英美煙草 (BTI) 2005 Q1 法說會逐字稿

Good morning everyone. I am Paul Adams, Chief Executive, and with me is Paul Rayner, Finance Director. This morning we will be taking you through the first quarter results, and there will be an opportunity for people in the audience to ask questions.

And a warm welcome to those of you who may be listening on the conference call, or watching via our website BAT.Com.

Reporting quarterly means that in the Tobacco universe BAT is the first to report results under the International Financial Reporting Standards. There are some significant changes to the year-on-year comparative numbers. And this morning we will try and explain what has happened, so that you get a feel for how the business has performed.

As we flagged some time ago, we have also moved South Korea from the America Pacific region to the Asia Pacific region, a logical move I am sure you will agree. And the 2004 comparative numbers also reflect that change.

Perhaps the one number that stands out the most is the remarkable 26% increase in adjusted earnings per share. We will take you through some of the factors that have contributed to this increase. But let me first point out that whilst we have had a good start to the year, the first quarter is not indicative for the year as a whole. As we progress through the year, the 2004 comparatives are going to be more demanding.

Similarly though, the 4% fall in profit from operations disguises the fact that four regions have enjoyed strong profit growth. Whilst the large part of the America Pacific decline is due to the IFRS treatment of our largest associate, Reynolds American. On a like-for-like basis, profit from operations was up around 6%.

There were some very good performances around the Group. And whilst we have a few problem markets, on the whole the strength of BAT around the world is very apparent.

Before we discuss the regions, let me point out the factors that have affected the results. As I have just mentioned, as an associate, Reynolds American is not included in profit from operations and therefore, is not included in the America Pacific Result. However, the Brown and Williamson tobacco business and Lane is shown in the 2004 comparative quarter's results and will be for the second quarter, and indeed one month of the third. This affects volume, as well as profit.

The results for Europe and Asia Pacific have been adjusted to reflect that STK and the Indian associates do not form part of profit from operations. In fact, it is the post-tax results of our associates which are shown in the Group income statement, but these must be shown at the pre-tax level.

The Group cigarette volumes exclude the associate volumes. And the global drive brand figures exclude the Pall Mall and Lucky Strike volumes sold in the U.S.

At the end of December, we sold the distribution business in Italy, which has had two impacts on the Italy results. Firstly, Etinera does not contribute to this quarter's results. The adverse affect is around £10m. Secondly, there were changes to the terms of trade, which have resulted in the earlier recognition of sales, giving rise to a one-off benefit of £23m and higher volumes of £3b.

Most of this benefit will unwind over time, but the net consequence of the Etinera sale is a £13m improvement to profit, and a £3b improvement to volumes.

So to summarize, profit from operations would have increased by 6% if adjusted for the Reynolds American and the Etinera effects, and the business is looked at on a like-for-like basis.

As far as volumes are concerned, the organic growth was 1%, after excluding the Reynolds American transaction and the earlier recognition of volumes in Italy. This was a reasonable performance against a background of industry declines in some key markets, such as Germany, Japan, South Korea and Canada.

Global drive brands disappointed with just 2% volume growth, but there was a mixed story. Dunhill was affected by a 40% decline in the first quarter of South Korean industry volumes, following an excise increase in the previous quarter. The good news in Korea was Dunhill's record share of 14% in that market. Lucky Strike volume, down 5%, continued to be affected by declines in key markets, despite good share performances in those markets. Kent, up 19%, has gone from strength to strength in Russia and Pall Mall was up 6%.

International brands rose 7% and the associates' volume doubled, not surprisingly, with the inclusion of Reynolds American. Our total associates' volume was 56b for the quarter.

We had good share performances in many of our key markets. In Russia, Kent now has a 4% share of the top 30 cities and the Group share is close to 25%. Elsewhere in Europe, Pall Mall grew share in Germany with the cigarette stix market continuing to grow strongly.

In the Asia Pacific region, Australia continued to grow share, with strong performances from both Dunhill and Winfield. Gold Flake and John Player Gold Leaf also grew share in Pakistan.

In the Africa and Middle East region, a number of markets experienced share growth. Turkey was outstanding, with good performances from Viceroy and Pall Mall. In Iran, Kent and Montana also increased share.

In addition, we had sequential share growth the first quarter over the fourth quarter of last year in Italy and Malaysia.

Turning to the regions, we start with Europe, because it is now our largest region in profit terms. In Italy, the results were affected by the Etinera sale, which I have mentioned, and also by a virtual ban on indoor smoking in public places, and an excise increase last November, resulting in a total market decline of 12%. Excluding the benefit from the change in the terms of trade, there were lower volumes in Italy, leading to a lower underlying profit. Share performance in Italy, however, was pleasing.

The overall market share for each of the last three quarters in 2004 was stable, with an increase in Q1 2005 over the prior quarter, an important turnaround considering [Eti's] historic share decline. Both Pall Mall and importantly MS improved share on a sequential basis. This is the first time the newly re-launched MS has recorded share growth for many years.

Profit in Germany increased strongly through our price increase, improved mix and reduced costs. Our share of the cigarette market rose to 25%, with our share of the total tobacco market also rising to 25%. Lucky Strike grew share in cigarettes, with another good performance from Pall Mall in the cigarette stix and roll-your-own segment.

There were improved results from France, due to a better sales mix. Market share of cigarettes rose to 16.4% versus the same period last year.

In Russia we are now gathering retail share data across 100 cities. In urban Russia, the Group continues to perform well, delivering significantly higher profit through an improved mix and volume increases. As stated earlier, higher volumes and market share were drive by Kent and the growth of Vogue. Volumes for the quarter increased 10% compared to 2004.

Australia continues to go from strength to strength. Our market share of total tobacco has risen to 45%, with good performances from the premium brands, Dunhill and Winfield. Higher margins through improved sales mix and lower costs have resulted in strong profit growth.

Profit in Malaysia declined, due to the costs of complying with new government marketing restrictions and pricing activities. The market declined by around 10%, following the severe excise increase in September last year. Dunhill maintained share relative to Q1 last year and increased share versus Q4. Pall Mall also did well, although overall share declined slightly.

South Korea delivered strong profit growth, due to the timing of excise payments following an excise increase, which in turn substantially reduced industry volumes. However, our market share grew, driven by a strong performance from Dunhill.

In Brazil, Souza Cruz's share fell 3 percentage points to 72%, the share loss being to small players, not international competitors. Profit, though, was up due to increased pricing and an improved exchange rate. Volumes declined marginally.

In Mexico profit was higher, due to an improved mix and price increases taken last year. Declines, however, in the mid and low price segments offset continued growth in the premium brands.

Also in the region, Venezuela posted good results with higher volume and share.

Profit in South Africa improved, with higher pricing and an improved mix. Volumes were stable over the quarter, with Peter Stuyvesant growing share. However, there was some overall market share loss, down to 91%, but with no material impact from new entrants to the market.

In Turkey there was outstanding volume growth. Good performances from Viceroy and Pall Mall helped increase our share of the market to 10%.

Nigeria continues to perform well, increasing profits and market share. The rise in profit is due to all products now being manufactured locally.

Finally America Pacific, which to all intents and purposes comprises just two markets, Canada and Japan.

Canada remains under pressure as profits continue to be impacted by lower volumes and deteriorating sales mix. Profit for the period fell 19% to £64m. Imperial's share of the value-for-money segment grew from 22 to 36%. However, it's share of the overall market continued to decline. During the quarter there was a further narrowing of the price gap between premium and value-for-money cigarettes and more recently price increases have been announced of a CAD1.40 per carton on regular premium brands and between CAD0.32 and CAD0.64 per carton on the value brands.

In Japan, the total market continued to decline, with volumes down 2.5%. The impact upon profits, together with the non-recurrence of the reorganization benefit. Our market share was marginally lower at 8.7%, due to a slight decline in Kent -- decline in Kent, with Lucky Strike and Kool remaining stable.

Finally, before I hand over to Paul, a brief comment on associates. As you are aware, we account for our share of associates post -- a share of the associates' post-tax results in our pre-tax profit. Two-thirds of our share of associates' post-tax results has come from Reynolds American, which reported a good set of first quarter numbers last week. A combination of increased pricing, merger-related cost savings and other cost reductions contributed to a very pleasing result.

I will now hand over to Paul Rayner.

Good morning everyone. As you've heard from Paul, there are a number of factors that have benefited the adjusted earnings per share. I am going to discuss some of the financial effects now in a little bit more detail.

First, net revenue, which was affected by the sale of Etinera in Europe and the Reynolds American transaction. Asia Pacific was flat, while Latin America and the Africa and Middle East regions saw strong net revenue growth. The overall 20% decline in net revenue as a result of these transactions has produced an almost 5 percentage point increase in the operating margin, which now stands at 27.6%.

As Paul commented earlier, four of the five regions showed strong profit growth in the first quarter. These figures are at current rates of exchange, versus the average rates for the first quarter in 2004.

Under IFRS, we show net corporate costs not directly attributable to the regions. These are up £6m at £25m, mainly due to exchange items in the 2004 comparatives. Excluding the exchange adjustment, unallocated costs were well down on last year.

Profit from operations was down 5 -- 4% at £582m. Taking into account the transfer of the Brown and Williamson business and the changes consequent on the sale of Etinera and new terms of trade in Italy, on a like-for-like basis, profit from operations was up 6%, as you can see from the slide.

Another way of showing this graphically on a like-for-like basis is this chart, which excludes the effects of the Reynolds American transaction and the sale of Etinera and the new terms of trade in Italy. Organic volume growth was almost 1%, profit at constant rates of exchange rose 7.4% and 5.9% at current rates.

Also from this chart, you can see how each of the regions, with the exception of America Pacific, has performed strongly. Excluding America Pacific, the four regions are up 15% at current rates.

Of all the lines in the IFRS profit and loss account, the net finance cost line is likely to be the most difficult to forecast and may well be more volatile. This is partly because financial instruments, such as derivatives, have to be recognized at fair value. For those of you who are kicking yourselves for not getting the £46m charge right in your forecast, let me assure you that if you exclude the impact of IAS21 and IAS39, net finance costs were actually similar to last year.

Here we have a breakdown of the net finance costs, which came in at £8m lower, due mainly to the recognition of gains in the quarter under IAS39 on derivatives, but did not qualify for hedge accounting.

At the 2004 preliminary results meeting, I indicated that we were anticipating net interest under U.K. GAAP to be running at around £65m a quarter, or £260m for the full year. This actually equates to £280m under IFRS, before IAS39 and IAS21 are taken into account. We still expect that this run rate, subject to the volatilities of the new standards, should apply to the year as a whole.

Returning to the profit and loss account, after bringing in the post-tax contribution of associates, which rose by 250% with the inclusion of Reynolds American, the profit before tax was £624m or up 9%.

The low tax rate for subsidiaries of 31% is lower than the guidance I gave under U.K. GAAP, which was in the 33 to 34% range. Given the distortion created on the income statement from the after-tax profits of the associates coming in at the pre-tax level, we think the most appropriate tax rate to track going forward is the underlying tax rate for subsidiaries, which actually dropped from 35.7% to 31%. And on this next slide, we show that underlying tax rate calculation.

Now that improved rate is the result of changes in the mix of profits and the main drivers for these mix changes are predominantly the lower profits in Canada, higher interest income in the U.K. and the benefit coming through of debt restructuring.

Profit for the period after £166m tax charge was £458m. Therefore, after the lower minorities charge, profit attributable to BAT shareholders actually rose 24%.

Finally, the 26.3% rise in earnings per share. This slide shows the drivers of earnings per share growth. Not all of these will necessarily be so beneficial as we go throughout the year. Underlying operating performance was almost up 6%, and that's excluding the impact of the Reynolds American transaction.

The Etinera sale and the new terms of trade had a 2.5% positive impact on earnings per share growth. This is a one-off and will unwind to a negative by the end of the year, as the last full year's operating profits for 2004 for Etinera offset the benefits of the terms of trade.

Lower net finance costs gave rise to a 3% improvement in EPS and as I said earlier, may be quite volatile as we go forward.

The earnings-enhancing effect of the Reynolds American deal is evident, with earnings per share improving by 5.5%.

The improvement in tax is as I explained earlier. We gave guidance, as I said earlier, of a tax rate of 33 to 34% under U.K. GAAP for this year. However, guidance under IFRS is difficult, due to the volatilities that I have described. Subject to these volatilities, underlying tax rate for subsidiaries is likely to be around 32% for this year.

Minorities are lower, mainly due to a lower result in Malaysia. We intend to recommence the share buyback program soon and the calculation for the quarter was based on 2,129m shares. And we bought back 4m shares in March.

It's been a good quarter, but as we say in the announcement, 26% growth in EPS is not indicative of the year as a whole.

We will now be happy to take your questions.

Thank you Paul. Could I just remind everybody to please state your name and the firm or publication you represent, for the benefit of the webcast and the conference call. And I will try to remember to repeat the question, because of that, before answering. John.

[John Phelps] from Morgan Stanley. A couple of things, first of all South Korea, can you just clarify why your profits are up there when volumes dropped? You said something about timing of excise payments. I just wanted a bit more explanation on that.

And secondly, wondering about the restructuring costs that are taken at Reynolds. I think in the '04 full year EPS number that you posted on the adjusted basis, you exclude the restructuring charges. But in this number, I think, for the first quarter, you haven't added back the restructuring costs. So I am just wondering, going forward, what your policy is on how you treat those?

Yes, let me repeat the questions. The first question was around South Korea - with volumes down how do we get a profit increase related to the timing of excise payments? And secondly, the treatment of Reynolds American in our figures.

Paul takes the second one; I'll take South Korea.

Basically, it was an excise windfall gain, which we get when we sell product, obviously, and because we're selling it without the excise increase.

But at the same time, because excise went up from a consumer point of view, volumes were down because of the loading in the fourth quarter. Yes?

[Inaudible question - microphone inaccessible].

Not off the top of my head, no. I think it was something like £7m or £8m.

On Reynolds America, it's still our policy to take out the restructuring costs, they just weren't substantial in the first quarter, negligible. So we haven't adjusted. So if you take the Reynolds American result as reported and take 42%, you come pretty close to the numbers that we've reported. So you don't have the difficulties that we had last year, with some fair value adjustments that we had in the early days. But then you've got some minor accounting changes for U.S. GAAP compared to IFRS.

I expect, though, there will be restructuring costs going forward on Reynolds, as they close the factories, which they haven't done yet. And we'll pull those out as exceptionals.

Gerry.

It's Gerry Gallagher of Deutsche Bank. Three questions. First, is it possible to give us a feel for the revenue number ex the impact of currency, I think you referred to currency in the operating profit?

I appreciate it's a movable feast but any indication of the tax charge post '05, Paul, on a subsidiary basis?

And thirdly, can you just clarify, on the interest charge you mentioned a £5m cost or £5m income for swaps, presumably that was a non-cash item. Can you just clarify, please?

Okay, three questions there. One, can we give an indication of the revenue excluding currency. Secondly, any guidance we may care to give on the tax charge post 2005. And a clarification on the interest charge. I think that's all your country, Paul?

Yes, I think that is my country. I think if you look at net revenue and you take out the effects of the one-offs, Brown and Williamson, the Etinera and terms of trade, net revenue at constant was up around 0.5% and at current was actually up around 1.8% for the total Group. So you've got volumes up roughly 0.6%, net revenue up 0.5% at constant and current we actually had some slight exchange gains on revenue.

The tax charge for the year, I think we are saying the tax charge for the year will be around about 32% on the underlying rate for subsidiaries. It is down on last year on a like-for-like basis, so we have had some permanent reductions. And that's mainly due to the debt restructuring, which I mentioned in the slide.

The £5m gain from swaps, yes, I expect it was a non-cash item, but I'd have to confirm that later, but I expect it was.

Marc Cohen from Goldman Sachs. Looking at the rate of decline in Canada, the profit rate of decline seems to have slowed somewhat. Going into the second half of the year, do you think the rate of decline will be in single digits [incentive-wise]?

And can you give us a comment on Japan about the [inaudible]?

Okay. Two questions. One on Canada and the rate of profit decline in the second half of the year, and some comments on Japan. One, I'll talk generally on Canada; I'll talk generally on Japan too.

On Canada, we are not out of the woods, but things look to be getting slightly better. If you look at the growth in the value-for-money segment, it is slowing considerably. The share of the total cigarette market that value-for-money took in the first quarter was around 40%, sorry, 41%. And in the fourth quarter of last year it was 41%. So not much of a decline quarter on quarter.

Imperial grew share in value-for-money, both versus the first quarter and indeed versus the fourth quarter, so we are growing share in value-for-money, around about 36% now. But obviously, that's not as high as our share of premium, so we're losing -- although we grew share in premium as well, we're losing out in overall share. And there was also a price increase recently in April, which was good news.

So with the price increase and with what looks to be - we'll wait, get a bit more experience - but what looks to be a significant reduction in the increase in the value-for-money segment, some slight signs for hope.

We've said that we anticipated that the 2005 profit for Imperial would be down but not down as much as we saw in 2004.

I don't know if you want to say anything about the second half.

I think for the second half we'll still be looking at double-digit rates of decline, in answer to your question. Even though the rates of decline shouldn't be as high as they were for the full year last year.

As regards Japan, the market was down quarter on quarter by about 2.5%. Our share was slightly down, like 0.1%, which was Kent; Lucky Strike and Kool were both stable. So reasonably stable in terms of share, but obviously we'd like to be growing share.

The market has become much more competitive, the rate of innovation of new products has increased substantially over the last 18 months. We anticipate that this year will be increasingly competitive, A, with the continuing rate of innovation and new variance being put into the market. But also obviously Philip Morris & May taking back Marlboro in Japan, which I am sure will create a flurry of competitive activity. So it's going to be tough trading in Japan in 2005.

[Robert Asquith] from JP Morgan Asset Management. A question about the restructuring cost savings. I don't know if you can split out what benefit you got in the quarter or pick out where you really got the benefit on a regional basis?

And also, if you could assess the gross savings and how much fell through the bottom line, i.e. the net savings, the retention rate?

Okay. The question was on cost savings in the quarter - can we give any figures for that. And particularly interested in net savings, i.e. how much goes to the bottom line, the retention rate, that was the question. Paul, do you want to answer?

I can only talk generally. If you look at all the regions, the operating margins have improved quite substantially. If you come back to the question that Gerry asked earlier, net revenue at constant was up 0.5% yet profit was up 7.4%. So obviously, a lot of the cost savings are coming through and are driving the profit result. And it's coming through across just about every region.

In terms of the quantum of cost savings coming through, I think I can only talk generally, because it will vary from period to period. But we've said we'll look for most of the cost savings from our overheads and indirects program, which to the end of last year for the first two years running about £150m or a bit over, would drop through. And roughly half of the savings from supply chain would need to be reinvested in brand spend, but most of -- the balance should drop through as well. And we had around about £120m of savings for the first two years on supply chain.

So obviously, the cost savings are a key driver of the profits. And if you look at the operating margins for each region and then you look at the improvement in net revenue, it comes through.

David.

David [Allen] from ABN Amro. A couple of questions, first of volumes. You've managed -- already managed to show some underlying volume growth in this first quarter. Given that comparative to markets like Italy and Germany should improve through the rest of the year, would you hope to be at least within your 1 to 1.5% target range, or will you perhaps top it or do better?

And then the second question is a supplementary on Japan. You did put or you said you put quite a lot of investment into Japan at the end of last year. Is that really to keep on pace with everybody else or would you hope to get some of that benefit back from that in the coming quarters?

Okay. There were two questions. One was on volume growth, we've achieved organic volume growth but lower than the 1 to 1.5% we talked about last time for the year, what do we think will happen? And secondly, a question around Japan and the incremental investment in 2004, will we see some impact of that in 2005? I will pick up both questions.

I anticipate for the year that our organic growth will do better than the 0.6% that we achieved in the first quarter. And I would be disappointed if we weren't 1% or better for the year total organic growth for subsidiaries.

I would also expect to do better on the global driver brands. As I mentioned, 2% is disappointing and I expect to do better than that for the year.

In terms of Japan, we did up the investment in 2004. Did that give us a head start in 2005? Not really. We're just, I think, remaining competitive in a fiercely competitive market.

Chris Wickham, Lehman Brothers. I was just wondering if you could give us the like-for-like movement in unit pricing in Europe because obviously there will be some Etinera effects in there? I was wondering perhaps also if you could let us know how much of that, the pricing that you achieved in Latin America, was the Brazilian price increase?

And I am also just interested to know a bit more about the strategy in Canada, and where you expect the two segments to end up relative to each other, in terms of whether at times we've seen that sub-premium segment narrow the gap and it now seems to be widening again, in terms of the gap between the two?

You are talking pricing?

Yes. Segments, and I was wondering if perhaps you could give us some clarity on that? And I suppose that number, you were talking about double-digit decline in the second half in Canadian profits, that's in sterling terms, because the Canadian dollar's taken a bit of a [inaudible]?

Okay. There were three questions. Can we give an indication of what the like-for-like unit pricing was in Europe? Can we similarly talk around pricing in Latin America? And can we give some indication of what we anticipate in terms of pricing in Canada in terms of a narrowing of the price differential between value-for-money and the premium?

I couldn't talk around the like-for-like unit pricing in Europe; maybe we can get it for you afterwards.

All I can tell you, Chris, because like-for-like pricing across Europe is not something we generally pull out. But all I can tell you is that if you pull out the effect of the Etinera thing, you've got volumes actually down 3%. And net turnover down 3% at constant, if that helps you.

Okay? And we know that operating profit at constant was up around 9% on a like-for-like basis there. You can see the cost savings coming through in Europe.

If there is any more detail you want, I think we would have to cover that afterwards, because we don't have it here.

On pricing in Canada, clearly it benefits us for the pricing between premium and value-for-money to narrow. And I don't think I'd be giving too much away, but that's what we would like to see going forward.

Now, the ability for that to happen, we have to have a competitor that is prepared to allow that to happen and we then get into pricing tactics, which I'd rather not talk about.

In terms of the Latin American situation, Chris, the price improvements in Brazil were the main reason for the profit improvement in Brazil. But if you look at the region as a whole, the Brazilian improvements were well less than half of the total improvements of the region. And we had improvements in a number of markets, in addition to Brazil, that concentrated exchange. Mexico was up, Central America and Caribbean was up, Venezuela was up, Peru was well up. So Brazil contributed probably to about 40% of the total profit increase for the region, and most of that was price.

Michael Smith from JP Morgan. There are two markets I wanted to ask about; South Africa. I believe Japan Tobacco has filed a lawsuit against you for some form of restrictive marketing practices. Do you feel that has any risk associated with it, in terms of the new entrants into the market and their route to market in South Africa?

And secondly, in Italy you reported a 12% volume decline. That was a little higher than I'd expected. I thought the figure was 10%. Has there been an acceleration recently? And how much of that do you think is due to the smoking ban itself?

Okay. I am going to ask Neil Withington, who is our Legal Director and General Counsel, to answer the question on Japan Tobacco. If anyone's got any questions on the legal side of things, that would be a good time to ask them.

I will pick up South Africa and -- sorry, no, South Africa will be handled by Neil, I'll pick up Italy. Yes, no, the figure we've got is that the industry was down 12%. I would say that around about 2% of that, it's not a precise science, 2 percentage points of that was down to a decline in consumption generally. The balance would be down to the smoking ban. I don't -- smoking restrictions, I don't see that 12% carrying forward for the year. I think the Italians will work within those parameters and I would see the market down, I don't know, between 7 and 9% for the year in Italy.

The situation in South Africa is relatively straightforward. It was a complaint that was brought by Japan Tobacco locally in terms of local marketing practices that was referred to a competition tribunal, which has then been referred back to a different tribunal. And they will then be assessing the impact of that in terms of whether there was any infringements in the competition environment in South Africa or not. BAT South Africa are pretty confident that their practices are okay. It will be up to the tribunal to try and determine.

But the downside, if they find that there has been a breach, then the sanctions are likely to be financial. Whether it would have an impact on the market itself, you'd have to wait and see to find out what the tribunal found.

Any questions on the legal?

Shall I shimmy off again into the distance?

I'd shimmy.

Fine, I will shimmy.

What else? Jonathan.

[Inaudible]. A question about central costs. We haven't talked a lot about where they might go, in the past. Are they going to benefit from the Group cost savings initiatives as well, going forwards? Or should we be assuming that figure's basically flat?

Okay. The question was around central costs and where might they go in the future. Would they be subject to the same general cost reductions as we've been trying to implement in the Group as a whole? Can you pick that up?

We are already benefiting from central costs, if you exclude some exchange adjustments, and some of that's to do with IFRS. But if you look at it on a like-for-like basis, they are actually well down on last year.

And some of that comes through in the unallocated central cost line and some of it has actually benefited the regions, because we now charge out all the costs that we can to the regions under IFRS. And the regions have got lower central cost charges than they had last year on a like-for-like basis.

We did reduce headcount numbers in the center by around 20% as part of the overheads and indirects program, and a lot of that is already done.

Adam?

Adam Spielman from Citigroup Smith Barney. Three questions, if I may. Firstly on South Korea, because obviously what's going on in this quarter was exceptionally complicated. If you try to adjust out both the one-offs, i.e. the rapid volume decline, 44% you said, and also the excise tax gain, do you think profit's up or down?

And I guess another way of phrasing that question is, as you think about the rest of the year, the final nine months, would you expect profit to be up or down, it's so difficult for us to see?

The second question is, I guess, a similar sort of question on Italy. You said on a year-on-year basis, profit is down excluding the one-offs. But you've also said sequentially market share is up. So I was just wondering if you could give us your sequential profit number, is it up, down, sideways, if you are comparing this quarter to the fourth quarter?

With or without the one-off?

Try to remove all one-offs, if it's possible.

And the third question is about BAR. BAR was a subsidiary last year; it's now an associate. You have never actually given a detailed number on the losses associated with BAR. I suppose the question is, is that change material to your operating profit number? And by material, I suppose, has it had a more than 1% impact, which would be about £5m? And if you can be more specific, of course, we would love it.

Okay. Three questions. One is on South Korea, adjusting out the one-offs on volume and excise gain. What is our feel for the profits in the first quarter and indeed our profits going forward for the year? Italy, same again, adjusting out the one-offs, what's our feel for the profit and our outlook in Italy? And BAR - is BAR a material impact on our profits, material being defined as greater than £5m?

Do you want to have a run at the profit?

Yes, sure. On South Korea, we did have two things that offset each other, but the excise gains are quite substantial. I think moving forward, I don't want to give a profit forecast for the year, but you've really got to take the excise gains out, so you'll come back to a much more flatter sort of result for South Korea, certainly than we had for the first quarter.

For Italy, I think we'd expect that we've still got some of the synergies to come through in Italy that we announced when we bought the business. Volumes were down substantially for the first quarter. We would expect they would pick up somewhat as we go through the year. So I would expect profit numbers would pick up in Italy as we move through the year in the last three quarters, compared to the first quarter, on a like-for-like basis.

BAR, the profit impact; your 1% is probably fairly close, probably slightly less than that, but something like that. And we are assuming that we've got no cost associated with BAR going forward this year as a result of the restructuring that we've done. And there is a saving and it will be slightly less than 1%, but rounded up it would be closer to 1% than 0%.

If you included -- sorry, if you compared Italy in Q1 versus Italy in Q4 '04, stripping out the Etinera business - up, down, sideways?

I think it would have been down, because of the substantial volume drop. I don't have the exact numbers, but I think it would have been down because of the substantial volume drop Q4 '04 to Q1 '05. And then we would expect to pick it up as we go through the year.

Thank you.

Yes.

Jonathan Leinster, UBS. There's [inaudible] about these bans on advertisement related to the second half, the rest of the E.U. that hasn't banned it already, Germany, Spain; Malaysia has obviously done a lot in terms of restrictions. Two questions on that. First of all, does that make any -- will that make any significant difference to profitability this year or seasonality?

And secondly, there seems to be some comments [coming] out of Russia about a similar ban and in Korea there seems to be [inaudible] the FT yesterday, even more drastic talk. Can you give us an update or comment on regulation there?

Yes. Let me just talk generally about advertising bans. Advertising bans make it more difficult to move market share. But they don't prohibit, they don't stop the ability to move market share. And as we've seen, we can move market share in markets which are what we call dark.

In terms of financial impact, I think the best assumption is to assume that advertising ban is neither a windfall nor a problem. We tend to redirect money above the line to trade marketing and other forms of direct adult communication. But generally on that, that's generally on advertising bans.

In terms of Russia and South Korea, yes, I am not taking either of those seriously at this stage.

Chas Manso from Dresdner. A few questions. Could you give us your spot market share in South Africa and maybe that of Philip Morris?

In Brazil, could you tell us the size of the price increase and maybe flesh that out, what is the price gap between yourselves and the local manufacturers and the share loss trend?

And in Germany, you were saying your cigarette share's now 25%. Could you tell us what's behind that and how much of that are your brands and how much distributed brands?

Okay. Three questions. One, what is the spot market share in South Africa. Secondly, at Brazil what was the size of the price increase and as a result the relative price gap between our brands and local brands, I think. And Germany, can we break out the 25% cigarette market share that we talked about.

Do you want to handle Brazil and I'll go for the other two?

South Africa. Market share in South Africa, you wanted the spot rate rather than the first quarter, not sure I can do that. Yes, it is 90.6%, 91%. We've come off about a point, point and a half, since the first quarter of last year. And we've come off about half a share point versus the fourth quarter of last year. That gives you a feel for it. So yes, a slightly softened share, as I mentioned, but we are not hemorrhaging share.

In terms of Germany, let me just break that out. In terms of Germany, well, you can look at it a number of ways. Our share of the total tobacco market - so that includes cigarettes, stix and RYO - is around 25% and has improved. If you take our share of cigarettes, if you include Group brands, which includes [Fair Play], which is a brand that we supply exclusively to a particular trade channel, it would be 25%. If you just take, if you like, the cigarettes within Germany, we would have 23%, which again is up. So we are up in total tobacco, up in total cigarettes and up in cigarettes that relate to those sold by BAT Germany rather than STC, our Smoking Tobacco and Cigars division. So we are up in all three.

Breaking that out, Lucky Strike was up in share and is now at around 5.5 percentage points. Pall Mall was up in share and Gauloise Blondes, which I think was what you were asking around distributed brands, that was also up and is around just over 6%.

So good performance in share terms in Germany, on just about any criteria. Of course, we are growing share very substantially in the stix market, where we have 22% of the stix market, 18% of that on Pall Mall alone. Terrific performance by Pall Mall. And we have about 30% of the RYO market in Germany. So we are doing well in Germany.

In terms of Brazil, I don't have the actual price gap information here. If you see us after, I can pull that out, I just don't have it here. All the year profit increase in Brazil, which is around about £9m, was due to the price increase. There are a number of other factors that influenced the profit result but they all netted out, basically, to zero. And the price increase came through and reflected basically the increase.

Go on, Adam.

Hi. It's Adam Spielman again. Two questions, if I may. Neil was asking very much about Russia, it's doing very well. Should I assume that it's going to continue exactly as it is? Is it accelerating the profit growth, is it decelerating? That's the first question.

The second question is a much more technical question. I notice in your profit and loss statement you have amortization tied up with depreciation. And I was just wondering how much amortization is there there? And if there is a significant amount of it, is it related entirely to software, things that really need replacing? Or is some of it the sort of things that frankly we should be stripping out from an adjusted EPS number, because it won't need replacing, because it's goodwill-like?

Okay. There were two questions. One was Russia, and obviously we are doing very well in Russia, but do we see profit growth accelerating, staying the same, or decelerating. And secondly, the question on amortization, how much is there, is it software type stuff and what adjustment should we be making.

Why don't I pick up on Russia? We are doing extremely well in Russia, as you say. Our volume was up 10% in the first quarter. And our share is growing; our mix is improving principally behind Kent and Vogue.

In terms of where will profits go, I think it's -- we are confident that profits will increase. At what rate they will increase is really dependant upon to some extent our competition. So it's very difficult to say how will profits accelerate or maintain the same rate of growth.

Clearly, as you progress, the ability to maintain that rate of growth will become more difficult and you can never legislate for what competition may do on pricing. Russia has been a competitive market on pricing. Occasionally it has bursts of very intense competitive pricing. It's very difficult to forecast what the profit growth is, but we still anticipate very healthy profit growth in Russia.

Your question is depreciation and amortization. I basically classify most of it as depreciation. Most of the amortization costs we used to have were goodwill and they have basically gone now under IFRS. And we do depreciate software generally over three years, but it depends basically on the life of the project.

For adjusted earnings per share calculations, I wouldn't be stripping it out but for cash flow purposes I would. There is no hidden agenda with the number; it's fairly straightforward.

Okay, one last one. Joe.

Yes, sorry. Can I -- I want to understand the Asia Pacific improvement a bit better. Clearly, Malaysia is down substantially. You mention in your release Australasia and Pakistan picking up some of the slack. Is it really all just that, or is it all really all down to Australasia and Pakistan? I never really thought that Pakistan was a major profit contributor. Or is it more to do with reduction in central costs that are allocated to that region?

Okay. The question is around Asia Pacific, which is clearly doing well. That is not happening coming from Malaysia, so where is it coming from. Is it all down to Australasia and Pakistan or is it possibly down to a reduction in central costs that are being allocated out to the region.

Do you want to have a go at that?

Yes. It's all the things you've mentioned. The central cost allocation for Asia Pac actually didn't come down that much for that region. It came down for a lot of the other regions but it wasn't so much down for Asia Pac. You've got to add in Korea, okay, because Korea is now part of Asia Pac and that had that substantial gain in profit. And dare I say it, we also had lower cost in, I don't even want to mention it, but China.

Okay. That was the last question. Thanks very much, everyone.