英美煙草 (BTI) 2004 Q3 法說會逐字稿

Thank you, Paul. Could I just remind everyone to please state your name and firm when asking your question. Thank you. Yes.

[Inaudible] to tell us what progress you're making and at what pace?

We continue our negotiations in China. Sorry, the question was, what's happening in China? We continue to talk with the Chinese authorities both at governmental level and below, and those negotiations will continue. I've been asked this question a number of times.

My guidance to you is to think more in years rather than months. It will take time. We do have to negotiate a factory location and a factory deal. Not only do we have to negotiate it, but we have to negotiate it in a way which will be value enhancing to shareholders, and secondly we have to determine a distribution capability and strategy for China. That will all take time.

John Prescott from Morgan Stanley. A question for [indiscernible], really, on progress in profits at first half and third quarter. In Latin America, profits are up 5% in the third quarter, having been down 11% at the first half. And [indiscernible] up a little bit in the first half and then 3% in the third quarter.

I was just wondering in terms of what we should be looking at for the fourth quarter. Is the 9-month figure a better guide, or should we be looking at the third quarter more?

I'll just repeat the question, Paul. The question was on profits, particularly on the regional profits and what guide does the 9month or third quarter give for the full year?

I think it would still be best to look at the first 9 months [indiscernible] results in Latin America. Brazil was slightly better in the third quarter, which picked up the results for Latin America for the third quarter versus the first half. And for Africa and Middle East the Turkey loses were slightly higher, but I think that should not be a reflection on what happens in the last quarter. And there were some timing differences in South Africa, so that didn't have as high a result as the first half.

So I think on balance its best to look at the results for the first 9 months compared to last year as an indication for the full year.

Michael Smith from JP Morgan. Clearly Canada's one of the key concern for investors, and I think with your recent share gain in the discount segment and your recent price increase there might be some early evidence that things are starting to turn the right way. But could you elaborate on how you see the share outlook in the discount segment and the recent price increase you've taken?

And then also on Japan, I wanted to ask about your outlook for market [inaudible]. It would appear your key competitors have got some initiative -- PMI are taking the Marlborough brand back, Camel Tobacco launching Camel and Winston. You have lost share this year. Do you expect that share loss to accelerate, or are there areas that could offset?

Okay. The questions were, firstly Canada, and our share performance in Canada and the recent price increase in Canada and the value for money and what indications may that give for the future and secondly Japan, the competitive environment in Japan and our share performance, and our likely share performance for 2005?

Why don’t I pick up Canada. Imperial have picked up significant share in the value-for-money segment. Just to give some basic facts, if you just look at the third quarter, the value for money segment is now about 38% of the total cigarette market in Canada, up significantly from last year. I think it was 22% in the third quarter of last year.

Imperial now ,in the third quarter, were running at 37% share of that value for money segment. Again, significantly up from where they were previously this year and certainly last year. So significant increase in share, and that has given them some critical mass, and important critical mass in the value for money segment. Just as a benchmark RBH has about a 40% share of the value-for-money. So Imperial is quite close now and if you've got 37% of the value for money segment then you've got roughly 70% of the premium segment, which Imperial has in Canada, you have some pricing power in that market.

About a week, 10 days ago, Imperial announced a price increases of their brands in the value for money segment -- not in premium but in the value-for-money segment -- and RBH followed. So the price gap between value-for-money is decreasing relative to premium. So that scale that Imperial has now got is important for the economics of that segment and for the industry generally. I think that's all I wanted --

So the question was, what does this mean? I think we've seen some slowing down of the value for money segment growth over the last 3 quarters. It's been growing, but the growth is beginning to slow, I think. I still think it’s got some way to run. People ask me, when is it going to stop? When's the pain going to go away? And I think we'll be well into the 40%, possibly even 50% share of the total market for value-for-money before it starts to peter out. That's just a guess but I hope it's a reasonably educated guess. But I do see that people are now looking for industry profitability as becoming not only important to us but important to our competitors, which is a reasonably good embryonic sign.

For Japan, yes our share loss in Japan is pretty minimal. I think it's 0.1% for the 9 months. The Japanese market has become significantly more competitive, [indiscernible] can extend that to Korea. What we've seen is Japan Tobacco being a source of business for the international tobacco companies in Japan and Korea Tobacco being a source of business again. Now both of those companies have raise their game significantly -- a lot of product innovation, a lot of brand work, a lot of distribution work. So it's a much more competitive environment in both Japan and Korea than it has been historically.

We have a lot of plans in the pipe line both on innovation and brand work and distribution so we don't see that share decline being a systemic issue. But it will be tougher.

Yeah?

David Arden from ABN AMRO. Couple of questions. First of all the [indiscernible] currencies, there seems to be a fairly wide spread consensus that the US dollar is being talked down, and I wondered if you had any thoughts first of all on the translation impact going forward but also your competitive position as PMI has another year to invest currency gains?

And then separately the tax rate is a little bit lower than expected, again any forward thoughts, particularly with the full 12 months for Reynolds American?

Okay, 2 questions. One on currencies -- what do we see on the dollar and its impact on translation? Does this provide an opportunity for PMI going forward to continue to invest substantial sums of money? And some comments on the tax rate?

Okay. On translation. Some of the other currencies apart from the US have actually been going our way, so even though the US has continued to weaken unfortunately, the market did show signs of strengthening over the last week or so. A lot of the other currencies -- the Canadian dollar, the [Australian] dollar, the rand -- have been going our way -- even the euro -- and they tended to offset. That’s-- we do have a bit of a balanced situation. So we've still got a significant negative translation loss compared to last year, but it's a fairly stable right now. If we've got the other currencies going our way, going forward hopefully we can get some more stability than we've had in the past.

And as I've consistently said over the last 3 or 4 meetings, sterling's been strong just about against every currency over the last year or so and that hasn't been the case over the last month or two. So we've got more of a balanced situation.

Perhaps I might just handle the tax question, if you want me to, and Paul can move on to PMI. Tax rate was lower in the third quarter. We did have a couple of one-off benefits there, where we received some extra tax credits in the US and for the [indiscernible] business. They weren't significant -- and a couple of other minor one off benefits. But the major reason why it was down, and why the trend was down this year, is because of the lower profits in some of the higher tax countries, such as Canada.

As we go into next year and the Reynolds American profits start to kick in, which we expect will be significant, we’ll obviously have the higher rate of tax [indiscernible] and also the higher rate of tax from the dividend. The dividend coming out of the US has a tax of about 7% as well. So that should kick the rate back up from the 33% that we're expecting this year, back up to 34% or there abouts.

On PMI, well, I’m, of course, I'm not party to their plans, but if the dollar continues to weaken, does that give them ability to maintain or increase their marketing expenditure, which I'd said before actually [indiscernible] pricing activity rather than marketing as we would understand it? I don't really know. I think PM are focused on growing their volume, and they're doing so at sub-premium. I think that will continue. The magnitude of their investment behind that strategy and the impact of currency on it I think will depend upon their need to produce profitable growth. I can't call that.

Yeah?

[Indiscernible] dollars share, but the dividend is about 380. When you merged, you said the payout ratio would be at least 75%. When, according to [indiscernible], does that actually kick in? When does it have to 75%?

Okay the question is Reynolds American and the understanding and expectation that the dividend payout would be 75%. The question is when do we expect that to kick in?

I would expect that that would start kicking in fairly soon, once things become more stable in the US. It’s obviously a question for the Reynolds American board, but I'm confident that the 75% payout ratio will stand the test of the long period of time once things start to settle down.

[indiscernible] does it have to be 75%?

No, it's an understanding that the Reynolds board has, that going forward in principle the payout ratio should be 75%, but they've obviously got to make that decision based on the circumstances at the time in the interest of all their shareholders. But we would expect, going forward, that the payout ratio would average 75%.

Stuart Reid, Private Outcall (ph). Just a quick question on IFRS. Does it have any implications on distribution of profits or your dividend level going forward?

I would expect none.

Yeah? Go on Adam.

It's Adam Sherwood from Smith Barney. A couple of questions if I may? Firstly, [indiscernible] obviously [indiscernible] buybacks from this [indiscernible] has been sharply lower than it was last year. I was just wondering if you could talk about 2005?

A second question, if I can. I understand that Latin American profits have been hit [indiscernible] by the [indiscernible] currency, but if the margin is down by [indiscernible] more than [indiscernible] profits [inaudible].

And then thirdly, in South Africa obviously there's been huge investment by Phillip Morris [indiscernible] recently [indiscernible] going forward what impact do you think that's going to have in 2005 and beyond?

Okay. Three questions. One, the rate of buybacks. Any comments on what the rate may be in 2005? Secondly, Latin American margins seem lower. What might be the reason for that? And South Africa -- the question was, what impact do we see going forward from the PMI launch in South Africa?

Do you want to talk about buybacks Paul?

Yeah. I think we would expect that, everything else being equal, we'd be buying back shares for a roughly a couple more years before we would get to the limit imposed by the RMR 30% limit. So I think a fair enough assumption is that, assuming that we don't do any major acquisitions, that the buyback would keep on going through, and that we end at 2006 or something like that. That's a fair enough assumption, I think, that you should make.

On Latin American profits, principally out of Brazil, I think the thing to bear in mind is that the export relief margins are lower out of Souza Cruz. The cost of buying leaf for exports in Brazil has increased because of the demand for Brazilian leaf. So that's impacted margins by a significant degree.

On South Africa, I think Phillip Morris’ share in South Africa in the third quarter was 0.7% of the South African market. Our understanding is that they're not terribly happy with that performance. Going forward, we have a robust position in South Africa and intend to hold on to it.

Hi. John [Lavis], Investec. Just if you could -- going back to Canada, at what level do you think that the current [indiscernible] from premium segment to value-for-money would stop, and do you think there’s a need to perhaps reposition the whole premium segment? [Indiscernible] brand equity [indiscernible].

Yeah. I don't want to get too much into those strategies and what we [indiscernible], but we have looked at it a lot. As I said earlier, when does it stop? Value-for-money is currently about 38% of the cigarette market in Canada. That said, I think that will go into the 40s before it peters out. In terms of our strategies going forward, I think we'll staying with our current strategy for the moment and watch how things go.

[Indiscernible] talk a little bit about Italy. I think it's probably fair to say that the profitability of the business in total is better than most of us were expecting, post the acquisition. How do you see that market developing?

And also would you just confirm whether there's nothing substantial in the Etinera numbers other than the underlying, such as the profitability growth we’ve seen, and it is coming from the cigarette business you will retain as [indiscernible]?

Okay. Two questions, then. Italy seems to be going well. How is the market developing? And what of the underlying profit of the business, particularly related to the profitability of Etinera. Do you want to handle the second one, Paul?

Yeah.

The market is developing reasonably well. As I mentioned, the Italian market is 0.3% down, which is pretty benign by Western European standards. Very benign indeed. Margins are improving. The government put in minimal collectibles tax which has caused, in the last month or so, the low-priced brands to come up, so I think a reasonably good industry profit outlook.

Secondly, that will help us on our particular brand portfolio. We have some important brands that we're sitting on, in pricing terms slightly above those low price brands which have now come up. So that should help us on profit. And we have a number of plans for improving the marketing of the brands, both international and domestic, principally MS, so that we can certainly slow, if not stop and increase MS. And we launched Dunhill this year, which is going extremely well in Italy, a premium-priced international brand. So we can see Italy doing well going forward.

In relation to Etinera, Jay, the total Italian profits is now about £136m for the 9 months, and of that £29m was Etinera. And that represents slightly higher run rate than one would normally expect. There are some [indiscernible] profits in there, so the £29m for 9 months is probably slightly higher than it would normally be [inaudible].

David Ireland here, from ABN Amro. Could you give us a little bit more detail on organic volume growth in the first 9 months?

And also, just again how you see the [indiscernible] going forward. Are you still happy that if you grow volumes organically by -- I think 1%-2% is your normal target rate?

Okay. Organic volume growth for the 9 months was very marginally ahead -- I think 0.1%. That's on cigarettes. If you included sticks in Germany to that figure, and we think that you ought to, we ought to be able to do that, then you would see organic growth round about 0.5% up as a result of our increase in sticks principally out of Germany. So internally we look at organic growth including sticks, which is around 0.5% up for the 9 months.

Going forward, I think we said 1% to 1.5%, David. And I think, as I've said before, that it's more likely to be 1% than 1.5% on organic growth. It’s very difficult to predict what excise shocks, in inverted commas, there will be around the world, but I think it's probably safer to assume 1% rather than 1.5%.

Can I just come back. You mentioned the [indiscernible] on sticks in Germany [indiscernible]. Have you got any views to the industry's position on price increases in Germany with the December 1 duty increase?

Okay, the question was about German price increases following the excise increase in Germany in December. We're not price leaders. We'll wait to see what Phillip Morris does. Very difficult to get a read on what Phillip Morris will do because historically in Germany they've eaten the excise increase. They've partially eaten it and may fully pass it on, so it’s difficult to get a read on that track record. We would hope they pass it on.

[Indiscernible] that probably we’re going to get a tax rate in December and January, even in Germany, but it's much more questionable what will happen in September next year. Have you not passed-- I suppose the question is, how many governments in Europe know that big sharp excise tax rises [indiscernible], and therefore shouldn't one take the view that looking forward your influence is much more benign than it has been [indiscernible] before?

The question was around excise and, quote, excise shocks and haven't governments, quote, learned their lesson, unquote. I would certainly hope so, in Europe. I think those very sharp, dramatic increases on excise have been counter productive for almost everybody.

Will governments take that into account going forward? One would like to think so, but certainly Malaysia did not -- and they can't have been totally unaware of the situation in Western Europe. I think, frankly, what drives it is governments' need for revenue. Simplistically, and it is only simplistically, some of them may think that the easy answer is tobacco excise but as we've seen that's not the case. So whilst I would hope that governments are taking more account of the learnings in Western Europe, I wouldn't like to bet money on it.

Anything else? Yeah?

[Indiscernible]. Last year, Europe had some seasonality between Q3 and Q4 on profits, and at Q4 European profit was half of Q3. And that was put down to cost, timing differences and if you average the two you get the underlying indications of the European margins. Can you tell us whether there have been any cost, timing differences this time around that we should beware of and what that means for Q4 in Europe?

Paul Adams. Okay the question was, historically there have been differences on phasing of profits between Q3 and Q4 in Europe. Do we anticipate anything like that this year?

Not to the same extent, although there could be a similar trend but nowhere near the same extent. It could be slightly down due to the same reason, but it's not going to be as marked as last year.

Michael Smith, again, with JP Morgan. Just on FX, I want to make sure I’ve got the right read. There was a 6% negative hit in the first 9 months.

Yes.

But is the right read that is the fourth quarter impacted less and that the [current spot] rate, the impact in 05 is broadly neutral?

Okay the question is on FX, a very interesting question as to what the FX rates will be in the fourth quarter and going forward into 2005.

I think it's an impossible question to answer, to be honest with you. If rates stay where they are today, I would think you would have roughly the same sort of FX movement for the quarter as we've had for the year -- compared to last year, because we're looking at movements compared to last year.

But obviously as far as next year's concerned, that's obviously anyones guess. You've got to make some sort of prediction as to what's going to happen to rates for next year.

[indiscernible] average for the first 9 months of this year.

Yes.

So it's fair to assume that it's not just that current [spot] rates are --

If rates obviously stay the same as they are today, then we'll get stability going forward. Yes. But what we're seeing -- I'm not quite sure what your question is. What we're seeing is though is continued volatility in the US, and a lot of the other currencies are moving our way. Okay? Now if we can get some stability in the US and the other currencies moving our way then hopefully we'll get a gain. We've had some quite continuous exchange losses on translation for some time.

The law of averages would say that over time they would balance out and they'd start coming our way. That's obviously what we would hope, but I'm certainly not going to predict that.

[Indiscernible].

[Indiscernible]. What's the group's position on a possible smoking ban in the UK? Do you think you would like to [indiscernible], or are you quite happy with an outright ban [inaudible] and how it would potentially affect the Group’s business?

Our position that we've stated before is that we think that an outright ban is unnecessary. It's over the top. It's unreasonable. And that you can banish the smoke without the smoker by sensible accommodation, by bettering ventilation and segregation of smoking and non-smoking areas. So we think that an outright smoking ban is not the way forward and is not in the vast majority of everyone's interest. So that's our view on it.

In terms of how it will impact our business, our actual profitability in the UK you could lose in rounding. So it's not going to impact our business.

Yeah? [indiscernible]

On Russia. Could you talk to us a bit about current financing in Russia? From what you were saying on Kent, it might even have picked up in Q3. Some guidance on the profits that are coming from Russia and how far you think you can push volumes and margins there?

The substantial increase in Russia. Volumes are up, year-to-date, by 15%. Kent is up much greater than that, and Kent, of course, is premium priced so our mix is improving substantially in Russia. Disposable incomes in Russia are increasing very steadily and at a fast rate, so we can see that up-trading continuing. So we see the potential both for headline volume growth in Russia and for improvement in mix continuing. Russia’s profitability has increased significantly and is going very well.

Okay. Thank you all very much for coming.