’ speed-to-market in branding
leading consumers away from premium brands, through
changes, new product launches, or changes in product
excise increases and/or through increased cost of complying
mix, could have an adverse effect on the Group’s operations.
with product design, disclosure or packaging requirements).
32 British American Tobacco Annual Review 2006
Operating and financial review


In tough competitive environments, where the price burden Financial
on consumers is high because of taxation or limited The Group’s subsidiary undertakings operate over
purchasing power, the Group is vulnerable to competitors 120 active retirement benefit arrangements worldwide.
aggressively taking market share through price repositioning, These arrangements have been developed in accordance
which generally has the impact of reducing the overall with local practices in the countries concerned. The
profit pool of the market and, ultimately, Group profits. majority of employees belong to defined benefit schemes,

most of which are funded externally, although the Group
Excise and sales tax
operates a number of defined contribution schemes. The
Tobacco products are subject to substantial excise and
contributions to the Group’s defined benefit schemes and
sales taxes in most countries in which the Group operates.
their valuations are determined in accordance with the
In many of these countries, taxes are generally increasing
advice of independent, professionally qualified actuaries.
but the rate of increase varies between countries and
Changes in asset returns, salary increases, inflation, long
between different types of tobacco products. Increased
term interest rates and other actuarial assumptions could
tobacco taxes, or changes in relative tax rates for different
have an adverse impact on the Group.
tobacco products, or adjustments to excise structures,
may result in a decline in overall sales volume for the Funding and liquidity risks expose the Group to shortages of
Group’s products or may alter the Group’s sales mix in cash and cash equivalents needed in the Group’s operations
favour of Value-for-Money brands. Increases in tobacco and for refinancing of existing debt. The Group cannot be
taxes can also lead to consumers rejecting the Group’s certain that it will at all times have access to the bank and
legitimate tax-paid products for products from illicit sources. capital markets and that the failure to achieve such access
will not have an adverse effect on the Group’s funding
Illicit trade and intellectual property
and liquidity position and on its credit ratings.
Illicit trade in the form of counterfeit products, smuggled
genuine products and locally manufactured product on The Group is exposed to changes in currency rates on
which applicable taxes are evaded, represents a significant the translation of the net assets of overseas subsidiaries into
and growing threat to the legitimate tobacco industry. the Group’s reporting currency, sterling. The Group is also
Increasing excise rates are encouraging more consumers exposed to currency changes from the translation of profits
to switch to illegal cheaper tobacco products and providing earned in overseas subsidiaries; these exposures are not
greater rewards for smugglers. Illicit trade can have an normally hedged. Exposures also arise from the foreign
adverse effect on Group volumes, restrict the ability to currency denominated trading transactions undertaken
increase selling prices and damage brand equity. by subsidiaries and dividend flows. The Group maintains

both floating and fixed rate debt. Where appropriate, the
The brand names under which the Group’s products
Group also uses derivatives, primarily interest rate swaps,
are sold are key assets. Investments over a period of time
to vary the fixed to floating mix. Changes in currency
have led to many of the Group’s brands having significant
values and interest rates could have an adverse impact
brand equity and global appeal to consumers, essential
on the financial condition or operations of the Group.
for delivering sustainable profit growth into the future.
The protection and maintenance of the reputation of Cash deposits and other financial instruments give rise
these brands is important to the success of the Group. to credit risk on the amounts due from counterparties.
In a number of countries around the world, the risk of The failure of any counterparty to meet its obligations to
intellectual property rights’ infringement remains high the Group could have an adverse effect on the financial
as a result of limitations in judicial protection and/or condition or operations of the Group.
inadequate enforceability. Any substantial erosion in
Further details on the Group’s financial management
the value of the brands could have an adverse effect
and treasury operations are on page 28.
on the Group.
Information Technology
The Group is increasingly reliant on information Cautionary Statement: the Operating and Financial Review and certain
technology systems for its internal communications, other sections of this document contain forward looking statements
controls, reporting and relations with customers and which are subject to risk factors associated with, among other things,
suppliers. A significant disruption due to computer the economic and business circumstances occurring from time to time
in the countries and markets in which the Group operates. It is believed
viruses, malicious intrusions, the setting up of shared that the expectations reflected in these statements are reasonable but
services centres or the installation of new systems could they may be affected by a wide range of variables which could cause
affect the Group’s communications and operations. actual results to differ materially from those currently anticipated.
Annual Review 2006 British American Tobacco 33
Summary Corporate Governance and Summary Financial Statement


Corporate governance Company’s business objectives rather than to eliminate
British American Tobacco is committed to maintaining these risks. The internal control system can therefore
high standards of corporate governance. Our corporate only provide reasonable, not absolute, assurance against
governance framework is directed towards achieving material misstatement or loss.
our business objectives in a manner which is responsible
The Audit Committee is chaired by Robert Lerwill. Its
and in accordance with high standards of honesty,

role is to monitor the integrity of the financial statements
transparency and accountability. These principles are
of the Company, review and, where appropriate, make
reflected in our Standards of Business Conduct, which
representations to the Board on business risks, internal
have been in place for many years and are kept under
control and compliance.
continual review in order to ensure that they remain
at the forefront of best business practice. Every Group The Corporate Social Responsibility Committee is chaired
company and every employee worldwide is expected by Kenneth Clarke and its role is to help identify and assess,
to live up to them. In addition, the principles set out with management, those significant social, environmental
within our Statement of Business Principles are designed and reputational risks that might impair the Company’s
to help meet the expectations placed on us by our various strategic objective to be recognised as a responsible
stakeholders. Both documents are available from the company in a controversial industry. The Committee
Company Secretary and through our website. also evaluates the adequacy of the Company’s policies
in this area and makes recommendations for change.
The principal governance rules applying to UK companies
listed on the London Stock Exchange are contained in the The Nominations Committee is chaired by Jan du Plessis.
Combined Code on Corporate Governance adopted by the Its role is to make recommendations to the Board on
Financial Reporting Council in July 2003 (the Code). The suitable candidates for appointment to the Board and
Company has either complied with the Provisions of the Management Board, ensuring that both boards have an
Code throughout the year or else a full explanation (in the appropriate balance of expertise and ability. In addition,
case of the continuing appointment of Rupert Pennant-Rea) it is responsible for reviewing the succession plans for the
has been provided in the Corporate Governance Statement Executive Directors and members of the Management Board.
at pages 67 to 72 of the Annual Report and Accounts
The Remuneration Committee is chaired by Kenneth
where it has not. The Board therefore considers that the
Clarke and the summary remuneration report below
Company has satisfied its obligations under the Code.
sets out its role, responsibilities and policies during 2006.
The Board and its Committees

The Board is responsible to the Company’s shareholders
for the success of the Group and for its overall strategic
direction, its values and its governance. Among the
key matters on which the Board alone may make
decisions are the Group’s business strategy, its annual
budget, dividends and major corporate activities. It is
also responsible for reviewing the Company’s internal
control and governance system and for approving our
Standards of Business Conduct. It held seven scheduled
meetings in 2006. Responsibility for implementing the
Group’s strategy and for creating the conditions for the
Group’s successful day-to-day operation is delegated to
the Management Board, which met nine times in 2006.
The Board is also responsible for the overall system
of internal control for the Company and its subsidiaries
and for reviewing the effectiveness of the system. It carries
out such a review at least annually, covering all material
controls including financial, operational and compliance
controls and risk management systems, and reports to
shareholders that it has done so. The system is designed
to manage risk that may impede the achievement of the
34 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


Jan du Plessis (British/South African) The Rt. Hon. Kenneth Clarke QC MP Paul Adams (British) Paul Rayner (Australian)
Chairman ▲ (British) Chief Executive Finance Director
Appointed Chairman in July 2004, Deputy Chairman and Senior Appointed a Director in March 2001 Joined Rothmans Holdings Limited
having been a Non-Executive Director Independent Non-Executive Director and Chief Executive in January 2004. in Australia in 1991. He held senior
since his appointment to the Board in ▲■●◆ He joined British American Tobacco executive positions with Rothmans
1999. He was previously Group Finance Appointed a Director in 1998. in July 1991 and held senior before becoming Chief Operating
Director of Richemont. He is Chairman He is Chairman of the Remuneration appointments as Regional Director, Officer of British American Tobacco
of the Nominations Committee. and Corporate Social Responsibility Asia-Pacific and Regional Director, Australasia Limited in September 1999.
He is Chairman of RHM plc and a Committees. He is Non-Executive Europe prior to becoming Deputy He became Finance Director in January
Non-Executive Director of Lloyds TSB Director of Foreign & Colonial Managing Director in June 2001 and 2002. He has been a Non-Executive
Group plc. (53) Investment Trust PLC and Independent Managing Director in January 2002. (53) Director of Centrica plc since
News & Media (UK) Limited. (66) September 2004. (52)

Antonio Monteiro de Castro (Brazilian) Piet Beyers (South African) Robert Lerwill (British) Dr Ana Maria Llopis (Spanish)
Chief Operating Officer and Director, Non-Executive Director▲ ◆ Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ■ ● ◆
America-Pacific Appointed a Director in June 2004. He Appointed a Director in 2005, he is Appointed a Director in 2003. She
Appointed a Director in March is an Executive Director of Richemont Chairman of the Audit Committee. is Executive Deputy Chairman of the
2002 and Chief Operating Officer and a Non-Executive Director of Distell He has been Chief Executive of Aegis J F Llopis Foundation and a member
in January 2004. He is President of Group Limited and Remgro Limited Group plc since 2005 and was formerly of the Good Governance Working
the administrative council of Souza where he was previously Marketing a Director of Cable & Wireless plc and Group for Spanish listed companies.
Cruz SA and a member of the board Strategy Director. (57) WPP Group PLC. He is Non-Executive Previously she was Executive Vice-
of the Getulio Vargas Foundation. Director of Synergy Healthcare plc President at Indra and Chief Executive

He has been a Director of Reynolds and a Director of The Anthony Nolan of Openbank, the Santander Group
American Inc. since July 2004. (61) Trust. (55) online bank. (56)

Rupert Pennant-Rea (British) Anthony Ruys (Dutch) Sir Nicholas Scheele (British/US) Thys Visser (South African)
Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ■ ● ◆ Non-Executive Director ▲ ◆
Appointed Non-Executive Director of A Director from March 2006. He joined Appointed a Director in 2005. A Director since 2001. He is CEO of
B.A.T Industries p.l.c. in 1995, Heineken N.V. in 1993 becoming Formerly President and Chief Operating Remgro Limited, having held senior
becoming a Director of British Chairman in 2002. He is a member of Officer of Ford Motor Company. He is management positions with Rembrandt
American Tobacco in 1998. He will the Supervisory Boards of ABN AMRO Chancellor of the University of Warwick. Group since 1980. He is Chairman of
retire at the conclusion of this year’s Bank and Sara Lee International B.V. He is Chairman of The Cambridge-MIT Rainbow Chicken Ltd and is a Non-
Annual General Meeting. Formerly and a director of Lottomatica S.p.A. Institute and Director of Pegasus Executive Director of Medi-Clinic
Editor of The Economist and Deputy (Italy). He was appointed an Officer Holdings Group (USA), Grupo Proeza Corporation Limited, Nampak Limited
Governor of the Bank of England. He is in the Order of Orange-Nassau in (Mexico) and Caparo plc. (63) and Distell Group Limited. (52)
Chairman of Henderson Group plc and 2005. (59)
Electra Kingsway VCT plc. (59)
Annual Review 2006 British American Tobacco 35
Summary Corporate Governance and Summary Financial Statement


Flavio de Andrade (Brazilian) John Daly (Irish) Nicandro Durante (Italian) Rudi Kindts (Belgian)
Director, Latin America and Caribbean Director, Asia-Pacific Director, Africa and Middle East Director, Human Resources
Joined the Management Board as Joined the Management Board as Appointed Regional Director for Africa Joined British American Tobacco in
Regional Director for Latin America and Regional Director for Asia-Pacific in and Middle East and appointed to the 1988. He has held a number of senior
Caribbean in January 2004, following a October 2004. He held a number of Management Board in March 2006. human resources roles across the
long career in Brazil with Souza Cruz senior management roles for Rothmans He previously held senior financial and Group (including Europe, Africa, the
SA, assuming a variety of senior International in Europe and the Far East general management roles in Brazil Middle East and Central and South
management roles (including President before becoming Area Director for (including President of Souza Cruz) and Asia). He has been Director, Human
of Souza Cruz) before being appointed the Middle East and North Africa in also in the UK and Hong Kong. (50) Resources since July 2004. (49)
to his current position. (58) 2001. (50)

Michael Prideaux (British) Jimmi Rembiszewski (German) Ben Stevens (British) Peter Taylor (British)
Director, Corporate and Director, Marketing Director, Europe Director, Operations and IT
Regulatory Affairs Joined the Group as a Marketing Appointed Director, Europe in January Joined British American Tobacco in
Appointed Director, Corporate and Director and as a Territorial Director in 2004 having previously joined the 1980 and worked in a variety of
Regulatory Affairs in 1998 following the 1991, having had various senior Management Board in 2001 as operational and general management
demerger of B.A.T Industries. He had marketing and business appointments Development Director. Since joining roles across the Group. He was
previously joined B.A.T Industries in in Procter & Gamble and Jacobs British American Tobacco in 1989, he appointed Global Operations Director
1989 from Charles Barker, a leading Suchard. He has been a member of the has covered a number of senior in 2003. (54)
financial and corporate public relations, Management Board since 1996. (56) marketing, finance and management

advertising and design agency, where roles particularly in Europe, South Asia
he was Chief Executive. (56) and Russia. (47)

The role of the Management Board
The Management Board, chaired by the Chief Executive,
comprises the Executive Directors of British American
Tobacco p.l.c. together with the executives shown
on this page. The Management Board has delegated
responsibility for overseeing the implementation by
the Group’s operating subsidiaries of the policies and
Neil Withington (British)
Director, Legal and General Counsel strategy set by the Board of Directors, and for creating
Appointed Director, Legal and Security the conditions for their successful day-to-day operation.
and General Counsel of British
American Tobacco in 2000, having
previously been the Group’s Deputy
General Counsel. He joined the Group Board Committees
in 1993 after a career at the Bar and Committee membership is indicated by the following symbols:
in the chemical and pharmaceutical ▲ Nominations Committee
industries. He has been a Director ■ Audit Committee
of Reynolds American Inc. since July ● Remuneration Committee
2004. (50) ◆ Corporate Social Responsibility Committee
36 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


This report is extracted from the full Remuneration Remuneration – key components
Report set out in the Directors’ Report and Accounts Table 1 Executive Directors’ remuneration policy summary
2006 (a copy of which is available on request and can Table 2 Directors’ remuneration
be found on our website, Table 3 Summary of share interests including long term
The role of the Remuneration Committee and

Executive remuneration policy Review of incentive arrangements and proposed
The Remuneration Committee determines the new Long Term Incentive Plan
framework and policy on the terms of engagement The Company’s current LTIP (the Current LTIP) will
(including remuneration) for the Chairman, the Executive expire in April 2008. The Remuneration Committee
Directors and the members of the Management Board. undertook a comprehensive review of the current
The Remuneration Committee also decides their specific incentive arrangements for the senior executive
remuneration, including awards under the share incentive team with a view to advising the Board on possible
schemes and pension schemes. replacement incentive arrangements to support the
executive remuneration policy and its embedded
The overriding objective of the British American Tobacco
link with the Group strategy (the Review).
remuneration policy is to reward the achievement of
corporate and individual goals by linking success in As a result of the Review, shareholder approval is
those areas to the Group strategy: a balanced approach being sought for a new Long Term Incentive Plan
to achieving growth, improving productivity, managing (the New LTIP). Details of the New LTIP will be set
the business in a responsible manner and developing a out in the notice for the 2007 Annual General Meeting
winning organisation. The delivery of strategy is measured and its accompanying letter from the Chairman of the
by the Key Performance Indicators (KPIs) and Business Remuneration Committee.
Measures set out and described on pages 6 to 9 of this
The proposed new plan, in which all Executive Directors
Annual Review. The continued focus by the Executive
and members of the Management Board would
Directors of British American Tobacco and the members
participate, is, in many respects, very similar to the
of its Management Board in driving all four elements of
existing arrangements and the key points and differences
the strategy will continue to build a sustainable business.
(including proposed award levels) are noted in Table 1 on
This methodology is supported by a competitively
page 38. Awards under the New LTIP would deliver shares
positioned and integrated pay and benefits structure
subject to stretching performance conditions over three
which reflects the nature of the Group’s worldwide
years. These performance conditions for the awards would

operations and the need to attract, motivate and retain
continue to be based on Total Shareholder Return (TSR)
high-quality executives.
and earnings per share (EPS) measures. Participants would
In order to strengthen the alignment of executive continue to receive the LTIP Dividend Equivalent. In order
remuneration to the generation of shareholder value, to provide flexibility and sufficient capacity for future
a balance is maintained between the short and the long awards over the life of the Plan, the individual limit would
term elements of the structure. The application of this be increased to 300 per cent of salary. The Remuneration
policy will continue during 2007, with performance based Committee does not anticipate that awards will be made
variable rewards (cash and share-based performance up to this limit in normal circumstances and there is no
related annual bonus plans; and a Long Term Incentive current intention to utilise this limit by making awards
Plan – the LTIP) comprising about 56 per cent of total in excess of the proposed levels referred to in Table 1
remuneration with the balance of core fixed elements on page 38. The Remuneration Committee will advise
covering base salary, pension and other benefits. shareholders in advance of any change in the current
proposed award levels, and any such change will be
disclosed in the Remuneration Report.
Annual Review 2006 British American Tobacco 37
Summary Corporate Governance and Summary Financial Statement

Long Term Incentive Plan: vesting of 2004 award
Historical TSR performance
As reported last year, 77.1 per cent of the 2003 LTIP award growth in the value of a hypothetical £100 holding over five years
vested on 19 March 2006. The sixth LTIP award was made 350
in 2004, with the performance period being completed
300 British American Tobacco
at 31 December 2006. The Remuneration Committee FTSE 100
has assessed the performance of British American Tobacco 250

against the two performance conditions outlined in Table 1 200

and has determined that 100 per cent of the award will 150
vest. On the TSR measure, the Company ranked tenth 100
out of the FTSE 100 group of companies, giving a vesting
of 25 per cent for performance at the upper quartile. Dec Dec Dec Dec Dec Dec
2001 2002 2003 2004 2005 2006
A vesting of 25 per cent was achieved for ranking second
FTSE 100 comparison based on 30 trading day average values.
out of the peer group of international FMCG companies,
this being upper quartile. Earnings per share growth was Total shareholder return (annual %)
8.98 per cent per annum in excess of inflation, resulting (1 January 2004 – 31 December 2006) FMCG group
in a vesting of 50 per cent. Upper Quartile Median – 15.3% BAT – 32.2% 35
Lower Quartile
The members of the FMCG group for the 2004 award 30

vesting in March 2007 were: 25

Altadis Imperial Tobacco Group
Altria Group InBev 15

Anheuser-Busch Johnson & Johnson 10

Cadbury Schweppes Kellogg 5
Campbell Soup Kimberly-Clark 0
Carlsberg LVMH Moët Hennessy
Coca-Cola Nestlé
Colgate-Palmolive Pepsico The FMCG comparison is based on three months’ average values.
Danone Procter & Gamble
Diageo Reckitt Benckiser Total shareholder return (annual %)
(1 January 2004 – 31 December 2006) FTSE 100
Gallaher Group SABMiller 70

Upper Quartile Median – 19.9% BAT – 32.2%
Heineken Sara Lee Lower Quartile
HJ Heinz Scottish & Newcastle
The Hershey Company Unilever 50

Performance graph
Schedule 7A to the Companies Act requires that the
Company must provide a graph comparing the TSR 20

performance of a hypothetical holding of shares in the 10

Company with a broad equity market index over a five 0
year period – the performance graph. This illustrates the – 10
performance of TSR against the FTSE 100 Index over a
The FTSE 100 comparison is based on three months’ average values.
five year period commencing on 1 January 2002. In the
opinion of the Directors, the FTSE 100 Index is the most
appropriate index against which TSR should be measured
because it is a widely used and understood index of
broadly similar-sized UK companies to the Company.
In addition to the performance graph, illustrative graphs
show the relative position on the TSR measures for the
LTIP award vesting in March 2007.
38 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


Table 1. Executive Directors’ remuneration policy summary

constituents Rationale Delivery Policy summary

Base salary – competitively reward – cash – annual review with changes effective from April

corporate and individual – monthly – benchmarked against a mid-market level of main board
performance directors from a UK comparator group with a mainly
– reflect skills and experience international consumer goods focus chosen from the
FTSE 100 Index
– additional reference to published salary data with
reference to companies in the UK comparator group

Benefits in kind – car or car allowance – UK management level benefit
– private medical and personal – Executive Directors receive the benefit of the use of a
accident insurance driver

Performance related – incentivise the attainment – International Executive – five common measures: underlying operating profit,
bonus of corporate targets on Incentive Scheme (IEIS) market share of key players, Global Drive Brand
an annual basis – 50 per cent cash volume, net revenue and cash flow
– 50 per cent shares (Deferred – for an ‘on target’ performance, the cash and
Share Bonus Scheme - DSBS) shares elements of the IEIS together carry a value
– DSBS shares held in trust for of 100 per cent of the base salary with an overall
three years and participants maximum of 150 per cent
receive cash sum equivalent
to the dividend on the after
tax position of all unvested
shares held in the DSBS at
the dividend record date

Long term incentives – alignment of executive – shares – maximum awards under the New LTIP will be increased
(Long Term Incentive remuneration with the – discretionary annual award from 175 per cent of salary to 250 per cent for the Chief
Plan or LTIP); new Long generation of shareholder – LTIP dividend equivalent as Executive, and from 125 per cent to 200 per cent of salary
Term Incentive Plan or value cash at time of vesting for the Finance Director and Chief Operating Officer
New LTIP proposed for – incentivise growth in – the proportion of shares – cash LTIP dividend equivalent to the dividends that
shareholder approval at earnings per share and Total awarded under an LTIP grant participants would have received as shareholders from
Annual General Meeting Shareholder Return (TSR) which later lapse upon the the date of the LTIP award to the award’s vesting date

on 26 April 2007 over a three year period vesting of an award do not – the value of the LTIP dividend equivalent is taken into
attract the LTIP dividend account when considering awards
equivalent – three year performance period
– TSR performance (50 per cent of the total award)
combines both the share price and dividend
performance during the three year performance period
as against two comparator groups: (1) the constituents
of the FTSE 100 Index; and (2) a peer group of FMCG
companies (25 per cent for each measure)
– earnings per share measure (50 per cent of the total
award) relates to earnings per share growth (on an
adjusted diluted basis) relative to inflation

Pension – provision of competitive – British American Tobacco UK – pension accrues at 1/40 of annual basic salary
post-retirement benefits Pension Fund; defined – UK Pension Fund normal retirement age of 60
benefit plan – maximum pension payable will not exceed 2/3 of
– benefit paid as on-going base salary averaged over the preceding 12 months
pension – Paul Adams and Paul Rayner are both members of the
UK Pension Fund
– UK Pension Fund retains a scheme-specific cap following
the introduction of the new UK pension regime in
April 2006
– excess benefits continue to be accrued within an unfunded
unapproved retirement benefits scheme (UURBS)
– benefits for Antonio Monteiro de Castro are all accrued
in the UURBS, offset by his entitlements under the
defined benefit plan of Souza Cruz of Brazil
Annual Review 2006 British American Tobacco 39
Summary Corporate Governance and Summary Financial Statement

Executive Directors’ service contracts Non-Executive Directors’ terms of appointment and
The Remuneration Committee continues to operate a remuneration policy
policy of one year rolling contracts for Executive Directors; The Non-Executive Directors do not have service contracts
these contracts incorporate a provision for a termination with the Company but instead have letters of appointment.
or compensation payment in lieu of notice. This will The terms of appointment provide that a new Director is
comprise: (1) 12 months’ salary at his then current base appointed for a specified term, being an initial period to

pay; and (2) a cash payment in respect of other benefits the next Annual General Meeting after appointment and,
under the contract such as medical insurance, or the subject to reappointment at that meeting, for a further
Company may at its option continue those benefits period ending at the Annual General Meeting held three
for a 12 month period. In addition, the Committee also years thereafter. Subsequent reappointment is subject to
maintains discretion in respect of this policy for those endorsement by the Board and the approval of shareholders.
Executive Directors who may be recruited externally Fees for Non-Executive Directors are determined by the
or from overseas, when it may be appropriate to offer Board with reference to the time commitment and
a contract with an initial period of longer than one year, responsibilities associated with the roles. Under the terms
reducing to a one year rolling contract after the expiry of their letters of appointment, on termination (at any time),
of the initial period. a Non-Executive Director is entitled to any accrued but
unpaid Director’s fees but not to any other compensation.

Table 2. Directors’ remuneration
Performance- Performance-
related pay: related pay:
annual cash deferred share Benefits 2006 2005
Salary/fees bonus2 bonus2, 3 in kind4 Total Total
£ £ £ £ £ £

J P du Plessis 520,000 – – 68,524 588,524 533,743
K H Clarke 150,000 – – 593 150,593 154,237
P N Adams 984,896 710,000 745,425 132,397 2,572,718 2,118,457
P A Rayner 5 608,646 436,650 460,512 232,642 1,738,450 1,443,800
A Monteiro de Castro 6 835,956 482,800 504,779 213,176 2,036,711 1,803,123
P E Beyers 60,000 – – 9,735 69,735 60,000

R E Lerwill 75,000 – – 403 75,403 79,664
A M Llopis 60,000 – – – 60,000 60,000
R L Pennant-Rea 60,000 – – – 60,000 68,750
A Ruys1 50,000 – – 831 50,831 –
Sir Nicholas Scheele 60,000 – – 8,739 68,739 50,860
M H Visser 60,000 – – 6,584 66,584 82,588
Former Director
K S Wong (deceased)1 – – – – – 10,000
Total remuneration 3,524,498 1,629,450 1,710,716 673,624 7,538,288 6,465,222
1 K S Wong died on 16 February 2005; Anthony Ruys was appointed a Director on 1 March 2006.
2 The Remuneration Committee, following its usual procedures, agreed that the performance targets for the year ended 31 December 2006 have been met (subject to confirmation of
a figure yet to be published). The Committee agreed that the performance-related bonus payments shown above could, as a consequence, increase or decrease by approximately
1.5 per cent following the publication of the outstanding information which would enable the relevant calculations to be finalised after 1 March 2007. Such changes, if any, will
be reported in the Remuneration Report for the year ending 31 December 2007.
3 The deferred share bonus payments include cash sums equivalent to the dividend on the after tax position on all unvested ordinary shares comprised in the awards held by
participants (including Executive Directors) in the Deferred Share Bonus Scheme at each dividend record date. For the year ended 31 December 2006, these payments for
Executive Directors were as follows: Paul Adams £35,425 (2005: £29,374); Paul Rayner £23,862 (2005: £19,750); and Antonio Monteiro de Castro £21,979 (2005: £18,376).
4 Benefits in kind include: (a) a car or a car allowance; (b) use of a driver; (c) spouse travel and associated expenses for business-related purposes. For Non-Executive Directors
these benefits relate to spouse travel only.
5 Paul Rayner’s benefits in kind included payments in respect of family education (£56,344) which followed his relocation to the UK from Australia.
6 Antonio Monteiro de Castro’s benefits in kind included tax advice of £65,424 in respect of his former contractual arrangements up to 1 January 2004 prior to which date he
derived his emoluments in both the UK and Brazil.
7 The Directors’ remuneration shown above does not include the illustrative value (as at 23 February 2007) of the Executive Directors’ Long Term Incentive Plan awards made
in March 2004 which will vest on 17 March 2007. Reference should be made to Table 3 on page 40 note 5.
40 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


Chairman’s terms of appointment and remuneration relevant notice period as the Board does not require the
Jan du Plessis’s terms of appointment provide that he will Chairman to perform his duties. The Chairman is subject
hold the office of Chairman with effect from 1 July 2004 to the reappointment of Directors’ provisions contained in
for a period of three years unless terminated earlier by: the Company’s articles of association; he will therefore not
(1) the Company giving three months’ notice or a ordinarily serve as a Director for more than two years
discretionary compensation payment in lieu of notice; before seeking reappointment. In common with the

or (2) by the Chairman giving one month’s written Non-Executive Directors, he does not participate in the
notice with the Company having discretion to make a Company’s share schemes, bonus schemes or incentive
compensation payment in lieu of such notice. This is plans and is not a member of any Group pension plan.
limited to any fees which are payable for such part of the

Table 3. Summary of share interests including long term incentives
Ordinary shares Options and Options and Share options
at 1 Jan 2006 Ordinary shares Ordinary shares awards over awards over exercisable from/to
or date of Ordinary shares (Deferred Scheme) (Deferred Scheme) ordinary shares ordinary shares LTIP awards initial
appointment at 31 Dec 2006 at 1 Jan 2006 at 31 Dec 2006 at 1 Jan 2006 at 31 Dec 2006 vesting date

P N Adams 143,051 143,394 125,517 118,611 – – –
Sharesave Scheme – – – – 2,492 2,492 Jan 10-Jun 10
LTIP – – – – 341,383 362,067 Mar 07-Mar 09
P A Rayner 83,228 83,558 83,155 82,821 – – –
Share Option and Sharesave Schemes – – – – 6,777 6,266 Sep 02-Jun 12
LTIP – – – – 200,511 177,490 Mar 07-Mar 09
A Monteiro de Castro 179,564 179,844 76,784 75,889 – – –
Sharesave Scheme – – – – 957 957 Jan 09-Jun 09
LTIP – – – – 229,480 266,273 Mar 06-Mar 09
J P du Plessis 50,000 50,000 – – – – –
K H Clarke 4,459 4,611 – – – – –
P E Beyers – – – – – – –

R E Lerwill 3,000 3,000 – – – – –
A M Llopis 2,200 2,200 – – – – –
R L Pennant-Rea 3,295 3,407 – – – – –
A Ruys1 – 3,000 – – – – –
Sir Nicholas Scheele – – – – – – –
M H Visser – – – – – – –
1 Anthony Ruys was appointed a Director on 1 March 2006.
2 No Director had a non-beneficial interest in the shares of the Company at the dates stated above.
3 Share options granted under the Share Option Scheme are not normally granted in any year to Executive Directors who receive an award under the LTIP; no options were
granted in the year ended 31 December 2006. The aggregate gains on share options exercised by Executive Directors during the year ended 31 December 2006 were £17,562
(2005: £423,516). Options granted under the Share Option Scheme are exercisable subject to a performance condition based on earnings per share growth; the Company’s
published adjusted earnings per share growth has to exceed inflation by an average of 3 per cent per annum over any consecutive three year period during the 10 year life
of the options.
4 The value of LTIP awards which vested to Executive Directors during the year ended 31 December 2006 was £2,783,533 (2005: £1,300,628).
5 The March 2004 LTIP award will vest on 17 March 2007 at 100 per cent in the manner described on page 37. For illustrative purposes only, the aggregate value of the vesting
awards for the Executive Directors was £3,820,370 based on a share price on 23 February 2007 (being the latest practicable date prior to publication) of 1,584p per ordinary share.
Annual Review 2006 British American Tobacco 41
Summary Corporate Governance and Summary Financial Statement


We have examined the Summary Financial Statement on
pages 42 to 47, including the Summary Remuneration
Report (pages 36 to 40) of British American Tobacco p.l.c.
for the year ended 31 December 2006.
Respective responsibilities of Directors and auditors
The Directors are responsible for preparing the Summary

Corporate Governance and Summary Financial Statement
in accordance with United Kingdom law. Our responsibility
is to report to you our opinion on the consistency of the
Summary Financial Statement (including the Summary
Remuneration Report) within the Summary Corporate
Governance and Summary Financial Statement with the
full annual financial statements, the Directors’ Report
and the Remuneration Report and its compliance with the
relevant requirements of Section 251 of the Companies
Act 1985 and the regulations made thereunder. We
also read the other information contained in the Annual
Review and consider the implications for our report if we
become aware of any apparent misstatements or material
inconsistencies with the Summary Financial Statement.
This statement, including the opinion, has been prepared
for and only for the Company’s members as a body in
accordance with Section 251 of the Companies Act 1985
and for no other purpose. We do not, in giving this opinion,
accept or assume responsibility for any other purpose
or to any other person to whom this statement is shown
or into whose hands it may come save where expressly
agreed by our prior consent in writing.
Basis of opinion

We conducted our work in accordance with Bulletin
1999/6, ‘The Auditors’ Statement on The Summary
Financial Statement’ issued by the Auditing Practices
Board. Our reports on the Company’s full annual financial
statements describe the basis for our audit opinions on
those financial statements and the Directors’ Report and
the Remuneration Report.
In our opinion the Summary Financial Statement is
consistent with the full annual financial statements, the
Directors’ Report and the Remuneration Report of British
American Tobacco p.l.c. for the year ended 31 December
2006 and complies with the applicable requirements
of Section 251 of the Companies Act 1985, and the
regulations made thereunder.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
1 Embankment Place, London
1 March 2007
42 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


2006 2005
£m £m

Gross turnover (including duty, excise and other taxes of £15,427m (2005: £14,659m)) 25,189 23,984

Revenue 9,762 9,325
Raw materials and consumables used (2,861) (2,760)

Changes in inventories of finished goods and work in progress (11) (2)
Employee benefit costs (1,554) (1,557)
Depreciation and amortisation costs (401) (383)
Other operating income 181 179
Other operating expenses (2,494) (2,382)
Profit from operations 2,622 2,420
after (charging)/crediting
– restructuring costs (216) (271)
– (losses)/gains on disposal of a business, brands and joint venture 41 72

Finance income 110 118
Finance costs (399) (346)
Net finance costs (289) (228)
Share of post-tax results of associates and joint ventures 431 392
after (charging)/crediting
– restructuring costs (13)
– US Federal tobacco buy-out (12)
– brand impairments (13) (29)
– exceptional tax credits and other impairments 17 57

Profit before taxation 2,764 2,584
Taxation on ordinary activities (716) (690)
Profit for the year 2,048 1,894

Attributable to:
Shareholders’ equity 1,896 1,767

Minority interests 152 127

Earnings per share
Basic 92.08p 84.34p

Diluted 91.33p 83.66p
Annual Review 2006 British American Tobacco 43
Summary Corporate Governance and Summary Financial Statement


2006 2005
£m £m

Non-current assets
Intangible assets 7,476 7,987
Property, plant and equipment 2,207 2,331

Investments in associates and joint ventures 2,108 2,193
Retirement benefit assets 29 35
Deferred tax assets 273 290
Trade and other receivables 192 197
Available-for-sale investments 24 27
Derivative financial instruments 76 87
Total non-current assets 12,385 13,147
Current assets
Inventories 2,056 2,274
Income tax receivable 59 81
Trade and other receivables 1,568 1,577
Available-for-sale investments 128 96
Derivative financial instruments 124 86
Cash and cash equivalents 1,456 1,790
Total current assets 5,391 5,904
Total assets 17,776 19,051

Total equity 6,688 6,877
Non-current liabilities
Borrowings 5,568 5,058

Retirement benefit liabilities 435 543
Deferred tax liabilities 296 277
Other provisions for liabilities and charges 161 261
Trade and other payables 146 180
Derivative financial instruments 29 19
Total non-current liabilities 6,635 6,338
Current liabilities
Borrowings 1,058 2,202
Income tax payable 292 374
Other provisions for liabilities and charges 253 234
Trade and other payables 2,766 2,883
Derivative financial instruments 84 143
Total current liabilities 4,453 5,836
Total equity and liabilities 17,776 19,051

This Summary Financial Statement was approved by the Board of Directors on 1 March 2007 and signed on its behalf by
Jan du Plessis, Chairman.
44 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


2006 2005
£m £m

Differences on exchange (685) 425
Cash flow hedges (2) 58
Available-for-sale investments (2)
Net investment hedges 117 (52)

Tax on items recognised directly in equity (12) (41)
Net (losses)/gains recognised directly in equity (584) 390
Profit for the year page 42 2,048 1,894
Total recognised income for the year 1,464 2,284
– shareholders’ equity 1,334 2,128
– minority interests 130 156
Employee share options 69 72
Dividends and other appropriations
– to British American Tobacco shareholders (1,008) (910)
– to minority interests (137) (112)
Purchase of own shares
– held in Employee Share Ownership Trusts (77) (48)
– share buy-back programme (500) (501)
Other movements 17
(189) 802
Balance 1 January page 43 6,877 6,117
Change in accounting policy page 29 (42)
Balance 31 December 6,688 6,877

Total equity comprised £6,461 million of shareholders’ funds (2005: £6,630 million), after deducting cost of own shares
held in Employee Share Ownership Trusts of £197 million (2005: £182 million), and minority interests of £227 million
(2005: £247 million).
Annual Review 2006 British American Tobacco 45
Summary Corporate Governance and Summary Financial Statement


The Summary Financial Statement on pages 42 to 47 However, as a result of the technical infringement of the
is a summary of information in the Annual Report and Companies Act 1985, the repurchase and cancellation
Accounts and should be read with the reviews on pages of these shares was invalid and accordingly, their nominal
1 to 32. Reference should also be made to the Summary value is included within the Company's share capital as at
Remuneration Report on pages 36 to 40. 31 December 2006. These shares will be repurchased on
The Annual Review and Summary Financial Statement 1 March 2007 from their present holders, the Company's
brokers, at the same prices agreed between 22 September

does not contain sufficient information to allow for as
full an understanding of the results of the Group and 2006 and 4 December 2006.
the state of affairs of the Company, or of the Group, and Contingent liabilities
their policies and arrangements concerning Directors’ There are contingent liabilities in respect of litigation,
remuneration, as would be provided by the full Annual overseas taxes and guarantees in various countries.
Report and Accounts. Shareholders requiring more
detailed information have the right to obtain, free of Product liability litigation
charge, a copy of the full Annual Report and Accounts for Group companies, notably Brown & Williamson Holdings,
2006, or for future years, by contacting British American Inc. (B&W), as well as other leading cigarette manufacturers,
Tobacco Publications as set out on the inside back cover. are defendants, principally in the US, in a number of product
liability cases. In a number of these cases, the amounts of
Report of the auditors compensatory and punitive damages sought are significant.
The auditors’ report on the full annual accounts of the Group
for the year ended 31 December 2006 is unqualified and Indemnity
does not contain any statement concerning accounting records On 30 July 2004, B&W completed transactions combining
or failure to obtain necessary information and explanations. its US tobacco business assets, liabilities and operations
with R.J. Reynolds Tobacco Company. A new company
Going concern called R.J. Reynolds Tobacco Company (RJRT) was created
After reviewing the Group’s annual budget and plans, the as a result of the combination transactions. As a result of
Directors consider that the Group has adequate resources these transactions: (a) B&W discontinued the active conduct
to continue in operational existence for the foreseeable of any tobacco business in the US; (b) B&W contributed
future and that it is therefore appropriate to continue to to RJRT all of its assets other than the capital stock of
adopt the going concern basis in preparing the accounts. certain subsidiaries engaged in non-US businesses and
Accounting policies other limited categories of assets; (c) RJRT assumed all
From 1 January 2005, the Group has prepared its annual liabilities of B&W (except liabilities to the extent relating

consolidated financial statements in accordance with to businesses and assets not contributed by B&W to RJRT
International Financial Reporting Standards (IFRS) as adopted and other limited categories of liabilities) and contributed
by the European Union and implemented in the UK. subsidiaries or otherwise to the extent related to B&W’s
tobacco business as conducted in the US on or prior to
Changes in accounting policies are as described on page 29. 30 July 2004; and, (d) RJRT agreed to indemnify B&W and
Dividends and share buy-back each of its affiliates (other than Reynolds American Inc.
The dividends are as described on pages 27 and 28. and its subsidiaries) against, among other matters, all
losses, liabilities, damages, expenses, judgments, attorneys’
For the first time the Company needed to file interim fees, etc, to the extent relating to or arising from such
accounts which were prepared to recognise additional assumed liabilities or the assets contributed by B&W to
dividend income during 2006. As a result of the Company RJRT (the RJRT Indemnification). The scope of the RJRT
not doing so, the interim dividend of £323 million paid Indemnification includes all expenses and contingent
on 13 September 2006 did not comply with the technical liabilities in connection with litigation to the extent relating
requirements of the Companies Act 1985. It is proposed to or arising from B&W’s US tobacco business as conducted
that the appropriation of distributable profits to the payment on or prior to 30 July 2004, including smoking and health
of the interim dividend will be ratified by shareholders by tobacco litigation, whether the litigation is commenced
way of a special resolution at the Annual General Meeting. before or after 30 July 2004 (the tobacco litigation).
Accordingly, the payment has been presented as a dividend
payment on page 44. Pursuant to the terms of the RJRT Indemnification, RJRT
is liable for any possible judgments, the posting of appeal
Between 22 September 2006 and 4 December 2006, bonds or security, and all other expenses of and responsibility
the Company sought to repurchase 6,927,790 shares for managing the defence of the tobacco litigation. RJRT
for an aggregate consideration of £100 million, which has assumed control of the defence of the tobacco litigation
are included in the purchase of own shares on page 44. involving B&W. Affiliates of B&W have retained control of
46 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


the defence in certain tobacco litigation cases with respect as B.A.T Industries p.l.c. was previously a defendant
to which such affiliates are entitled to indemnification. in around 1,000 consolidated individual cases in West
Virginia. British American Tobacco (Investments) Limited
US litigation
has been dismissed from those West Virginia consolidated
1. Medical reimbursement cases
smoking and health cases in which it was a defendant.
These civil actions seek to recover amounts spent by
government entities and other third party providers 5. Conduct-based claims

on healthcare and welfare costs claimed to result from In 1999, the US Department of Justice brought an action
illnesses associated with smoking. As at 31 December against various industry members, including RJRT and
2006, a reimbursement suit brought by an Indian tribe B&W. British American Tobacco (Investments) Limited
and two non-governmental reimbursement suits were is a co-defendant in the action. The trial of this claim
pending against B&W. The vast majority of other such was completed in June 2005. In August 2006, the District
claims have been dismissed on legal grounds. Court issued its final judgment, finding in favour of the
Government, and against certain defendants, including
As at 31 December 2006, B&W was named as defendant
B&W and British American Tobacco (Investments) Limited.
in two US cases brought by foreign government entities
The court also ordered a wide array of injunctive relief,
(São Paulo and Panama) seeking reimbursement of medical
including a ban on the use of ‘lights’ and other similar
costs. In July 2006, the Delaware Superior Court granted
descriptors. Defendants filed a motion to stay enforcement
defendants’ motion to dismiss these cases. Plaintiffs
of the judgment shortly after the judgment was issued.
appealed to the Supreme Court of Delaware, which heard
The court denied the stay motion, but defendants filed
oral argument in December 2006 and reserved decision.
a notice of appeal and an emergency motion to stay the
2. Class actions judgment before the Washington DC Circuit Court of
As at 31 December 2006, B&W was named as a defendant Appeals in September 2006. In October 2006, the Court
in some 15 separate actions attempting to assert claims on of Appeals granted defendants’ motion to stay enforcement
behalf of classes of persons allegedly injured by smoking. of the judgment pending the outcome of the appeal.
In the Engle case (Florida), one jury awarded compensatory
6. Settlement of State Health Care Reimbursement Cases
damages totalling US$12.7 million and assessed
After an Independent Auditor found that the terms of the
US$17.6 billion in punitive damages against B&W. The
Master Settlement Agreement (MSA) were a ‘significant
intermediate appellate court reversed the trial court’s
factor’ in market share losses experienced by signatories
judgment. In July 2006, the Florida Supreme Court upheld
to the MSA in 2003, several US tobacco companies
the intermediate appellate court’s decision to decertify
asserted their rights under the MSA to recover a payment

the class, and vacated the jury’s punitive damages award.
credit or offset for MSA payments made in April 2004.
In Scott, the jury returned a verdict of US$591 million
The amount at stake exceeds US$1 billion. The settling
on the class’s claim for a smoking cessation programme.
states have filed motions seeking enforcement of certain
Defendants’ appeal to the Louisiana Fourth Circuit Court
MSA provisions and defendants have opposed these
of Appeal resulted in the reduction of the award by
motions, arguing instead for arbitration.
US$312 million. In the Schwab class action complaint,
the court granted plaintiffs’ motion for class certification. 7. Other claims
By order in November 2006, the Second Circuit Court of The Flintkote Company (Flintkote), a US asbestos production
Appeals granted defendants’ motion to stay proceedings and sales company, was included in the acquisition of
in this case, and further granted defendants’ petition for Genstar Corporation by Imasco Limited (now Imperial
leave to appeal the class certification order. Tobacco Canada Limited (Imperial)) in 1986 and became
a Group subsidiary following the restructuring of Imasco
3. Individual cases
in 2000. In 2003, Imperial divested Flintkote and then,
Approximately 3,471 cases were pending against B&W
in 2004, Flintkote filed for bankruptcy in the US. In 2006,
at 31 December 2006, filed by or on behalf of individuals
Flintkote, certain representatives of both the present and
in which it is contended that diseases or deaths have been
future asbestos claimants as well as certain individual
caused by cigarette smoking or by exposure to environmental
asbestos claimants were permitted by the bankruptcy court
tobacco smoke (ETS).
to file a complaint against Imperial and other defendants
4. Consolidated claims for the recovery of dividends paid and other compensation
In the West Virginia consolidated smoking and health cases, under various legal theories. The parties are presently
the court so-ordered the parties' stipulation dismissing engaged in case management discussions to establish the
B.A.T Industries p.l.c. from the action, with prejudice, scope and manner of discovery in this case. This litigation
on 12 December 2006. This is a significant decision is expected to take several years to proceed to trial.
Annual Review 2006 British American Tobacco 47
Summary Corporate Governance and Summary Financial Statement

In Wisconsin, the Authorities have identified potentially the certification of the class but limited any liability, if
responsible parties to fund the clean up of the Fox River proved, to the period from 1997. In Quebec, in February
after pollution from paper mills operating nearby, a task 2005, two smoking and health class actions were certified.
currently estimated to cost in the order of US$600m. There is no right of appeal against class certification.
Among the potentially liable parties are NCR Corporation
Imperial is currently being investigated by the Royal Canadian
and Appleton Papers Inc. B.A.T Industries p.l.c. purchased
Mounted Police relating to its business records and sales of
what was then NCR’s Appleton Papers Division from NCR

products exported from Canada between 1989 and 1994.
Corporation, and B.A.T Industries p.l.c. spun off the
No action has been commenced against Imperial. Imperial
Appleton Paper business in 1990 having obtained full
believes that it has conducted itself appropriately at all times,
indemnities from Appleton Papers Inc. for past and future
but cannot predict the outcome of any such investigation,
environmental claims. Disputes have arisen between NCR
or whether additional investigations will occur.
Corporation and B.A.T Industries p.l.c. as to the indemnities
given and received under the purchase agreement in Two actions have been started in Russia by a minority
1978 which disputes have been the subject of arbitration shareholder in OJSC Company British American Tobacco-
in 1998 and 2006. Under the terms of the arbitration Yava (BAT-Yava), a Russian incorporated subsidiary of
awards B.A.T Industries p.l.c. has an obligation to share British American Tobacco Holdings (Russia) B.V. The
the costs of environmental claims with NCR Corporation, minority shareholder, Branston Holdings, issued a claim
although it has never been required to do this because in Moscow seeking to have a contract between BAT-Yava
Appleton Papers Inc. has paid any sums demanded. and its sister company invalidated, and issued another
It is our belief that all future environmental liabilities claim in the Stavropol region alleging that certain of
will continue to be met directly by Appleton Papers Inc. the directors of BAT-Yava, and other parties, took various
by self funding or insurance cover and no demand will unlawful steps. The Moscow Court has dismissed the claim
be made upon B.A.T Industries p.l.c. by NCR Corporation. and the Stavropol Court has ordered the transfer of the
case filed there to Moscow. An appeal of the dismissed
Other foreign litigation
Moscow case has been sent to the Moscow Appellate
At 31 December 2006, active claims against Group
Court. Branston has also threatened actions in the
companies existed in 18 countries outside the United States
Netherlands and England but has not yet commenced
but the only countries with more than five active claims were
these. The Company considers these actions to be
Argentina, Brazil, Canada, Chile, Italy and the Republic of
without merit and will defend the claims strenuously.
Ireland. As at 31 December 2006, there were some 1,142
pending individual cases in Italy. 1,113 cases are pending Conclusion

before the Justice of the Peace Courts, the majority of While it is impossible to be certain of the outcome of any
which relate to claims of alleged fraud in connection with particular case or of the amount of any possible adverse
‘light’ cigarettes. Because of the type of court involved, verdict, the Company believes that the defences of the
the most an individual plaintiff can recover is €1,033. Group companies to all these various claims are meritorious
There are around 27 smoking and health cases filed by both on the law and the facts, and a vigorous defence is
or on behalf of individuals. There are also two labour being made everywhere. If an adverse judgment were
cases for alleged occupational exposure pending in Italy. entered against any of the Group companies in any case,
an appeal will be made. Such appeals could require the
The Supreme Court of Canada has upheld the constitutionality
appellants to post appeal bonds or substitute security
of the British Columbian Tobacco Damages and Health Care
in amounts which could in some cases equal or exceed
Costs Recovery Act. Non-Canadian defendants challenged
the amount of the judgment. In any event, with regard
the personal jurisdiction of the British Columbia Court but
to US litigation, the Group has the benefit of the RJRT
these motions were dismissed. The Court found a ‘real and
Indemnification. At least in the aggregate and despite
substantial connection’ between British Columbia and the
the quality of defences available to the Group, it is not
foreign defendants. Defendants’ appeal to this decision
impossible that the results of operations or cash flows of
was dismissed in September 2006. Defendants then filed
the Group in particular quarterly or annual periods could
leave to appeal to the Supreme Court in November 2006.
be materially affected by this and by the final outcome of
In addition, there are five class actions and four individual any particular litigation.
cases in Canada. In the Knight class action, the Supreme
Having regard to these matters, the Directors (i) do not
Court of British Columbia certified a class of all consumers
consider it appropriate to make any provision in respect
of Imperial manufactured cigarettes in British Columbia, not
of any pending litigation and (ii) do not believe that the
just British Columbia residents. Defendant’s appeal was
ultimate outcome of all this litigation will significantly
heard in February 2006, and the Appeal Court confirmed
impair the financial condition of the Group.
48 British American Tobacco Annual Review 2006
Summary Corporate Governance and Summary Financial Statement


Registrar Church Street Station, New York, NY 10286-1258, USA,
Enquiries concerning your shareholding, mandating your tel: +1 888 BNY ADRS (toll-free) or +1 212 815 3700,
dividends (including consolidated dividend tax vouchers) e-mail:
and notifying changes in your personal details should be website:
directed to Computershare Investor Services PLC, PO Box 82,
Individual Savings Accounts (ISAs)
The Pavilions, Bridgwater Road, Bristol BS99 7NH,
A British American Tobacco sponsored ISA; contact The
tel: 0800 408 0094 (UK); +44 870 889 3159
Share Centre, PO Box 2000, Aylesbury, Bucks, HP21 8ZB,
Online tel: 0800 800 008 (UK); +44 (0)1296 414 141,
Access comprehensive information about British American
Capital gains tax
Tobacco and download shareholder publications at the
Fact sheet for British American Tobacco historical
corporate website; visit the Investor Centre for valuation
capital gains tax information; contact the British
and charting tools and dividend and share price data; and
American Tobacco Company Secretarial Department,
subscribe to the e-mail and SMS alert services for key financial
tel: +44 (0)20 7845 1000 or access the Investor Centre
events in the British American Tobacco financial calendar
Final dividend 2006
Access the web-based enquiry service for shareholders
Ex-dividend date – 7 March 2007
operated by Computershare Investor Services; view details
Record date – 9 March 2007
of your British American Tobacco shareholding and recent
Payment date – 3 May 2007
dividend payments and register for shareholder electronic
communications to receive notification of British American Annual General Meeting
Tobacco shareholder mailings by e-mail Thursday, 26 April 2007 at 11.30am, The Mermaid
Conference & Events Centre, Puddle Dock, Blackfriars,
London EC4V 3DB
Go online or telephone 0870 703 0084 (UK) to buy or sell
British American Tobacco shares Financial results 2007
First quarter – 3 May
Interim – 26 July
Contact Computershare Investor Services by e-mail
Third quarter – 1 November

Analyses of shareholders
Copies of current and past Annual Report and Accounts
At 31 December 2006, there were 2,068,803,944
and Annual Reviews are available on request. Copies
ordinary shares in issue held by 60,226 shareholders.
of the Group corporate descriptive booklet About Us
These shareholdings are analysed as follows by category
and past Quarterly Reports are also available. Highlights
of shareholder and size of shareholding:
from these publications can be produced in alternative
formats such as Braille, audio tape and large print. Percentage of issued
Contact British American Tobacco Publications, Unit 80, Category of Number of of total Number of ordinary
shareholder holders holders ordinary shares share capital
London Industrial Park, Roding Road, London E6 6LS
Individuals 53,283 88.47 77,196,613 3.74
tel: +44 (0)20 7511 7797, facsimile: +44 (0)20 7540 4326, Financial institutions/
e-mail: pension funds 273 0.46 5,913,028 0.29
Nominee companies 6,162 10.23 1,356,353,424 65.56
Dividend Reinvestment Plan Other corporate holders 507 0.84 25,004,252 1.21
A straightforward and economic way of utilising your R&R Holdings S.A. 1 – 604,336,627 29.20
dividends to build up your shareholding in British 60,226 100.00 2,068,803,944 100.00
American Tobacco; contact Computershare Investor
Services for details Percentage of issued
Size of shareholding Number of holders ordinary share capital

American Depositary Receipts 1 – 1,999 48,232 1.26
British American Tobacco sponsors an American 2,000 – 9,999 9,852 1.79
Depositary Receipt (ADR) programme in the United 10,000 – 199,999 1,609 3.24
200,000 – 499,999 215 3.33
States. Enquiries regarding ADR holder accounts and 500,000 and over 318 90.38
payment of dividends should be directed to Shareholder
60,226 100.00
Relations, The Bank of New York, PO Box 11258,

Registered office
Globe House, 4 Temple Place, London WC2R 2PG
tel: +44 (0)20 7845 1000, facsimile: +44 (0)20 7240 0555
Incorporated in England and Wales No. 3407696
Nicola Snook
General Counsel
Neil Withington
Investor relations
Enquiries should be directed to Ralph Edmondson or
Rachael Brierley, tel: +44 (0)20 7845 1180
Press office
Enquiries should be directed to Fran Morrison or
David Betteridge, tel: +44 (0)20 7845 2888,
PricewaterhouseCoopers LLP, 1 Embankment Place,
London WC2N 6RH
Enquiries concerning your shareholding, mandating your
dividends (including consolidated dividend tax vouchers)
and notifying changes in your personal details
Contact Computershare Investor Services PLC, PO Box 82,
The Pavilions, Bridgwater Road, Bristol BS99 7NH,
tel: 0800 408 0094 (UK); +44 870 889 3159 (International)

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