The company's total contribution to the Treasury last year amounted to Shs42 billion up from Shs40.3 billion in 2005 even as BATU's counter on the Uganda Stock Exchange continues to remain largely inactive with its share price stagnating at Shs470
KAMPALA
Only seven months after laying off 80 workers and restructuring its operations to cut costs and improve productivity, British American Tobacco Uganda is once again aglow with optimism after three years of loss making.
The tobacco firm has struggled to pull off profitability in the last three years causing uneasiness among shareholders who have not received any dividends for the same period as well.
This year however, BATU management believes it has tucked in most of its overheads and taken the right measures to ensure that the company could breakeven or return to minimal profits.
"Due to high costs we were not doing well and that is why from the beginning of this year we have reviewed our last three years. We identified our key focus areas, corrected our position by right sizing and we have taken some other measures also so that we can feel more comfortable," Mr Serhat Eroglu, the BATU Managing Director, told Business Power.
Top on the agenda, targeting cost cutting and increasing productivity both at the farmers' and plant level, has been to downsize personnel which involved laying off 80 people and transferring some 54 others from permanent into contractual workers last December. The decision was, among other reasons, based on a declining performance in tobacco leaf output that had dwindled from over 25 million kilogrammes in 2004 to 11.5 million kilogrammes last year, making the company less competitive.
"We are an export company and to be able to compete in those export market we need to control our cost base. That is why we had to take this right sizing exercise to regain our competitiveness in the export market," Mr Eroglu said. He said the current size of BATU's leaf output determines how many people can be employed at the factory.
"In terms of head count normally our crop size of 16 million kilogrammes business should have at least 65 to 70 people. Last year, we had more than 330. We reduced the number of people, and we offered some staff to be retained instead of permanent staff," he said.
Restructuring
Most of those offered contractual terms were working only six months but would receive 12 months salary instead of six months. Cutting down on the numbers has helped the company reduce on its costs and encouraged hard work on the promise of bonuses being offered by the company to high achievers.
The internal changes at BATU were part of the global restructuring of BAT Group, which saw the company redistribute its leaf production, processing, and distribution activities to different countries depending on comparative advantage and least costs provided by the selected countries.
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In East Africa, Uganda has been designated as a leaf production and minimal value addition country while Kenya retains cigarette making. The company that faces stiff opposition from the local anti-tobacco lobbyists has created a family of loyal farmers by registering 47,000 farmers this year, an increase of 6.2 per cent from the previous 29,000.
These farmers are expected to produce exclusively for BATU and maintain a loyalty to the tobacco firm that Mr Eroglu says offers cheap loans as an incentive for increased output and has boosted farmer incomes by increasing farm prices by up to 14 per cent for the highest quality.
Milestones
The company will pay Shs3,300 for top-grade Flue-Cured Virginia Tobacco up from Shs3,000 this year, and Shs2,450 for top-grade Burley Tobacco up from Shs2,400 this year. In addition to this, for every extra 30 per cent a farmer delivers on top of his targeted volume, a 5 per cent bonus payment will be offered.
The company's total contribution to the Treasury last year amounted to Shs42 billion up from Shs40.3 billion in 2005 even as BATU's counter on the Uganda Stock Exchange continues to remain largely inactive with its share price stagnating Shs470.
Last year the company got rid of inventory [old stock tobacco leaf] that had accumulated in its stores from 1999 worth 5,300 tonnes. Returns from this sale realised $11.3 million (Shs18.1 billion) and cleared space for new crop.
The company's current forecast of 16,000 tonnes of leaf has already been committed to buyers even before it is wholly delivered to its stores. And it is the first time that the company's output is sold off ahead of harvest.
It has also already made a record shipment of 13,654 tonnes (packed) worth $38.9 million (Shs62.4 billion) this year.
"For the first time in our history the warehouses are empty from previous years crop and it has helped us to move out of third party warehouse which has given a saving of $0.4 million (Shs642 million) in 2007 and $1.0 million (Shs1.6 billion) for next year," a BATU document reads.
The changes are already bearing fruit according to Mr Eroglu.
"This message has been very well accepted by the farmers and when we look at our crop size we [expect] about 16 million kgs [of] tobacco already grown. It was 11.5 million kilogrammes last year, and there is about 40 per cent increase we are very happy," he said.
Turnaround
If, as the company hopes, leaf output meets expectations then the company could return to winning ways sooner than later according to the managing director and probably be able to meet shareholders' demand for dividends. According to its 2006 financial report, BATU had accumulated losses of Shs7.9 billion as at December 31, 2006 a slight increase from the previous year's net loss of Shs7 billion.
Despite these scenario, the company's gross revenue rose from Shs127.2 billion in 2005 to Shs140 billion in 2006, an increase of Shs13 billion representing a 4 per cent revenue growth. The Ugandan company remains optimistic that its parent company the British American Tobacco (Investments) Ltd incorporated in the UK will continue to provide financial support to the company to enable it meet its liabilities.
Having sorted out the firm's low productivity concerns, the company is now focusing on how to improve its competitiveness and the re-capture of the international share trade.
"In terms of quality we have no issues. Tobacco quality of Uganda is one of the best in the international market.
Our problems was high production costs and yet in the world market there is one standard price and like any other trade if you can match this price you can make money but if you cannot match this price, you can still sell your tobacco but you cannot make any money," Mr Eroglu said. He said BATU must compete with other countries like Brazil, Zimbabwe and Indonesia which have been the dictating export price.
Optimism
With the changes however, the company is optimistic that Uganda could become the lead price setter in the tobacco leaf market.
"If you look at Brazil, their production volume is ten times higher than Uganda. But I believe that with the actions we have taken this year, our cost will be much lower than Brazil which means they need to follow our prices," he said.
One other thorny issue that remains of major concern to the tobacco company is smuggling and illicit tobacco leaf businesses. Mr Eroglu said despite his company's huge investment in the 47,000 farmers, and in the several corporate social responsibility activities, illicit traders and smugglers, who eat up almost 20 per cent of the tobacco/cigarette market, are undermining their efforts.
"They have to put themselves under pressure and take some risk and do some social responsibility then we can compete but currently we are taking all the risk then some people during the harvest season visit our farmers all night and they are paying cash to farmers. That is why we are looking for long term loyalty with the farmers," he said.
But even if the company overcomes that problem, it still has to come to terms with the Framework Convention on Tobacco Control (FCTC) agreement that the government of Uganda has just accented to meaning that the tobacco firm will have to entertain stricter measures on smoking and sale of its products to the public.
Tobacco treaty
The FCTC is a treaty inspired by the World Health Organisation with the purpose of reducing the health social and economic impact of tobacco consumption and exposure to second hand smoke.
Having ratified the FCTC Uganda will now be required to legislate measures such as banning all tobacco advertising, requiring stronger warning labels on cigarette packets including pictures, and increasing taxation of tobacco products.
"This is probably the single most important step that the government has taken this year in health matters. It is a wonderful and strong demonstration of the commitment of this government to protecting its people.
We look forward to the Government combating tobacco with the same zeal that it using to tackle HIV/Aids," Mr Phillip Karugaba, spokesperson of The Environmental Action Network (TEAN) - an anti tobacco lobby group - said in a release.
Cigarette smoking is said to be responsible for 5 million deaths worldwide per annum.
Ms Cathy Adengo, BATU's spokesperson, said their company has been involved in the negotiations and drafting of the FCTC over the years and are therefore prepared for the eventuality of the law.
"We are more than welcome to engage with government on this. We know that in some countries where BAT is operating they have already started implementing some of the regulations stipulated in the FCTC," she said.
She said they engaging with the ministry of Health on how to implement it well and how to enforce real policy that can be seen. "We are open to the issues of regulation. It is about achieving balance and understanding the win-win situation for both. It is about knowing what we need, what they need and what is good for both of us but engagement is important," she said. Enditem
