Annual Report 2012 - Souza Cruz

ANUAL REPORT 2012
CORPORATE PROFILE
In 2013 Souza Cruz commemorates its 110th year. This anniversary
is a celebration of a victorious campaign, marked by historic, record
market share and our continuing as the leader of the legal cigarette
market in Brazil. The Company is present throughout the entire
country and is one of the main companies in the British American
Tobacco (BAT) Group, which is present in over 180 countries.
Souza Cruz understands that investment in people is what guarantees it will achieve all its strategic objectives. That is why it seeks
to attract, develop and retain the best talent in the market, investing in a work environment that stimulates people to strive to reach
their full potential.
The Company has 7,400 employees and is vertically active in the
production chain, from growing and processing the tobacco to the
manufacture and distribution of cigarettes, with 30,000 tobacco
growers and 300,000 retailers who serve over 5,000 counties in
Brazil.
The main sources of income for the Company are tobacco exports
and the sale of high-quality brands such as Dunhill, Free, Lucky
Strike, Hollywood and Derby, among others. Souza Cruz is based in
Rio de Janeiro and has four tobacco processing plants in Santa Cruz
do Sul (RS), Blumenau (SC), Rio Negro (PR) and Patos (PB),
as well as two cigarette factories — one in Cachoeirinha (RS) and
the other in Uberlândia (MG), the latter being the largest in Latin
America. Also in Cachoeirinha are the Product Centre Americas, the
reference centre for tobacco intelligence and research for the entire
BAT Americas Region, the Printing Plant, that produces cigarette
packaging with a high standard of quality, and the GSD (Group Service Delivery), a BAT global area of information technology.
For more than 15 years Souza Cruz has been part of an international venture, Brascuba, an association with the Cuban government
for production and export of cigarettes, and is also a shareholder
in Agrega, a company that optimizes purchasing of materials and
services, based in São Paulo.
The Company’s objective is to create wealth responsibly, producing
value for everyone involved in the production chain. Its strategy for
sustainability is based on four pillars: Sustainable Growers, Sustainable Company, Sustainable Retail and Sustainable Society. In the
last fiscal year, Souza Cruz put emphasis on support for projects
combating child labour on the farms, and for farm development
with incentives for crop diversification and adopting environmentally protective practices.
ADDED VALUE STATEMENT (AVS)
Calculating the AVS is intended to show the socio-economic performance of a company, with information on the wealth created and how
it was distributed. In 2012, Souza Cruz generated consolidated added value of R$ 11.7 billion, 11% over 2011 (R$ 10.6 billion), as shown
in the table below:
AVS
R$ million
2011
%
Government 8,272.4 78.3%
Shareholders
1,504.2
14.2%
Employees 613.9
5.8%
Financing 80.5
0.8%
Reinvestment
99.8
0.9%
01
2012
R$ million
%
9,239.6
1,553.9
684.7
155.9
88.7
78.8%
13.3%
5.8%
1.3%
0.8%
MESSAGE FROM THE PRESIDENT
The year 2012 was marked by several competitive challenges,
with changes in the regulatory scenario and in the tax load
on cigarettes that required determination and focus on the
part of the Company’s employees to overcome. To close this
year with significant results in terms of efficiency, growth and
market share gives us a feeling of having once again achieved
a very successful year, which renews our strength and enthusiasm for 2013.
continuous work made possible more than 2,100 operations,
totalling record seizures of cigarettes: 4 billion. With a firm focus on reducing the volume of the illegal market and increasing
the legal market, another record was broken: the police shut
down a total of 11 illegal cigarette factories in Brazil in 2012.
Within this context, Souza Cruz’s portfolio showed extraordinary performance that contributed to the Company’s achieving
a 74.9% market share in 2012, which is growth of 1.2 percentage points for the year, and in the fourth quarter it reached
76.6%, a record in company history.
One of the first challenges faced was the publication of Board
Resolution (RDC) No. 14/12 by Anvisa (National Health Surveillance Agency), that banned the use of ingredients in the manufacture of cigarettes. Because Souza Cruz believes that the
measure exceeded the jurisdiction of the regulatory agency,
with innumerable systemic effects, the Company has been proactive in demonstrating the disproportionality of the measure
and pointing out alternatives in order to maintain balanced
regulation.
Dunhill reached a record level of market share with 10% in December 2012, closing the year with 9.2% share, an increase of
0.5 percentage points over the same period of 2011. The advent of the new platform for the Hollywood brand resulted in
consistent performance, increasing market share to 12.8%, up
0.5 p.p. over the same period the previous year. The increase in
illegal activity reflected especially on the Derby brand, which
was directly impacted by the sale of illegal products and had its
market share reduced by 0.8 p.p. in 2012.
In December 2011 President Dilma Rousseff signed new legislation (Law 12.546/11), which is pending regulation, assuring the
display of cigarettes at points of sale (different from what was
proposed by Anvisa in Public Consultation 117), but banning
advertising on signs and posters in these locations. The new
law provides further that in 2016 there will be new warnings
on cigarette packaging, occupying an area equivalent to 30%
of the front, and standardizing national legislation prohibiting
smoking in enclosed areas and, thereby, assuring that one can
smoke in open areas.
This performance, together with our constant quest for cost efficiency, meant the Company registered operating profits for
2012 of R$ 2,374.6 billion, 9% above the results of 2011. Tobacco exports played a major role in this, with an increase of 106%
compared with 2011 results, due to higher volume of exports
and the devaluation of the real against the dollar.
Such impressive results in a scenario of constant change would
not be possible were it not for our talented team that works with
an attitude of leadership and has the ability to create and make
things happen. We share this merit with the entire value chain,
from the growers to our sales and distribution force that gets our
products out to the entire country, even the most remote areas.
Implementation of a minimum retail price (R$ 3.00) in May
2012 proved to be effective, providing the market with a fairer
competitive arena and conditions that are favourable for competing on a level playing field, and defining the legal cigarette
market in Brazil.
The increase in the price of cigarettes as a result of the increase
in the excise tax rate by 41% in 2012, ended up stimulating significant growth in smuggling, mainly from Paraguay. It is estimated that the volume of that market grew 7.4% compared
with 2011.
Creating value and dividing the wealth created with the entire production chain, shareholders, employees, suppliers and
society, acting responsibly, respecting the law, preserving the
environment, promoting education in rural areas and developing the individual farms — these are values that will certainly
continue to be with us and will make 2013, the year the Company celebrates its 110th anniversary, one more reason for all
the people who make up Souza Cruz to be proud.
This increase in illegal activity occurred in spite of the exemplary efficiency of the authorities who, with the deployment
of federal and state police, expanded the strategic plan for
frontiers with Operations Agate and Sentinel, responsible for
constant monitoring of 34 critical points of illegal trade. This
Andrea Martini
President
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QUICK VIEW
• More than 30,000 integrated growers
• 300,000 points of sale
• 7,400 employees
• 240,000 jobs created in the production chain
• 120,000 tonnes of tobacco exported
• 66.6 billion cigarettes sold
• 74.9% market share
• R$ 1.641 billion net profit
• R$ 8.508 billion in sales taxes, making Souza Cruz one of the 10 biggest taxpayers in the country
• R$ 1.554 billion in remuneration for the shareholders
• 3 environmental parks, totalling 310 hectares of environmental preservation
• 95% of wastes recycled
• 60% of packaging for product delivery reused
• 60% of power grid renewable
• 3 reforestation farms for growing firewood, used as an energy source
• 100% of sewage at the plants is treated and 31% reused
• 85% of carbon emissions neutralized, and the rest offset by the Company’s environmental practices, preservation areas,
environmental parks and reforestation.
03
GROWTH
COMPETITION AND REGULATORY ENVIRONMENT
The total volume of cigarettes sold on the Brazilian market in
2012, estimated at approximately 112.3 billion units, represented a retraction of 3.4% compared with 2011. This retraction was
mainly due to the increase in the price of cigarettes to absorb
the rise in the average excise tax rate of 41% as from 1 May 2012.
And at the end of 2012, Souza Cruz adjusted its prices by 16% to
offset the average excise increase of 18% that took effect on 1
January 2013.
Further, Law 12.546/11, still pending regulation, assures the display of cigarettes at points of sale and bans advertising on signs
and posters inside the points of sale, provides that new warnings
on the front of cigarette packs will be included in 2016, and standardizes national legislation by banning smoking in enclosed
areas and, thus, guaranteeing that one can smoke in open areas.
The high tax load on cigarettes continues to be a principal factor
in stimulating the sale of illegal product in Brazil, mainly through
smuggling and tax evasion (illegal market). It is estimated that
the illegal market grew 7.4% compared with 2011.
The introduction of the minimum retail price of R$ 3.00/pack by
the federal government, as from 1 May 2012 (Law 12.546/11),
was complied with by the other companies that operate legally.
Noncompliance with this rule by retailers can result in penalties
ranging from seizure of merchandise to a prohibition of selling
cigarettes for a period of 5 years. Cigarette manufacturers can
have their special registration cancelled. This measure has served
to define the legal cigarette market in Brazil. Effective 1 January
2013 the minimum retail price was increased to R$ 3.50/pack.
In spite of the positive results obtained by the Brazilian authorities through more frequent inspections and more rigorous control of the frontiers, with 34 critical frontier points being monitored, the market share for illegal cigarettes in Brazil is still very
high. In 2012 federal and state police carried out more than
2,100 operations with approximately 4.1 billion illegal cigarettes
seized, a record, and 11 illegal factories were shut down.
THE CIGARETTE MARKET
AND BRAND PERFORMANCE
Souza Cruz is the market leader in Brazil, recognized for the excellence and quality of its products, and it maintains a continuing
process of improvement in offering innovations to adult smokers. The Company’s strategic objective is to continue increasing
its share of this market and continue offering the best portfolio
of cigarettes in the country.
In 2012, Souza Cruz consolidated a series of initiatives that were
already ongoing over the last few years, and ended the year with
innovations, especially in the Premium brands.
Brand Innovations and Developments in 2012
Dunhill Showed excellent performance in 2012 due to expanding the “Reloc” initiatives and consolidating the versions
that have capsules.
Free
Kept its performance stable during the year, with the launch of the versions that have capsules (“iSwitch” and
“iBoost”) and the new “iTaste” platform.
Lucky Strike
The “Click & Roll” version continues to be very successful and represents 70% of the portfolio of the brand, following
the launch of the “Boost” version in the first quarter of 2012.
Hollywood
New soft-rigid packaging, with a better look, was developed for this product.
Derby
The brand’s packaging has recently been redone, adding more rigid versions for the retail markets in the
Southern regions and in Curitiba.
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The Company achieved a volume of 66.6 billion cigarettes sold
in 2012, a figure 6.1% lower than the 70.9 billion sold in 2011.
This reduction is mainly due to the increase in cigarette prices,
a consequence of which was accelerated growth of the illegal
market that has taken advantage of the increased tax load on
the industry.
a historic record that consolidates Souza Cruz as the absolute
leader of the cigarette market in Brazil. This growth is due,
above all, to the excellent performance of the Dunhill and Hollywood brands, principally in the 4th quarter. The international
brands Dunhill and Lucky Strike have been well accepted in
Brazil, with constant growth on the domestic market.
Even given this adverse situation, Company share of the legal
market grew 1.2% compared with 2011 and ended at 74.9%,
The chart below shows the evolution of market share of the
main Souza Cruz brands:
Brands
2011
2012
Dunhill8.7%9.2%
Free14.1%13.9%
Lucky Strike1.2%1.3%
Hollywood12.3%12.8%
Derby28.4%27.6%
TOBACCO AND CIGARETTE EXPORTS
In 2012, Souza Cruz exported 120,000 tonnes of tobacco, a volume 24% greater than in 2011. This positive impact includes
sales of tobacco from previous harvests that were only shipped
in 2012, in accordance with the export schedule defined by the
clients.
Also worthy of highlighting from the last fiscal year was the development of a program for qualifying Souza Cruz as an export
hub for the BAT Group. Included in this effort were the initiation
of cigarette exports to Argentina, Chile and Cuba, with volumes
estimated at 300 million cigarettes per year, and exports of filters and processed tobacco (DEER, toasted tobacco, stem dust,
among others).
Revenues were R$ 1,372.4 million, 29,8% over the previous year.
These numbers were positively impacted by the higher volume
shipped, better quality and good productivity of the tobacco in
this harvest, and by the devaluation of the real against the dollar
in 2011.
DISTRIBUTION
Souza Cruz has a sophisticated and complex distribution network that directly serves some 300,000 retailers. Sales and distribution vehicles supply the points of sale. Over three thousand employees are involved in the nationwide operation,
between salespeople, drivers and helpers.
portant information to retailers, and the “Clube +”, that offers
advantages to commercial partners by signing agreements
with suppliers who are willing to negotiate promotional pricing and different methods of payment, are initiatives that corroborate this intention.
The Company is recognized as a model supplier in an increasingly organized and demanding market, and is considered by
COPPEAD (Coordination of Post-Graduate Programmes in Administration of the Federal University of Rio de Janeiro) as an
international reference for logistics for products of mass consumption, based on the Michigan State University model.
Also worth mentioning is the investment in security and monitoring of the fleet of cars that distribute the products, and the
investment in providing training for employees who establish
personal contacts with the points of sale.
It should be noted that Souza Cruz, following clear principles
of responsibility, always places great emphasis on compliance
with legislation against selling cigarettes to minors under 18
years old, and supports awareness programmes that reach
100% of the retailers served by the Company.
Souza Cruz also offers services, assistance and programs intended to increase the satisfaction of commercial partners and
help promote sustainable growth of the retailers’ businesses.
Tools such as Mais Varejo magazine, that seeks to provide im-
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BRASCUBA
Brascuba, the most modern cigarette factory in Cuba, is the result of the partnership between Souza Cruz and the Union of Tobacco Companies of Cuba (Tabacuba). The company has more
than 300 employees, with management shared between Brazilians and Cubans, and produces and sells the Popular, H. Upmann,
Romeo y Julieta, Cohiba, Hollywood and Lucky Strike brands.
This is a mutually beneficial partnership: Souza Cruz had the
opportunity to get into a promising market and Cuba received
trained labour and high quality products that substitute imports
and create foreign exchange via exports.
In 2012 Brascuba achieved record results of 17.8% of the total
cigarette market in Cuba, with volume of 2.2 billion units sold,
which represents 99.8% of the foreign exchange market (CUC —
convertible currency).
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PRODUCTIVITY
VERTICALIZED OPERATIONS
Souza Cruz is active over the entire value chain by means of
a vertical process that goes from supplying tobacco seeds to
growers to the distribution of cigarettes in over 5,000 counties
throughout the country.
The Integrated Tobacco Production System is a fundamental
piece in maintaining the Company’s commitment to sustainability, since it represents a true multiplying agent of behaviour that helps to increase farm productivity and improve the
quality of life for the growers. Programmes such as “Maize and
Beans After the Tobacco Harvest”, that encourage growers to
diversify their production, as well as other initiatives that are
intended to improve financial management of the farms and
leverage socio-environmental issues, collaborated significantly
for the improvement of the contracted growers’ quality of life.
The most emblematic example of this is the Integrated Tobacco Production System, which has been in operation for nearly
a century and includes more than 30,000 growers. By means of
this system, the Company offers feedstocks for planting tobacco,
technical assistance, recommendations for good farming practices, treatment of the soil and environmental preservation.
LOGISTICAL EFFICIENCY
The Souza Cruz Centre for Tobacco Improvement (CTI), located in
Rio Negro, Paraná, houses the beginning of the Company’s production cycle and supply chain. One of the Company’s Tobacco
Processing Plants is also located in this city.
The Company’s factories are located in Uberlândia (MG) — the
largest cigarette factory in Latin America and leader in production volume for the entire BAT Group — and Cachoeirinha (RS),
inaugurated in 2003, with production capacity of up to 30 billion
cigarettes per year. The Cachoeirinha Plant is a modern industrial
complex that also houses the Product Centre Americas, a reference centre for tobacco intelligence and research, The Printing
Plant, responsible for producing cigarette packaging to high
standards of quality, and the GSD (Group Service Delivery), a
global area for information technology of the BAT Group.
After being harvested and cured by the growers, the tobacco is
processed and only then is it taken to the factories for the manufacture of cigarettes. The part of the tobacco that does not go
for internal production is exported to over sixty countries. The
Processing Plants are located in the main tobacco-growing regions — Santa Cruz do Sul (RS), Blumenau (SC), Rio Negro (PR)
and Patos (PB) — and their operation is closely monitored with
quality tests that are carried out to ensure product excellence
and to meet customers’ specifications.
The Company’s distribution structure also has six modern Integrated Distribution Centres (IDCs) — located in Rio de Janeiro,
São Paulo, Contagem, Curitiba, Porto Alegre and Recife — 24
Distribution Centres and 80 supply depots, both owned and outsourced. The design of the Integrated Distribution Centres follows the worldwide trend of creating hubs for market-servicing
operations that were formally dispersed, thus gaining in dynamism, flexibility and control. At the heart of this system is the IDC
São Paulo, the largest and most modern cigarette distribution
centre in Latin America.
INTEGRATED OPERATIONS
Patos / PB
• Tobacco plant
Rio Negro / PR
• Centre for Tobacco
Improvement
• Tobacco Plant
Cachoeirinha / RS
• Cigarette factory
• Regional Product
Centre
•Printing Plant
/ IT Centre
Santa Cruz do Sul / RS
• Tobacco Plant
São Paulo / SP
• Supplies
•Agrega
•Shared Services
(HR & Finance)
Uberlândia / MG
• Cigarette Factory
•Roll Your Own (Trevo)
Rio de Janeiro / RJ
• Planning & Log
Blumenau / SC
• Tobacco Plant
EFFICIENT COST MANAGEMENT
Efficient cost management is indispensable for maintaining
the profitability of the business. In 2012 a broad programme
of cost management was developed, with integrated activities and multifunctional groups. With a focus on analysis and
follow-through of opportunities in Production Costs, Variable Costs, Indirect Costs, Stock Management and payment
terms, among others, these activities led to total savings on
the order of R$ 48.5 million, R$ 33.4 million as relates to the
forecast budget.
Another important initiative in the quest for efficiency is the
Agrega subsidiary, a joint venture with Ambev for purchasing
indirect materials, with economies of scale in the acquisition
of certain supplies.
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SUPPORT OF GROWTH
Souza Cruz maintains constant investments in technology and
research with the objective of supporting the growth strategy,
making sure equipment technology is state-of-the-art, capable of
producing the innovations created by the Company speedily and
with high quality. Among the innovations implemented in 2012
in the industrial area are the new Hollywood soft-rigid packs —
giving it a Premium look and providing better protection for the
product — the expansion of the Dunhill Reloc brand, and the family of Free iTaste, with thread technology for improved taste.
INNOVATION AND RESEARCH
Souza Cruz specialists are dedicated to sustainably increasing
productivity and the quality of the tobacco produced by the
Company, with focus on the following areas: genetic improvement, seed production, soil, pest and disease management, curing and drying, irrigation, mechanization and reduction in the
use of agrochemicals.
Among the innovations introduced last year, we can highlight
the adaptation of drip irrigation technology, intended to improve quality and productivity, use of the intelligent cure controller that allows automatic regulation of the greenhouses during the tobacco curing and drying process and also the adoption
of mechanized harvest technology for Burley tobacco. This technique is intended to reduce the need for labour and improve
quality and productivity.
Since 2011, Brazil has housed the centre for excellence in agronomy research for tobacco, set up by BAT to support other Group
tobacco operations. This is the GLR&T (Global Leaf Research &
Technology), the reference for intelligence and research in tobacco for all the BAT Group companies. From genetic improvement and the production of new tobacco cultivars to the processing and warehousing of the product, and on to cultivation
of seedlings, planting, harvesting and curing management, the
GLR&T has been adding value to the business through innovations.
The year 2012 was also marked by an increase in the automation
of processes and investments in technology. An example of this
was the inauguration of the new Automatic Shredded Tobacco
Centre at the Cachoeirinha plant, that houses the Product Centre
Americas, responsible for various steps in the creation and development of innovative products.
QUALITY, ENVIRONMENT, SAFETY AND HEALTH
For Souza Cruz, quality is a concept that covers many factors, such
as care for the product, for the environment, for safety and for occupational health. This integrated system of quality was given the
name QuEnSH (Quality + Environment + Safety + Health).
community, to the balance it maintains with the environment,
and to its employees for their efforts in assuring safety and
well-being.
In 2011, Souza Cruz developed an integrated safety plan,
strengthening is objective to achieve the goal of “Zero Accidents”. From analysis of statistics and the main causes of accidents, the Company structured guidelines for the implementation of specific programmes and training in critical processes
and equipment. Engagement and awareness of the teams and
incentives for employee participation in the prevention of accidents, proposing improvements with a focus on safety, are
fundamental pillars for achieving this goal.
This innovative process of integrated certification meant that
the Company was the first in the British American Tobacco
Group to obtain international certification simultaneously for
its entire production chain: quality management (ISO 9001),
environment (ISO 14001) and safety and occupational health
(OHSAS 18001). These certifications, prepared by the International Organization for Standardization, are renewed every
three years and go through external and internal audits yearly,
in preparation for the international evaluations.
The results were already obvious in 2012, with a 37% reduction
in the number of accidents requiring leave, and examples such
as that of the Rio Negro factory, current record holder with over
1,000 days with no serious accidents.
These standards provide management guidelines for the various steps in production and emphasize the Company’s commitment to its customers, to the quality of its products, to the
08
SUSTAINABILITY
Sustainable business practices are incorporated into the strategy of the BAT Group and of Souza Cruz. Using a consolidated
model of sustainability and specially developed programmes,
the Company manages its social, environmental and economic
impact and assures high standards of ethics in relationships
with its shareholders, suppliers, employees, customers, adult
consumers and society in general, always creating value for
everyone involved.
Sustainable Company: groups together actions for the purpose
of developing the employees, aligning suppliers with the Company sustainability strategy and encouraging diversity in team
Souza Cruz;
Souza Cruz implements this strategy through projects on four
platforms for action that include the entire value chain, emphasizing three fundamental pillars: environment, people and prosperity. Following below is a brief explanation of each one of these
platforms:
Sustainable Society: promote improvement in the quality of life
in the areas surrounding where the Company operates, stimulating debate on ethics, freedom of choice and consumer rights
and developing initiatives in support of education and development of farming youth.
Sustainable Growers: includes actions focused on eradicating
child labour, maximizing the farm as a sustainable business (for
example, through crop diversification) and mitigation of environmental impacts;
Also, concerning education in sustainability, the Souza Cruz Institute potentializes farms, contributing to the entrepreneurialism of farming youth. Below is a list of some of the main programmes and initiatives developed by Souza Cruz in the area of social responsibility.
Sustainable Retail: concentrates initiatives intended to prevent
the selling of cigarettes to minors under 18 years of age and maximizing the use of retail as a sustainable business;
SUSTAINABLE GROWERS
Sustainable Farms: is intended to provide small farmers with management training, focusing on diversification, planning, financial
management and respect for socio-environmental issues, seeking
sustainable development of tobacco-growing farms. In 2012, 216
families in 25 counties in the Southern states participated in the programme.
agricultural areas. In 2012, the programme included 23 projects in 21
counties in the Southern states, with investments of R$ 1.7 million.
Project Knowledge: facilitates financing for computers that are
partially subsidized by Souza Cruz, intended for digital inclusion of
integrated growers and to contribute to their becoming agents for
transformation in agriculture. The project includes, further, donations
of computer equipment to schools in agricultural areas, with the objective of contributing to the improvement of education for young
farming people. In 2012, two thousand growers were benefited by
the programme.
Soil Management Plan: intended to make Souza Cruz integrated
growers aware of the responsible use of water and soil, through planning of activities and technical assistance from the Company.
Reforestation Programme: seeks to preserve biodiversity and the
native forests in tobacco-producing areas through financing for seedlings of exotic species and dissemination of reforesting techniques for
Souza Cruz integrated growers. In 2012 the amount financed was R$
923,000, used for acquiring 4.1 million seedlings by 3,712 growers.
Grow Up Legal Programme: a partnership established between
Sinditabaco (Tobacco Industry Association) and companies associated with Afubra (Tobacco Growers Association of Brazil), that is
intended to prevent and combat child and adolescent labour in tobacco-growing through awareness programmes for growers and society in general. To this end it offers seminars, educational campaigns,
training in farming techniques and dissemination of advertisements
on TV, radio and in the principal newspapers in the tobacco-growing
regions of the country.
Friends of the Native Forests Programme: is intended to protect
the native forests through acquisition of firewood of legal origin,
seeking self-sufficiency in firewood for the tobacco curing process
among integrated growers who do not have areas of reforestation.
Diversification: a programme developed in partnership with the
Federation of Agricultural Workers of Santa Catarina, that encourages diversification of income on tobacco-growing farms by planting
other value-added crops.
Maize and Beans After the Tobacco Harvest: some aspects of the
Souza Cruz integrated production system are incentives and guidelines for growers to diversify their crops. Besides providing farmers
with additional income, crop rotation plays a fundamental role in the
management of pests, diseases and soil conservation. Following the
tobacco harvest, an excellent alternative is to plant maize and beans,
encouraged by Souza Cruz in the state of Rio Grande do Sul and Santa
Catarina in a universe of some 60,000 growers. In 2013 the program
will also be offered in the state of Paraná.
Longer School Day: invests in projects that help to improve the
quality of elementary education, with alternatives for occupation and
entertainment and a multidisciplinary education outside of school
hours, offering extracurricular activities to children and adolescents in
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Awareness of Agrochemicals: conducting courses in partnership
with Senar for the safe use of agrochemicals, as well as training in the
entire structure of techniques related to the issue, were also highlights of 2012, even though tobacco is one of the commercial crops
that uses the least agrochemicals in Brazil, according to data from the
IBGE and studies conducted by UFPEL and UFPA.
Integrated Tobacco Grower Magazine: a publication intended
to help Souza Cruz integrated growers with technical matters of tobacco production, as well as providing reports on health and safety at
work, social and environmental responsibility and opportunities for
increasing income. The magazine is published quarterly and in 2012
reached the milestone of 35,000 copies per edition.
Collection of Triple-Washed Empty Agrotoxin Containers: a
partnership between Souza Cruz, Sinditabaco and Afubra for collection of empty agrochemical containers in the South of Brazil. In 2012,
more than 1 million containers were collected.
Music in Movement: the idea of this project, begun in 2010, is to
take art to tobacco-growing regions and promote it, giving value to
the relationship with the community and the integrated workers.
SUSTAINABLE COMPANY
Renewable Energy Sources: Souza Cruz owns three areas dedicated to reforestation: Fazenda Boa Vista (RS), Fazenda Triângulo
(SC) and Fazenda Buriti da Prata (MG). Having these farms makes
the Company self-sufficient in firewood, a source of renewable
energy. Another initiative is the utilization of vehicles powered
by natural gas and biofuels (flex) for the Leaf Department’s fleet
and for the cigarette sales and distribution team.
Sustainability in the Supply Chain: To align its supplier base
with its strategy for sustainability, Souza Cruz assesses its strategic suppliers using a robust process based on mutual benefit
and the continuous improvement of processes (Best — Business
Enablers Survey Tool). The initiative is intended to disseminate
and encourage adoption of good socio-environmental practices
and ethics by Company suppliers.
Rainwater Impounding: Souza Cruz invests in the creation of
areas for impounding rainwater at the Cachoeirinha Plant (RS),
to reduce consumption. In 2012 impounded water met about
54% of the factory’s consumption needs. The Uberlândia Plant is
a model for reusing water and waste.
Zero Accident Programme: with significant investment, the
programme is intended to strengthen the culture of safety and,
through a set of actions, reduce leave time resulting from accidents on the job. In 2012, Souza Cruz indices, already at a historical low, were reduced by approximately 50%. The highlight
was Project Pulsar for behavioural safety that was implemented
in Company factories.
Solid Waste Management: Souza Cruz conducts systematic and
continuous evaluation of waste generated in all its units to identify areas of opportunity for recycling or reuse. In 2012, 96.4% of
all waste was reused. The Company also conducts a programme
of generating energy using biomass waste. In the last fiscal year,
106 tonnes of tobacco dust were converted and, for 2013, the
intention is to expand the programme.
Recovery of Solvents: to recover and reuse solvents, Souza
Cruz set up a recovery plant in the Printing Department of the
Cachoeirinha Plant, with an investment on the order of R$ 26
million. Every year, 500 tonnes of solvents, that were previously
discarded, are reused.
Treatment of Sewers and Liquid Waste: Souza Cruz factories
have liquid waste treatment stations and 100% of waste is processed for recycling, reuse and/or composting. In some cases,
the treatment of liquid waste already makes the water available
for uses that do not require drinkable water.
Ergonomics: throughout 2012, the Company analysed and developed processes to reduce ergonomic risks at the production
units. The highlight was installation of the Shredded Tobacco
Centre at the factory in Cachoeirinha, with investment of R$
13.5 million. Besides the ergonomic aspects, this contributed to
reducing the risk of accidents and improving the quality of the
work environment.
Climate Change Management — Carbon Balance: in 2008,
Souza Cruz began monitoring greenhouse gas emissions in its
production chain. The study allows quantification of the Company’s carbon stock, helping it to identify areas where it is possible to adopt cleaner technological alternatives. In 2012, 86%
of emissions in the production chain were neutral, and the 14%
remaining were offset by the Company’s preservation areas, environmental parks and reforestation.
10
SUSTAINABLE RETAIL
Awareness Campaign for the Prohibition of Selling Cigarettes to
Minors Under 18: Souza Cruz supports the awareness campaign
conducted by principal organizations in the areas of hospitality, gastronomy, baking, tourism and fuels, disseminating it to
100% of the retailers who make up its distribution network.
Further, as a means of beating the illegal cigarette trade, it developed a communications campaign for these 300,000 retailers, supporting the Minimum Cigarette Price Law, passed by
the federal government at the end of 2011.
Cruz launched a Support Campaign for the Minimum Cigarette Price Law, by communicating with the 300,000 retailers
it serves.
Dissemination of Responsible Social Practices for Retailers: Souza Cruz uses its channels of communication with its retailers,
including Mais Varejo magazine, a monthly publication distributed free of charge, to inform about issues such as environmental impact, service and respect for the customer, management
and ethical principles for retail. Further, it creates awareness of
Social Responsibility for retailers, through the Centre for Development of Sustainable Retail of the Dom Cabral Foundation.
Support Campaign for the Minimum Cigarette Price Law: To
make retailers and consumers aware of the issue, in 2012 Souza
SUSTAINABLE SOCIETY
Souza Cruz Volunteers Programme: encourages employee involvement in social causes, strengthening the Company’s relationship with the communities and the culture of social responsibility. In 2012 the work of some 2,000 volunteers benefited
23,000 people and 162 institutions.
Rio – Sustainable City: conceived by the Brazilian Business Board for Sustainable Development, in partnership with the state
and municipal governments and assorted businesses in two
communities in the city of Rio de Janeiro, the project’s objective is to implement repeatable solutions for urban and social
infrastructure that promote sustainable development. Participation by Souza Cruz is through the Urban Organic Agriculture
Front that encourages generating income and improvement in
the diet of the residents via training and the production of organic crops on residential patios and rooftops. In 2012 approximately 20 families were trained in the Chapéu Mangueira and
Babilônia communities.
Environmental Parks: Souza Cruz has three environmental parks, open to the public, at the plants in Uberlândia (MG), Cachoeirinha (RS) and Santa Cruz do Sul (RS). Together they make
up an area of 310 hectares intended for the preservation and
recovery of biodiversity. In 2012 there were over 3,000 visitors
to the parks.
SOUZA CRUZ INSTITUTE
The Souza Cruz Institute is a non-profit, non-governmental organization that operates nationwide. Recognized by the Ministry
of Justice as an Organization of Civil Society of Public Interest
(Oscip, in Portuguese), the institute is committed to the cause
of sustainability in agricultural areas and directs its efforts to
educating young businesspeople in these areas, using initiatives
that contribute to strengthening Brazilian family agriculture.
as agents of sustainable agricultural development. The programme is
currently offered in 30 counties in the states of Santa Catarina, Paraná,
Bahia and Ceará, and has already graduated 600 young people.
Rural Youth Network: a collective project made up of institutions dedicated to the well-rounded education and development
of young people in rural areas, it seeks to connect the people involved and promote the exchange of experiences, cooperation
and mutual support for these causes.
The Institute works with the conviction that education is the key
for preparing young people who are able to play a strategic role
in agricultural development and prosperity, consciously, fully,
and environmentally aware, combining technical innovation and
respect for traditions.
The New Rural Youth: a pilot experiment with the objective of
fostering strategies of diversification of production and trade
among young people who live in agricultural areas, the program
was started in 2012 in Rio Grande do Sul, Santa Catarina, Paraná
and Rio de Janeiro. The initiative, besides encouraging digital inclusion, offers new skills and abilities to graduates of institutions
of formal education, within an agricultural context, turning them
into agents who can add value to the products and services of
family farming. In its first year of operation, the programme benefited 428 young people, and in 2013 will be expanded to approximately 30 micro-regions throughout the Southern states.
We highlight below some Souza Cruz Institute programmes:
Rural Youth Entrepreneurship Programme: intended for young people between 16 and 29 years old, the programme complements the
formal education of young people in agricultural areas by teaching
practices that stimulate critical thinking, reflection, creativity, ethics and
good citizenship, with the objective of preparing them to play a role
11
Brazilian Rural Youth Exchange: held every two years by the Rural
Youth Network, the programme promotes integration of young
people with different agricultural backgrounds, with a focus on
building a network for encouraging entrepreneurship among
young farmers and the development of concepts of good citizenship. In 2012 the programme was in its fourth edition, covering
the regions of the South, Southeast and Northeast and with the
participation of 49 young farmers and 9 non-governmental organizations.
Participation in Events: In 2012 the Souza Cruz Institute participated in two major events. Between the 5th and 8th of July, with a
programme full of debates and lectures, and sponsored by the Institute, Freedom House was one of the highlights of the tenth edition of the Paraty International Literature Fair (Flip, in Portuguese).
It was attended by opinion makers and exponents of socio-political and cultural thought to debate trends, perspectives and paths
of freedom.
Between the 25th of August and 2nd of September, the Institute was
at Expointer, one of the most important events in the farming and
cattle-raising world, sponsoring Agriculture House, which is part
of the Federation of Agriculture System of the State of Rio Grande
do Sul (Farsul, in Portuguese). Besides displaying the brand in various areas, the Institute also had a stand inside Agriculture House,
where it showed videos and distributed institutional materials.
Marco Social: In 2012 the publication, which can be translated
as “Social Milestone,” began circulating in its online format (www.
marcosocial.com.br), with weekly updates. The objective is to
build a channel for interaction and dissemination of ideas from
people who are thinking about sustainability in family farming in
different areas. This fulfils the mission of helping to understand the
processes of articulation and mobilization in Brazilian agriculture.
POSITION ON SMOKING
Souza Cruz recognizes that consuming its products involves
health risks and seeks to develop products with the lower potential risk for consumers. The Company believes that the decision to smoke, or not, is a matter of free choice and must be
made by adults who are aware of the health risks. The only way
to avoid the health risks that stem from smoking cigarettes is
not to smoke, and the best way to reduce these risks is to quit
smoking.
On 27 April 2010, the Superior Court of Justice (STJ) ruled for
the first time on the merits of a lawsuit for indemnification for
damages attributed to smoking cigarettes, ruling that the necessary requirements were not present that would create an obligation to pay indemnification. Since then there have been 11
other rulings from this court, all rejecting this type of claim on
the same grounds.
In view of the fact that rulings of the STJ orient the positioning
of all other courts, these results are fundamental for obtaining
future favourable decisions. Another indirect effect of these results from the STJ is to discourage the filing of new lawsuits over
the same subject.
REGULATION
Souza Cruz supports sensible and balanced regulation that
keeps adult smokers informed about the health risks and, at
the same time, respects their freedom of choice regarding
smoking. The Company also believes that the manufacture of
cigarettes must only be done by legally established companies.
Summarizing, in the 12 rulings denying liability of the cigarette
manufacturers for damages associated with consuming the
product, the justices of the STJ confirmed the follow Company
defence arguments:
Considering that Brazil has some of the most severe legislation
governing the tobacco sector, the imposition of new and greater restrictions outside the jurisdiction of legislative authority
and without prior study of effectiveness and impact, simply
burdens the companies that operate legally, opening doors for
the growth of the illegal cigarette market, which today represents some 30% of the total market.
· Legality of the Activity: “In reality, the Federal Constitution itself,
in Art. 220, § 4, explicitly authorizes the sale of cigarettes in Brazil, imposing restrictions only on advertising, the framers of the Constitution being aware of the risks of consuming them”.
As an example of an excessive measure, there is the Resolution
passed by the National Health Surveillance Agency (Anvisa in
Portuguese) in March 2012, that restricts the use of ingredients
in tobacco products manufactured and sold in Brazil. There is no
doubt that this is an extremely onerous measure, the complexity
and consequences of which go beyond the agency’s authority.
· Public knowledge of the risks: “In truth, on a daily basis humanity
goes about leading its private life which, until very recent decades,
was indeed highlighted by cigarettes, alcohol, as well as salt, animal
fat and a sedentary life, all of which are associated with widely recognized harm”.
· Free Choice and the Role of Advertising: “One cannot give cigarette advertising, practiced for decades, an absolutely decisive value
Claims for indemnification by smokers and ex-smokers
Over the last 17 years Souza Cruz has been the target of many
lawsuits with claims for indemnification for smokers and exsmokers in Brazil. After more than a decade of litigation, there
have been over 540 decisions and 290 appeals rulings from 17
State Courts denying these claims. All decisions that are now res
judicata denied the claims for indemnification from smokers, exsmokers or their family members, totalling 447 cases closed.
in a person’s choice to choose the path of smoking. (...) To say that
man does not act according to his free will due to supposed “contamination from advertising” orchestrated by the tobacco industry is to
say that no option taken by man is genuinely free”.
12
WINNING ORGANIZATION
Souza Cruz believes that one of its fundamental strengths is its
ability to continue attracting, developing and retaining the best
talent, guaranteeing a solid team of leaders and staff that work
to the fullness of their potential, with commitment and pride in
working for the Company.
Also worthy of note is the Growth Academy platform. With the
objective of preparing employees for full professional development, the programme encompasses integration of peoplemanagement processes (performance, development and career)
with other levels of the Organization, potentializing the use of
Company talent banks.
The year 2012 held many competitive challenges for the Company
and, once again, Souza Cruz delivered impressive results, ending
the period with significant achievements and recognitions. These
accomplishments marked the consolidation and legitimization of
the strategic pillars that have been adopted in recent years:
Souza Cruz believes that feelings of belonging to the Organization are reinforced by opportunities for growth and development offered by the Company. The employees are ambassadors
of the Souza Cruz brand and play a decisive role in the peoplemanagement strategy, helping to attract, contract and retain
new talent. Besides the programme Refer New Talent, that perfected the process of referrals from the network of relationships
among Souza Cruz employees, in 2012 the kinship policy was
reviewed, attributing new guidelines for recruiting and hiring
personnel, and allowing greater involvement of employees in
attracting talent.
• Guarantee the ability to attract the best talent by strengthening
the Souza Cruz brand;
• Create career and development opportunities at all levels, to assure continuous professional growth;
• Reinforce the culture of high performance and pride in working
at Souza Cruz by practicing Company values;
Souza Cruz maintains a high standard of quality in its processes and, thus, uses the best practices in the market. Diversity and the desire for inclusion guide permanent Company
efforts to employ people with physical disabilities. Over the
last two years, the number of workers with some type of disability tripled and the VIDA Programme was developed, which
is intended to guarantee full development of employees with
disabilities. Further, partnerships were established with institutions such as AVAPE (Association for the Valuation of People
with Disabilities), assuring development and external training of professionals that in 2012 were incorporated into team
Souza Cruz.
• Guarantee a highly competitive compensation and benefits model in relation to the market.
In line with these pillars, Souza Cruz strives to offer a good work
environment, career and development opportunities and competitive compensation. This is reflected at all levels of the Organization and has been recognized for strengthening the employer
brand, which is reflected in awards from the market and the
number of candidates for positions in the Intern and Trainee programmes, the main entryway for young talent into the Company.
In just the last year there were 25,000 applications for the Trainee Programme and another 10,000 for the Intern Programme
(47.1% over the number of applicants in 2011).
The success of all these initiatives can be measured by a study
of organizational climate, such as Your Voice, conducted every
two years in various companies in the BAT Group. The study permits comparison of Souza Cruz with the other companies in the
Group and with external benchmarks. In 2012 the results were
excellent, with 97% participation and 72% favourability, surpassing the scores from the previous study (2010), with special mention for the index for engagement and leadership that surpassed
not only the Group average, but also the global benchmark.
Another important result was the level of excellence achieved
by the Uberlândia and Cachoeirinha factories: 1st and 3rd place,
respectively, in the category Best Organizational Climate out of a
universe of over 50 Group factories studied.
In 2012 the Company paid special attention to vocational education for employees in technical areas. Through partnerships with
institutions such as Senai and Sesi, and practical training carried
out on Company premises in programmes such as “Practice” and
“Qualify”, intended to improve technical development and practices in the industrial areas, Souza Cruz believes it has taken an
important step in creating specialized labour for the challenges
that are inherent to the business.
Also on the technical level, there are two sponsorship programmes that invest in the employees. The University Development Programme (UDP), that encourages employees to attend
university, and the Language Development Program (LDP), that
consists of partial sponsorship of fees for language courses for
employees who need to acquire this skill for their current and/
or future jobs, were other important Souza Cruz programmes in
2012, benefiting nearly 1,000 employees.
Results from Your Voice are the bases for action plans, and
the most important indicator is precisely the evaluation of
the implementation of these plans. In 2012, reflecting the results from the last study, Souza Cruz implemented the Live
Well Programme, that encourages employees’ well-being by
providing incentives for actions related to health, comfort,
practicality and quality of life through innovations in the area
of occupational health. On the same subject, the year 2012
was also marked by significant advances in matters related
to the Environment and Workplace Safety, using sensitivity
campaigns to change behaviour and reduce work-related accidents to zero.
Leadership development was another important objective in
2012, with the continuation of programmes that were already
under way and local BAT corporate training: the Cell Manager
Training Programme, that focuses on developing productionline managers, and the Product Chain Essentials, to prepare middle management in Operations and Marketing for future challenges faced by the business.
13
All this robust human-resources structure is reflected in the
turnover metric, the percentage of employees who leave the
Company, whether due to retirement, dismissal or resignation
on the part of the employee. Souza Cruz has historically maintained a turnover rate of 10%, an indicator considered to be a
benchmark in the retail sector, and that serves to evaluate both
employees’ satisfaction and the Company’s hiring policy.
and awards best practices and policies in Human Resources
worldwide. The certification is granted to organizations with
high standards in Human Resources, based on the following
criteria: benefits, working conditions, career plans, corporate
culture and training and development. This type of award, the
result of in-depth analyses of businesses’ human resources
practices and management, reinforces Souza Cruz’s recognition as one of the best companies to work for.
The company received important recognition when it received
the Top Employers Award Brazil for the second year in a row,
from the CRF Institute, a European institution that identifies
AWARDS
Following is a list of other awards and recognitions the Company has received:
• Top Employers Brazil 2012
Souza Cruz received the Top Employers Brazil 2012 Award, given by the CRF Institute to organizations with the highest standards in Human Resources.
and valuation of its employees. The Company achieved second
place in the category Education and Development, in recognition of initiatives developed by the Human Resources area.
• Golden Shopping Trolley Award 2012
Twenty-nine companies were given this award by AGAS (Rio
Grande do Sul Supermarkets Association), in Porto Alegre (RS),
the majority of them from that state.
• Época Business Award 360º
Souza Cruz received the Época Business Award 360º. The award
was given to 23 companies in six categories: Finance, Human
Resources, Vision of the Future, Socio-Environmental Responsibility, Corporate Governance and Innovation.
• Best and Biggest Award from Exame Magazine
Souza Cruz once again received the Best and Biggest Award
from Exame magazine, in the Consumer Goods category.
• Leader in EVA
The Company was awarded first place in The Best Companies for
the Shareholders 2012, in the Economic Value Added category.
The biggest tobacco company in Brazil, Souza Cruz showed an
increase of 16% in its EVA, the equivalent of R$ 175.5 million.
• Two important certifications from the publisher of Gestão & RH
Souza Cruz received two important certifications from the publisher of Gestão & RH — that annually conducts a study among
the biggest and best companies elected by Exame magazine
and classifies them in accordance with best practices in Social Corporate Responsibility, Sustainability, Management and
Transparency. The Company was certified among the “10 Best
Companies in OHDI — Organizational Human Development
Index” and among “The 50 Best Companies in Corporate Citizenship 2012”.
• Amauta Award
The Souza Cruz Interaction Centre received yet another Amauta
Award from the Direct Marketing Association of Latin America
(ALMADI), their maximum recognition for direct and interactive
marketing in Latin America.
• Modern Consumer Award for Excellence in Customer Service
Souza Cruz won the Modern Consumer Award for Excellence in
Customer Service — given by Modern Consumer magazine and
the Padrão Group. The Company was recognized for its commitment to the quality of the service in the Interaction Centre,
winning in the industrial category.
• Estado Agency Distinction Award
Souza Cruz once again was among the winners of the Estado
Agency Distinction Award 2012. The award is in recognition
of companies that, even given an unfavourable international
scenario, were able to deliver extraordinary results to their
shareholders.
• Citizen Company Seal 2012
Souza Cruz received the Citizen Company Seal 2012. Created
by the Regional Accounting Board of the State of Rio de Janeiro (CRCRJ in Portuguese) in 2002, the initiative is intended
to improve the quality of accounting and socio-environmental
information published in the annual reports of businesses of all
sizes, sectors and regions of the country.
• Most Admired HRs Award
The Souza Cruz director of Human Resources, Fernando Teixeira, received the “10 Most Admired HRs in Brazil” award. The
selection of winners was based on a study carried out by the
publishers of Gestão & RH and by Deloitte Consulting, that included executives from the biggest and best companies in Brazil. Souza Cruz also received an award as one of the “20 Companies Most Admired by HRs in Brazil”, beside companies such as
Natura, Nestlé, Google and Colgate-Palmolive.
• SESI Award for Quality at Work
A pioneer award in the sector, the 15th edition of the SESI Award
for Quality at Work recognized Souza Cruz for its management
14
• ClienteSA Award
The Souza Cruz Interaction Centre once again received recognition from the market by winning the ClienteSA Award in Multichannel Sales, for its Hybrid Telesales case, for Best Practices in
Strategic Management.
• XVIII ABEMD Award
The Souza Cruz Interaction Centre received the XVIII ABEMD
Award (Brazilian Direct Marketing Association), for its Hybrid Telesales case. This award is of great importance in the market as it
shows the evolution of direct marketing in Brazil and the positive
results that this type of service generates for the country.
• Award from Gestão RH magazine
Souza Cruz received awards given by Gestão RH magazine. The
Company was among the 150 best Brazilian companies in the
category “People-Management Practices”, besides being part
of the “10 Psychologically Healthy Companies” (10+ EPS), that
recognizes organizations that work to guarantee the quality of
life of their employees.
• Ranking among the biggest ICMS taxpayers in Paraná
Souza Cruz was awarded by the newspaper Industry & Commerce
for classifying among the companies included in the 3rd Ranking
of the 100 Biggest ICMS (Sales) Taxpayers in Paraná. A certificate
was presented to the representatives of each of the companies
awarded.
• ADVB-RS Exports Award
Souza Cruz received the Exports Award RS 2012 from the Brazilian
Association of Sales Directors (ADVB-RS). The Company was highlighted in the Master Exporter Trajectory, reserved for companies
that had “very impressive” export histories, situating itself among
the largest exporters in Rio Grande do Sul for a long period (three
years) and showing significant rate of growth.
• 19th Edition of Top of Quality Brazil
Souza Cruz received the 19th edition of the Top of Quality Brazil
award, which is given every year in principal cities throughout Brazil. Its main objective is to recognize high standards of excellence
and quality in businesses’ products and services. It also rewards
executives who have acted with distinction and credibility.
15
CORPORATE GOVERNANCE
MANAGEMENT MODEL
For Souza Cruz, maintaining high levels of corporate governance
is one of its most important commitments. Honesty, transparency
and accountability are the principles that govern its conduct.
the Brazilian market to begin paying interest on equity (IOE). In
2001 the Company began paying quarterly and, since 2005, both
IOE and dividends are adjusted by the Selic rate. In 2008 the Fiscal Board was established at the request of Souza Cruz shareholders. One of the board’s three members is elected by the minority
shareholders, and the entire board is renewed annually.
One of the biggest factors of governance in the Company, ever
since its founding in 1903, is innovation. The timeline of the building of its management model shows that.
The following year, the Company took another important step in
consolidating its governance practices when it adopted the new
international accounting rules, the “International Financial Reporting Standards (IFRS)”.
In 1914 Souza Cruz became part of British American Tobacco
(BAT). BAT is the second-largest publicly traded tobacco group in
market share in the world, and it is active in over 180 countries.
In 1946 Souza Cruz was listed on the Rio de Janeiro Stock Exchange and, in 1957, on the São Paulo Exchange. Since then it
has maintained its credibility on the capital markets as a company
that pays dividends and distributes over 90% of its profits. Souza
Cruz has been part of the Bovespa index every year since the index
started in 1968.
For more efficiency in the Company’s risk management, in December 2011 the Board of Directors approved unification of the Audit
Committee (good corporate governance practice begun in the
1980’s) and the Social Responsibility Committee. The new committee, called the Audit and Social Responsibility Committee, is made
up of four executives from outside the Company who meet every
four months to deliberate on issues of risk in the business, as well
as collaborate with the Board of Officers in developing strategies
and guidelines for matters of social responsibility, the environment and business ethics.
In the 1970’s, anticipating a trend that would only be confirmed in
the 1990’s, the Company created an Independent Board of Directors. Of the eight-member board, comprised of business leaders
and recognized professionals, only three have a direct connection
with Souza Cruz and/or BAT. The members, who meet ordinarily
each quarter, are elected by the General Shareholders Meeting,
pursuant to the Law of Corporations.
Members of the Audit and Social Responsibility Board:
Rudolf Hohn – ­President
Luis Felipe Lampreia
Adir Pereira Keddi
José Alfredo Lamy
In an unprecedented decision, in 1996 Souza Cruz established
bi-annual payment of dividends, making it the first company in
PRINCIPLE MILESTONES
SOUZA CRUZ ON THE CAPITAL MARKET
Becomes
part of
BAT Group
1903
Creation
of Audit
Committee
Listed on
São Paulo
Stock Exchange
1946
1914
Founding of
Souza Cruz
Risk
Management
1970’s
1957
Listed on
Rio de Janeiro
Stock Exchange
Indexing of
IOE &
Dividends
by Selic
1996
1980’s
Policy of
Negotiating
Shares
16
2009
2005
First
Company in
Brazil
to pay
IOE
Creation of
Independent
Board of
Directors
Abrasca
Self-Regulation
Code
2013
IFRS
Adopted
Multifunctional groups complete the Souza Cruz management
model. Made up of representatives from different areas of the
business, these groups support the Officers Board in making
strategic decisions. Bringing together members from diverse
Company departments, the Corporate Governance Subcommittee is one of these support groups and it discusses matters
involving Company rules.
One of the items on the corporate governance agenda for 2013 is
adapting to the Abrasca Code for Self-Regulation and Good Practices for Public Companies that established principles, rules and
recommendations for the purpose of perfecting corporate-governance practices. Adoption of the Code by Souza Cruz is intended
to promote investor confidence, facilitate access to capital markets
and reduce costs, fostering sustainability and long life for the Company, as well as creating value over the long term.
MANAGEMENT MODEL
Fiscal Board
(3 independent
members)
General Shareholders
Meeting
Audit and Social
Responsibility Committee
(3 independent
members)
Board of Directors
(5 independent members / 3 internal)
Internal
Audit
Strategic guidelines
for the business and
management
Recommendations
for processes, risk
assumption and
strategic issues
Officers
Results &
Support
Business
Units
Internal Audit
Directives
& Policies
Multifunctional
Groups and
Subcommittees
MEMBERS OF THE BOARD OF DIRECTORS AND THE FISCAL BOARD IN 2012
OFFICERS BOARD
• Andrea Martini – President
• Leonardo Senra – Dir. of Finance and Investor Relations
• Adriano Alvim – Director of Industrial Operations
• Maria Alicia Lima – Legal Director
• Dimar Frozza – Director of Leaf
• Fernando Pinheiro – Director of Corporate Affairs
• Fernando Teixeira – Director of Human Resources
• Paulo Clóvis Ayres Filho – Director Strategic Planning
• Jorge Irribarra – Director of Marketing
BOARD MEMBERS
• Ellen Gracie Northfleet
• Luiz Felipe Palmeira Lampreia
• Pedro Sampaio Malan
• Carlos Ivan Simonsen Leal
• Rudolf Hohn
• Leonardo Senra
FISCAL BOARD
• Sitting: Antonio Duarte Carvalho de Castro
• Alternate: Elizabeth Piovezan Benamor
• Sitting: Paulo Eduardo Pessoa Cavalcanti da Silva Santos
• Alternate: Edmilson Loureiro de Lyra
• Sitting: Humberto Casagrande Neto
• Alternate: Rafael Rodrigues Alves da Rocha
BOARD OF DIRECTORS
• Jack Bowles – Chairman
• Andrea Martini – Vice-Chairman
17
Andrea Martini – President
Academic Background: Economics and Business Administration.
Professional Experience: Andrea Martini is Italian. He began his career
in Barilla, a leading pasta brand worldwide. In 1995 he came to Brazil as
Director of Marketing for the Barilla-Santista joint venture. From 1996 to
2000 he was Marketing Director of Bauducco. Subsequently, he became
Director-General of Parmalat and, beginning in 2003, General Manager
for the Southern Cone at Hershey’s. He came into the BAT Group in 2005,
worked at Souza Cruz for three months, and then took over BAT General
Management in Colombia. From 2007 until assuming the Presidency of
Souza Cruz, Andrea was the chief executive of BAT Mexico.
tions in the area of Finance. In 2000 he took over General Management of Brascuba (a partnership between Souza Cruz and
the Cuban government). Back in Brazil, he held the positions of
Manager of Corporate Finance and coordinator of the Strategic
Leadership Agenda from 2003 to 2005. At BAT in London he was
manager of Organizational Development and, in April of 2007,
he was named Director of Human Resources at Souza Cruz.
Jorge Irribarra – Director of Marketing
Academic Background: Bachelor’s degree in Psychology from the
Catholic University of Chile.
Professional Experience: Jorge Irribarra started at BAT in 1992 in
Chile, his country of birth, where he held several positions in SPI and
brands. From there he went on to hold important positions on three
continents in many different locations: England (as International
Brand Manager), Brazil, where he was Regional Group Brand Manager for the LACAR region, based in Rio de Janeiro), Mexico (in TM&D
and Category Manager for the ASU30 brands), Hong Kong (Regional Head of Brands and Project Manager of the Legacy Programme),
Spain (Marketing Director Iberia), Netherlands (Head of Marketing
- Western Europe Area). In 2009 he worked in Argentina as the Director of the project that resulted in the “Driving our Growth” plan. He
then returned to Chile as Country Manager, and in 2011 was promoted to Director of Marketing for the Cone Sul. In March 2012 he took
over the position of Director of Marketing at Souza Cruz.
Adriano Alvim – Director of Industrial Operations
Academic Background: Graduated in Electrical Engineering, Post-Graduate studies in Manufacturing Automation and Business Administration, plus an MBA and Post-MBA.
Professional Experience: Adriano Alvim started at Souza Cruz in 1992
in the Uberlândia Factory as Production Supervisor. Throughout his
career in the area of Operations, he has held many leadership positions in Brazil and abroad. With broad international experience, he
worked in production management in Bayreuth, Germany, and was
Director of Operations in Venezuela. In 2008 Adriano became Head
of Manufacturing for Russia and Eastern Europe, where he gained
recognition for his important contributions to performance in the
Operations area, as well as for bringing the factories in Russia into the
Supply Chain Global model. In April he returned to Brazil to take over
as Director of Industrial Operations at Souza Cruz.
Leonardo Senra – Director of Finance and Investor Relations
Academic Background: Bachelor’s degree in Economics from the
University of São Paulo, with an MBA in Finance from Coppead/UFRJ
and an MBA from the Dom Cabral Foundation.
Professional Experience: Leonardo Senra began at Souza Cruz in
September 1996 as a Trainee in Finance, and held several positions in
this area through 2002. From 2003 to 2004 he was Coordinator of the
Treasury for Latin America at Brown & Williamson in the United States.
In 2004 he returned to Souza Cruz as manager of Strategic Planning
and Finance and, starting in 2006, he held Director positions in the
BAT Group in Kenya, Eastern Africa and in Japan. He returned to Brazil
in 2010 to take over as Director of Finance and Investor Relations.
Dimar Frozza – Director of Leaf
Academic Background: Graduated in Administration with specialization in Finance.
Professional Experience: Dimar Frozza began his career at Souza
Cruz in 1978 in the city of Pinhalzinho (SC). He has had many positions in the Company, in the area of Accounting and Finance. He
transferred to São Paulo in 1989 in Procurement Financing while he
was doing post-graduate studies in finance. Later he moved into the
Operations area where he was manager of Tobacco and Industrial
Procurement (Blumenau, Rio Negro and Santa Cruz do Sul). He was
also manager of the factories in Uberlândia (MG) and Cachoeirinha
(RS). He worked in London for three years coordinating British American Tobacco (BAT) industrial operations in Central and Eastern Europe. He then ran the Supply Chain area for Europe until 2007 when
he returned to Brazil to the Leaf Department at Souza Cruz.
Maria Alícia Lima Peralta – Legal Director
Academic Background: Graduated in Law from the Catholic University of Rio de Janeiro (PUC), with post-graduate study in Intellectual
Property at the same university.
Professional Experience: She started at Souza Cruz in 2000,
where she has held the positions of Legal Manager for Intellectual Property, AIT, Operations, Marketing, Regulatory and
Product Liability Litigation (PLL). In 2007 she worked at BAT in
London as the attorney for Brands and Marketing. In July 2010
she was named Legal Director at Souza Cruz.
Fernando Pinheiro – Director of Corporate Affairs
Academic Background: Bachelor’s degree in Business administration from FGV-SP.
Profession Background: Fernando Pinheiro began his career as an
account manager at Citibank, between 1989 and 1992. He started at
Souza Cruz in 1992 in Marketing, where he was a district sales manager. He worked in cigarette exports as district manager and, later, as
a brand manager. In 1995, he participated in the negotiating group
for the joint venture in Cuba and was appointed Director of Marketing of Brascuba. From 1997 to 2003, in Brazil, he worked on development of Souza Cruz mass-volume brands. In 2004 he took over regional management of Trade Marketing in São Paulo. In January of
2007 he was named General Manager of Souza Cruz brands and, in
April 2008 he was named Souza Cruz Director of Corporate Affairs.
Paulo Clóvis Ayres Filho – Director de Strategic Planning
Academic Background: Economics and Civil Engineering from the
University of São Paulo.
Professional Experience: He began his career at Souza Cruz in 1985,
where he had the opportunity to hold several different positions in
the areas of Planning, Accounting, Pricing and Control. In 2001, he
was seconded for two years to Globe House where he held the position of Operations Finance Manager. Upon returning to Souza Cruz, in
2003, he was named Corporate Controller. In 2005 he also took over
management of Investor Relations. Throughout his career he has
played a fundamental role in consolidating Corporate Finance and
Governance practices at Souza Cruz, which has become a reference
in the Brazilian market, and as spearheading important projects. In
April 2009 he was named Director of Strategic Planning.
Fernando Teixeira – Director of Human Resources
Academic Background: Bachelor’s degree in Civil Engineering from
PUC-RJ, with a Master’s degree in Administration from Coppead/UFRJ.
Professional Experience: Fernando Teixeira started at Souza
Cruz in 1989, where he held many different management posi18
CORPORATE STRUCTURE
The diagram below shows the current corporate structure at Souza
Cruz. The BAT Group holds 75.3% of Company shares, the rest being
traded on Ibovespa under the code CRUZ3 — common shares only,
that is, shares that confer voting rights on the shareholders.
Continuing with the simplifying of its corporate structure that was
begun in 2010, in June 2012 the sale of Yolanda Netherlands B.V. to
British American Tobacco (GLP) Limited was approved, respecting
the best market conditions. Thus, the 50% stake in the joint venture
with the Cuban government, called Brascuba S.E. Mista, and all other
assets held by that company, previously held by Yolanda Netherlands
B.V., were transferred to the wholly owned subsidiary Yolanda Participações S.A. Since then corporate structure of Souza Cruz has been as
shown below:
For over fifteen years Souza Cruz has also participated in an international venture, Brascuba, in association with the Cuban government
for manufacture and export of cigarettes. It also holds equity in Agrega, a joint venture with AMBEV with head offices in São Paulo.
FASC
BAT AMERICAS
PRESTAÇÃO DE
SERVIÇOS LTDA.
BAT International
(Holdings) B.V.
100%
Minority
Shareholders
24.7% = R$ 8.4 B
SOUZA CRUZ S.A.
SOUZA CRUZ
INSTITUTE
ATHLETIC
ASSOC.
75.3%
100%
50%
Agrega Inteligência
em Compras LTDA.
Agrega Argentina
Inteligência em
Compras Ltda.
Yolanda Participações S.A
Agrega Brasil
Inteligência em
Compras Ltda.
19
50%
Brascuba S.E. Mista
FINANCIAL RESULTS
BUSINESS CONTEXT
In 2012 the international economic scenario was marked by the crisis
in Europe, by the slowdown in growth in China and by the continuing
process of recovery in the United States, as well as a significant drop
in the level of activity in the industry. This context certainly had an
impact on the growth of Brazil’s GDP, which was just 1.3% according
to first estimates from the Central Bank.
In spite of its direct relationship with the Euro Zone and other
world economic powers, there is an expectation of recovery in
2013 in the domestic market, with higher GDP growth than the
previous year. Investments in infrastructure and sports — such
as the 2014 World Cup and the 2016 Olympics — should result in
considerable economic movement. However, other sectors of the
infrastructure (education, health, public safety) still need attention
and investment to achieve the level of growth that is hoped for.
Brazilian industry faced a year marked by low investment, a loss of
competitiveness and an increase in the supply of products imported
into the country. The effects of this situation were not significantly attenuated by a series of measures for stimulating consumption and
reductions in interest rates.
THE CIGARETTE MARKET
The total volume of cigarettes sold in the Brazilian market in
2012, estimated at approximately 112.3 billion units, represented a retraction of 3.4% compared with the previous year. Due to
the tax increase that took effect in May on the cigarette market,
some companies opted to increase the price of their products to
compensate. However, today, the thinking is that the fall in sales
volume is a result of the sum of two main factors: the increase in
the price of cigarettes and the lower-than-expected growth in
the Brazilian economy in 2012. Souza Cruz opted to adjust its prices by 16% at the end of the year, in preparation for the increase
in Excise tax that took effect in January 2013.
smuggling and tax evasion. The illegal market, taking advantage of the inevitable increases imposed on legal manufacturers,
sells cigarettes at a significant discount in the Value for Money
market segment. Thus, it is estimated that the illegal market has
grown by 1.7 billion cigarettes, or 7.4% compared with 2011. In
spite of the positive results obtained by the Brazilian authorities
by means of more frequent inspections and more rigorous control on the frontiers, resulting in the closing of 11 illegal factories
in 2012, the share of the illegal market in Brazil is estimated at
22.5% of Brazilian cigarette consumption.
In the regulatory area, in March 2012 the National Health Surveillance Agency (Anvisa) passed a resolution (RDC 14/12) that
restricts the use of ingredients in the manufacture of cigarettes
sold in Brazil. The only ingredients that were not banned are those that are indispensable for the manufacture of cigarettes. The
industry will have a period of 18 months to adapt its products to
the new rule, and 24 months before all products not adapted to
RDC 14/12 are to be withdrawn from the market.
The introduction of the minimum retail price of R$ 3,00 per
pack by the federal government, beginning on 1 May 2012 (Law
12.546/11), was followed by a good level of compliance by businesses that operate legally. Penalties for retailers who do not
comply with the law vary from seizure of merchandise to a prohibition of selling cigarettes for a period of five years, and in some
cases there can even be criminal charges. Manufacturers who do
not comply with the new law are subject to cancellation of their
special registration as cigarette manufacturers. Since it was implemented, this measure has served to define the legal cigarette
market in Brazil. In January 2013 the minimum retail price rose to
R$ 3.50 per pack.
Further, Law 12.546/11, which is still pending regulation, guarantees the display of cigarettes at points of sale, but it prohibits advertising on signs and posters. It provides for new
warnings on 30% of the front of cigarette packs that will be
included in 2016, and it standardizes national legislation, prohibiting smoking in enclosed areas, thus guaranteeing that one
can smoke in open areas.
The high tax load on cigarettes continues to be a principal factor
in stimulating illegal sales of the product in Brazil, principally via
20
THE TOBACCO MARKET
The tobacco grown in the South of Brazil employs more than 165,000
families of small growers and is one of the main sources of income for
these farms, as it uses only 15.4% of the total area but represents 56%
of farm revenues.
from tobacco is also due to better quality and high productivity of
tobacco in this harvest.
Brazil is the leading tobacco exporter in the world and the second
largest producer. In 2012 Brazil shipped 638,000 tonnes of tobacco
and its derivatives, almost 20% over the previous year, and about
20% of this volume was exported by Souza Cruz. According to
data from the Foreign Trade Secretariat of the Ministry of Development, Industry and Trade (SECEX/MDIC) exports were worth US$
3.3 billion, which is a record in the 20 years of Brazilian hegemony
in exports, surpassing the 2009 mark that reached US$ 3.1 billion.
With this result, tobacco represented 1.34% of all Brazilian exports
in 2012. In Brazil’s Southern Region, tobacco is responsible for
7.3% of exports (12.9% of exports in Rio Grande do Sul and 10.8%
de Santa Catarina).
According to information from the Association of Tobacco Growers of Brazil (Afubra), total production for the 2011/2012 harvest in
the Southern Region reached 727,000 tonnes, 12.6% below the
2010/2011 harvest (a harvest with the highest productivity and third
greatest volume in the history of tobacco in the Southern Region),
due to a 13% reduction in planted area (325,000 hectares).
However, the reduction in volume was offset by the increase of about
11.6% in the price paid to growers, generating R$ 4.6 billion in revenues, one of the best revenue levels in recent years. Good income
MAIN BRAZILIAN TOBACCO CUSTOMERS
(Source: Sinditabaco – 2012)
European Union / Europe
40%
North
America
12%
Eastern Europe
9%
Far East
27%
Latin
America
5%
Africa /
Middle East
7%
THE COMPANY’S OPERATING PERFORMANCE
CIGARETTES
As it has been doing in recent years, the Company continued investing in marketing to strengthen its portfolio, especially the Premium
brands, with emphasis on Dunhill, Free and Lucky Strike. One of the
principal steps taken was to remodel the portfolio by launching new
versions and changes in the packaging to take advantage of opportunities in the market. In the Value for Money segment Souza Cruz continued implementing various initiatives to develop its local brands,
the intention being to minimize the reduction in volume caused by
the illegal cigarette market.
The previously mentioned introduction of the minimum retail
price served to define the legal cigarette market in Brazil. As a
function of this, Souza Cruz began monitoring its market share
based on legal retail sales, using normal practices for measuring
consumer sales. This study does not include, for auditing purposes, volumes of smuggled and counterfeited cigarettes that
constitute the illegal cigarette market.
Thus, the Company’s market share reached 74.9%, an increase of 1.2
p.p. over 2011. This change is mainly due to the performance of the
Dunhill and Hollywood brands, mainly in the 4th quarter.
These efforts helped the Company reach a volume of 66.6 billion cigarettes sold in 2012, a number 6.1% less than the 70.9 billion sold in
2011. The main reason for this reduction was the increase in the price
of cigarettes that, in the wake of the increased tax load on the industry, created room for growth in the illegal cigarette marked.
21
RESULTS FOR THE MAIN BRANDS IN 2012
• Dunhill – Performance was excellent in 2012, ending the year
with a volume of 9.3 billion units sold and market share of 9.2%,
surpassing the 2011 results by 0.5 percentage points.
EVOLUTION OF MARKET SHARE AND SALES VOLUME:
Volume
• Free – Performance remained stable throughout the year, ending
2012 with 11.2 billion units sold and 13.9% market share, a slight
decrease (0.2 p.p.) compared with 2011.
71.4%
• Lucky Strike – Remained stable compared with 2011 and reached
1 billion units sold and market share de 1.3%. (0.1 p.p. over 2011).
The highlight was the Click & Roll version, representing 70% of the
portfolio.
78.6
• Hollywood – Consolidation of the new packaging platform corroborated the results from recent periods. Hollywood ended 2012
with 11.3 billion units sold and market share of 12.8%, 0.5 p.p.
higher than 2011.
2008
Market share
73.1%
72.8
2009
74.6%
73.7%
71.9
70.9
2010
2011
74.9%
66.6
2012
• Derby – In spite of actions to protect volume and defend competitiveness, and due to price pressure from the illegal market,
Derby reached a volume of 25.8 billion cigarettes and had its market share reduced by 0.8 p.p., ending the year with 27.6% of the
market.
TOBACCO EXPORTS
EVOLUTION OF TOBACCO EXPORT VOLUME:
(in thousands of tonnes)
Tobacco exports in 2012 totalled 120,000 tonnes. This volume
was 24% higher than in 2011 (96,600 tonnes), because it includes volumes of tobacco from previous harvests that were
only shipped in 2012, due to the export schedule defined by
the customers.
127.8
119.9
113.4
Company revenues from exports totalled R$ 1,372.4 million,
29.8% higher than 2011 revenues (R$ 1,057.6 million), having
been positively impacted by the higher volume shipped and
the devaluation of the real against the dollar compared with
the previous year.
93.2
2008
2009
2010
96.6
2011
2012
NET INCOME FROM SALES
EVOLUTION OF NET INCOME FROM SALES:
(in R$ millions)
Net income from sales for fiscal year 2012 reached R$ 6,131.1 million, generating growth of 10% over 2011, mainly as a result of tobacco exports that were benefited by higher volume shipped and
the devaluation of the real against the dollar compared with the
previous year. There was growth of 4.5% in the cigarette segment
compared with 2011 due to better pricing practices combined
with more influence on the sales profile by the Premium brands,
principally Dunhill.
5,301
2008
22
5,793
2009
5,519
5,550
2010
2011
6,131
2012
TAXES ON SALES
EVOLUTION OF TAXES ON SALES:
(in R$ millions)
Souza Cruz continues to be among the 10 biggest taxpayers in
Brazil. In 2012 it generated R$ 8,508.4 million in sales taxes. In
the last five years, Souza Cruz sales taxes alone have increased
an average of 10% per year, totalling more than R$ 35 billion.
5,746
2008
6,329
2009
7,435
7,627
2010
2011
8,508
2012
OPERATING PROFITS
EVOLUTION OF OPERATING PROFITS:
(in R$ millions)
Consolidated operating profits before financial results was
R$ 2,374.6 million, approximately 9% higher than the previous
year (R$ 2,186.4 million). Factors that collaborated in this
scenario were:
1,604
• Greater export volume of tobacco combined with the
devaluation of the real against the dollar;
• Better sales mix combined with higher prices and increased market share of the Premium brands.
2008
1,890
2009
1,941
2010
2,186
2011
2,375
2012
NET PROFIT FOR THE FISCAL YEAR
EVOLUTION OF NET PROFIT (in R$ millions)
AND THE PERCENTAGE DISTRIBUTED
AS DIVIDENDS IN RELATION TO NET PROFIT:
In 2012 consolidated net profit reached the figure of R$ 1,641.4
million, 2% higher than the previous year (R$ 1,602.7 million).
Over the last five years the Company has been increasingly
distributing to its shareholders a significant portion of its net
profits, as can be seen in the graph on the right.
Payout
Net Profit
(in R$ millions)
96.4%
96.7%
97.0%
1,485
1,450
2009
2010
1,250
2008
23
95.5%
94.7%
1,603
1,641
2011
2012
EBITDA
EVOLUTION OF EBITDA AND EBITDA MARGIN
EBITDA (earnings before income tax, depreciation and amortization) reached R$ 2,546.1 million, representing growth of 8%
compared with 2011 (R$ 2,357.3 million), mainly as a result of the
increase in operating profits.
Payout
Net Profit
(in R$ millions)
32.8%
1,740
2008
35.1%
38.0%
2,034
2,095
2009
2010
42.5%
41.5%
2,546
2,357
2011
2012
OPERATING CASH FLOW
EVOLUTION OF CASH FLOW:
(in R$ millions)
In 2012 operating cash flow continued to be the main source of
Company resources and reached R$ 1,871.7 million, 4% higher
than 2011. Strong cash flow continues to allow the Company to
keep up an aggressive policy of distributing dividends.
1,626
1,616
2008
2009
1,872
1,806
1,546
2010
2011
2012
INVESTMENT PROGRAMME
IN 2012, INVESTMENTS WERE DISTRIBUTED AS FOLLOWS:
In 2012 investments totalled R$ 279.2 million (R$ 215.9 million
in 2011) and were applied, mainly, to modernizing its industrial
facilities, the fleet of vehicles and on projects in the area of information technology. Some highlights included: (a) acquisition
of machinery and installations as a consequence of diversifying
the portfolio of cigarette brands, (b) replacement of computer
equipment and (c) renewal of the fleet of distribution vehicles.
Vehicles
5.4%
Hardware / Software
6.3%
3.0% Other
Buildings 4.9%
80.4%
Machines and
Equipment
24
THE CAPITAL MARKET
One of the biggest dividend payers in the Brazilian capital market, Souza Cruz is widely known for its tradition of remunerating
its shareholders.
(IOE and dividends) paid during the year — in the amount of R$
725.6 million — total shareholder remuneration from fiscal 2012
profits were R$ 1,553.9 million (about R$ 1.02 per share), approximately 95% of the consolidated net profits for the period.
Based on earnings from fiscal 2012, Company management
proposed payment of dividends in the amount of R$ 800.5 million, which was endorsed by the General Shareholders Meeting.
Therefore, considering the interest on equity (IOE) of R$ 27.8 million, declared in December 2012, and the interim remuneration
At the end of 2012 the market value of Souza Cruz totalled R$
47 billion and its shares were quoted at R$ 30.81, 34% over the
closing price of the previous year. The graph below illustrates the
performance of Company shares over the last five years.
PERFORMANCE OF SOUZA CRUZ SHARES VS. IBOVESPA
220%
Souza Cruz
350
300
Ibovespa
250
200
150
-5%
100
50
0
dec/07
dec/08
dec/09
dec/10
In March 2011, with the objective of reducing the trading price
of the minimum lot of shares and stimulating liquidity and access by small investors, Souza Cruz decided to split its shares
5 to 1. Thus, each common share of the Company became five
shares. As a result of this, the number of shares traded and
the volume traded increased considerably, which indicates an
increase in Souza Cruz´s share liquidty and pulverized share
ownership, as shown in the graph below:
dec/11
dec/12
Greater share liquidity allowed the Company to become part of
two important BM&FBovespa indices: the IBrX-50, that uses the
50 most liquid shares on the Exchange, and the ICO2 (Carbon Efficiency Index), that is made up of companies with the best efficiency in carbon emissions from among those on the IBrX-50.
Souza Cruz has 24.7% of its shares available for trading on
Bovespa, with a shareholder base composed especially of foreign institutional investors and physical persons.
SHARE LIQUIDITY INDICATORS
INVESTOR PROFILE
Minority shareholders 24.7%
8.5bi
2011
Domiciled Abroad
Pension fund
2012
Physical Person
Legal entity
5.1bi
66%
311.6M
220.2M
41%
Volume
Qty.
Traded
58%
1,083.0k
686.5k
1.8
1.5
2.5
1.1
7.6
Nº of
Trades
25
7.8
1.3
1.1
1.7
7.1
7.0
6.8
12.9
14.3
16.3
16.6
16.3
2008
2009
2010
2011
2012
RISK FACTORS
LEGAL RISKS
The Company is involved in lawsuits seeking indemnification for
moral and material damages attributed to smoking cigarettes.
Since 1995 there have been more than 540 decisions and 290 appeals rulings in 17 State Courts denying indemnification claims
of this nature. To date, 100% of all cases closed with court rulings
have been favourable to the Company.
Souza Cruz maintains a robust system of internal controls to
safeguard shareholders’ investment and Company assets. This
system was not conceived to eliminate risks, which are inherent to any business, but to manage those that may come to
interfere with or prevent meeting objectives or the continuity
of the Company.
This system is composed of a set of procedures that allow evaluation of the risks in terms of external or internal factors, and
provide transparency to the actions and controls implemented
to mitigate them, constituting a consistent basis for continuous
monitoring.
COMPETITION
Company results are influenced by the political, socio-economic
and competitive environment in which it does business. A possible worsening of the competitive environment, generated by the
search for tactical growth in sales volume, or by the new dynamic
and structure of prices, or by the increased supply of products
from the illegal market, or even by the reduction in consumption
resulting from an adverse macroeconomic scenario, could lead
to an imbalance in the relation of prices to costs, with a reduction
in profit margins.
Thus, the Officers Board, Internal Audit and Audit Committee,
responsible for constantly monitoring these risks, can provide a
reasonable, though not absolute, guarantee against mistakes or
material losses.
The main risk factors evaluated and monitored are as follows:
INFORMATION TECHNOLOGY
At Souza Cruz, as with the great majority of organizations that
are always seeking productivity in their business, information
technology (IT) systems participate significantly in the operationalization of internal registers, controls and processes. This
serves to ensure internal communication, relationships and communications with customers and suppliers, and provide information to management’s decision-making process.
ILLEGAL MARKET
The illegal trade, in the form of counterfeited products, either
smuggled or manufactured in Brazil, that pay no taxes, represents a significant and growing threat to the tobacco industry.
Tobacco products are subject to high tax loads and are the focus of constant rises intended to increase government revenues.
These high taxes, in the context of a more restrictive economic
scenario, can encourage more consumers to opt for purchasing
illegal products that, because they pay no taxes, have lower prices and generate significant income for organized crime, affecting
not only the Company’s business but also public revenues.
FINANCIAL RISKS
Souza Cruz adopts practices to mitigate impacts to its cash
flow and profits, in order to protect shareholders’ remuneration
against market risks:
REGULATORY ENVIRONMENT
The regulatory environment in the Brazilian tobacco sector, following a worldwide trend, is becoming increasingly more restrictive. An example of this was the signing, by many countries, of
the Framework Convention on Tobacco Control (FCTC) of the
World Health Organization, by which the signatory countries
commit to implementing, in their domestic legislation, measures
that are intended to control the use of tobacco products.
• Interest rate risks
The objective of the risk-management policy for interest rates is to
minimize possible losses from fluctuations in interest rates that increase financial expenses on loans raised in the market.
To manage interest-rate risk, the Company adopts a strategy of diversifying its financial instruments with fixed and variable rates. The
Company and its subsidiaries constantly monitor market interest
rates in order to evaluate potential need to carry out transactions to
At the end of 2011, federal legislation that regulates the sector
was changed in order to further restrict smoking in public areas
and the possibility of advertising smoking products, which directly influences the right of the Company to communicate with
its consumers.
protect against risk of volatility and adopt a conservative policy of
Also in 2012, new regulations were passed prohibiting the use of
almost all the ingredients used in the manufacture of cigarettes
and other tobacco products.
• Exchange risk
acquiring and applying its financial resources. Investments are made
for a maximum period of 90 days, and transactions with longer time
periods can only be carried out at floating interest rates and as long as
liquidity is guaranteed at the moment the investment is made.
A significant portion of Souza Cruz transactions are conducted on the
international market, especially tobacco exports. The capital structure
of the Company is exposed mainly in the areas of cash, accounts re-
Measures such as these only lead to increased operating costs
for the Company, and can also cause negative consequences for
society, one example being the illegal market.
ceivable, suppliers and loans, which are mostly in US dollars.
26
To reduce this risk, besides permanent monitoring of the exchange
market, whenever the Company believes it is necessary it contracts
financial instruments to compensate for potential impacts. The
Treasury monitors and carries out hedge transactions in order to
guarantee that available cash is protected from potential exchange
fluctuations. It is important to point out that there are no financial
derivatives outstanding.
• Credit risk
Souza Cruz sales policy is intimately associated with the level of credit
risk to which it is willing to expose itself in the course of its business.
Diversification of its portfolio of receivables, selecting its clients and
farmers, as well as monitoring the payment periods for sales and individual exposure limits, are procedures the Company adopts to minimize credit risk.
• Liquidity risk
The liquidity risk-management policy means maintaining a safe level
of available cash and access to immediate funds through short-term
funding from financial institutions.
CORPORATE INFORMATION
Souza Cruz S.A.
Rua da Candelária, 66
Rio de Janeiro – RJ
20091-900
CREDITS
General Coordination
Souza Cruz Department of Corporate Affairs
Text and Graphics
Debê Produções
Marcio Debellian / Silvia Rebello
Revision
Diogo Henriques
Translation
M. Hruby Translations
GO TO: www.souzacruz.com.br
TALK TO: [email protected]