英美煙草 (BTI) 2013 Q2 法說會逐字稿

Good morning, everyone. I'm Nicandro Durante, Chief Executive of British American Tobacco. With me this morning is Finance Director, Ben Stevens.

This morning we will be taking you through the half-yearly results. Like last year we will be doing our Q&A via conference call following this presentation, when there will be the opportunity for you to ask questions.

And now to the headlines; I am pleased to report that we have delivered another good performance against a difficult backdrop of global economic uncertainty, more challenging industry volumes and a currency headwind. On a constant currency basis, these are the strong numbers with growth in revenue and profit. We are continuing to deliver on our commitment to high single-figure EPS growth.

Total tobacco volume in the first half was down 3.2%, although this result was impacted by a number of one-off factors, including trade inventory movements in Brazil and the GCC, and the impact of the leap year. Excluding these factors, underlying volume was down around 2%, this is slightly better than the industry, which now expects to be down 2.5% to 3% this year.

The difficult economic conditions in a number of markets in Western Europe, softer volumes in Brazil and Russia, as a result of the excise-driven price increases and ongoing instability in the Middle East and North Africa have resulted in lower overall industry volume.

The Global Drive Brands continue to perform well with cigarette volumes up over 2%, or [3.5%] excluding one-off factors, against a declining overall market. This demonstrates the continued strength of the brands.

We have carried good share growth momentum from 2012 into the first half of this year. Overall market share in the top 40 markets is up strongly. And, importantly, our share of the premium segment is also growing strongly, up 0.7 percentage points. Our fine cut business in Western Europe continued to perform well and volume was up 7%.

Adjusted EPS was 8% to 109.1 pence, but in constant terms it would have grown 10%. We continue to reward our shareholders with increased dividends, and I'm pleased to announce an interim dividend per share of 45 pence, up 7%.

Let's now look at the brands; the Global Drive Brands continue to perform well with volumes up over 2%, and market share up by 0.4 percentage points.

Dunhill grew share and volume was up 6%. There were good performances in a number of markets including Indonesia, Brazil, Chile, Romania, Malaysia, and the GCC. In addition, the brand is performing well in South Korea, and has increased share over the last two quarters.

Kent share is stable, volume was down 3%, impacted by industry decline in some of its larger markets, such as Romania, and Russia, which offset growth in other Eastern European markets.

Lucky Strike grew share, volume was 7% lower mainly due to the market contraction in Spain, and instability in the Middle East. The brand continues to do well in Western Europe, where share is up 0.2 percentage points (sic - see slide 5 "0.1 percentage points"). Lucky Strike Additive Free continues to grow strongly and it remained the leader in this growing segment, including Fine Cut volume was down 5%.

Pall Mall grew share and volume was up 8%, with good growth from Asia Pacific and the Americas. The brand performed well in Pakistan, Chile, and Romania, partially offset by declines in Germany, Russia, and in Spain. In addition, Pall Mall continued to grow volume and share in the Fine Cut segment, consolidates its position as the number one brand in Western Europe. Including Fine Cut, volume was up over 9%.

Our other international brands rose 2%, and together with the GDBs now account for close to 60% of BAT's volume. Rothmans was one of our fastest growing international brands with volume up over 12% driven by a strong performance in Russia.

Reported cigarette volume was down 3.4% during the period, although this was affected by trade inventory movements in Brazil and in the GCC, and the impact of the leap year. Underlying volume was down 2%, revenue on a constant basis was up 4%, due to good pricing and a price mix of more than 7%.

In the AsPac region volumes were strong up over 5%, driven by good performances from Bangladesh, Pakistan, Vietnam, South Korea and Indonesia. Revenue at constant rates grew 5%.

In the Americas volume was down 9%, heavily impacted by industry declines in Brazil, growth in illicit trade and prior-year inventory trade movements. This was partially offset by good performances from Canada and Mexico. However, good pricing helped revenue increase 2% in constant terms, and price mix in the region was over 11%.

The difficult conditions in a number of markets in Western Europe resulted in an 8% fall in volume, against an industry decline of 10%. Declines in volume were seen in Italy, Spain, Poland, Greece and Germany. Revenue, however, was up 4% at current rates, and 1% on a constant basis.

EEMEA cigarette volume was down 4%, or 3% excluding the one-off impact of trade inventory movements in the GCC last year. This was mainly due to industry declines in Turkey, the Ukraine, and instability in the Middle East. However, revenue grew 7% at constant rates, driven by strong price mix of more than 11%.

AsPac delivered another good profit performance, due mainly to Australia, Pakistan, Vietnam, Taiwan and Bangladesh, all of which contribute to the 9% profit growth at constant rates.

Profit at constant rates in the Americas region grew 2%, mainly due to Brazil, Mexico and Canada. However, the region was affected by adverse currency impacts, mainly the real.

In Western Europe, profit in constant terms was flat. This was a good result in a region that is seeing significant duty paid market contractions, due to fragile economic conditions. Despite this, France, Switzerland, UK and Sweden all achieved good profit growth.

EEMEA delivered an excellent 13% growth in profit. This was mainly due to the GCC and South Africa. Although exchange movements were negative for the region, profit at current rates grew 7%.

Turning now to the regions in more detail. In Asia Pacific, strong performances from a number of markets helped profit to grow 7% at current rates, despite unfavorable foreign exchange. At constant rates, profit rose 9%. Volume increased over 5%; driven by good performances in Bangladesh, Pakistan, Vietnam, South Korea and Indonesia, partially offset by declines in Japan and Malaysia.

The GDB's performance is strongly across the whole region, with volume up 14% during the period, led by Pall Mall in Pakistan, Dunhill in Indonesia, and Lucky Strike in the Philippines. In Japan, volume declined, but share was maintained despite strong competitor activities in aggressive trading inventory deals by other competitors. In Australia, volume declined. However, profit increased strongly, due to higher pricing and cost saving initiatives.

The GDB's performed well, mainly driven by the growth of Pall Mall. Share was lower, due to competitors' price activities and growth in the ultra-low price segment. Although it remains a recent event, there continues to be no change in market trends, as a result of the plain packaging regulation.

In Indonesia, we had a very good first half, with increasing volume in the stabilization of share. Sharing the premium and ASU30 segments grew; driven by Dunhill Mild Kretek. Increased marketing investment in this strategic portfolio, together with higher input costs, impacted profit.

In South Korea, volume was up, although share was stable, with a growing trend over the last eight months. Profit was lower, due to higher marketing investment, partially offset by cost savings.

Pakistan, Vietnam and Bangladesh continue to deliver excellent results. All three grew volume, profit and share strongly.

In the Americas region, profit was down 1% at current rates, mainly due to exchange movements in Brazil. At current -- at constant rates, profit grew 2%, although this was held back by transactional ForEx FX in Venezuela.

Regional volume declined just over 9%, mainly due to Brazil where volume was down by 15%, as a result of large excise-driven price increases; and associated one-off trade inventory movements. Excluding the distortions, underlying volume in Brazil was down 11%.

Share was strong across the region, driven mainly by growth in Brazil, Canada, Mexico and Venezuela. Good performance from Lucky Strike, Pall Mall and Dunhill helped the Global Drive Brands grow over 17%.

Brazil reported a strong constant currency profit growth, driven by higher pricing and cost savings. Volume was lower, due to the contraction in the overall market, following significant excise-driven price rises, trade inventory increases in Q4 2012, and growth in illicit trade, which is now 28% of the market. However, market share continues to grow strongly, and was up 2.3 percentage points, to more than 77%; mainly driven by Dunhill and [Free].

In Canada, profit grew strongly, and volume increased, driven by the good performances of Pall Mall and du Maurier; leading to market share growth. The illicit market remained relatively stable.

In Mexico, profit and volume grew strongly. Share increased by 1 percentage point, mainly due to an outstanding performance by Pall Mall. A good performance from Lucky Strike and the launch of Pall Mall in Argentina led to an increase in share. However, profits decline, due to the lower volume and increased marketing investment.

In Western Europe cigarette volumes declined 8%, mainly due to contractions in Spain, Italy, Poland, Germany, Greece and the Netherlands. However, Fine Cut volume continues to grow strongly and was up 7%. As a result, total tobacco volume was down 6%.

Despite the reduction in volume, profit, at current rates, was at 3% or flat on a constant basis thanks to good performances from Switzerland, the UK, France and Romania. Industry cigarette volume in the region continues to be impacted by the high unemployment levels, which are causing consumers to trade down to Fine Cut and illicit trade in a number of markets.

E-cigarettes are growing although from a very small base. I am pleased to say that we have now launched Vype, our first new e-cigarette into limited Internet distribution here in UK and we have plans to do much more over the next few years.

In Italy both volume and profit were down as a result of the difficult economic environment. Share in cigarettes declined, but share and profit in the Fine Cut segment continued to grow strongly.

In Germany good performances from both Lucky Strike and Pall Mall led to a stable market share. Profit declined mainly due to the reduction in industry volume. BAT remains the leader in the additive-free category with continued good growth in the additive-free volumes of Lucky Strike and Pall Mall.

In France volume was lower due to the market contraction, but profit was higher as a result of exchange rate movements. Lucky Strike continued to perform well, growing overall market share.

In Spain market share was stable. Volume was significantly lower due to the industry volume being down over 12%. Profit also declined.

In Romania, although volume was lower, share continues to grow, driven by good performances from Lucky Strike, from Dunhill and Pall Mall. Share in the premium segment is now nearly 70%. Strong pricing drove an increase in profit.

Market share increased in the UK, driven by the strong performances of Pall Mall and Rothmans. Although industry volumes declined, good cost management and pricing led to a strong growth in profit.

Despite the difficult economic condition in Western Europe, we are growing share in a number of markets, with good share growth in the GDBs and we have now the number one Fine Cut brand in the region.

Profit in the EMEA region grew 7% and this was mainly due to good pricing, which was partially offset by the adverse impact of exchange and lower volume. At constant rates, profit increased strongly by 13%. Volume was down 4% impacted by trade inventory movements in the GCC in the prior year.

Underlying volume was down 3%, mainly as a result of declines in the industry volumes in Russia, Turkey, Ukraine and the continuing instability in the Middle East.

In Russia the overall market was down 7%, as a result of the excise-driven price increase and the first signs of some growth in illicit trade. Share in Russia grew, driven by the performance of Rothmans in the value-for-money category. Kent held share, maintaining its leadership of the premium segment. Good growth in revenue was offset by increased marketing support behind the portfolio, leading to flat profit.

In the Ukraine good share growth was driven by strong performances from Kent and Rothmans. However, volume was down following a significant decline in the industry, partly driven by a growth in illicit trade. These together increased marketing [investment], impacted profit.

In South Africa profit grew in local currency, but adverse exchange rates impacted reported profit. Industry volume declined, leading to lower BAT volume, although this was affected by trades destocking.

In Turkey profit increased due to the improved mix, improved pricing and cost savings. Volume declined as the overall market contracted following the excise-driven price increase at the end of 2012 and the growth of illicit trade. Market share was lower.

Continued political instability and a fragile economy affected volume in Egypt. These, together with adverse foreign exchange, resulted in lower profit.

The GCC markets reported good market share growth due to Dunhill's continued strong performance. Profit grew strongly, mainly driven by improved product mix and price increases in 2012. Industry and BAT volume was down due to a strong comparator, which was inflated by trade inventory increases ahead of the implementation of graphic health warnings.

In Nigeria profit was up, mainly due to cost savings. However, the continuing instability in the country resulted in lower volumes.

I will now hand you over to Ben, who will go through the financials.

Thank you, Nicandro; and good morning, everyone.

Before I get into the detail, I'd like to point out that the 2012 comparatives have been restated to take account of the revised IAS 19 employee benefits.

Profit for the six months to June 2012 is reduced by GBP21 million and earnings per share by 1.1p. The full-year effect in 2012 was GBP46 million and 2.3p respectively. Obviously, while this affects reported profit, there's a compensatory entry in other comprehensive income and the balance sheet values do not change.

As you know, currency headwinds during the first half impacted both revenue and adjusted profit by 2%. The impact on EPS was also 2%.

I wouldn't like to speculate on currency movements for the rest of the year given the recent volatility. However, if spot rates were to stay as they are for the balance of the year, the impact on the full-year EPS would be 1.6%.

Operating margin for the Group grew by 100 basis points in the first six months of the year. At constant rates this was 80 basis points. All regions contributed to this improvement with the exception of Western Europe.

Asia Pacific, in particular Australia and the EMEA region once again performed well; this was mainly driven by higher pricing and lower costs. Americas also continued to improve despite already high margins in the region, although this benefited from foreign exchange. Western Europe margins were slightly down despite good cost management, due to the impact of lower volume.

This is another good achievement on top of a significant improvement last year. We reiterate our objective of growing margins by 50 basis points to 100 basis points a year.

Turning now to the income statement, adjusted profit from operations grew 4% to GBP2,944 million. At constant currencies growth was 6%. This reflects good pricing momentum, combined with our continuing focus on cost management, so that we achieved good flow through from our revenue growth.

Restructuring costs were higher than in the first six months of 2012. The main items were further costs associated with factory rationalizations in Australia and Russia; and charges relating to restructuring in Argentina and Canada; together with the cost of initiatives directly related to the implementation of our new operating model.

Unadjusted profit from operations grew 3% to GBP2,807 million. I'll cover net finance cost on the next slide.

Despite some weakness in the Indian rupee, associates were 26% higher at GBP425 million. For the purposes of the adjusted earnings per share calculation, the adjusted contribution from associates is GBP29 million, or 9% higher, at GBP368 million. The adjusted contribution from Reynolds American was 3% higher at GBP219 million, at constant rates the increase was 1%. This is lower than Reynolds American announced due to adjustments between US GAAP and IFRS for IAS 19 and the accounting treatment of Medicare costs.

Once again, ITC has performed extremely well with its adjusted contribution increasing by 18%, to GBP144 million. At constant rates, the growth was 22%.

Profit before tax was 5% higher at just under GBP3 billion.

Net finance costs were 12% (sic - see slide 16 "minus 14%") higher compared to the same period last year. This is mainly due to higher interest payable as a result of increased borrowings, a reduction in investment income on cash balances across the Group, and one-off tax-case-related interest income in 2012. This was partly offset by the net impact of fair-value changes on derivatives and exchange differences.

Our underlying tax rate for the period was 30.5%. This is below the rate for the first six months of 2012, but broadly in line with the full-year rate. The lower rate is mainly due to the geographic mix of profit. I would anticipate a similar rate for the full year.

Profit for the period rose 6% to GBP2,188 million, and the non-controlling interest charge fell 6%, to GBP148 million. At constant currencies, the adjusted non-controlling interest charge fell 2%.

The share buyback reduced the average number of shares from 1,961 million to 1,922 million and this contributed to an adjusted earnings per share of 109.1 pence, an increase of 8%, or 10% at constant rates.

The main driver of adjusted earnings per share growth was operating profit, which was up 6%. As mentioned earlier, we're now facing a currency headwind, and exchange rates had a 2% adverse impact on EPS growth. A strong performance by ITC, the lower tax rate, and the share buyback program, all contributed to the 8% earnings per share growth.

Moving on to cash flow; operating cash flow increased by GBP151 million. This was largely driven by the higher profits in the first half of 2013, and is consistent with the increase in the same period last year. The timing of working capital movements tends to absorb cash in the first half, as was the case last year. This is largely driven by the timing of leaf purchases. I expect the increase to partially unwind by the yearend.

Net interest rose as a result of higher borrowing, and tax paid grew due to increased profit. Higher dividends to non-controlling interests reflect the payment of final dividends from 2012.

Income from associates is in line with last year.

Overall, free cash is GBP812 million, which is GBP91 million higher than last year.

Dividends paid increased by GBP32 million. The increase in the share buyback program to GBP1.5 billion in 2013 is reflected in the higher cash outflows.

Net investment activities mainly relate to further payments in respect of the CN Creative acquisition. Investment activities in 2012 also included a small increase in our shareholding in the business in Bangladesh. Total net cash outflow for the period was GBP1.68 billion.

And finally net debt has increased by GBP2 billion since the yearend, and is GBP1.2 billion above the same period last year. The difference in net debt is due to a higher opening balance, and the exchange rate impact of non-sterling denominated debt. Net cash flow is in line with last year.

That's the end of the presentation. And I'll hand back to Nicandro for the Q&A session.

Thank you, Ben. In summary, the underlying business continues to perform well, despite the pressure on industry volume, and the adverse impact of exchange rates. Our growth strategy continues to deliver. Constant revenue growth of 4% reflects continued good price mix of over 7%, and a strong performance from the GDBs. At 109.1p EPS is up 8%. Excluding the currency impact, it would have been -- would have grown 10%.

These are good results, at the upper end of our strategic metrics. And I remain confident of another year of high single-figure earnings growth.

Now, on a personal note, I'd like to mention that this will be John Daly's last half-year results' briefing. John has decided to retire, and he stepped down from the Management Board at the end of December, although he'll remain a member of the main Board through the first quarter of next year.

Over nearly 20 years with BAT, John has played a very large role in the success of this Company. The Board and I wish John the very best for a well-earned retirement. We all miss John's passion, commitment and energy, and great humor. He really leaves behind him a true legacy -- a true leadership legacy.

Finally, thank you for watching [the] webcast. We will be shortly starting your question. But before asking your question, please do not forget to state your name and firm. Thank you.

(Operator Instructions). David Hayes, Nomura.

Two areas, if I can. Just, firstly, on Russia you talked about the increased marketing investment, mainly in profits were flat. We've heard one of your competitors talk about increased spend in Russia. Just wonder whether you can talk about that marketing spend and whether that is a rise in competitiveness, whether that's just a phasing issue that will drop away a little bit in the second half; and then, also to confirm that you took a price rise in July and the quantum of that.

And then the second area of questioning was just on the cash flow. Obviously, as you say, seasonally you like an outflow in the first half, as expected. But I notice that the inventory actually was an inflow. Is that the benefits of SAP coming through and work on the inventory side starting to benefit? And is that something we can expect to see as a trend for the next couple of years? Thank you.

Well, let me answer the first question, David, good morning. And Ben, he'll take the second one.

Regarding Russia, yes, we have a little more load on marketing investment in the first half. Nothing unusual, in our case it just supported the launch of Rothmans. We launched Rothmans there the second half of last year, and really the continued support to scale the distribution of the brand across the country.

By the way, the brand is doing extremely well with our market share now is around 1.7% of the Russian market. And on the back of the performance of Rothmans, on the back of the performance of Kent, we are growing market share big time in Russia. And we are extremely confident in the performance of those brands.

As you know, Russia was -- declined 7% the first half of the year. And in the case of BAT we declined just 1%, because of the market-share growth. So the market investment is working. But I think that the load in the first half is pretty much on the back the Rothmans launch in the second half of last year. So nothing, I would say, exceptional.

Hi, David. It's Ben here. Obviously we buy leaf stock at the half-year. So you'll see an increase in inventory in the half-year, but the effect of stock bills also has an effect. So sometimes stock bills appear in inventory, but more often they appear as trade receivables. So you've got two offsetting effects there.

So I think you've got to look at working capital as a whole. And that's been broadly similar to last year in terms of the shape of it. We do expect that to reverse slightly as, obviously, leaf stocks come down for the full year.

It's a little early for inventory reductions to be seen as a result of the SAP implementation. Remember, we're only live in Malaysia at the moment. But it is, certainly, one of the areas that we're looking at over the next couple of years to squeeze harder. Partly because, on the one hand, you'll see excise credit coming under pressure from governments; but also, partly because we're going to have a reasonable period of higher CapEx as we invest in next-generation products, as we invest in innovations, and obviously as we spend the money on the SAP program rolling out.

Okay, that's great. Thank you very much.

Erik Bloomquist, Berenberg.

Could you discuss the NGP initiative and certainly, with the launch of Vype yesterday, how that fits into the prospective regulatory environment proposed by the MHRA and where the European Union seems to be going?

I believe the product that Kingsley mentioned, which I believe is Nicoventures [Ocset] product, and then if you could expand as well as part of that on your -- Nicandro's comments that e-cigarettes account for about 0.5% to 0.8% of the tobacco market?

Well, we launched Vype two days ago in a limited Internet distribution, as I told you. And we intended to expand this in the second half during the next couple of months in UK and beyond.

The market today, Erik, isn't regulated. And I think that there is a market out there and we want to participate. That's why we have launched Vype. It doesn't mean that as soon as we have the MHRA approval, the two products that are going through regulation now, we are not going to launch them.

MHRA has said already that it's going to grow farther for around two years, the current products in the market. We didn't think that we needed -- we should be out of this market, even if it is a regulated one. When you have the approval, we will launch our products -- regulated products according to the legislation that is going to be in place.

In terms of the size of the market, as I said, it's a market that is growing. We see consumer interest for e-cigarettes nowadays is quite small market. You can split the European market in two categories; the ones that are developing markets in which the consumption in terms of adult smokers that have some loyalty to the category is around 1%; and then markets such as France, and markets such as Germany, that you have a little bit more developing, which we have 3% or 4% of the smokers is smoking e-cigarettes. So we thought there is a market out there, we should participate.

But the loyalty is very low because the products do not deliver. We believe that with Vype, we'll have a better consumer acceptance. We think that is a better product, that's why we have that.

Okay, thank you. And then with respect to your comments on Australia, you noted that the low-price segment was increasing and suggested this was due to competitor activity. Is that the whole reason for the down-trading or is it possible to disaggregate competitor activity from any plain packaging effect?

And then related to that, the Australian press is suggesting there's a tax increase coming in Australia. If you had any further detail on that, that would be helpful. Thank you.

No, regarding the potential excise increase in Australia, I have no details, to be honest with you. We heard something this morning that it may come, but I have no -- probably I have the same information that you have, same piece of information that you have. So I don't have anything to add on that.

Regarding Australia, plain packaging, and then I'll go to the down-trading; to date, we have not seen any change in consumer behavior as a result of the plain packaging legislation.

What we see in Australian market is some down-trading, but this has been a feature of the market in the last couple of years. This has been driven mainly by price increases and also, some competitors have launched some brands in the low-price segment. But this has been happening in Australia for the last four years or five years. So we have seen some down-trading in Australia, as I said, for some time; so nothing unusual.

So, so far, after eight months of implementation plain packaging, we have seen no influence. The size of the market is declining, but it's declining more or less the same level as it used to decline with the size of price increase that you have implemented. So, nothing new has changed.

Great, thank you.

Adam Spielman, Citi.

I've got two questions; one on Brazil and one on marketing.

Can I ask the Brazil one first; and it's really to gauge the outlook particularly for profitability in Brazil or profit in Brazil, profit growth in Brazil? Clearly, we've passed the anniversary of a big tax increase. My understanding is there's been no price increases in Brazil since January in effect. In the statement that Souza Cruz yesterday, there was a statement that some costs -- or cost increases might be higher in the second half than in the first half. And so I just wondering on Brazil how we should think about the second half and going forwards. Thank you.

And then I'll come onto marketing.

Okay. Regarding Brazil, we first of all -- Adam, as you know, we don't comment on pricing going forward, so I cannot comment anything about how the price is going to evolve.

What I can tell you is that you have another excise increase in January next year that's going to be lower than the previous ones, as I said before, because the excise increase will go down in the coming years. The plan was a big excise two years ago; a smaller one last year; then a smaller one next year; and even smaller one in two years/three years' time. So that's the situation in Brazil. We don't comment on pricing.

Regarding costs, I don't feel that the costs in the second half in Brazil are going to be significantly higher than in the first half, to be honest. I see no reason. We have bought the leaf already. So the leaf that you are using the first half is the same one that you are using the second half. So I don't see any big, big pressure in the cost base of the Brazilian market.

What we may have is that this phasing of market investments. Sometimes, it's a little bit more loaded in the first half; sometimes a little bit more load in the second half. I wouldn't be able now to talk about what is the load in Brazil in the first half or in the second half, but I wouldn't say that it's an additional investment. It's just a question of loading one half against another one. So that's the situation in Brazil.

Thank you. And that's a good lead into the second half of the question. I noticed in a number of markets, you're talking about increased marketing investment. You mention it in Russia; you mention it in Ukraine; Argentina, for example; and Korea.

And I was just wondering whether you could give a global figure; whether marketing investment has gone up as a percentage of sales, whether -- and how we should think about that?

And I guess whether -- also related to that, were there any big offsetting decreases you haven't mentioned maybe in Australia or somewhere else?

Regarding marketing investments, of course, I'm not going to give you the number, the figure, but what I can tell you it's growing -- it's lower than the net turnover, first.

But I don't think that we have a huge surge in marketing investments. We are trying and we are doing, as part of this strategy, to invest smarter. So we are investing markets in which needs a boost. For example, places that you just mentioned or South Korea and those marketing investments are working quite well.

You remember, at the beginning of this year, when you have the full-year announcement, we said that you are going to focus in some markets in 2013 that were facing some problems, such as Indonesia and such as South Korea, and it's working quite well. South Korea, we have 18 months of consecutive share growth. Indonesia, we stabilize the share; we started to grow the last couple of months. Dunhill Kretek is growing fantastically well.

So we are just investing smarter. So we are investing less in some markets and are investing more in some others. I don't think the total marketing investment is a substantial change. And I think the marketing investment, you have to look at those things in three years or four years base. Three years or four years base, we are not increasing dramatically, just refocusing the investments where -- what we call. as a high-growth markets or priority markets.

Okay. Just to be clear, the marketing investment as a percentage of turnover, I think you said, had fallen in this half relative to first half '12.

No. It's very difficult to talk about half-year, because sometimes you have investments in one half against another one. You have launch of innovations. You have launches of brands. For me, it's much easier to talk in a two to three years' perspective. In a two to three years' perspective the net turnover is growing faster than the marketing investment; that's what I said.

But in a six months' period it's very difficult to be precise, because it depends on how you implement your pipeline of innovations; depends when you are launching your brands. As you said, in Brazil, the first question, the second half, probably you are going to spend a little bit more, probably because there is a load in terms of implementing innovations behind our brands in the second half. So if I give you a number, a figure for it in the first half, probably it's not going to be accurate.

So what I'm saying is that in a two to three years' timeframe, that's how we see these things. Marketing investment is growing -- is lower than the turnover.

Okay. Thank you very much.

Henry Davies, BofA Merrill Lynch.

Four questions. First on current European volume; how much of this do you think is being driven by increases in illicit trade?

Second, on your margin progression, I'm just interested to know what your margin progression would be without cost saves. And also, just what timeframe should we be thinking for the mid-term, 50 to 100 basis points margin progression guidance? Is it another two, three, five years, or even more than that?

Third, how much of your volumes, at a Group level, are accounted for by slim cigarettes and menthol cigarettes, including the capsule technology?

And lastly, I was just interested reading the interview earlier, you talk about e-cigs being a potential opportunity. Now, it looks to me like e-cigs could be much more competitive than traditional tobacco, which might run the risk of lower price and margins, and of tobacco companies getting a smaller share of the overall pie. So I was just interested to hear your thoughts on why that wouldn't be the case, and why it is a potential opportunity? Thank you.

Okay. Let me take three out of four questions, and I'll pass to Ben to talk about margin progression.

So let's go for the third question; volumes of slim and menthol in a global base. To be honest, Henry, I'll get back to you. I don't have the numbers on top of my head here, but I will get back to you. I think that should be -- so I'll get back to you, to this question. If you don't mind, I ask one of my guys here to inform you later, okay?

Regarding the first question, European volumes; yes, they are declining this year, pretty much at the same rate of decline that we saw in 2012. But remember, at the beginning of the year, I -- when you are -- I have several questions about West European volumes.

It seems that the market was a little bit more optimistic about this year. And we said it; that we saw no reason at that time to believe that 2013 would look better than 2012, because, at the end of the day, it's all about unemployment; it's not about disposable income. And those things are not changing. So I didn't see any motive to be optimistic, about 2013, about European volumes.

Regarding illicit trade, yes, illicit trade is an issue. It's growing in some European markets. We are working with the governments to see everything that can be done in order to bring it down. In markets, like Italy, for example, illicit trade this year has been stable, has not been growing. On the other hand, in UK, for example, has been growing. So it's an issue for Europe, but we work as close as possible to the governments to inform them about the problems, and find common solutions.

In the case of Romania, has been declining. So you have some areas in Europe that you have some successes, and some areas that has been -- has got worse. But European volumes are declining, more or less, at the same rate as they declined last year.

The fourth question is about e-cigarettes and margins. Well, let me start by saying it's a very small segment nowadays, it's 0.5%/0.8% of the market is almost -- it's minimal.

We have some competition, but I think BAT is in a unique position, in terms of the quality of the brand that we are offering, the products, the Vype product. And we believe as we believe that we have a consumer understanding to be a front runner in this category.

In terms of margins, this is a category that's starting now. Our expectation -- our projection is that the margins are going to be relevant. I don't think that they're going to be detrimental to the business. We are selling products with very good margins.

And I think that it's going to be an important category, not only from the volume but from the profitability point of view. So we are not getting to the category, because we have to think that there is an opportunity there to make money, to be commercially successful.

I will pass the question to Ben, to talk a little bit about margins now.

Yes. On margins, Henry, the way I tend to think of it is at about 50% of the margin improvement tends to come through from pricing, and 50% tends to come from cost savings. It's different in each period, but that's a broad rule of thumb to go by.

On the guidance on margin improvement, we're still confident of the 50 to 100 basis points. And we've done very well against that over the last few years.

I've always said that when we get to 40% operating margin, we'll pause and reconsider that guidance. That doesn't mean that we won't actually still grow margin after that, because a lot of the work we're doing, things like the rollout of SAP, won't actually be complete until 2017. And so that will still be driving cost savings.

So the quest for cost savings never stops, but I think 50 to 100 basis points is a good guide until we cross 40%. Then we'll pause and think again.

Perfect. Thank you very much.

Fulvio Cazzol, Goldman Sachs.

It's a quick follow up on your comment, Ben, on the cost savings. I was just wondering, on Western Europe specifically, I understand that, obviously, the economic environment has been poor. But in recent years, you've been able to deliver better operating profit growth than your competitors from cost savings. And we didn't really see that in the first half.

How should we think about the rest of the year, and even in 2014 and beyond? Are we going to see a pause in terms of contribution from cost saving until the SAP program is rolled out in Western Europe?

I've got another question after that, but I'll just leave it there for now.

Hi, Fulvio. Yes, I think you'll find that our profit increase in Western Europe was better than Philip Morris' entire profit increase. So I think that's not a bad performance by Western Europe.

We've taken some cost savings out of Europe over the past few years, because, as we've said, it is a tough operating environment there. But we are really moving the SAP program into Western Europe next. So we start with Asia, and then we move on to Western Europe. So you'll see in a tough operating environment the benefits of SAP coming through, starting late next year.

Okay. And then my second question was on Vype. I saw that you're selling the product at around GBP7. I was just wondering how does that compare to cigarette on a stick-equivalent basis. And also, how does that compare to other e-cigarettes in the marketplace?

And also, as a follow-up question on that, could you give us some details of what your total production capacity is in the UK for that product? Thank you.

Regarding pricing, Vype is being sold for the price that you just mention, which is equivalent a pack of cigarettes. A pack of cigarettes, Dunhill, for example, in the UK, is around GBP8.50, so just to have an idea. If you go to value for money brands, it's GBP2 cheaper than that. So that is a comparable basis.

In terms of capacity, we are ramping our capacity. That's why we started the Internet sales last week, two days ago. And we are ramping up capacity. I don't think that capacity is going to be a problem for us in the second half of this year.

In the next two or three months, we'll be able to expand distribution for the whole country and going for other channels, and capacity is not going to be an issue. So we are ramping up capacity and we went to Internet first, just to see consumers' reaction. In spite of the pilot that we went through and so on, we thought that to have a light launch was a good idea. But capacity is not an issue at all.

I see; okay, thanks. Just as a quick follow-up on the pricing. But on a stick-equivalent basis, how does that compare? I don't know how you would measure it, whether it's nicotine delivery. How does that compare to, say, a package of cigarettes on that basis?

Fulvio, as I said, a stick of e-cigarette is equivalent to around 20 sticks of cigarettes. So you can compare a stick of e-cigarette to a pack of cigarettes.

Okay, fine. So it's comparable.

Price is equivalent. Okay?

Okay, fine. Yes, thank you.

James Bushnell, Exane.

I wonder if I could just dig into a couple of the regional dynamics; firstly, with Asia. Clearly your volumes are very strong but your price mix was, well, effectively zero. I'm guessing there's some country mix in there.

But also, given that your margins were up, and apologies if I missed your comment, Ben, on this, just wondered how that tallies. Is there some SAP coming in there or what else was at play in the margins being up with pretty minimal price mix?

So, are you talking about Asia here? I missed because you came through on the phone not too clearly.

Asia will always have a low price mix, because quite a lot of the growth in Asia comes from places like Bangladesh and Pakistan, and that's been true for the last three or four years, not just this first half. So, you will see always a lower price mix from Asia.

The implementation of SAP, we've done Malaysia. The fourth quarter of this year will see the implementation in Australasia. And then the first quarter of next year, if things go well, we'll see the implementation in South Asia and then after that we'll carry on rolling out to places like Japan and Korea. So, the SAP-related benefit you won't see until -- certainly, at the earliest, as the back half of next year.

However, we are still seeing some benefits from the new operating model. We're still gathering back office cost together, putting it in shared service centers, taking advantage of labor arbitrage, that sort of thing. So, it will be a mixture for Asia but don't expect a high price mix from Asia, because quite a lot of the growth is in lower margin markets, and that's just the structural nature of Asia.

Okay, sure, thank you. And on Europe, your pricing was very strong and also, at the same time, I noticed that of the nine markets you provide commentary on, only three of those, you mentioned, had higher profits. And I just wondered where is that strong pricing coming from, in terms of the price mix in Europe. And can we assume that of those three markets that were going in profit that it must have been very significant to offset what was going on in your other markets to keep that region flat overall?

Well, we have a very good pricing in Europe in several markets. I'm not that sure that I can give you a list market by market now where we had the pricing this year. But we had it in France; we had in Germany recently; we had in Italy at the end of last year; we had in Switzerland; we had in Romania; we had in UK. We have everywhere.

In terms of profitability in the first half, I usually -- as I said before in other questions, you have to take this in a yearly basis, because the half-year's result, we always have the load of investments one year against another year. But we have been growing profitability in a number of Western European markets, despite the market decline, the volume decline of 8%. We haven't been able to deliver profit growth across the region, which I think that was a very good performance.

Okay. Thanks very much for your help.

Rogerio Fujimori, Credit Suisse.

Two questions for me, please. Nicandro, do you expect the big revenue growth differential between emerging and developed markets in the last five years to be perhaps a bit less significant in the future, given the greater maturity of important emerging markets, like Russia, Brazil and Turkey; if you agree with this statement?

Yes, I think that the markets -- Rogerio, you have to see these things from a perspective. You look at the last five years, the gap in terms of margins of developed markets and -- developing have been reduced, not dramatically but have been reduced, and I expected this to happen going forward.

That's the whole part of this strategy, to be strong in the developing markets in which the potential to grow margins are much higher than in developed markets in which the prices are very high and the margins are high. So, you take prices in developing markets and you end up with higher margins. So, yes, the gap is going to be reduced over time, as it happened in the last years.

Also the revenue growth differential should perhaps narrow as margins go up?

Correct. No doubt about that.

My second question is do you think the industry profit pool in Western Europe can still grow in the medium to longer term?

Well, let me put into perspective. When you ask this question, in a moment that we are in the mid of the biggest economic crisis in Europe since the '30s, the obvious answer is going to be doom and gloom.

I believe that the day that the markets stabilize, the day that disposable income will start growing again, unemployment is going down, there is no doubt that the profit pool of Western Europe will go up. I think that is a question of macro economy. It's a question of the situation which the markets face themselves today.

But do I have the expectations that we will go back and start growing the profit pool? I have no doubt on that.

Thank you, Nicandro; and all the best.

As that was the final question, Nicandro, can I please pass the call back to you to close?

Well, thank you. Guys, thank you. I think that we see each other at the yearend. I appreciate that -- joining us for this conference call. Thank you very much.