| Pakistan Tobacco Company Limited |
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| Annual
Report 1998 |
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| CONTENTS |
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| Corporate
Information |
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| Chairman's
Message |
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| Review
of Our Brands |
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| Millennium
Challenge |
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| Year
at a Glance |
|
| Report
of the Directors |
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| Auditors'
Report |
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| Total
Quality Management |
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| Profit
& Loss Account |
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| Balance
Sheet |
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| Cash
Flow Statement |
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| Notes
to the Accounts |
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| Financial
Highlights |
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| Pattern
of Shareholding |
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| Notice
of Meeting |
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| Phoenix
(Pvt) Limited- |
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| Report
and Accounts |
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| CORPORATE
INFORMATION |
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| BOARD
OF DIRECTORS |
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| MICHAEL
PAUL FENN |
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| Chairman
& Chief Executive |
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| JOHN
VICTOR RICHARDSON |
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| Finance
Director |
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| MARCO
ANTONIO NOVOA |
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| Production
Director |
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| TIMOTHY
CHARLES LACY DAY |
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| Leaf
Director |
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| ASLAM
KHALIQ |
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| Consumer
& Regulatory |
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| Affairs
Director |
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| ANTHONY
CAMERON JOHNSTON |
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| (Non-Executive
Director) |
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| FATEHALI
WALlMUHAMMAD VELLANI |
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| (Non-Executive
Director) |
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| RAZI-UR-RAHMAN
KHAN |
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| (Non-Executive
Director) |
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| NAVEED
AFTAB AHMAD |
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| Secretary
& Corporate |
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| Affairs
Manager |
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| AUDITORS |
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| A.F.
FERGUSON & CO. |
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| Chartered
Accountants |
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| REGISTERED
OFFICE |
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| Saudi
Pak Tower, 61/A, |
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| Jinnah
Avenue, Blue Area |
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| P.O.
Box 2549, |
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| Islamabad-44000 |
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| Telephone:
(051) 278370 |
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| Fax:
(051) 278376, 278377 |
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| CHAIRMAN'S
MESSAGE |
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| It
gives me great pleasure to present my report to all the PTC stakeholders for |
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| 1998.
Last year was a difficult year for Pakistan and also for Pakistan Tobacco |
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| Company.
Although I remain firmly of the belief that PTC's Business |
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| Renewal
Plan is on track and is the right strategy to secure our long-term future, |
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| which
is demonstrated by the significant improvement in operating profit, I am |
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| disappointed
to report another after tax loss. The fundamentals of our business |
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| have
strengthened. Sales volume shows an increase of 7% on 1997, ahead of both |
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| the
overall market (+ 4%) and our competition. All our Brands have improved; |
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| in
particular, John Player Gold Leaf had another excellent year. I also continue
to |
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| be
impressed by the ability of our employees to develop new skills and respond |
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| effectively
to the ever-challenging business environment. |
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| The
reported loss is predominantly due to the continued decline in real cigarette |
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| prices
over the last few years. Although we were pleased to obtain an 8% price |
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| increase
in the June 1998 budget, this was still below the underlying rate of |
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| inflation.
We have however made good progress in outlining to Government the |
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| need
for a partnership with the legitimate Industry to gradually return prices to
realistic levels and work to |
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| reduce
the tax evaded and smuggled market segments. The objective of this
partnership is to deliver increased |
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| duty
revenue to Government, enable us to continually improve our products' quality
to fully satisfy our |
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| consumers
and allow the legitimate industry to return to sustainable profitability. I
am convinced that together |
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| with
the Government we can return realistic pricing to the Pakistan cigarette
market and am therefore |
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| determined
to continue focusing on building our Brands and People to ensure we obtain
the maximum benefit |
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| as
this occurs. We also support the Government's intent towards deregulation for
the economy, to improve the |
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| tax
structure to enable industrial growth and we urge them to speedily resolve
the anomalies in the tobacco |
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| industry
excise structure. |
|
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| In
November, I was delighted to participate in the 100 year celebrations of one
of our key distributors, Allied |
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| Marketing
of Lahore, which, given the numerous crises during that period, underlined
the importance of a |
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| long-term
vision and maintenance of corporate values. We have a similar long and
successful history in |
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| Pakistan
based on our ability to build Brands that meet our consumers' needs. So our
strategy continues to |
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| focus
on building and delivering long-term value and we are prepared to accept the
short-term losses, although |
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| painful.
I am pleased to confirm that British American Tobacco. our major shareholder,
fully supports the |
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| strategy
outlined and have committed significant funding in support of our objectives. |
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|
| Turning
to our Brands, 1998 was another good year. Our established portfolio
continues to offer consumers a |
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| well-segmented
choice, catering to their every requirement. |
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|
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| Benson
& Hedges continues to perform its role as the
destination brand in PTC's portfolio |
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| and
is well perceived by its consumers. Volume grew by a healthy 12%. The brand
is firmly |
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| established
as the foremost premium segment offer and has played a key role in setting
high |
|
| benchmark
price for smuggled brands, thereby reducing pressure on the locally
manufactured |
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| cigarettes. |
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| For
the fourth year in succession, John Player Gold Leaf has grown strongly, showing an |
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| increase
of 14% on 1997. equivalent to almost four times the growth of the overall
market. |
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| The
brand dominates the premium category, contributing significantly to our
overall value |
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| share
leadership. The brand's dynamic performance can be attributed to its
established image |
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| and
our continuous work to improve brand quality and the total brand offer. The
brand was |
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| helped
by two world class promotions developed and implemented here in Pakistan. John |
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| Player
Gold Leaf Lights performed extremely well. growing volume
by some 50% albeit from a very small |
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| base.
John Player Gold Leaf is now
firmly established as the benchmark cigarette brand in Pakistan. |
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|
| Wills
Kings was the focus of significant effort during the year
as we worked to consolidate the brands |
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| position
following its re-launch in 1997. We are encouraged to see continued signs of
success as the brand |
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| showed
a small increase in share whilst overall the Medium segment declined
slightly. Due to the positive |
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| Consumer
response to the new blend. we are confident of the brands long term
potential. |
|
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| Embassy
also continued its strong growth. increasing by 8% ahead of
both the overall market and the Low |
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| Price
segment (+ 6%). The brand remains the outright volume leader in Pakistan.
continues to support our |
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| distribution
network and together with Wills Kings will provide a solid platform for
future market share |
|
| growth. |
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| Of
course the good brand performance cannot be achieved without an ongoing focus
on quality. We continue |
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| to
invest in delivering the best quality and value for money available. During
the year we completed the first |
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| phase
of a leaf processing improvement program and committed to the purchase of
further new machinery. |
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| Our
Quality Management Program launched in 1997 under the banner of BEST 2000 - Building Excellence |
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| and
Success Together continues at a fast pace. All employees
have now received training and all understand |
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| that
they have an important role in making Pakistan Tobacco Company the BEST This
is reflected in a new |
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| level
of understanding between workers and management. and due to this improvement
we maintained |
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| excellent
industrial relations during 1998 with no significant disputes. Within our
entire operation we also |
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| continue
to invest in developing a safe, supportive and environmentally friendly work
place. Our safety |
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| standards
show continuous improvement. Personally, I am very proud of the progress made
in these areas and |
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| wish
to thank everyone in the Company for their efforts and commitment. |
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| An
important area in which we are a leading company is in achieving Millennium
compliance. I am pleased |
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| to
confirm that we are now internally fully compliant and have agreed action
plans in place with all our major |
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| suppliers.
Our success in this area follows the launch of a wide ranging program in 1996
which was aimed at |
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| first
identifying all the potential applications that could be impacted by the year
2000 bug. Following this |
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| analysis,
we commenced numerous projects to achieve compliance and our performance to
date is a great |
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| credit
to all involved. In particular, it is an honor for PTC as a leading
representative of the private sector to |
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| be
asked to join the Government's Task Force 2000 Group. |
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| The
Millennium program in PTC is sponsored by myself and I am charged with
ensuring business continuity |
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| as
we enter the next century. We see this issue as a major threat to business
and our progress to date gives me |
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| absolute
confidence that we will be fully prepared. |
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| Our
Edible Oil division has had another good year, growing by almost 9% and
selling over 5000 tonnes of |
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| our
premium brand. Sundrop. We have
successfully leveraged our brand building expertise to develop |
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| Sundrop, which now has a 39% share of the branded sunflower oil segment.
This year, four years following |
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| Sundrop's launch. the Edible Oil division broke even at the operating
level. Our challenge now is to continue |
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| this
excellent growth and deliver added value to PTC. Our effort with Edible Oil
is evidence of our broader |
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| corporate
contribution to Pakistan, first in lowering the edible oil import bill and
second through extending |
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| our
agricultural expertise. We have continued our major contribution towards
improving the environment |
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| through
our Afforestation Programme planting over 3 million tree saplings in 1998. |
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| Throughout
my short statement I stressed that the fundamentals of our business are
strengthening. Of course |
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| I
am disappointed that these improvements are not yet reflected in PTC's
financial performance. However. |
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| our
strategy, fully supported by our major shareholder is the right strategy to
deliver a long-term and |
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| sustainable
recovery. So I remain confident that PTC will in the future provide
shareholders with attractive |
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| returns
and hope that you will continue the valuable support of recent years. |
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| Finally,
during 1998 there were a number of Board changes. outlined in the Report of
the Directors. I would |
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| like
to take this opportunity to welcome Mr Razi-Ur-Rahman Khan as a Non-Executive
Director. Also. I |
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| would
like to record a special vote of thanks to Mr Safdar Iqbal (PTC's Production
Director) who has |
|
| proceeded
on leave prior to retirement. thanking him for his substantial contribution
to his department and |
|
| PTC
over his many years with the company. |
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|
| Review
Of Our Brands |
|
|
| Imported
Benson & Hedges performed according to strategy in |
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| 1998,
fulfilling its role as a destination brand in PTC's brand portfolio. The |
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| brand
is well perceived by its consumers as the most prestigious |
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| premium
offer. After its launch in 1996, Benson & Hedges has |
|
| established
itself as the foremost premium segment offer in the country |
|
| and
at the same time it has played a key role in reducing price pressure on |
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| the
locally manufactured cigarettes by the smuggled brands. |
|
|
| The
all new Benson & Hedges outlook on 1999 |
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| With
Benson & Hedges' increasing growth. an initiative was undertaken to
further |
|
| strengthen
the brand on a global basis. In 1999, we will be launching the new campaign
for |
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| Benson
& Hedges. The campaign is aimed to further improve the brand's position
as the |
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| ultimate
number one in the premium segment. |
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| Explore
the World |
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| with
John Player Gold Leaf |
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| Explore
the World' consumer promotion proved to be the all |
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| time
hit in the British American Tobacco world establishing a |
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| benchmark
for all future promotional activities. The |
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| promotion
generated an overall response rate of 21% which is |
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| the
highest ever for any promotion in the British |
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| American
Tobacco world The scheme generated a record |
|
| breaking
quantum of grand draw entries amounting to 1.27 |
|
| million,
clearly demonstrating the consumer confidence in John |
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| Player
Gold Leaf. |
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|
| WILLS
KINGS |
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| Wills
Kings' new blend was launched in 1998 |
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| with
a view to cater to the changing consumer |
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| needs.
The new blend was well received by the |
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| consumers
and the brand share grew in 1998. With |
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| further
planned inputs to improve the total mix, |
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| we
look forward to substantial volume |
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| improvements
in 1999. |
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| Millennium
Challenge |
|
|
| The
Millennium (Year 2000) Problem is the highest priority-for Pakistan |
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| Tobacco
Company. In November 1996, ahead of most organisations in |
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| Pakistan,
we launched a millennium programme covering all areas which |
|
| could
potentially be impacted by the Year 2000 Problem. As part of the |
|
| programme,
all our Information Technology systems and manufacturing |
|
| equipment
have been tested and fixed for compliance. |
|
|
| PTC
was also the first company in the country to generate awareness within |
|
| the
organisation and amongst business partners. Noticing the lack of initiative, |
|
| we
organized seminars, briefing sessions and media coverage. As a member of |
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| the
Government appointed Task Force 2000, we are also providing advice & |
|
| guidance
to organisations seeking help in countering this problem. |
|
|
| In
short, Pakistan Tobacco Company is dedicated in ensuring a smooth |
|
| transition
into the new Millennium. |
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|
|
| YEAR
AT A GLANCE |
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|
|
|
|
|
1998 |
1997 |
1996 |
1995 |
1994 |
|
|
|
|
| Volumes |
|
millions |
22115 |
20599 |
21318 |
19311 |
16352 |
|
|
|
|
|
|
| Turnover |
|
Rs. millions |
14250 |
12138 |
11832 |
10152 |
8788 |
|
| (Loss)/Profits
Before Tax |
" |
(281) |
(246) |
(39) |
(8) |
59 |
|
| (Loss)/Profit
After Tax |
" |
(308) |
(268) |
(59) |
(24) |
104 |
|
| Shareholders'
Equity |
|
" |
1002 |
1311 |
1579 |
590 |
615 |
|
| Value Added |
|
" |
10301 |
8880 |
9045 |
8092 |
7252 |
|
| Duties
and Taxes |
|
" |
9403 |
8158 |
8356 |
7411 |
6556 |
|
| Dividend
Rate |
|
% |
Nil |
Nil |
Nil |
Nil |
10 |
|
| (Loss)/Earnings
Per Share |
Rs. |
(8.8) |
(7.7) |
(1.2) |
(0.2) |
1.9 |
|
| Before Tax |
|
|
|
| PROFIT
OF THE DIRECTORS |
|
| FOR
THE YEAR ENDED DECEMBER 31, 1998 |
|
|
| The
Directors hereby present their Report and the Audited Accounts for the year
ended December 31, |
|
| 1998
before the fifty second Annual General Meeting of the Company to be held on
May 11, 1999. |
|
|
|
|
|
|
1998 |
1997 |
|
|
|
|
(Rs. 000s) |
|
|
|
|
| (Loss)
for the Year |
|
|
|
(308,361) |
(268,097) |
|
| Unappropriated
Profit Brought Forward |
|
- |
- |
|
|
|
|
|
---------- |
---------- |
|
| Appropriation |
|
|
|
(308,361) |
(268.097) |
|
| Transfer
from Revenue Reserve |
|
|
308,361 |
268.10 |
|
|
|
|
|
---------- |
---------- |
|
| Unappropriated
Profit Carried Forward |
|
Nil |
Nil |
|
|
|
|
|
========== |
========== |
|
|
| The
Operating performance for 1998 shows a significant improvement increasing to
Rs 92mn compared |
|
| to
Rs 8mn for 1997. However, the burden of high debt results in an interest
charge of Rs 369mn, which, |
|
| combined
with tax of Rs 27mn and other expenses of Rs 4mn. generates a loss for the
year of Rs 308mn. |
|
| Our
short term profits continue to suffer from the continued absence of realistic
price increases in the |
|
| market
such that prices today are in real terms significantly below the levels of
1994. We were pleased |
|
| to
implement an 8% price increase following the June 1998 budget and
congratulate the Government on |
|
| their
efforts to reduce the quantity of tax-evaded product enabling the legitimate
industry to compete on |
|
| a
more 'level playing field'. |
|
|
| Efforts
to level the playing field must continue as realistic but fair price
increases are necessary to |
|
| overcome
inflation, fund product improvements, deliver increased tax revenue and
improve shareholder |
|
| returns. |
|
|
| Whereas
the bottom line represents another poor result, our strategy over the
long-term to re-establish |
|
| Pakistan
Tobacco Company as a strong company remains on track and is fully supported
by our major |
|
| shareholder.
British American Tobacco. We continue to invest in building our brands,
people and asset |
|
| base
and remain resolved to take the short-term losses in order to secure a
healthy future, developing our |
|
| competitive
position to maximise the benefit once realistic prices return to the market. |
|
|
| Despite
the significant impact of price on our profitability, we continue to focus on
improving the |
|
| effectiveness
of our expenditure. The cost of goods sold (net of duties) grew by 21% on
1997 funding |
|
| overall
volume growth of 7.4%. the excellent performance of John Player Gold Leaf and
the impact on |
|
| material
purchases of the economic crises, particularly devaluation and inflation.
Overall production costs |
|
| after
accounting for volume reduced in real terms by 7%. |
|
|
| The
major growth areas in expenses were depreciation (+22%) reflecting previous
capital investment in |
|
| high
performance machinery and the purchase of spares (+7%), both to support these
machines and to |
|
| provide
for improved maintenance. We maintained our training and development
expenditure at 1997 |
|
| levels,
in line with our commitment to fully develop our employees. |
|
|
| Similarly,
working capital increased by 12% to fund volume growth and inflation.
although our stock |
|
| durations
improved significantly. The continued investments noted above resulted in an
increase in |
|
| borrowing
of 30.7% to Rs 2.6bn. Of the increase. Rs 266mn was provided by British
American Tobacco as |
|
| unsecured
debt. Our major shareholder has also approved further such funding during
1999, which will |
|
| enable
Pakistan Tobacco Company to continue its strategy and secure the long-term
future. |
|
|
| We
would like to record our appreciation of the significant contribution of all
our employees during 1998 |
|
| and
for their commitment to delivering the long-term strategy. |
|
|
| Given
the loss reported, continued high debt and need to retain cash in the
business to fund our |
|
| investments,
the Board of Directors recommend that no dividend be paid for this financial
year. |
|
|
| DIRECTORS |
|
| Mr.
Philippe Adams and Mr. Francisco Garcia resigned from the Board with effect
from March 19, 1998 |
|
| and
March 31, 1998. respectively, to take up other senior positions within
British American Tobacco. |
|
| Mr.
A. K. M. Sayeed resigned from the Board with effect from 12th August 1998 and
Mr. Safdar Iqbal, |
|
| who
plans to retire, resigned from the board on December 18, 1998. The Board
would like to place on |
|
| record
their appreciation for their significant contribution to Pakistan Tobacco
Company. |
|
|
| The
Board is pleased to welcome Mr. Razi-Ur-Rahman Khan as Non-Executive Director
plus Mr. John |
|
| Richardson.
Mr. Tim Day and Mr. Marco Novoa as Finance, Leaf and Production Directors
respectively. |
|
|
|
| AUDITORS |
|
|
| The
Auditors Messrs A. F. Ferguson & Co. retire and offer themselves for
re-appointment. |
|
|
|
|
| HOLDING
COMPANY |
|
| British
American Tobacco (Investments} Limited is the Holding Company and is
incorporated in the |
|
| United
Kingdom. |
|
|
|
|
| PATTERN
OF SHAREHOLDING |
|
| The
pattern of holding of shares of the company as at 31st December 1998 is shown
on page 36. |
|
|
|
|
|
On behalf of the Board |
|
|
|
|
M.P. FENN |
|
|
F.W. VELLANI |
|
|
Chairman & |
|
|
Director |
|
|
Chief Executive |
|
|
|
| Islamabad:
March 17, 1999 |
|
|
|
| AUDITORS'
REPORT TO THE MEMBERS |
|
|
| We
have audited the annexed balance sheet of Pakistan Tobacco Company Limited as
at December |
|
| 31,
1998 and the related profit and loss account and cash flow statement.
together with the notes |
|
| forming
part thereof, for the year then ended and we state that we have obtained all
the information |
|
| and
explanations which to the best of our knowledge and belief were necessary for
the purposes of |
|
| our
audit and, after due verification thereof. we report that: |
|
|
| (a)
in our opinion, proper books of account have been kept by the company as
required by the |
|
| Companies
Ordinance. 1984; |
|
|
|
|
|
|
| (b)
in our opinion: |
|
|
|
|
|
| (i)
the balance sheet and profit and loss account together with the notes thereon
have been |
|
| drawn
up in conformity with the Companies Ordinance, 1984 and are in agreement |
|
| with
the books of account and are further in accordance with the accounting
policies |
|
| consistently
applied; |
|
|
|
|
| (ii)
the expenditure incurred during the year was for the purpose of the company's |
|
| business;
and |
|
|
| (iii)
the business conducted, investments made and the expenditure incurred during
the |
|
| year
were in accordance with the objects of the company; |
|
|
|
| (c)
in our opinion and to the best of our information and according to the
explanations given to |
|
| us,
the balance sheet, profit and loss account and cash flow statement, together
with the notes |
|
| forming
part thereof, give the information required by the Companies Ordinance, 1984
in the |
|
| manner
so required and respectively give a true and fair view of the state of the
company's |
|
| affairs
as at December 31, 1998 and of the loss and cash flows for the year then
ended; and |
|
|
| (d)
in our opinion no Zakat was deductible at source under the Zakat and Ushr
Ordinance, 1980. |
|
|
|
|
|
A.F FERGUSON & CO. |
|
| Islamabad:
March 18, 1999 |
|
|
Chartered Accountants |
|
|
| Total
Quality Management |
|
|
| BEST
2000 -A Total Quality Management Programme is the most |
|
| ambitious
Change Management Programme ever initiated by our company. |
|
|
| Total
quality is more than just Product Quality; it is quality of everything |
|
| we
do in our Business. It means understanding our Consumers, Customers, |
|
| Stakeholders
and Suppliers, agreeing with them what they want and |
|
| empowering
our employees to organize their own work to deliver the |
|
| required
Products and Services to the agreed performance levels. |
|
|
| BEST
2000 is serving as the fundamental building block in
directing our |
|
| energies
to achieve our Mission Statement |
|
| "Together
we will be the best in everything we do". |
|
| Since
it's launch in 1997, BEST is
helping us improve our team building, |
|
| is
providing the means to continuously improve and break the vicious |
|
| cycles,
which inhibit improvement activities and is assisting employees to |
|
| participate
in driving the company forward. |
|
|
| Evidence
of the positive change in the Attitude, the Will and Skill to |
|
| improve
is visible. Although we still have a long way to go with these |
|
| positive
changes, we can WIN. |
|
|
| The
end objective is to ensure that PTC team is fully aligned to meet |
|
| future
challenges and well prepared to drive PTC into the next millennium. |
|
|
|
| PROFIT
& LOSS ACCOUNT |
|
| FOR
THE YEAR ENDED DECEMBER 31, 1998 |
|
|
|
|
Note |
1998 |
1997 |
|
|
|
|
|
(Rs. 000s) |
|
|
|
|
|
|
|
| TURNOVER |
|
|
14,249,644 |
12,138,290 |
|
| Less:
Cost Of sales |
|
|
3 |
13,414,222 |
11,467,010 |
|
|
|
|
---------- |
---------- |
|
| GROSS
PROFIT |
|
|
|
835,422 |
671,280 |
|
|
|
|
| Less:
Marketing expenses |
|
4 |
547,493 |
504,178 |
|
| Administration
expenses |
|
5 |
195,620 |
159,003 |
|
|
|
|
---------- |
---------- |
|
|
|
743,113 |
663,181 |
|
|
|
---------- |
---------- |
|
| OPERATING
PROFIT |
|
|
|
92,309 |
8,099 |
|
| Other
income |
|
6 |
7,938 |
13,189 |
|
| Other
expenses |
|
7 |
12,342 |
7,836 |
|
|
|
|
---------- |
---------- |
|
|
|
|
87,905 |
13,452 |
|
| Less:
Financial charges |
|
8 |
369,249 |
259,372 |
|
|
|
|
---------- |
---------- |
|
| (LOSS)
BEFORE TAXATION |
|
(281,344) |
(245,920) |
|
|
|
|
|
|
| TAXATION |
|
|
|
| Current-For
the year |
|
27,017 |
22,177 |
|
|
|
---------- |
---------- |
|
|
|
|
(308,361) |
(268,097) |
|
|
|
|
| APPROPRIATION |
|
|
|
| Transfer
from revenue reserve |
|
25 |
308,361 |
268,097 |
|
|
|
|
| UNAPPROPRIATED
PROFIT |
|
|
|
---------- |
---------- |
|
| CARRIED
FORWARD |
|
|
|
- |
- |
|
|
|
|
========== |
========== |
|
| (Loss)
Per Share |
|
|
|
(Rs. 9.66) |
(Rs. 8.39) |
|
|
|
|
|
|
| The
annexed notes form an integral part of these accounts. |
|
|
|
M.P. FENN |
|
|
F.W. VELLANI |
|
|
Chairman & |
|
|
Director |
|
|
Chief Executive |
|
|
|
|
| BALANCE
SHEET AS AT DECEMBER 31, 1998 |
|
|
|
Note |
1998 |
1997 |
|
|
|
|
|
(Rs. 000s) |
|
|
|
|
| TANGIBLE
FIXED ASSETS |
|
|
10 |
1,468,203 |
1,328,772 |
|
| LONG
TERM INVESTMENT |
|
|
12 |
5,000 |
5,000 |
|
| LONG
TERM LOANS |
|
|
13 |
6,567 |
5,609 |
|
| LONG
TERM DEPOSITS AND PREPAYMENTS |
|
14 |
2,141 |
3,740 |
|
|
|
|
|
|
|
|
| CURRENT
ASSETS |
|
|
|
| Stores
and spares |
|
|
15 |
188,961 |
161,596 |
|
| Stocks |
|
|
|
16 |
2,508,748 |
2,309,154 |
|
| Trade debts |
|
|
|
17 |
12,210 |
27,516 |
|
