英美煙草 (BTI) 2003 Q1 法說會逐字稿

... first quarter 2003 results presentation. For those of you listening to this conference by telephone, I am Paul Adams Managing Director of British American Tobacco. If you are close to a computer, a video of this presentation and the slides can be seen on our web site BAT.com

Also with me today is Paul Rayner, Finance Director who will take you through the results after my opening remarks. As usual, there will be an opportunity for people in the audience to answer questions -- to ask questions, not the ideal conference.

As we said just two months ago at the 2002 preliminary results announcement, 2003 will be a challenging year for businesses generally giving the Iraq war and its aftermath, exchange rate fluctuations and the downbeat state of the world economy. Given the broad geographic spread of British American Tobacco and the diverse market conditions out there, report a one percent drop in operating profit, a four percent increase and adjusted earnings per share says a great deal about the resilience of the business.

Also, the fact that we have been effected by the significant fall in the profitability of the U.S. cigarette industry and have still performed in line with expectations. Underlying excellent performances elsewhere within the group and the strong competitive position to which we entered the year.

At this point, it might be worth saying a few words about the outlook for the U.S. cigarette industry volume in 2003, particularly in the light of last Friday's event and all of the subsequent speculation. Brown & Williamson's view is that total consumer consumption this year will continue its long-term trend, the decline of around two to three percent per annum.

The total shipment volume in 2003 may decline at a slightly higher rate as trade inventories unwind from the previous year. Therefore, we see total market shipments probably declining in the range of three to four percent.

You can understand all of the uncertainties of the first quarter 2003, industry shipment figures have caused, but one has to appreciate the level of loading that took place in the first quarter of 2002 at all levels, wholesale, retail and in data consumer level. Also, we believe that the first quarter's decline should not be seen as a guide for the year as whole. There is little in consumer data that shows a decrease at the consumer level over and above the historic figure I've just given.

Whilst the U.S. trading environment at the moment is tough, it is manageable. Further it's not only the trading environment that has been attracting the attention of common traders and investors. Orson (ph), Illinois has made an aware of $10.1 billion against Philip Morris. And they claimed that in marketing light, they committed consumer fraud. Understandably investors express concerned particularly in relation to bonding requirements that had to be met before the defendant could start the appeals process.

Investors have also expressed concerns that RG Reynolds and Brown & Williamson (ph) are subject to similar claims in the same space. It is much too early to give any view on the possible outcome of these claims or the likely time table. Leaving aside the merits of the case, our view is that class certification is inappropriate. And the magnitude of the against Philip Morris is without foundation. As with other class action, we would expect the jurist prudence as established in many states and federal courts -- and indeed at the appeal level to prevail. And the class certification is not appropriate for tobacco litigation.

Now the recent decision of the U.S. Supreme Court of State Farm versus Campbell is more encouraging. It meant that Court has determined that punitive damages should now usually exceed a low single figure ratio compensatory damages but multiple punitive awards for the same alleged conduct should be avoided. We look forward seeing this -- applied by trial judges when instructing jurors in the future - and Paul will now take you through the results.

Thank you, Paul. And good morning everyone. Let's start with first group volumes where there was a slight increase during the quarter to 183.7 billion. Despite the fact that group's worldwide duty free business has been effected by reduced travel as a result of fears about the Iraq war.

Asia Pacific was down very slightly during the first quarter of 2003. Lower volumes in Cambodia and Indonesia offset good volume increases elsewhere in the Asia Pacific region. Outlook in the Middle East will return to strong volume growth particularly in Nigeria and certain Middle East markets.

The remaining three reasons are a continuing of the trends in 2002. Lower volumes and Canada and the U.S. partly offset by continued growth in South Korea, bringing American Pacific volumes down three percent. Price increases to maintain margins in Latin America have depressed volumes by four percent, whilst in Europe, volumes grew almost three percent to 52 billion mainly as a result of the continuing strong performance in Russia.

Our global drive brand performance continues to be an out standing success story. Dunhill, Kent, Lucky Strike and Pall Mall achieved overall growth of 15 percent. Hence 22 percent growth in the first quarter volume that's driven by volume increases in Japan, Russia, Middle East and Romania. Dunhill's 14 percent growth was driven by South Korea and Malaysia, while Pall Mall show strong growth in the U.S., -- and European markets and also in Italy. Lucky Strike volumes declined eight percent reflecting declines in the overall markets in Germany and France.

Now turning to the financial results. The key feature of the 2002 full year results was the impact of exchange differences particularly due to weakness of key currencies in the second half of the year. Currency weaknesses continue to have a significant effect with net revenue coming in down one percent for the quarter, that's 3.7 million pounds, versus a 2.2 percent increase with net revenue that's measured at constant rates.

The weakness of certain currencies notably the U.S. dollar, the Canadian dollar, as well as devaluations in some Latin American countries, had a depressive based on our financial results when translated in to sterling. On the other hand, two important currencies that influenced our results, the euro and South African ran (ph) has strengthened considerably contributing to strong growth in net revenues in Europe, Americas and Middle East regions. Both regions also saw good volume growth which benefited the net revenue line.

Latin America's net revenue was widely effected by devaluation. And America-Pacific's net revenue was down two percent due mainly to the impact of exchange and the lower volume. Asia Pacific's net revenue was effected by exchanged and fell for percent at constant rate.

Looking at the performance of the regions in turn, and starting with America-Pacific. Regional profits fell 16 percent to 187 million pounds due to a significantly lower contribution from the U.S. market. Slightly lower profitability in Canada, and the impact of exchange which obscured good results from both Japan and South Korea.

During the past year or so, the United States market has seen a severe decline in industry profitability due principally to large shipment volumes, increased discounting, previous promotions, rising state excise taxes, and the growth in the big discount category. -- we had some contributions from its U.S. cigarette business was down zero percent. In local currency terms we made 39 million pounds.

Industry volume is down 12 percent against the first quarter last year due largely to inventory dynamics in the first quarter of 2002. Brown & Williamson volume was 10 percent lower at 9.4 billion sticks (ph). The three strategic brands, Kool, Pall Mall and Misty all grew volume in share whilst the volume and share losses were largely accounted for by GPC and -- Brown & Williamson share shipments was up at 10.6 percent versus 10.2 percent last year so we're down from the previous quarter.

At the end of the quarter, Brown & Williamson moved to efficient premium price delivery on Kool which resulted in a one-off trade cost depressing the first quarter results. The underlying decrease in Brown & Williamson's profit from the U.S. cigarette business is around 40 percent.

In Canada, industry volumes slowed (ph) an estimated 14 percent following stringent (ph) increases in federal and provincial taxes last year. High trade inventory levels in the first half of 2002, and the growth in the discount brand and contra band. Imperial Tobacco Canada experienced a 17 percent fall in volumes. Our profit was just two percent lower in Canadian dollar terms. This translates in to a significant improvement in profit per thousand, and a slight improvement net operating profit margin.

The discount category partly accounts for an eight percent of the market and management continues to monitor developments in that segment closely. A competitor Ross's (ph) Benson Hedges (ph) recently repositioned it's number seven brand in the discount segment and Imperial Tobacco responded with its Peter Jackson brand. Both Peter Jackson and number seven are small brand with a combined share of little more than one percent. Imperial Tobacco Canada continues to focus on the premium segments which still accounts for more than 90 percent of the tailor made cigarette market. And just the three main brands, players, Imaria (ph) and Matinee together account for 64 percent of that segment.

Elsewhere in the region the parent (ph) put in another solid performance with growth in Kent and Kool while Lucky Strike maintained market share. Other industry volume feel two percent. Our progress in South Korea continues to go from strength to strength. Market shares for Dunhill exceeds 12 percent up four share points. This has been translated in to a substantial increase in profit. -- is operational. And the transition to local manufacturing is proceeding smoothly.

In Asia Pacific, regional profits of $180 million pounds if $5 million pounds above last year. As I mentioned earlier improved results from the number of the markets in the region were proudly offset by reduced duty free sales. In terms of profit contributions, -- markets in the region were Australia, Malaysia and our associate business in India. Australia delivered strong profit growth through higher margins and lower overheads. Overall volumes were stable as Dunhill volumes and share continued to grow, while Winfield volumes and share were down slightly.

Total market share and profit continued to grow in Malaysia driven by higher volumes, the addition of the new Dunhill light and menthol range with Dunhill continuing to produce steady growth in both volumes and share.

Profits from the group's associate companies in India grew strongly with increased volume. In Latin America, results were effected by currency devaluation as well as by difficult economic conditions. Although these have recently improved somewhat apart from Venezuela. And in Brazil profit declined due to the average real sterling exchange rate being some 30 percent lower. And reduced volume as a consequence of price increases, which reduced the size of the total official market. The high level of contra band and -- was boosted by the price increases and remains a concern. Souza Cruz improved operating profit margins despite its lower volumes.

Profits in Mexico rose as a result of price increases and initiatives to reduce variables and secondary supply chain stock (ph). In Chile, volumes are in line with last year, the profit was lower due to the devaluation. Our profit in Venezuela was materially down as a result of the severe of the devaluations of currency and an increased share in BAT. Despite the disruption to the supply products, our shares there remain stable, and volumes have only been impacted slightly.

Federal property in Europe of 134 million pounds increased by 18 million pounds, with good performances from a number of markets including Germany, Russia, and Hungary, as well as lower cost in the U.K. In Germany, profit improvement was achieved through cost savings despite low volumes as overall market consumption declined following an excise increase in January. There are key brands there, Lucky Strike, Pall Mall, and Gauloises Blondes continue to grow market share. Volumes in Switzerland were in line with last year, but all three local dry brands Barclay, Lucky Strike and Parisienne posting market share gains. In France, higher margins stemming from a price increase were not sufficient -- reduction in the overall market -- but both the profit and market share were down.

Russia, continued its solid volume and profit growth with market share in the top 30 cities growing to a record level as a result of the success of Pall Mall, Kent and Vogue. In addition, the company sustained its leading position in Moscow with market share growing to over 32.

Then in the Middle East regions, profits of $80 million is up by 15 million pounds with good results from many markets. And despite the significant cost associated with our investment in Turkey. Sales volumes in South Africa were in line with the same period last year. Profits there improved strongly largely through the benefits of price and market, driven margin gains and a stronger currency. Peter Stuyvesant, Benson Hedges, Rothmans and Dunhill all increased share and improve margin.

Profits from Algeria continued to increase as volumes improved. And we expect local manufacturing to start in the new factor this quarter.

Profits in the Middle East rose strongly as share growth was achieved in Iran, namely through Kent, coupled with pricing gains in Saudi Arabia where John Player Gold Leaf and Benson Hedges rule (ph) share.

In summary, regional operating profits at constant exchange rates would have been three percent. But given the adverse movement in exchange rates referred to earlier, referred to earlier and so one percent, 612 million pounds.

Despite the falling profits in the United States, profits -- at constant rates would have been up in three pounds 37 to there pounds 41. And down only slightly at three pounds 33 per thousand current rates of exchange.

Moving to the rest of the profit and loss account and the adjusted earnings per share calculation, a net interest cost was 15 percent lower at 51 million pounds benefiting from the group's cash flow. We commenced -- share buyback program at the beginning of March. We purchased some 80 million shares at a cost of around 110 million pounds before suspending the program ahead of these results. This has had a minimum effect on earnings per share in the first quarter, and will have a greater effect during the remaining quarters. We intend to continue the program following today's announcements.

Our growth interest cover (ph) now stands at 8.4 times. A tax charge is $10 million lower at 192 million pounds representing an underlying tax rate of 34.2 percent. The improvement in the tax rate reflects a change in the mix of profits, lower profits in the U.S. and improved results in the U.K.

The minority interest charge was nine percent to 37 million pounds, largely due to improved results in Malaysia and the Caribbean. The adjusted net profits that appeared was 332 million pounds, which gives an adjusted diluted earnings per share of 14.5 pence (ph). This is an increase of four percent on the first quarter of 2002.

We'll now take questions from the audience. Please remember to give your name and the name of your firm or publication when asking your questions. Thank you very much.

Who would like to be first? Here.

A couple of questions. -- from ABN AMRO. You talked about on your -- consumption, in the U.S. Could you -- other issues that come up in the U.S. market ...

And then secondly, I wonder if you could say what, if anything, -- weaker ...

OK. I had questions. One ...

I'll come back.

You'll come back. OK. One was can we get some more detail on the U.S. market in particular relation to PM (ph) and the price gaps. -- promotional spend, and a low profit warning. Secondly whether SARS has had any impact on our business.

Let me talk about SARS first. The SARS epidemic didn't really kick off until the middle of February. So I don't believe that had much impact on our trading in the first quarter. And it's quite possible that it will impact duty free in either the domestic business in the second quarter, but it's very difficult to forecast on that. And there's been some sort of waggly (ph) around the building, that if you've got a mask across your face it's very difficult to smoke unless you redesign the cigarettes, which we won't be doing.

I don't think it's had much impact in the first quarter. It may have some impact on the second but we're not forecasting anything dramatic.

And in terms of the U.S., I think the first quarter is characterized by a number of things. And especially comparing the first quarter of 2003 with the first quarter of 2002. And the first quarter of 2002 had a lot of parade load (ph) and we discussed this last year. And significant amounts of inventory -- And of course that hasn't happened or anything like that -- in the first quarter of this year. And their volumes are declining generally.

And definitely in terms of promotional and discounting characteristics, Philip Morris -- against their four focus brands kicked off in the middle of February. And of course, -- they'll obviously go to their contracted stores first, and they will build a new price. And the -- against that new price across time. You've seen sort of a progressive build of the Philip Morris of invoice (ph). And that's a dynamic across the last six weeks of the quarter. And of course, RJ Reynolds has not moved to an off invoice (ph) or a low list price program. They're still working off discounting and free goods. And they've seen a substantial amount of free goods even higher than this time last year from RJR.

So there's a lot of noise activity in the marketplace, and things are still betting down. I don't think we've seen the full impact yet of the pricing. I think you're seeing a lot of the cost of the pricing in the first quarter numbers, but I don't think you're seeing that translated to the full extent at retail and therefore, consumer levels as they push those new prices in to high levels of penetration which is what everyone is trying to do.

I think you've seen the cost but not necessarily the off take or the response to those lower prices, which I think you'll see more in the second quarter. And ...

... I wonder if you could -- profit and -- U.S. market, in the -- quarter. I think -- marketing stand -- second quarter. And then the rebate in the latest quarter.

The dollar profit was around about $63 million. And it was half of the previous quarter or half of the first quarter last year which would have been 126.

... to a pretty good start I have to say in the first quarter. All did well. Pall Mall did well. Misty did pretty well. Our strategy brand share was up. And our shipment share was up by 0.4 first quarter-on-first quarter. So we're pretty pleased with that ...

... are you able to give some indication -- on the profits and aggregate them. -- in the U.K. not having the advertising -- last year - in Russia, and the cost of that in Germany. Maybe you can ...

Let me understand the question. If you took the Russian profits out, the German profits out ...

What unusual ...

Well as I understand the question, what you're trying to get is a more normalized profit figure for Europe taking our problems we had in the first quarter with Russia. Normalizing the fact that we've got less expenditure in the U.S. this year. And I think Germany was in there somewhere. I'm not sure we actually got that figure Chris. If you want to have a go at this --

Yes, answering the question. You've also got a strengthening euro, strengthened by that -- so you've got to forecast what's going to happen to the euro, and that's...

The profits in Europe have obviously been very strong this quarter. And usually if you take out the major countries that contribute to that profit growth which has gone through in terms of Germany, Russia, et cetera right across from the U.K. The balance of markets has done pretty well. I mean we referred to the fact that France was down with lower shares. We would hope that over time but I mean the French results were down which was a significant profit contributor to Europe. Switzerland results was slightly down. It's a balance where the markets performed extremely strongly. And I think it's a continuation of a trend that we've had in Europe. And we also seem to have one or two very strong profit contributors.

I mean the Russian result has been consistently quite strong. And the Hungary result was very good as well. So it's a very difficult question to answer. That's accounting (ph) for every country-by-country. But I think the general trend in terms of profits isn't quite strong in Europe. In the U.S. it's obviously ...

This is John Dover with -- Could you put a bit more flesh on -- And given the sales for -- profit for the year? Or do we get to a point where -- and in terms of -- brands, any particular reasons ...

OK. The question was we've sort of seen a volume drop both in the industry and for imperial in the first quarter. Why and what's the outlook for the year? And secondly, are we targeting any particular geographic or demographic segments with a lower price brand? And just a couple on volumes, I'm beginning to sound like a cracked record, but there was a lot of loading in the first half of last year in Canada. The trade anticipated there were going to be the price increases. I think April one, so they loaded a private (ph) there. In fact, it didn't happen April 1, so they deloaded in the second quarter. Then the excise came in on the first of July, I think it was, so they loaded again in the second quarter. So there's fairly heavy loading in the first half. So I don't think you'll see anything like the volume drop for the year in Canada that you saw in the first quarter. First point.

Second point, lower price brand. What's happening is that these small manufacturers and a lot of the volume off of the Indian reservations in Canada are really quite regional. And it's mostly Quebec and the Maritimes (ph). So Peter Jackson we positioned it with price is focused against those areas which I think account for something like a third of the Canadian volume if not all of the Canadian volume. So we're being quite geographic in our targeting and precisely to go off at those lower price brands in that particular region.

... Merrill. The second point about stocking in the U.S. but nonetheless with volumes continuing to fall, we've got the ban in New York which has got a lot of publicity. And all of these -- to provide off -- zero, what would be a response for that?

That would be foolish -- What we could then see is -- consumer uptake declining significantly. You still see it working on this long-term trend of about two to three percent decline. It's interesting. If you take the first quarter, and volume and your strip out the effects of the third quarter load in 2002 at the wholesale and retail levels, forget consumer pantry loading for a moment. If you strip out wholesale and retail load effects the market would have declined round about four percent, roughly in line with what we think shipments will be done in 2003 for the year.

I don't think you can conclude that the first quarter is some kind of precursor of a sinking ship. I think the ship may be taking a little water but it's not sinking. Yes, John.

Just going back to Canada, could you tell us exactly how -- minus 17. -- expect volumes to not be as bad for the full year. Does that inspire that in local currency trends you'll actually see higher than -- for the year? Or is there any particular factor --

All right, let me just repeat the question. Basically volume is down significantly in the first quarter. Th profits came in only slightly down. How do we square the two?

...

The reason why the profit was -- volume decline was the average in price and continuing prices on cost levels. It's mainly in the former. For the full year, that -- forecast, I mean the Canadian business, I think, continues to perform in line with expectations. I wouldn't be looking for any out standing improvements in profits other than those, I think, that you may have forecast.

There was a concentrated effort in the quarter to ensure that we recover the effect of bones. And going forward, we expect the strong profit response. But I think nothing out of the ordinary in terms of the -- for the average level of profit improvements that we have achieved over the last 19 years.

-- from Smith Barney. Just following up that question, I noticed that your net operating margin increased superbly in Latin America and Asia Pacific. In South America you were up from 27 percent to 34 percent, one heck of a jump. And in Asia Pacific you're up four percentage of points too. I was wondering whether at what expense you could attribute that to the benefits of hedge enhancing. And how you would explain it otherwise and -- --

And then completely separately, -- forces said it's not been modified by -- And ...

Let me just repeat the question. The question was around operating margins in Latin America and Asia Pacific which have performed strongly. What was this attributable to? Was it down (ph) to hedging currency? If not, what would be the reasons? And secondly, the few on FRS 17?

The margins in Latin America, there's not much hedging currencies since it's been strong focus on Latin America recovering the effective excise movements which really begins with basically the price improvements, which have had an effect on volume. And also continued prices on cost and strong focus on -- in Latin America. So it's not very much hedging. I mean we essentially hedged dividend close coming back to the center or the local markets will hedge their costs associated with equal cost which must be nominated in overseas currencies.

It's more strong management on the ground which has improved the Latin American margins and has been a very strong result. Everything's been consistent with what they've done in prior years. It can't go on forever, but some of those exchange rates in Latin America has actually moved against -- has moved for us in the last couple of months. But compared to the first quarter last year, they did move significantly against us.

In terms of Asia Pacific, it's really, I think, looking at the strong improvement in the high margin markets where -- and Malaysia have done extremely well -- profit powerhouses for Asia Pacific. They have very high operating margins, -- compared to a number of the other countries in Asia Pacific. We know the two businesses have performed extremely strongly. Malaysia was up over 10 percent. And Australia was up another 20 percent in terms of profit. So I think it obviously helped the margins for Asia Pacific.

In terms of FRS 17 I think we'll continue to report the effects of FRS 17 in the account. I think we'll continue to adopt 324 the current accounting standard. At least we know what's actually going to happen in the U.K. But I mean you'll be able to see the effect of FRS 17 because we report those accounts, we report the results of FRS separately in our accounts and we'll continue to do that until we get through 2003.

-- Goldman Sachs. Could you flesh out a bit the actions that you're taking in Germany to reduce cost? And is it right, am I reading without that action, the profitability in Germany would be -- would have been down in the quarter. And what's your prognosis to the underlying profit outlook in Germany for the year?

What have been our actions in Germany in relation to cost absent those actions would our profit in the first quarter in Germany have been down in the first quarter. And you get some kind of -- balance for the year.

We have taken some action in Germany in terms of reducing cost. We're doing some -- using cost saving innovations (ph) in -- costs which has obviously contributed to the results for the first quarter. There have been some savings generally across the board as well whether it's continuing price -- But there would have been a significant --

It would have been -- as to where there still would have been a profitable increase in marginal. I mean it may have brought back to something like break even. I didn't have the exact numbers here. They still would have been -- rather strong results.

In terms of going forward, I'm not going to give a forecast on the German business. -- It comes back to the forecast in terms of industry profitability for Germany -- other excise increases and what happens to Germany ministry profitability. I mean Germany profits are still well down on where they were a couple of years ago, substantially down. We hope by the time the industry profits can kick up, -- pricing policies than the one in the market which is --

So we continue to manage that business like we do others. The margins are coming under pressures, we're focusing on -- And that's resulted in the strong results. We'll continue to that going forward.

-- I just really have a question on litigation -- Is there any -- Illinois that prevented -- -- Is there any sense in that --

OK Two questions on the litigation environment of U.S. I think I'll ask Neil Witting (ph) to come up our legal director to answer them. One is in the case of Illinois. Is there anything in the appeals process that may cause our own case to either be delayed or indeed not happen? And secondly, could we expand a little bit on the State Farm, why if at all is this more significant than other guidance that this was board was given?

... I think the issue around that case is it's still very early days in terms of what the landscape is likely to be -- is like -- the appeal process. And -- The Harrow (ph) case which was the Brown & Williamson case -- March 2004. It's quite a way off. And there's at least one other case --

It's possible that a number of different things may happen. -- One of which is the possibility that -- state of Illinois. And take a view that it's not appropriate for these other trials to be litigated through which are essentially on the same issues. At a time when there's the issues of questions through their due process. And that there is a possibility, I guess, of the Reynolds and the Brown & Williamson cases being stayed as part of that process. We'll have to wait and see.

And interestingly enough -- yesterday, Philip Morris have actually asked for the appeal process in the price case to be -- And we shall see. We may get some news sooner than you think. But you've got to bare in mind as far as the Brown & Williamson case -- -- -- So that's the situation with respect to mild (ph) --

With respect to State Farm, the headline is that it's extremely interesting and it's very beneficial for business generally as well as the tobacco industry. And I think it might be quite useful if I were to discuss here some of the reasons why we believe the State Farm decision is significant.

What's absolutely clear -- and certainly in my opinion in reading -- with respect to the guidance that they've given previously not -- -- Now they make it very clear that compensatory damages are intended to address the concrete loss to the plaintiff -- But the punitive damages are aimed at different things which are essentially deterrents and retribution. It's quite clear that the due process clause of the 14th amendment -- position -- grossly excessive and arbitrary -- --

The Supreme Court expressed some pretty clear concerns concerning -- jury instructions that were given by trial judges. And that potential -- juries would use these to conspire against -- And both those concerns were heightened as far as the justices were concerns where juries were presented with evidence that have little bearing to the amount of punitive damages being ordered. -- evidence -- punitive damages at any given place.

As a consequence, and this is a direct quote, the thought process an exacting -- required to ensure that the reward of punitive damages is based on the application of law rather than a decision maker's caprice -- And that cases, these cases shouldn't be used as a platform to expose the fee deficiencies in nationwide operations rather than conjure up conduct directed towards the plaintiff --

So they're not to be seen as a scatter gun approach. There has to be a clear link to the conduct on the specific -- And interestingly enough they made it pretty clear that the state usually cannot punish a defendant for conducts that may have been lawful -- -- even further that nor as a general rule does the state have a legitimate concern in imposing punitive damages -- for unlawful activities outside a state jurisdiction.

Under any event such conduct to be -- if at all is -- for such conduct to be -- at all there as to be in their words a nexus to the specific -- So there has to be a clear link between the conduct that is alleged to give out punitive damages and the harm suffered by that.

They're trying to narrow it down all of the time what needs to be focused on, the consequences of that. -- because it's a very interesting decision. It's not a long decision. -- for some time. But a defendant shouldn't be punished at all -- A defendant should be punished -- that harmed the plaintiff not for -- individually which in any other basis creates the possibility of --

And that the jurist prudence demonstrates that in practice peer (ph) awards exceeding a -- ratio between the compensatory damages to a significant degree -- And they reiterated the fact that in previous cases they've made it quite clear that punitive awards of more than four times -- -- might be close to the line of --

- greater ratios -- particularly egregious act has resulted in any or small amount -- But the converse is also true, that if it's compensatory damages are substantial at a lower ratio perhaps equal to the compensatory damages themselves they reach the outer most limit of the due process -- -- result of a defendant not justifying otherwise constitutional --

So that's pretty clear guidance. -- some of the obvious -- Indeed, Philip Morris has now failed -- in the Williams case to the Supreme Court of the United States. And they're referring to the decision immediately. What you record in that case is the compensation -- And the punitive damages were 79.5 million. So that's a ratio of -- And I think it could still have an impact on that -- , eventually see what the potential impact might be on -- for example. That's why we think it's a particularly significant decision and it's pretty clear guided.

Can you quantify the value -? --

-- Marlborough Light we'd be having a different presentation in the United States, lots more. Millions of smokers -- -- I can't give you that --

We don't know what it is in Illinois but --

On a different subject -- -- have you got any sense at all --

Not -- -- but perhaps mid year we might hear something. I don't know. It'd be interesting to see whether State Farm has any impact on -- We haven't heard any new news recently.

.

-- A couple of follow ups. The first one -- U.S. market -- -- look at the fall out from there -- -- sell off. And is that something that you'd be interested in?

And the second question you talk about that -- I've actually managed to capture this 200 million pound -- first quarter. Are we talking about -?

-- questions. One is if part -- as part of the strategic review, RJR decided to get smaller, possibly sell of some brands would be interested? And secondly, has there been any impact in the fist quarter of our cost product program that we talked about previously? If you want to take up that one and then I'll pick up RJR.

I'm now sure that we would describe it as being interested. I think we would be open. If the dynamics of the U.S. market have changed over the last six to nine months. And we said a number of times that we haven't ruled out any possible acquisitions in the U.S. And if RJR were interested in selling off some brands, I'm sure we would look at it. I'm sure at this stage, we would describe it as interest or we would look at it.

In terms of the cost reduction program we are looking at 2002 costs essentially as being the base of cost reductions from 2002, lower cost reductions. It will be part of the 200 million overhead production program. So the answer to your question essentially is yes. We do intent to track at regular intervals and report back progress -- And that the exact figure for the first quarter, I think we'll wait until we've got a few quarters down the track.

It doesn't represent a significant part of it. But essentially seeing -- lower cost in 2002, the answer would have to --

-- You -- this morning talked about -- earnings -- I was wondering if there was anything useful you could say about --

I think we talked about our acquisition strategy previously. A number of -- were interested in businesses which would have relatively high margins. And we've announced a number of expansions in to what might be called emerging markets. It would be nice to balance that by having acquisitions in markets which have higher margins.

We're interested in businesses where they would have strong brands and/or would have the ability to run our international brands through their distribution and marketing capabilities. And clearly Italy fits those criteria. We are interested in Italy. We did put in a preliminary bid. We intend to go forward with that. That's no secret.

Timing is, I think, final bids have to be in by the end of June, early July. As I understand the timing, the -- which to have two months to open the sealed bids. And then we'll see what happens.

Yes.

Rick Gallo with Deutsche. Have you satisfied the impact of the Kool back issue on the first order? And whether that was a repeat, perhaps not in that form, but in another form of --

Alright, the question was the impact of the Kool activity in the first quarter and will that be repeated? And Kool was on steady heavy promotion in January and February. And share responded well to that. The share increased well in to January and February. Are we going to repeat it? As you know, we're moving to fixing premium price delivery. Congratulations to myself for remembering that.

As from the first of April so, -- of course is to reduce the list price of Kool and to expand that reduced price and further distributional penetration of the market is a good way or proceeding. And you won't see the same level of motion free goods discounting as we move towards a sort of every day low price at premium levels for Pall.

The -- I pointed out in the presentation, you probably picked it up, there was a one off cost with the buy down of the -- when we moved to the -- premium price delivered on Kool. And that if you take that out the result would have been 40 percent down rather than 60 percent --

OK - with Dresner - on a negative watch. If -- rating below single A, what sort of impact, if any, would it have on your -- target for your share price -- how do you think it might be on your acquisitions?

OK. The question is credit agencies have put us on negative watch. What impact would that have if we moved off of the single A credit rating in terms of acquisitions and financing?

It will only impact if we move below single A. Credit agencies are looking at it now - increase slightly -- to the interest cost. -- we want to borrow additional funds from the marketplace would not have any effect on acquisition strategy. We have a very strong balance sheet and interest covered 8.4 times. And we're very open about the fact that we'd like to be -- but we haven't done one. We've had the opportunity for minor acquisitions. We're successful with one or more of those minor acquisitions that we've talked about such as Morocco and Italy. It's not going to have a substantial effect on our interest cover. It's obviously going to drop us but it's not going to take it anywhere near the low level, the minimum level we've talked of five because we continue to generate strong cash flow.

So if it dropped down we would be disappointed. The rating agencies' obviously concerned about what happened in the U.S. and we get caught up in that because we've got an operation there. But I think the impact would really only be slightly higher interest cost. There's a slightly higher cost associated with raising funds.

Any more? Great thanks very much everyone.