Interview: British American Tobacco FD Ben Stevens

NEW YEAR’S RESOLUTIONS are either in full swing or have fallen by the wayside. On nearly every smoker’s resolution list is the ambition to give up, but British American Tobacco’s FD is unperturbed.

FD and chief information officer Ben Stevens beams as he tells Financial Director about the last five years’ figures, which show the tobacco products maker has grown earnings 15% per share, improved dividend 18% a year, and grown operating margins by 17%.

More recently, revenue growth has increased 4% despite cigarette volumes decreasing 1.2% for the nine months ended 30 September 2012. The FTSE 100 company also managed a €337m (£291.36m) bond repayment, and in July last year cancelled a €450m syndicated term credit facility.

Although the various “give up smoking” campaigns gain momentum every year, with more TV adverts, Stoptober (in October) and stop smoking initiatives from pharmaceutical retailers such as Boots, the industry is relatively stable, claims Stevens, which makes forecasting easier.

“Because BAT is in over 100 markets it is diversified geographically and so always ends up producing extremely consistent results,” he explains.

Although some of the brands, such as Lucky Strike and Kent, may not have a huge following in the UK, the company has consumer reach all over the world, particularly in Africa, with its competitors either not selling in those regions or having only just entered them.

Another reason for the steady numbers is his work with various governments around the world to mitigate excise ‘shocks’. He explains that part of his role is working with policymakers to persuade them to make increases in duty in “bite-sized chunks”, rather than a huge rise every few years, which can send forecasting into a spiralling guessing game because, historically, large rises will see the taxman’s revenues decline as smokers turn to illicit trading to manage their craving – bad for the company and for government.

Another issue to contend with is the erosion of brands, as cigarette packet labelling is covered up. In the UK during the last four years, warning labels on packets of cigarettes have been increasing in size and gruesomeness and supermarkets have hidden packets behind a metal screen.

Last year also saw the Australian region roll out plain packaging after the tobacco industry’s combined legal battle was lost in the High Court.

“That made investors quite nervous,” says Stevens. “While cigarettes are now in plain packets in Australia, they had a very significant graphic health warning on them prior to that. And in any case, when you walk into an outlet in Australia all the cigarettes are behind steel shutters because there is a display ban. So you have already decided what you want to buy before you go into the outlet and see the pack.”

Stevens defends the company’s decision, and that of other rival businesses such as Imperial Tobacco, to fight the case in court because it is another attempt to chip away at their brand recognition. “Brands are part of our property and we feel they are being taken away from us,” he says.

“I think investors, when they look at companies to invest in, want to see a company with a very clear strategy, with quality management, with quality brands.”

Strategic focus

Like many other large-cap finance directors, Stevens is immersed in the strategy and decision-making process behind the business – alongside managing the finance function.

In his role at BAT, he is part of a larger investor relations initiative. He is one element of a three-pronged team, alongside the CEO and head of investor relations, which communicates decisions to the investment community.

He visits investors and explains the strategic directions the company has taken. This places the onus on him to understand all elements of the business so that he is able to clearly explain company decisions – and as a senior manager he is involved in the decision-making process on investments in new products and acquisitions.

Although not a smoker himself – he gave up 25 years ago, two years before he joined the company – he is passionate about the unique position BAT has carved out for itself in the marketplace over his 23 years with the company.

BAT has managed to increase its share price by 7.14% in the last year alone, compared to FTSE 100 competitor Imperial Tobacco, which saw its share price fall 5.66% in the same timeframe, according to stock market figures at the time of publishing.

He attributes the company’s stability and success to something that many would not usually associate with a tobacco company: innovation. Stevens is proud of the strides the company has made in what he describes as a stagnant market.

“We brought to market a number of first-to-world innovations and I think investors recognise us as the most innovative tobacco company, considering we are placed in an industry which has been very un-innovative historically,” he says.

Some of the new creations from BAT include the creation of the capsule, or ‘click’, cigarettes – a cigarette that has two flavours, with the user clicking the cigarette to release a menthol taste. It is also the first tobacco producer to acquire an electronic cigarette maker, taking the company in a whole new direction.

UK-based start-up e-cigarette maker CN Creative was acquired by BAT earlier this year. It is not the first time a tobacco company has shown an interest in such a product, but it is the first to make the leap. Imperial Tobacco also took an undisclosed stake in an e-cigarette company while Japan Tobacco International has a commercial agreement with a company that manufacturers nicotine “vaporisers”.

Although this is an area of the business Stevens and the board are keen to grow, he is quick to point out that, for the foreseeable future, the majority of profits for the company will come from the core business operation and product, “combustible tobacco”. However, BAT’s CEO Nicandro Durante is more boisterous about the acquisition, claiming e-cigarettes would account for as much as 40% of BAT’s revenues – which were £15bn in 2011 – in 20 years’ time, according to a Financial Times interview.

Stevens is more modest than his chief executive, but he agrees that it is an exciting new direction and one that he is keen to explore. Yet for the moment – especially as the market remains unregulated – he declines to forecast any huge swings away from the core product.

The acquisition of CN Creative brings a well-known and successful brand to a burgeoning area. There are no regulations, guidelines or standards on the quality of the nicotine in e-cigarettes. Stevens believes that having a huge company such as BAT behind e-cigarettes could give reassurance to both consumers and regulators.

Given the new types of cigarettes produced by the company and its venture into e-products, Stevens is adamant the company is marketed purely at the over-18 age group and is in no way trying to glamorise smoking, although he concedes that criticism comes with the job.

“There are two types of anti-tobacco activists. There are people who are generally interested in reducing the harm of the smoking industry, and there are people who are interested in bashing tobacco companies. You tend to grow quite a thick skin when you have worked in the tobacco industry for as long as me,” he concludes. ?

BOX: In it for the long haul

Stevens joined British American Tobacco 23 years ago as regional financial controller in and has worked in a variety of roles, having changed his job within the business roughly every couple of years.

He was headhunted from Shorrock, where he was FD, to BAT and decided to make the move so he could feed his appetite for international opportunities. Four years in, Stevens became brand executive and trade channel development manager in Switzerland, and a year later moved to Pakistan as chairman and managing director of the BAT subsidiary company. After getting his hands dirty in that role, including time spent literally in the field, Stevens took a similar role in Russia two years later finally coming back to the UK in 1998 as head of corporate affairs.

However, he held the title for just six months before BAT merged with Rothmans and Stevens managed the integration between the two companies.

Two years later he became part of the management board as development director working on strategy and planning, taking responsibility for IT and various subsidiary divisions. It wasn’t long before Stevens got itchy feet and two years after that took on the role of director of Europe for four years. He recalls his time in that role as “fun” taking over eastern and western European markets – from Russia to the EU -before he took on responsibility of finance in his current role.

“It was quite an odd way of making it to FD in BAT – I started in finance and I’m in finance now, but my entire interim career was outside finance,” he says.

Stevens wouldn’t have it any other way. As a FTSE 100 finance director, much of the role involves speaking to investors who want to understand the whole business. “I find it much easier talking about the whole business having run big chunks of BAT myself,” he explains.

“On the other hand, coming back to finance after 15 years out of it, things had changed a lot so it was hard. There is no best route. It is just a matter of taking the experience where you can and making up for the bits you have missed.”

In a large international business such as BAT, Stevens believes you can’t rely on finance skills alone – there must be an element of strategy. “We have good technical finance people in the company, good chief accountants, heads of tax, heads of treasury, so I don’t add much in that area.” Although, he concedes FDs can’t be without financial knowledge.

“Each company chooses the sort of FD it wants to make the sort of contribution it wants. Some prefer a more financially orientated person and that is absolutely fine and for those sorts of people a career coming up through finance would be better. Some prefer a more strategically orientated person, which is BAT, and in that case someone with a more strategic background or a more line-management background is probably better. But I don’t think there is a right and wrong route,” he says.

“If you had all the experience you needed to be an FD of a FTSE 100 company, then you’ll probably be about 85 by the time you got there.”