英美煙草 (BTI) 2003 Q2 法說會逐字稿

Good day and welcome to the British American Tobacco second quarter 2003 conference. During the presentation, all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question and answer session. At that time, if you have a question, you will press star and 1 on your touch-tone telephone to register. As a reminder, this conference is being recorded on Tuesday, July 29th, 2003.

I would now like to turn the program over to Mr. Robert Copudeo (ph), of Financial Dynamics. Go ahead, please.

Good morning, everyone. This is Robert Copudeo of Financial Dynamics. Along with my colleagues in London with like to welcome you to British American Tobacco's six month results conference call. Today in London we have Martin Broughton, Chairman, Paul Adams, Managing Director, Paul Rayner finance director, Martin, please begin.

Thanks very much, Robert. Well, good morning, everyone. Welcome. I'm going to make a few opening remarks then Paul Adams will take you through the highlights of today's announcement. And then we're going to spend a didn't bit of time on our successful bid for ETI and Paul Rayner will comment on that. That is the first time we have managed to get you all together at the same time. Successful bid for AT followed a relatively small and exciting deal in Peru which gives us a controlling interest in Peru's leading tobacco company, Tobacco (ph). It's one of the highest markets in Latin America and the acquisitions gives us a strong market presence and both these transactions pave the way for future growth.

At 2.3 billion euro, the price for ETI was more than the market was looking. We did not think the market was looking as a potential for the business. We bid conservatively what we considered the business to be worth to us based on the detailed financial information we received and discussions with the ETI management and view of the long-term interest and prospects that can be achieved. Now asking the question, why was it so high? Perhaps we should be asking, why did they bid so low? The economy distortium the other buyer was another buyer with no strategic interest and we thought they would bid different lid and their bid looks rational.

The family should value ETI 10% lower than the value of (ph) frankly this -- when ETI has doubled the volume on profit. In any case we chose to focus on what we should bid rather than on what the others would bid. Paul Rayner would enlighten you further in the deal later in the presentation. First interest results operating profit rose 2% from (indiscernible) helped by increased contributions or regions accept American Pacific. Profitable rate exchange up 2% with a strong euro South African almost affective the weaker U.S. dollar.

Pre-tax profit was lower reflecting the costs restructuring the businesses in the U.K. and Canada. And in the second quarter we took a charge of 279 million pounds but still expect the combined charge of those two restructuring to eventually be around 320 million pounds. We also expect the restructures to generate savings around 65 million pounds per annum by 2005, most of which will be in addition to the overhead and direct projects announced earlier this year.

As you hear from Paul Adams, volume rose 1%, we particularly delighted with the continued strong performance of our global grievance. Adjusted EPS rose by 4% to 31.7 cents and reflecting the higher operating profit low in interest and the effect of the share buyback program which will continue shortly.

The impact of the buyback promise was about half a percent on EPS. 10% increase in interim level (indiscernible) demonstrates our competence of the future and the strength of our balance sheet. A few words on litigation. The first quarter's meeting, Neil witnessing, discussed punitive damages. U.S. Supreme Court guidance was considered by furtherance DCA and the Engel appeal and applied by California Supreme Court in the Philip Morris sent back to the trial court for reconsideration.

Also, the third DCA's ruling in Engel is (inaudible) I recommend 21. I don't often read legal judgments from cover to cover but this one beats it many time if you want a compelling read. It was a complete vindication of the defendants on every count and concluded that the fundamental basis for overturning the verdict was in the case the class should not have been certified in the first place.

The certified factions against the tobacco industry since the 19 maintenance is receiving fast. The Illinois claim against Philip Morris is -- should suffer the same fate as Engel. Recently in Massachusetts appeal court decertified a similar class action. Also note that the Howard versus Branum William case (ph) has been stayed following the outcome of FM appeal of the verdict. Late last night the Scott Louisiana class action saw the jury driver both for the plaintiff's a (inaudible) of their case submitted. The trial mobile Engel, the judge acted as a consultant, would you believe. It's the second verdict rejected medical monitoring that smoke claimed no injuries.

However, the jury also determined the industry should pay for smoking sufficient programs. So curious position given the two class defendants -- given them in the trial have quit smoking. The MSA payments were in any case intended for the foresight program and uncertain whether Louisiana law permits such a claim. By the way, this Engel type action is rightfully going to the appellant courts. Let's go back to the results and I'll pass it back to Paul Adams.

Thank you, Martin and good morning everyone. Let's start first with group volume where for the half year group volumes of 383 billion pounds were 1% higher. Boasted by Good Grope (ph) from Europe and the African Middle East regions. Volumes in the American Pacific region were down 3% to 51 billion pounds principally as a result of lower industry volumes in the U.S. and Canada. Ream natural volumes in Asia-Pacific were slightly lower at 96 billion pounds with increases India and Vietnam, largely compensating for the declines from Indonesia, Cambodia, Pakistan and duty-free sales which were affect by SARS and the Iraq war in the second quarter.

In Latin America, volumes declined 4% to 72 billion pounds from early due to lower volumes in Brazil following last year's price increases. In Europe and Africa and the Middle East, volumes grew 7% and 4% respectively. The 77% rise in Europe was due mainly to increases in Russia, Italy and Romania, which offset decreases in France and Germany as a result of lower industry volumes in both markets. Strong growth in Nigeria and the new investments in turkey resulted in volumes rising 4% in the Africa and Middle East region to 47 billion pounds.

Now, this slide, which hopefully you have in front of you I won't talk in full detail. It's more for your reference. But from it you can see how the movements in volume translate into net revenue. We have shown net revenue movements at constant rates and current rates. The two regions with the most significant reductions in net revenue are America-Pacific and Latin America.

The two regions adversely affected by weaker currencies. Group net revenue was up half of 1% at constant rates and down just over 1% at current rates. The continued strong performance of the four global drive brands, Lucky Strike, Kent, Dunhill and Lucky Strike, saw an overall growth rate of 17%. The four global drive brands now account for 15% of group volume.

Looking at those brands in turn, Kent continued to grow strongly with excellent performance in Japan, Russia, Iran and Romania. Dunhill's performance in South Korea continues to be outstanding. With notable success in many other countries including Malaysia, Australia, South Africa and Taiwan. Lucky Strike volumes were stable in the second quarter. Leading to volumes being down 4% the six months.

Lucky Strike continued its outstanding growth with volumes up 42%. The U.S., Russia, Germany, Italy, Ukraine and Romania all reported excellent progress. And moving to regional profit and looking at the regions in turn, in America-Pacific, the U.S. market remained very competitive with pricing and promotional activities continuing to erode margins.

Industry volumes were down 8% for the six months, but down just 2.4% in the second quarter. And our tracking in line with our expectations for the year. Brandon Williamson's contribution to the U.S. mark was down 27% at 128 million pounds as a result all lower volumes and lower net pricing. Partly offset by on-going settlement expenses. The results were visited by want 27 million-pounds benefit from the settlement of certain disputed MSA payments. The underlying decrease was 42%.

Regional results also include costs of the industry agreement reached with tobacco farmers in the U.S. The impact of this was largely offset from a run off payment for lower law for a release of an indemnity given with the release of a purchase of non-U.S. cigarette trademarks.

Immoral tobacco Canada produced a reassuring stable performance contributing 208 million pounds of profit before restructuring costs. This was despite a steep decline in industry volumes due to the continued high increase in tobacco taxes. Growth at the lower price segment and the resurgence of elicit trade.

Our market share grew in Japan as Kent and Kool continued their share growth while all brands benefited from a rise in industry volumes in anticipation of the excise increase on the 1st of July. The strong growth of Dunhill in South Korea continued following the smooth transition to local manufacture. This helped lift market share and volumes to record highs, increasing the total group share to 12.8%.

In Asia-Pacific, regional volume was up 11 million pounds, 228 million pounds. Australia delivered strong profit growth through higher margins and lower overheads. Volumes were in line with last year but with market share up reflecting the performance of the key brands, Dunhill and Win field. In malaise a strong profit growth was achieved as volumes increased and costs were reduced. Dunhill's further increased its share and also good growth from Lucky Strike resulting in a higher overall market share.

In Vietnam, price increases and continued strong performances by State Express 555 and Cracing-A (ph) resulted in a significant growth in profit, volume and market share. In Latin America, profit of 220 million pounds was slightly up, an increase during the last quarter despite currency devaluations and difficult economic conditions. Profit in Brazil increased following the 2002 price increases and lower leaf costs partially offset by lower sales volumes and devaluation.

Volumes were affected by competitor activities and the reduction in the size of the total official market was a consequence of price increases, contraband and counterfeit as well as the difficult economic environment. Mexico, profit in sterling terms rose as price increases and the improvement in costs more than offset the exchange rate devaluation and higher excise taxes. Volume increased in Argentina but the impact of inflation not fully recovered through pricing significantly reduced profit compared to last year.

In Chile, profit was slightly higher, I beg your pardon and profit was slightly lower as a result of competitor activities, although volumes were up mainly driven by Belmont. Profit in Venezuela decreased significantly with the severe devaluation of the currency and an increase in VAT not fully recovered by two price increases.

Total profit in Europe was up 5 million pounds to 264 million pounds as the strengthening of the Euro strong growth in Russia, Hungary, Romania and lower cost in the U.K. more than offset lower profit from Germany and France as well as the transfer of production from the U.K. to South Korea. In Germany, market share fell slightly to 22.6%, although all three key brands, Lucky Strike and Gauloises continued lower share.

The lower volume result in a fall from total industry volumes followings an excise related price increase in January. In Switzerland, all three drive brands, Barkley Lucky Strike and Paribean (ph) continued to contribute well and contributed to an increase in the overall market share to just over 44%. Volume and profits were both down in France driven by intense competitive pricing and the significant reduction in the overall market size. Profit and volume continued to grow in Russia, driven by Vogue, Commave (ph) and Kent.

In Romania, where Kent increased its lead in the premium segment, results improved as volumes grew. Higher prices resulted in a significant increase in profit in Hungary, although volumes were marginally down. In the Ukraine, volume growth lead by Pilokia Seblidly (ph) enabled the company to maintain its leading position in the market.

In the Africa and Middle East region, profit of 153 million pounds was up by 21 million pounds. Profit in south Africa grew strongly benefiting from price mixed driven margin gains and a much stronger currency compared to last year. Partly offset by cost increases and lower volumes. Profit in Nigeria was below last year with a benefits of the steep volume improvement mainly Benson and Hedges in London following the opening of the newly built factory were more than offset by higher marketing costs and overhead.

In the Middle East, profit was up despite a volume decline resulting from the weakness in U.S. international brands in a number of markets following the Iraq war. At the group level, operating profit pros 2% to 1.339 billion pounds at current rates. At constant rates, operating profit was also 2% ahead. The effects of the weakness of the U.S. dollar and Latin America currency has been largely offset by the strength of a number of other currencies, mainly the South African Ryan and the Euro. Paul Rayner will now continue with the rest of the profit and loss statement.

Thank you, Paul and good morning everyone. The share buyback program has reduced the number of shares in issue by some 53 million shares and for the purpose of the EPS calculations as of June of 2003 by 50.5 million shares.

Therefore, based on a fully diluted shares number of 2,269,000,000, which is calculated at a weighted average number in accordance with financial reporting standard 14, the operating profit of 1,339,000,000 pounds equates to 59 P per-share, an improvement of 3%. Net interest was 9 million pounds lower due to lower interest rates and a lower level of average net debt.

Our gross interest cover stands at nine times. Tax before allowing for restructuring costs was 441 million pounds. The underlying tax rate for the group was two over last year at 35.6%. You will recall that there were a number of benefits to both interest and tax in the second half of 2002. Minority interest was slightly higher than last year at 79 million pounds, which brings us to a 4% increase in adjusted earnings per share at 31.7 P.

Net operating cash flow was 97 million pounds lower at 1,229 million pounds largely due to the resolution of certain disputed IMI's payments. Return on investment and finance costs reflect lower interest tally. Text outflows are 109 million pounds lower at 388 million pounds due mainly to the timing of payments. Net cash generation was 31 million pounds higher at 383 million pounds.

The acquisition with disposal in 2003 relates principally to the transactions in Peru. The cash out flow to finance the purchase of shares under our share buyback program was 316 million pounds. Taking these two movements together with the affective exchange differences, the net debt movement was an increase of 717 million pounds to 4.1 billion pounds at the 30th of June. A little higher than at the 30th of June, 2002.

The final part of the presentation is devoted to outlining our thinking behind the proposed acquisition of ETI, the Italian state tobacco company. As you saw from the announcement, BAT bid 2.325 billion euros in cash, which represents an EB over EBITDA pool of 11.8 times based on a 2003 EBITDA of 190 million euros and a match 2003 net cash position of 86 million euros. The acquisition accident establishes BAT as a leading plan in the Italian cigarette market. The deal is expected to enhance earnings per share in 2004 by around 2% and is conditional on antitrust clearances. We expect the transaction to be completed by the end of this year.

As a market, Italy is particularly attractive. It's the fourth largest economy in the EU with a population of 58 million. The transaction is consistent with our often stated strategy of looking for acquisition opportunities in strong, stable, high-value economies, which they have a low market share. With an annual consumption of 103 billion sticks, declining at less than 1% per annum, the market is the second largest in Europe and ninth largest globally.

ETI is the number two player with 26% of the market and leader in the value to money segment with MS, which accounts for 75% of its volume. ETI has almost 40% of the cigar market and through as an (inaudible) is a strong distributor of cigarettes throughout Italy.

Financially, ETI's position is strengthening with substantially improved profits as a result of the recent price increase and its factory-restructuring program. But from our point of view, this job is not just about extracting costs, although we do expect to achieve synergies, it's about enhancing our ability to compete in a key market as a significant player and using our capabilities to grow both the volume end margin of the combined business. We will use ETI's base to introduce new products and improve the availability and for those people who think we are new the distribution, just look at our business in Latin America where expertise and distribution is a major competitive strength.

The manufacturing base comprises of five cigarette factories and two cigar plants. We will honor the three-year agreement in respect of compulsory redundancies. As you can see there was significant capital expenditure in 2002 for the news of cigar factory in Luca (ph).

We see capital expenditure as being fairly flat in the near-term and falling there after. We've also assumed in order to be conservative in our bid valuation that both contract manufacture and distribution of PM's products will be discontinued. (Inaudible) others are welcome to stay. We think we can structure distribution on the basis that Etinera is sufficiently independent and neutral so that they will be here to stay. Some analysts commented extensively on the distribution business.

ETI distributes all cigarettes sold in Italy. It is a very extensive distribution network in a geographically challenging country. Italy is long, mountainous from north to south with cigarettes sell through 58,000 tobacco throughout the country. It's not the easiest place to distribute a product. Despite this, Etinera distributions are not capital intensive. There are 14 regional warehouses supported by 540 local warehouses, which are managed by independent operators under contract for Etinera.

Transport services are not owned by Etinera but are outsourced. Looking forward we are committed to maintaining the professionalism and neutrality of Etinera towards all the manufacturer's who use our services including Philip Morris. The nature of this business allows it to be benefited in the demand in the effect of a manufacturer making other arrangements. The current contract with Philip Morris runs to the end of January 2005. But may be terminated sooner if PM withdraws under a change of control orders.

As I said earlier, this deal is not about generating synergies but we do expect annual cost savings from general selling and administration costs of around 35 million euros per annum by 2007. We believe that there are further savings of value pre-requirement and manufacturing efficiencies. There is incremental value in this deal through revenue synergies, which we have not priced into the transaction.

The opportunity to use ETI as a platform for our successful global drive brands represents real value. We are confident that we can use ETI to improve brand presence through increased availability and a distribution network enhanced by our world-class trade marketing systems. How did we value the business?

As Martin said earlier, our bid of 2.325 billion euros in the sealed bid auction was is based on firstly, the detailed financial information made available to all bidders; secondly, the discussions we had with ETI management and thirdly an incredible business plan we had developed based on our long-term view of the business an our synergies we believe we can achieve from the merger of ETI with BAT Italy. We have a substantial business there already with 170 employees -- 170 employees and offices which will be merged with ETI.

Our discount flow evaluations use the projected EBITDA of 190 million euros to the year-ended the 30th of September 2003. We are unlikely to complete the acquisition before the end of September this year. The 31% uplift on 2002's EBITDA is based on a price increase affective in April of this year and the cost savings achieved during this year by ETI's management by its own restructuring.

For 2004, we see further uplift in EBITDA through the four year impact of the price increase in savings, which should be sufficient to offset any losses arising on the withdrawal of Philip Morris' profits.

In assessing the appropriate weighted average of cost of capital to use for a project in BAT, we adjust the group's cost of capital either up or down, depending upon the economic or political risk of a country and the project risk. For instance, projects involving the acquisition of an existing business with cost savings would offer a lower risk than a brand launch.

The country risk adjustments we apply range from minus 1% for Triple A rated countries to plus 7% for high risk markets. For this project, therefore, we adjusted the group's average cost of capital which is 7.5%, down by 1% to use a project weighted average cost of capital of 6.5%.

Incidentally, we used the weighted average cost of capital of 12% on the (inaudible) Moroccan business. Our business plans will ensure that we cover the projects cost of capital in 2006 irrespective of Philip Morris' decisions. So on a discounted cash flow valuation, excluding Philip Morris future involvement in ETI and taking in 50% of the cost savings, we came to the bid price of 2.325 billion euros.

Given our lowest (inaudible) market share in Italy and Philip Morris dominant position acquiring ETI was our only route into this key European market. We see this as an excellent acquisition which leads plenty of scope to generate substantial shareholder value from the cost in revenue synergies that we're very confident in achieving over the medium-term. Thank you, we will now take your questions.

At this time if you would like to ask a question, please press the star and 1 on your touch-tone telephone. To withdraw yourself from the queue, you may press #. Once again, to ask a question, please press star, 1" now on your touch-tone telephone to register. We'll take our first question from the site of Martin Feldman of Merrill Lynch.

Thank you, good afternoon, everyone.

Paul or Paul Adams, a quick question for you. On Italy and France, can you talk a little on how you see prospects for the discount segment of the markets in those countries over the next year or so?

Let's take Italy first of all. I think the discount segment in France -- it's in Italy will remain pretty vibrant and will grow. And to a lesser degree I think the same will happen in France.

Paul, how much do you think that the growth in the discount segment of the market has been influenced in Italy by the sale process of ETI?

I'm sorry, Martin, say that again?

OK, OK. That's fine. They have been some views in the market that the pricing of other companies couldn't be influenced or couldn't change too much during the sales processes but do you think the deep discount market or the discount market in Italy is likely to continue to grow even once the deal is complete?

Yes.

OK. Just a housekeeping point. After going through your results altogether should I conclude that currencies were up so far this year broadly neutral?

Yes. I mean, we have got a slight translation loss, Martin, for the first half but it's improved since the first quarter. The translation loss I think was about 7 million-pound for the half.

All right.

So, you're right. We're off to the same - it works out to be operating profit of the same (inaudible) at constant and at discount rate, 2%.

OK, thanks for that. Just two other quick points. In the U.S., should we be looking at the third and fourth quarters if there are not too many changes in the overall market operating environment from now at being down roughly the same proportions after the adjustment in the second, about 42%?

I don't think industry profit, if I'm answering your question, Martin, I don't think industry profitability will be down in the second quarter to the degree that it is down in the first.

I was thinking more about BMW than the industry.

OK, I'll duck on that one.

Finally a question for Martin. Martin, when we have spoken about the BAT's interest and involvement in the U.S. in the past, I think you've said that in European have perhaps 50% of your shareholders favoring it in the U.S. and 50% generally don't favoring increased investments in the U.S. Is that correct?

That is correct.

I was wondering if you could characterize how the board generally feels about investment in the U.S.? I mean, where did the board fall in favor of those who like it or those who don't?

Didn't well, I mean, we've made no secret of the fact that -- We made no secret that we looked at investment opportunities on both sides of the Atlanta and the board is open to investment opportunity on both sides. The risks are different and the value leakage risks in terms of competition risks, et cetera, are different. We obviously are cognizant of our shareholders' views but I think the board sees the risks involved in U.S. investment differently to some of the shareholders.

And when you say differently, is that -

We see the cost of doing business in the U.S. and there is still some shareholders who feel there are catastrophic risks exposure there I think it is fewer and fewer but nevertheless it has come down from 100% to about half of them now probably.

Right. If we look at the recent developments, I mean obviously there have been some very positive decisions, the State Farm decision as way of an example and characterize them as set-backs, being the mess in Illinois at the moment, I mean, have those developments broadly changed the view of the board, especially on the negative side? Does anyone have -- has the miles of oppressed litigation change the board's view to the U.S.?

No.

Martin, just a final question one for you. I keep reading in the press about pressure on you to withdraw from your business (indiscernible) if I'm correct.

Yes.

Can you comment at all on that, please?

Well, what -- we have received pressure from the British government to withdraw. We have received a formal request from the British government to withdraw.

Right.

And what we've said is that since we received a formal request we will give them a formal answer. We have got no specific time to give them that formal answer. We are reviewing our options at this stage.

How important is that business? I mean, either in terms of volumes or in terms of profits or is it simply something from the future more than -

As an individual business it gets lost in the roundings.

I see. We shouldn't expect any change in the method future?

There is nothing very significant going to happen to the bottom line as a result of any decision we make on that.

OK, thanks very much.

We'll take our next question from the site Rob Campagnino from Prudential.

Good afternoon, gentlemen.

Hi, Rob.

(inaudible) ETI and the purchase price, we have to concede that we don't have complete information but we have to assume that Altados (ph) did and I know it will be hard to answer this question but you asked it why did Altados bid so low. Can you give us some insight what you saw versus what Altados saw?

I think we said the same thing. The only guess that I can come to and it is nothing more than that is that they were influenced by the Morocco bid where they were castigated by the market for overpaying, maybe paid attention to what the market view was and bid the market estimate recognizing that on that basis they couldn't be criticized. I can't come up with a financial explanation for it. I think the market had certain information, which was clearly out-of-date compared to the information that the bidders had.

As I say, the consortium bid the venture capital values where you had to have assumed that they were looking to invest for the short-term, maybe keep the distribution business, maybe the cigars but flip over the cigarette business in a few years time at a profit. So the Altados bid looks very strange. Like I said, they bid above 1.3 billion Euros for 80% of Morocco. About 1.65 for 100% of Morocco. It makes less than half of the profit, less than half of the volume. It just doesn't stack up. So the only thing I can come up with is that they felt in the share price interest they shouldn't go beyond what the market expected rather than go to what they felt was a fair value.

I think that is a very fair commentary relative to market expectations. Would it be fair to suggest that this acquisition would not preclude you buying back the 7.5% of your stock by June of next year?

Correct.

And would this also not preclude you doing another large acquisition should the opportunity arise?

Correct.

Last question. The MS brand in Italy has had some difficulty recently. What are you forecasting for that -- you might avoid this question but do you have plans for correcting some of the problems that that brand has had?

Let me pick that one up, Rob. We think there is potentially some vibrancy in MS. Without going into too much detail, I think there are things that we can bring as BAT to that brand in terms of product innovation in terms of marketing that can bring back some vibrancy to the brand which I have to say has shown little more resilience recently and there may be an opportunity to increase volumes outside Italy for MS, although I'm not holding out any large opportunities there. So we think this is something that can be done with the brand; however, when it came to valuing the business, we took a very conservative assumption going out on what would happen to the MS market share. So plus we have hopes and expectations, we didn't translate those into the bid valuation. OK.

OK, as a matter of housekeeping your international brand of volume for the six months, I didn't see it in the release?

On the slides -

I saw the drive brand volume.

Yeah. International brands for the six months were $131.7 billion pounds they were.

Thank you for your time, gentlemen.

Once again if you would like to ask a question please press the star and one on your touch-tone-telephone. Our next question comes from the site of Dave Adelman of Morgan Stanley.

Good afternoon, everyone.

Hi, Dave

Hi, Dave.

Paul, I want to follow up on you on a question earlier. You commented that you thought second half U.S. industry profitability would decline less in the first half. Given that the fourth quarter last year was sort of the low point because you hadn't yet had the step down in MSA payments that is not going out on a limb. So I'm curious, do you think the run rate of profitability in the industry, Q2 -- I'm sorry second half versus first half will be similar or do you know the run rate of profitability can improve somewhat in the second half of the year?

You're right. It wasn't a big statement. I think the third quarter will be down far less but still down and I think you may even see some profit growth in the fourth quarter.

OK. And what is Braun Williamson look at as the key incremental risk given all the dynamics that have occurred going forward over the next couple of quarters? Is there one thing in particular they're particularly concerned about?

Why would we tell that to the competition?

OK. Let me ask you a question about France and Germany where there obviously have been substantial price tax driven increases and there is the very high likelihood going forward a very substantial tax increase in those markets. What do you think the likelihood is that the industry can evolve more of a profit focus in those markets taking net pricing?

I think profits can improve in those markets. I have long maintained that while -- I'm talking more broadly but it certainly applies for France and Germany that whereas excise increases are more severe than they have been historically, the industry can still recoup those excise increases plus a bit. The question is, will the industry do is that? And the industry has not chosen to do so far. So I think to some extent it's the industry shooting itself in the foot or determining its own destiny rather than on profitability rather than having it determined by the government.

And to relates to the ETI bid, did you put any implicit value or explicit value in the fact that by owning that business you put PM in an uncomfortable position? Is that a value to you in your analysis?

No.

OK. And then lastly, what's your position on the institute of minimum tax or a higher minimum tax in the Italian market and is there some reasonable agreement that you think PM would think would be reasonable for you to retain their distribution business where you would be willing to accept a minimum tax in the market?

On the 9th of July just before the bidding took place. The Minister of Finance made a specific statement saying he was not planning to introduce a minimum tax or excise and he was not planning to make any changes in excise at all. We see no reason to accept that the government would do anything other than what they have just said. We can understand that Philip Morris would put forward for a minimum excise. But you were not commit to being the government Brown-Forman interest or the industry interest. You see the time is different in different countries. Your tobacco companies lobby government's for an excise system that suits their portfolio and I don't see anything different happening here in Italy. Distribution agreement, you know, that is very much in Philip Morris' hands. The offer is there and it's available. It's their call.

OK. Thank you very much. Good luck.

Thanks.

Once again if you would like to ask a question please press star, 1 on your touch tone telephone. It appears we have no further questions. I'll turn the program back over to our host for any concluding comments.

Well, thank you very much. I mean, I think I'm taken a little back by questions stopping. I didn't think we have any further comments to make. We've got results that are on track, not spectacular but no disappointments at the same time. It's a challenge now to keep them on track for the rest of the year but we are hopeful that we can do that and I think the dividend expresses our confidence in our longer-term future. I think enjoy the RJR Conference Call. Thank you very much. Bye.

This concludes our conference for this morning. You may now disconnect your lines and thank you for participating.