英美煙草 (BTI) 2003 Q3 法說會逐字稿

All sites are now on the conference line in a listen-only mode. Good morning everyone, and welcome British American Tobacco's third quarter results conference call. Now I will give the call over to Robert Tekido (ph.) of Financial Dynamics. Go ahead, please.

Good morning everyone. This is Robert Tekido of Financial Dynamics. I along with my colleagues in London, would like to welcome you to British American Tobacco's 9 months results conference call. Today, in London, we have Paul Adams, Managing Director, Paul Rayner, Finance Director, Neil Williamson, General Council and Ralph Edmondson, Head of Investor Relations. Ralph, you are going to begin the call.

Thank you, Robert. Before we begin, I would like to remind everyone that remarks made by British American Tobacco management during the course of today's call, contain certain forward-looking statements which involve known and unknown risks, uncertainties, or other factors that can cause actual results to differ materially from results, performance or other expectations implied by these forward-looking statements, in particular relating to the Private Securities Litigation Reform Act of 1995 and to any statements relative to the closing conditions of the proposed transaction. In addition, Reynolds American, the holding company to be formed, in the proposed transaction, intends to file a form S4 Registration Statement, that will include a joint proxy statement prospectus and other documents connected to the proposed transaction. We strongly urge investors to read and be aware of the complete forward-looking statement that is part of last night's announcement, and to be thoroughly familiar with the proxy material when it becomes available, as it will contain important information about the proposed transaction.

Good morning, everyone. I am Paul Adams, Managing Director of British American Tobacco and during the presentation, the Powerpoint slides can be viewed on our website. Also today with me is Paul Reynolds, Finance Director, who will comment on the nine month results later. As usual, there will be an opportunity for people to ask questions. Before we look at the results, I would like to take you through last night's announcement that British American Tobacco and RJR have agreed terms to the proposed combination of RJR with the US business of Brown & Williamson. This exciting combination makes both strategic and financial sense. The combination will improve the Group's competitive position in the most important cigarette market in the world. The current business with the Brown & Williamson and RJR's US businesses will be combined in a new public company, Reynolds American Inc. RJR's existing shareholders will receive 58% of the common stock with British American Tobacco receiving 42% together with Brown & Williamson. A new company, Reynolds American, will seek a quote on the New York Stock Exchange and with the basis of RJR's current market capitalization, of about $3.6b, the US business of Brown & Williamson has an implied value of approximately $2.6b. In addition, British American Tobacco's US subsidiary, Lane Limited, will be sold to Reynolds American for $400m in cash. Lane manufactures several cigar, roll-around and pipe tobacco products. Andrew Schindler, the current Chairman and CEO of RJR will become Chairman of Reynolds American on a full time basis, for six months during the integration, but non-executive after six months. Susan Ivey, currently President and CEO of Brown & Williamson, will become CEO of Reynolds American straight away.

There will be substantial cost savings, in excess of $500m, in addition to the cost reduction program already announced by RJR. On the slide on [indiscernible] that you now have on your screen, you can see the proposed corporate structure on completion. The transaction will be a tax-free reorganization for Brown & Williamson and the shareholders of RJR. Note that it is the US assets and liabilities of Brown & Williamson that are to be transferred to a new operating company. [Indiscernible] by Reynolds American in return for 42% of the fully diluted shares of Reynolds American. Brown & Williamson itself will continue as a group subsidiary and will be indemnified by the new operating company for all existing and any future litigation, related to the US tobacco business. Lane, and Santa Fe will be separate subsidiaries of Reynolds American and will not form part of the enlarged operating company. So what are the benefits of the combination? Firstly, the creation of a stronger player to compete effectively in an uncertain and challenging US operating environment. Both RJR and Brown & Williamson have been squeezed by a market leader that has 50% of the market and a growing discount segment comprising smaller companies with a clear cost advantage under the MSA. The outlook for RJR and Brown & Williamson as separate companies is challenging, to say the least. The combined share of RJR and Brown & Williamson will be in excess of 30%. The combination will bring together the strategic brands of both parties. Kool, Pall Mall and Misty from Brown & Williamson and Camel and Salem from RJR. These five brands will account for 45% of the combined volume. In addition, there are significant volume brands such as Winston, Doral and GPC to be running for profit. The combination also brings together a strong R&D capability, who will be essential for new product development.

The annual cost synergies, over and above those already managed by RJR are estimated to be in excess of $500m. Thereby freeing up resource for the new company to compete more effectively. Both parties will benefit from the combination which will expect for BAT will be earnings and cash flow enhancement in 2005, the first full year after completion. We are confident that the majority of the annual cost savings, in excess of $500m in annual savings can be achieved in the first full year following completion, with savings from sales and distribution, general administrating and manufacturing. We do not intend to give any further detail on these savings, but it is currently planned that the Reynolds American headquarters and operations will be consolidated in Winston Salem, North Carolina. There will be exceptional rationalization costs incurred in achieving the cost synergies. EBITDA specifically one to two times the cost savings and it is expected that the exceptional charges will be at the lower end of that range. As I have already pointed out, the synergy savings will be incremental to the $800m reduction by 2005 in RJR's cost structure, previously announced. The combination brings together the best of current in both businesses. Andrew Schindler will become Chairman of Reynolds American and Susan Ivey will become CEO. As I said, after six months, the Chairman's role will be non-executive. From the government's point of view, we will appoint five Directors and ensure that at least three are independent and the other six will be members of the current board of RJR. We will have roughly proportionate membership on Board committees. British American Tobacco will enter into a 'stencil' agreement with Reynolds American, which prevents the Group from increasing its shareholding above 42% for ten years. The Group is also restricted in its ability to sell shares. No more than 5% in any six month rolling period. But let me make it absolutely clear that we will remain committed to the US market and see this as a long term, strategic investment. Importantly for BAT shareholders, there will be value transparency in so far as well as American is a quoted stock; our 42% shareholding will be reflected in our right to appoint 5 out of the 13 Directors.

Finally, from a BAT shareholder point of view, there will be greater clarity in terms of the exposure of Group assets to the very manageable risk of US litigation, as a result of the indemnity granted by the new operating company. In other words, BAT will be an independent minority shareholder in a publicly owned company. Following the combination, the Group's interest in Reynolds American, will be equity accounted and we expect the transaction to be earnings accredited in the first full year. The transaction will also be cash flow accredited in the first full year. The designate Reynolds American management will recommend to the new Board, a dividend policy of approximately 75% of net income. The Group's 42% holding is likely to preclude substantial share repurchase programs by Reynolds American. Reynolds American US assets will be transferred, free of debt and cash with the exception of the MSA liabilities and the corresponding cash balance which has been started to be included in the Group's balance sheet. The MSA liability averages over the year approximately $750m. But the size amount will be contingent on the MSA accruals at the date of closing the transaction. Partially offsetting the effect of transferring the earmarked MSA cash, the Group will receive $400m in cash for the sale of Lane. Obviously Reynolds American's debt will not be consolidated into the Group balance sheet and the structure of the transaction, means that Group will preserve financial flexibility for future opportunities. The ongoing relationship will see Brown & Williamson employees and related assets and liabilities transferred to Reynolds American. Contract manufacture arrangements for Japan and some other export markets, will transfer to Reynolds American for a minimum of five years. Finally, before we move on to the nine months' results, we expect to complete the transactions in early 2004, subject to anti-trust clearance, SEC clearance, RJR shareholder support and tax clearances. This exciting combination makes both strategic and financial sense. This merger will improve Brown & Williamson's competitive position in the most important cigarette market in the world. It gives us a 42% share in a stronger, competitive and more sustainable business with an enhanced brand portfolio.

We believe that the combination is the best way to achieve our long term strategic ambitions in the US, while improving both our earnings per share and our cash flow, in the first full year following completion.

Moreover, the transaction gives British American Tobacco shareholders a transparent value for a much stronger interest in the US. I will now move on to the nine months' results. It has been a solid performance, with higher profit contributions from all regions except American Pacific, where the combination of the weak US dollar and the lower profits of Brown & Williamson's US cigarette business, overshadowed good results in Canada, Japan and South Korea. Group operating profit before exceptional charges rose 3% to £2.1b at current rates of exchange. Global drive bands, led by an outstanding performance by Pall Mall, continued to show double digit growth, up 13% during the nine months, whilst global volumes rose 1% to £584b. Adjusted fully diluted earnings per share rose 5%, to 51.47p, assisted by the benefit of the share buyback program. Looking briefly at the regions - firstly the America-Pacific region, where operating profit fell £30m to £728m, due to the US competitive environment and the weaker dollar. There is no letup in the intensity of price promotion, with all players aggressively defending market share, although the deep discount segment, represented by the non big four, seems to have stabilized at around 10%. Total industry volumes are down around 7% of which 4.5% was adjusted for lower wholesale inventory levels. The great share performances with Kool, Pall Mall and Misty, Brown & Williamson's strategic brands, but market share gains were more than offset by the declines in the non-strategic brands, mainly GPC, resulting in a marginal decline in annual shipment share to 10.5%. Brown & Williamson's underlying profit in its US cigarette business declined by approximately 36%, excluding the one-off benefit from MSA payments reported last quarter. Profit increased 5% in Imperial Tobacco, Canada before restructuring costs, despite a steep decline in industry volumes following high increases in tobacco taxes, last year. Imperial Tobacco Canada's share of the premium segment grew, driven by Du Maurier although there was an erosion of overall share, with the growth of illicit trade and growth of the lower priced segment. In Japan, profits improved due to good performances from Kent and Kool, which led to higher overall market share and volumes, despite total industry volumes falling. Following the smooth transition to local manufacturing in South Korea, Dunhill continued to grow strongly, resulting in a substantial higher profit. In Asia-Pacific regional profit rose by £9m to £358m. Australia continues to deliver outstanding profit growth, with volumes and market share both up, reflecting the performance of Dunhill and Winfield. Higher volumes and increased efficiencies in Malaysia, resulted in increased profits. Volumes in Dunhill remained stable, with good growth coming from Pall Mall, resulting in a higher overall market share. State Express 555 and Craven 'A' continued to perform well in Vietnam, which resulted in a significant growth of profit and volume, with much higher market share.

In Latin America profits rose 6% with increased contributions from many markets in the region, including a first time contribution from the newly acquired business in Peru. The rise in profits was achieved despite the difficult economic conditions in many of the countries and link back of currency devaluations, compared to last year. Profits in Brazil continued to increase due to lower costs, together with price increases taken in 2002. These positive factors were only partially offset by lower volumes and currency devaluation. Volumes remained under pressure due to excise and price increases, reducing the size of the legal market. Mexico saw higher profits following price increases at the end of 2002 and lower overheads which more than offset a weaker peso. Higher volumes and market share in Argentina led to improve the profitability, as well as price increases in July, sufficient to cover inflationary pressures on costs and partially restore margins. In Venezuela, profits were made under pressure, despite two price increases which were not sufficient to cover the severe impact of the devaluation of the currency and an increase in VAT. A 7% increase in profit to £444m from the Europe region came from significantly higher profits in several key markets and a strong euro, which more than offset lower profits from France. In Germany, the key brand, Lucky Strike, Pall Mall and Gauloise Blonde, continued to grow share. Profits and volume remained under pressure in France, due to intense competitive pricing and a significant decline in the overall market. In Russia, volume and profit growth continued with 30 key cities' volume share growing to a record level of 24% and an outstanding near 33% share in Moscow. Last week, the EU Competition Authority announced that it was transferring the review of the sale of ETI to the Italian Competition Authorities. The growth maintained its leading position in the Ukraine, despite a marginal decline in total volumes in Hungary, a record market share was attained while higher prices resulted in profit growth. In the Africa and Middle East region, profit was up £43m at £250m, due to the general good performances across the region and new parity of the stronger Rand which easily compensated for ongoing costs in building the business in Turkey. Profits in South Africa grew strongly, benefiting from a much stronger currency, price and mix driven margin gains, offsetting cost increases and lower volumes. Elsewhere, profit in Nigeria continued to improve, benefiting from strong volume growth following the opening of the new factory and an expansion of the distribution network. In the Middle East, profits remained healthy, although overall volumes declined due to the weakness in US international brands in a number of markets following the Iraq war. Bringing the regional operating profits together, total operating profit before exceptional charges rose 3% to £2.115b and the effect of exchange was just an adverse £9m, due mainly to the effect of the weaker US dollar.

Before I hand over to Paul, a quick look at the margins. The profit per thousand cigarettes during the period improved 3% on the same period last year and now stands at £3.62 and the Group operating margin rose from [33.7]% to [34.7]%. Paul.

Thank you Paul and good morning, everyone. Operating profit was affected by restructuring costs of £21m for the quarter and £302m for the year to date. This in the main reflects continuing costs associated with the proposed closure of the factories in the UK and Canada, which have been previously announced. However we continue to religiously review our cost base and inline with our productivity improvement program and the charge for the quarter includes some one-off costs associated with this. Last February, we included that reference to the Flintkote company in the contingent liability statement of the report and accounts. Flintkote was part of the acquisition of Genstar, by Imasco in 1986. At that time, it had long ceased to trade but had been named as one of a large number of defendents in numerous asbestos related actions. Flintkote became a subsidiary of the Group in 2000 on the restructuring of Imasco. All rights, title and interests that the Group had in Flintkote had been transferred irrevocably to a trust. The transfer does not affect the position of claimants, and as a result of the transfer the Group's financial statements will no longer have to include Flintkote's results and its litigation related issues. With effect from September 29 2003, Flintkote ceased to be a subsidiary of the Group resulting in a loss on disposal of £62m. The ongoing share buyback program has reduced the number of shares on issue by some 84 million and the earnings per share calculation for the nine months to September 30, is based on 2,254 million shares.

The operating profit of £2,115m before exceptional charges equates to 93.8p per share - an improvement of 6%.

Net interest was £14m higher at £156m resulting in profit before tax being up £56m to £1959m. Tax before allowing for restructuring costs, was £680m. The underlying tax rate for the Group was 34.7%. Minority interests were slightly higher than last year, at £119m which brings us to an adjusted earnings per share of 51.5p, an increase of 5% on last year. At that point, we will pause for your questions. Would you please remember to give your name and the name of your firm when asking your questions.

At this time if there are any questions, please press the 'star' and '1' on your touch tone phone. To withdraw your question at any time, please press the '£' key. Once again if you have any question please press the 'star' and '1' on your touch tone phone. We will take our first question from Bonny Berzog, of Saloman Smith Barney. Your line is open.

Good morning, everyone. I actually have obviously some questions about the deal that was announced if I may. My first question is that I am very curious about the indemnity that BAT acquired in this transaction. I am just curious that at the negotiation table, how was this evalued or quantified? In other words what did you need to give to get the indemnification because I do think that is pretty favorable for your company? That's my first question.

I wouldn't say that you could isolate this one point. The deal was a series of quite intensive negotiations taking into account not only the indemnity point, but the respective cash flows and the synergy benefits and a few other things. As a result of that, we came up with the deal that we came up with. You can't isolate any point, I think.

Was this something that RJR pushed back on? Was this a tough sell for you to get that?

I don't think I am going to get into the details on negotiations. I think we have a deal with both parties that we are very happy with.

I am not disagreeing. Did you ever contemplate going and buying RJR outright, and if not why? Was it is indemnification that you acquired by doing the deal this way?

I don't think that the indemnification is the issue. I think that we thought it was a better deal for us. In the end I think this is a deal which suits quite a cross-section of our shareholders. There is no doubt that if you look at our shareholder base, a number of them were negative about us making an acquisition in the US, and probably an equal number were positive. What we have done, we think, should please all shareholders. We have expanded our interest in the US. We have got a better business with increased profits and cash flow, without putting in any extra investment.

That is a good point. Can you talk a little bit about the anti-trust authorities in the US and possibly how you think that this deal will be looked at - maybe specifically how they all look at Kool and Salem - I guess I am assuming that both companies have talked to some of the authorities. Will they make you sell one of these brands, being that they are both menthol or are there options, for instance, to reposition these brands? How will they actually look at this?

Bonny, it is Paul Adams here. I think we are going to remain quiet on that one. I am sure that the FTC will review this closely and I think we will just get into discussions with them, without revealing any of our thinking.

But is it fair to say that you have already had obviously conversations with them?

I am not prepared to say that.

Okay. That's helpful. One last question. Just some more color if I could get on the Lane Limited business - just in terms of if you could put some profitability numbers around it, or even volume. Is the business going obviously, RJR is paying £400m for this business - what are the opportunities with that business to grow in the future? Then your contract manufacturing business at RJR key, will now take over. How big is this business in terms of volume or even profitability?

The Lane business is in smoking tobacco, cigar and pipe tobacco brands. It is quite diversified across the smoking tobacco and cigar product range. I don't think there are any sort of meaningful volumes I can give you, but in terms of profits, it did make $39m in the twelve months to December 2002. It has made $27m in the nine months to September 30 2003. It is a business that has been a very steady profit earner for the company in the past. It hasn't had the fluctuations in profits because of the nature of its business that the other US tobacco companies have had. That is a fairly steady profit earner. In terms of the contract manufacturing, Brown & Williamson are contract manufacturers for product for other markets outside the US such as Japan, markets in Africa and the Middle East, Korea. The contract manufacturing rights will now be with the new vehicle, Reynolds American Inc. That will provide a steady profit flow, going forward. We have entered into a minimum five-year contract manufacturing arrangement.

Okay. Thank you so much for your help.

The next question comes from Donald Lipkin of Bear Stearns. Go ahead please.

Good morning. In terms of your actual shipment volume at Brown & Williamson in the US for the quarter and the nine months, do you have those numbers?

Sorry, Donald. Could you repeat the question, please?

Sure the actual shipment volume of cigarettes for Brown & Williamson in the US market for the quarter and the nine months. Would you have those numbers?

For the nine months it was just under 30 billion and for Q3 it was 10.

Okay. What kind of a percentage change was that from the year before?

For [indiscernible] quarter, it was down 14% and for the year to date, it was down 12%.

You state in your release that industry shipments were down 7% in the US. RJR in its release today, said that according to MSA [indiscernible] shipments were 4.6% for the quarter and 6.7% for the year. Would your number be for the year, or are you using different numbers?

It is for the nine months. 6.7% and 8.7%.

Okay. I just wanted to see if it was comparible. Then you stated on the call that the deep discount sector had stabilized at 10% and then you said that that was the non big four, so just to make sure I understand it, so the big four are still 90% of the market?

What is [indiscernible] is that the discount segment is measured. Some of it is measured; some of it is not measured. What we were trying to point out there is that it is the measured amount which is stabilized at that 10%.

So the MSA numbers would be 90% of the big four?

Yes.

Great. One last question.

The £27m benefit of the settlement of certain disputed MSA payments - could you go into a little bit more detail on that as to what the dispute was, when the money was paid and then when it came back?

That was in the second quarter, I think and it was $44m, about £27m, and it was a settlement in relation to past MSA payments and would be a non-participating MSA participant, which is quite involved calculations as to how we came up with that figure. That profit was brought to account earlier in the year. It was effectively a one-off profit which is in the numbers for this year - $44m.

Now that's sorted out, all the settlement that was?

I am sorry, on an ongoing basis, you would have to exclude it, because it was a one-off.

Would that have to do with that year when you - this could put your whole payment into escrow and then came to an agreement on that?

I think it is partly to do with this, but I think it actually spread over more than one year, going past.

It had to do with the NPM adjustment?

Yes.

So that wouldn't apply anymore, because those don't happen. Thank you so much.

Our next question comes from David Attleman of Morgan Stanley. Good morning everybody, or good afternoon.

I wanted to ask a technical question about the indemnity. Obviously you have a tremendous invested interest in the indemnity and in the financial strength and health of the new Reynolds company. Are there certain particular provisions in the new company's biologue that requires it to maintain certain financial [indiscernible] covered in for ratios, [indiscernible] agency ratings?

We expect that the new company is going to be much stronger than obviously the previous two put together when we add the synergies to it. We will have [indiscernible] but we are quite comfortable with the new management. It is going to take that company forward and be very successful.

Okay. Can you talk at all about philosophically how you envision the company in being run in terms of balancing profitability and market share in the US market?

No. I think that is probably best left up to new management once we get the deal completed. But obviously we have a stronger business going forward with the ability of the synergies to generate stronger cash flows and far as BAT is concerned, it is going to be cash flow positive for us, because of the dividends coming out of the new business, as the dividend payout ratio. That is the one financial criteria that perhaps I should have mentioned before and that we have, or the new management will agree to the new Board of the company, that they will pay out 75% dividend payout ratio. That is important to us. Though I perhaps should have mentioned that.

Apart from that, nothing else. But that will enable us to get cash flows that are greater than the current cash flows we get from Brown & Williamson.

The last question - in terms of packs(ph.) treatment, are those dividends and the $400m cash payment for Lane limited to those? Are neither of those payment taxable to BAT?

The $400m is tax free. We expect it will be tax free. The ongoing dividends will get out and those dividends will flow to Brown & Williamson. We will attract tax at something around 7.6%.

Okay. Thank you very much.

Our next question comes from Martin Feldman of Merrill Lynch. Go ahead, please.

Thanks. Good afternoon.

Can you talk a little about how you saw profitability progressing in the US market for the whole industry or for BNW over the course of the next eighteen months?

I think that you will see profits increase.

I am not talking about in the merged business, I am just talking about that you are saying that the industry's pool will begin to grow.

I think so. Yes.

When you talk about this deal being earnings enhancing, are you talking about it being enhancing from the Brown & Williamson's results or projected results for this year, or for what would have been Brown & Williamson on a standalone basis next year?

We are talking about it being earnings enhancing for the total group. I am not sure that I understand the questions.

Are you expecting Brown & Williamson's profitability without this deal to have grown this year?

I think that obviously depends on what happens to the market place, so I think it depends on the assumptions that you make. I would prefer not to get into that. What we do know, is regardless what happens to industry profits, obviously the new business is going to give us enhanced profits going forward. From a BAT Group perspective, is it going tot be enhancing to earnings per share? Obviously, if as Paul says, industry profits pick up then Brown & Williamson per se will benefit from that. But it obviously depends on the assumptions you make in terms of market share and more importantly, assumptions made in terms of price increases and the level of discounting.

Paul, can you talk about Brown & Williamson's present debt, or the debt within B&W will become part of Reynolds American?

The only cash or debt that will transfer across is essentially the USA cash and the associated MSA liability. The balance of the cash and Brown & Williamson would have actually have cash balances, would actually stay with Brown & Williamson. So we will be transferring the assets and liabilities. I don't expect there would be any debt associated with those liabilities, but you have the MSA liability and the associated cash to meet that liability.

Okay. Interest income associated with those assets, would also be minimal presumably?

You get interest income associated with the MSA cash and that will be earned by the new Reynolds American Inc.

Right.

The average level of MSA cash that is in Brown & Williamson, that will transfer across to new vehicles is about $750m.

Okay. That's helpful. Another question. When we go back and look at the cost cutting initiative that Brown & Williamson went through around 3 years ago, how much further cost cutting do you think was potentially available to Brown & Williamson, had this deal not gone through and had they simply continued to operate on a independent basis?

There was an opportunity for cost savings as part of our overall, overhead and indirect cost savings program. Having said that, I still think we will achieve the target that we have set, even putting aside the fact that Brown & Williamson will go on to this new vehicle. We still expect to achieve the Group figure of £200m over the next few years. I think that there is some potential, but obviously that has got to be put into context of the new vehicle.

Okay. Thank you very much.

The next question comes from Anne Girton of Davenport. Go ahead, please.

I just thought I would ask you if you could give us an update on what is going on in Turkey, assuming you made a bid there. Can you give us an update there?

We put in a bid and we will wait to see over the next two to three weeks, which is our best bet, to wait for something to materialize as to what happens as to whether we have got through to the next round and what the outcome will be.

I have to say that the process is a little unclear. There is a written process, but what we have been told is very different from the written process. But our understanding is that over the next two or three weeks, we will find out whether we have got through to the next round or not.

Also, with some higher taxes looming in Germany and France, can you give me an update on those markets?

Yes. You will be aware that both governments have made noises about increasing excise levels. In France and Germany they both go to their respective upper houses in November. Germany is looking at something a 1 euro increase in tax, probably spread over three phases over an eighteen month time period and France is looking at about €0.80 excise increase to be implemented in 2004. Timing remains unpredictable because there are French elections and this is proving to be a highly unpopular tax, or proposed tax. If both of them go through, there will be an impact on the domestic market volumes, though in terms of consumption, we don't believe the consumption will go down as much of the domestic market volumes, because we think there will be a significant increase in cross-border sales.

Okay. Thank you so much.

Once again, if there are any questions, please press the 'star' and '1' on your touchtone phone now. We have a question from Lauren Capagnino (ph) of Prudential Equity. Go ahead, please.

Good afternoon, gentlemen. First of all, congratulations on what seems to be a nice transaction. I think that reported earnings, as well, they are fairly solid. Congratulations again. A couple of questions here. You suggested that the transaction would be accretive to cash flow, due to the anticipated level of dividends from [Nukow]. At what level is that not accretive? At what dividend level?

That is a very good question. I don't think I will answer it. All I can say is that based on the assumption, which I think is a fairly realistic assumption, saying that I think it is the policy that you all will adopt, of the 75% payout ratio; it is comfortably cash flow accretive for us. I think that is a relevant thing to acknowledge. I think that looking at other assumptions, does become a little bit hypothetical.

I will ask you the same question in a different way. I wouldn't suspect that you would speak to RJR's intentions regarding their restructuring cost saves and where that will flow to - whether back into the business or into the bottom line, but what are your assumptions for the $500m in merger savings?

We are expecting that the $500 in merger savings, in the main, will fall through to the bottom line and we were saying that we think that there is the ability for us to achieve over $500m savings and the majority of that should be able to fall to the bottom line, we would hope.

Over what time period?

We would expect it would be implementing those savings over the next 18 to 24 months post closing. But by the end of 2005, most of them would have been implemented.

A question on acquisitions. Obviously you are engaged in Italy. You have something on your plate here in the US. You are looking at Turkey. Hypothetically, if Turkey were to fall to you would you be done for the foreseeable future, in terms of acquisitions?

I would rather not answer hypothetical questions because that starts to get into the big value remarks put on Turkey and all those sorts of questions. I guess the best way to answer it is that this transaction has obviously strengthened our balance sheet from the point of view that our interest cover will rise. We have got the $400m cash release coming to us. Offsetting that in the [indiscernible] liability when cash goes over, but effectively we have got a stronger company in terms of being cash flow accretive, going forward. So this really hasn't changed that balance sheet capacity to do other deals. As we have said in our release, it preserves our financial flexibility. So we have said that we would intend to continue our share buyback program, probably next week, once we have let the market settle down following last night's announcement and we have got the ability to purchase other things if we wish. But we are conscious of the fact that there are limitations as to how much you can use your balance sheet for acquisitions, but we still have the balance sheet capacity to be able to do that, if opportunities come up.

One final question - more housekeeping than anything else. Are there any issues in terms of trademarks that might reside at Brown & Williamson that you potentially will have to transfer or where exactly are the brands held in the US?

They are held in a BAT subsidiary which is above Brown & Williamson, so other than those for the US markets specifically which will be transferred, the international rights are still retained within the Group.

I understand. Thank you very much for your time this afternoon.

At this time we have no further questions.

Let's give the call back to Paul Adams in London for closing remarks.

Mr Adams, if you have any closing remarks, you can make those now.

I think we said earlier in the announcement that we think that this is a good deal. It is a good deal for shareholders and its strategic financial value. It is cash flow enhancing. It is earnings per share enhancing around a fairly short time period and frankly, we think it is a smart deal. Thanks very much everyone.

This concludes today's program. You may disconnect your lines at this time.