英美煙草 (BTI) 2005 Q3 法說會逐字稿

Good morning everyone and welcome to British American Tobacco's nine months results presentation. For those of you listening into this conference I am Paul Adams and with me today is Paul Rayner.

2005 looks like its going to be a vintage year for VAT. If you look at all the key measures, net turnover, volumes, global drive brands, profit from operations and adjusted earnings per share, all are either on or ahead of target. Reported profit from operation is down some 43%, but that is due the impact of last year's Reynolds American transaction and restructuring charges for factory closures.

The Reynolds American deal has already demonstrated how it has generated shareholder value and made a positive contribution to adjusted earnings per share. As our operating companies review their cost base we anticipate that there may be future factory closures which may give rise to further restructuring charges.

We took 142 million pounds over the nine months and as we announced last week, there will be a further charge in relation to Canada during the fourth quarter. The 9% increase in profit on a like for like basis provides a better indication of our performance during the nine months, and I am pleased with the quality of our volume growth. But the global drive brand is doing particularly well, up 14% in the third quarter.

We continue to make progress in each of the key areas of our corporate strategy, growth, productivity, responsibility and winning organization. In terms of responsibility I am delighted to report that British American Tobacco has been selected for the fourth year in succession to be included in the Dow Jones sustainability index.

A few words on volume. After making allowances for the Reynolds American transaction and the change in terms of trade in Italy, organic growth -- sorry, organic volume from our subsidiaries grew by 2%, ahead of what we would expect from the business on average over the medium to long term. We have seen year on year share growth in many of our strategic markets; Russia, Japan, South Korea, Australia, Turkey and Pakistan, which overcame declines in Canada, Argentina and Mexico.

Global drive brands, as I said, performed very strongly in the third quarter with 14% volume growth, giving a 9% growth for the nine months. Kent is up 17% for the nine months and is likely to end another year with solid double digit growth, yes driven by Russia, where it was up 33%, but also other markets such as Romania, Ukraine, Iran, Chile, Poland and Serbia.

Furthermore Kent's growth will come from three out of our five regions, with Europe up 45%, Africa and the Middle East up 20% and Latin America up 12%, while Japan is relatively stable with volume down less than 1% but with market share growth in a declining market. So Kent continues to grow both in terms of its traditional market but also across many of its recent markets.

Dunhill has been significantly affected this year by market declines in its two key markets, South Korea and Malaysia. Outside of these two markets Dunhill has grown 4% this year and has also seen share growth in most of its important markets, such as South Korea, Taiwan, Australia and France, as well as share growth in the premium segment in Malaysia of over 1%. In addition, Dunhill is being seeded into several markets across Europe with very encouraging results to date in Russia, the UK, Germany and The Netherlands.

Like Dunhill, Lucky Strike has also been affected by market declines, principally Germany where volume is down 9% but market share is up 0.3 of a share point and Spain where price competition is hampering Lucky Strike's performance. Overall Lucky Strike volume for the nine months is down less than 1%. It is worth mentioned that outside of these two markets Lucky Strike has grown by 7%, with solid performance in markets such as Indonesia, France, Italy, Argentina, Brazil, Portugal, Serbia and Chile. Lucky Strike's recovery is becoming more and more solid and the brand is much better positioned. Moving forward with less reliance on Western Europe but also growing share in most Western European markets.

Pall Mall continues to provide exceptional growth across a large number of markets, up 23% driven by significant growth in its traditional markets such as Greece, Serbia, Romania, Malaysia, Hungary, Taiwan, Germany, Czech Republic and Russia, as well as new launch markets such as Iran, Chile, Brazil and Nigeria. Pall Mall continues to go from strength to strength with a solid mix of traditional market growth and new launch markets.

This chart shows volume and net turnover development for the nine months on a like for like basis and excluding the associates. In Europe there was excellent volume growth, in Russian, France and Poland, partially offset by the impact of lower industry volumes in Germany, Italy, Benelux and Hungary. However, despite the adverse geographic mix in Europe net turnover rose 2%, a constant rate, as a result of price increases and the growth of global drive brands.

In Asia Pacific despite lower industry volumes in Malaysia and South Korea, resulting from excise driven price increases, volume and net turnover saw good growth with strong volume increases in Bangladesh and Pakistan. In Latin America volume growth of almost 1% has continued with higher volumes in many markets, partially offset by lower volumes in Mexico and Argentina. There is also an improvement in sales mix across the region and strong pricing, leading to double digit growth in net turnover.

Africa and the Middle East is showing strong 8% volume growth, mainly from Turkey and markets in the Middle East. America Pacific is affected by lower industry volumes in Japan, and downtrading in Canada. The volume and net turnover growth in the other four regions means the Group net turnover has increased 4% at a constant rate and a very good 7% at current rate. This shows the strength of our geographic portfolio and underlines the sustainability of our business.

Looking at operating profit development on the same like for like basis. Europe increased 11% at current rates with strong growth from Russia, Germany, France and Romania. In Asia Pacific lower profits from Malaysia, Vietnam and Bangladesh were more than offset by good performances in Australia, South Korea and Pakistan, together with lower costs.

Latin America saw good performances in Brazil, Chile, Venezuela and Peru with improved mix, pricing and higher volumes. Africa and Middle East benefited from strong performances in South Africa and Iran, combined with lower costs. America Pacific saw lower profits in both of its markets due to lower volumes and downtrading in Canada and the impact of exchange and the non-recurrence of a benefit from a business reorganization in Japan.

Some quick reports on key markets which have been of particular interest to investors, starting with Europe. In Italy the market continued to be affected by the public place smoking ban and the excise increase in December '04. These combined led to lower industry volumes and profit. In addition, volumes were also affected by a price increase in July.

Pall Mall and Lucky Strike both grew share in the third quarter relative last year. The price competition in the low price segment led to market share loss for MS and Saks. Dunhill continues to do well in its test market. Germany reported excellent profits over the period despite a decline in both total tobacco industry and cigarette volumes. Profits grew substantially over the nine months driven by price and mix changes, a reduction in overall cost base and higher cigarette market share. The good performances at the interims from both Pall Mall and Lucky Strike continued with Pall Mall, in particular, growing strongly.

In Australia industry volumes remain under pressure, however profits for the group increased due to stable volumes, improved margins and an increase in overall market share due to the continued strong performances from both Dunhill and Winfield.

Profit in Malaysia continued to be impacted by lower volumes, adverse product mix, price competition and the contribution to a government sponsored leaf program. Despite this our market share was maintained in line with last year at 64%. Pall Mall continues to gain market share but this was offset by lower volumes -- sorry lower shares for Dunhill and the non-drive brand. Our share of the premium price segment has grown to 72% driven by Dunhill and our share of the value for money segment has grown to 49%, driven by Pall Mall.

In Brazil, price increases, high volumes, mix improvements and a stronger local currency resulted in good profit growth. Volumes increased due to anti-illicit trade operations and on a total consumption basis the share grew. Elsewhere in Latin America we saw strong profit growth in Mexico, Peru, Argentina, Chile and Venezuela, this was through a combination of stronger local currencies, improved margins and high volumes.

Moving onto the Africa and Middle East region, profits continued to grow strongly in South Africa, as improved pricing, product mix and currency helped offset slightly lower volumes as the overall market declined due to illicit trade. Peter Stuyvesant continued to grow reaching a record market share of over 44%.

In Canada, there were no significant excise developments in the third quarter and with some currency benefit, third quarter profit was slightly ahead. However, we would still urge a significant degree of caution in respect of the Canadian market. The value for money segment picked up in the third quarter and is now 41% of the market, and our share of that segment has slipped slightly to 39% due to the emergence of a budget segment within value for money. This has caused the price gap between premium and low price brands to widen, which is not good news for the premium brands.

On a more positive note the Group's share of the post tax results of Associates rose to 277 million pounds, helped by a good result from Reynolds American and strong volume, increased profit and some one-off items from ITC.

I will now hand over to Paul Rayner.

Good morning everyone. Paul has taken you through the regional segmentation of net revenue and profit from operations on a like for like basis.

This slide shows profit from operations at current rates of exchange, prior to an allocated center cost and exceptional items. Paul has already discussed the drivers behind the regions operating profit. Under IFRS we show net corporate costs not directly attributable to the regions, these were down 4% at 72 million pounds. There were two exceptional items during the nine months, 142 million pounds of restructuring charges, principally due to the decision to transfer production out of the UK and Ireland. There will be further charges to be taken in respect to Canada during the current quarter. The other exceptional item is a profit of 68 million pounds arising on the sale of certain trademarks to Gallaher. The corresponding figure of 1.4 billion pounds related to the gains that arose in the third quarter of 2004 on the completion of the Reynolds American transaction.

Taking into account the transfer of the Brown & Williamson business, the changes consequent on the sale of Etinera and the new terms of trade in Italy, and backing out the various exceptional items, profit from operations on a like for like basis was up 9%.

The net finance cost line continues to be the most difficult line to forecast under IFRS. This is partly because financial instruments such as derivatives have to be recognized at fair value and this will be explained in more detail on the next slide. The strong performance of Associates, up 180 million pounds, represents our share of our Associates' post tax profits and is due to nine months of Reynolds American compared to two months in 2004, and a good result from ITC, up 35 million pounds due in part to an exceptional gain of 27 million pounds.

Here we have the breakdown of net finance costs which came in at 50 million pounds lower, due partly to the recognition of a benefit under IFRS derivatives that did not qualify for hedge accounting, plus some exchange differences previously incurred in reserve movements under UK GAAP.

If we exclude the impact of IAS 39 and 21, net finance costs were favorable on last year. This reflects in the main a higher level of investment income due to higher cash balances and higher interest rates on those balances. The balance of the net finance costs are derived from exchange and interest rate movements which are difficult to predict. However some of the volatility associated with these movements has now been reduced, as a result of clarification of the accounting standards and restructuring of some of our loans. We will still review the issue at the year end to see whether they should be included in the adjusted diluted earnings per share calculation.

The lower underlying tax rate for subsidiaries is 30.6%, which is slightly lower than the guidance given at the interim results meeting, which is an IFRS tax rate of 32%. This lower rate is mainly due to the IFRS gains which I referred to earlier, which arise in the UK and do not give rise to a tax charge because of our UK tax losses.

Going forward, the underlying tax rate should still be in the range of 31 to 32%, if you exclude the volatility in net finance costs. Apart from this, the principal drivers for the lower tax rate than last year are mainly mixes, in other words reduced profits in Canada and the absence of Brown & Williamson's profits in 2005, and these go together with the benefits of debt restructuring.

As for the fourth quarter, you will recall that last year there were some one-off benefits that resulted in a very low tax rate for the final quarter of 2004. You should bear this in mind when looking at your estimates for the current quarter. This gives 1.477 billion pounds of profit for the period of which the minority interests are 96 million pounds; lower than last year due mainly to Malaysia where we own 50% of the stock.

Adjusted diluted earnings per share rose 23% to 67.9 pence, and this slide shows the drivers of earnings per share growth; they are not a good guide for the fourth quarter. Profit performance was up 10%, excluding the impact of the Reynolds American transactions. This is an improvement from the second quarter, mainly due to favorable exchange movements in the third quarter. The Etinera sale and the new terms of trade had a marginal negative impact on earnings per share growth.

The lower net finance costs gave rise to a 5% improvement in earnings per share and may be quite volatile in the fourth quarter. The earnings enhancing effect of the Reynolds American deal is evident, with earnings per share improved by 5%, with the third quarter for Reynolds, excluding exceptionals being particularly strong, mainly because of timing. The improvements in tax and minorities are as I explained earlier. We intend to recommence the share buyback soon and the calculation was based on 2119 million shares; we bought back 37 million shares during the nine months at a cost of 394 million.

As we stated in the Chairman's comments, the results as a whole continue to point to a highly satisfactory year, although the comparisons with 2004 will become more demanding as the final quarter last year contained significant one-off tax and interest benefits, while the uncertainties inherent in forecasting net finance costs under IFRS remain. However, based on good quality organic volume growth, British American Tobacco has real momentum. Thank you.

Thank you Paul, we'll now take your questions. For the purpose of the webcast please remember to state your name and firm or publication when asking questions. Thank you.

Adam, I think you were first.

Just by a short whisker. A couple of technical questions if I can. First of all on the tax rate, you've given guidance, Paul Rayner, of 31 to 32%. Can you just confirm that that's a slight change because last time it was 32%, in my memory. I just want to make sure that's right.

The second one in Canada, can you just expand a little bit about this development of a new budget segment, which previously I wasn't aware of. Who's introducing it and just talk a little bit more about that?

And thirdly, if you can, I believe there were some over shipping in the third quarter, perhaps particularly in Malaysia. Are you able to quantify the profit impact of that?

And then fourthly, I'm sorry to ask so many questions, about the litigation in Canada, I'm talking particularly about the British Columbia case. When do we expect that court case or similar ones based on that law to actually hit court? In other words when and then how long would the case be likely to last? If I can ask Neil that question.

And that is all thank you.

Okay, let me try and repeat those questions. Firstly it was around the tax rate and we're talking about a 31 to 32% tax rate as a guide. Is that a slight change.

The second question was Canada. Can we explain a little bit more about the new budget segment.

Thirdly in Malaysia, there appears to have been some over shipping in the third quarter. Can we quantify that.

And fourthly in Canada, when will the court cases hit and how long are they likely to last.

Okay, Paul why don't you talk about the tax rate?

It is a slight change. We continue to look at opportunities on debt restructuring, we continue to try and take costs out of the center, it's not a huge change but it does represent a slight change, yes.

I'll pick up the second two. Just on Canada, it's been a fairly recent development.

What's happened within value for money, value for money was starting to sort of split into two segments; you had a slightly higher price which would have been around Matinee and Number 7, and a slightly lower price which would have been around Peter Jackson.

What's happened is that, at least to our way of thinking, JTI have launched McDonald's Special at a new lower price which is below Peter Jackson, and we've obviously followed with Peter Jackson and RBH have followed, I believe with Canadian Classics. So if you like there's a sort of new lower price segment emerging, really prompted by that new launch of McDonald's Special. Don't know where that's going but it's all got pretty interesting down there.

[Inaudible] get a feeling for that.

Hang on a second. Yes that's VFM. Premium, this is the weighted average price per pack of 20 cigarettes, Premium is at 8, CAD28 and value for money now on average is about 6 CAD14.

This might help you on your third one. Malaysia for the first half at constant rates was down round about 20% on last year. And for the discrete third quarter was only just down a touch, and I think the first half is more symbolic of the year as a whole.

Just before I ask Neil to come up, has anyone else got a question on any legal issues? John?

John from [inaudible]. Well just on Canada as well, can Neil update us on where we are with this issue of the parent companies being pursued by BC as well?

And also, if the worse came to the worst and you happened to lose the initial trial in the BC case, what are the chances that the litigants would be able to try and stop Imperial paying you a dividend while the appeals are going on?

We can obviously talk about the BC case but [inaudible] in other provinces, so if Neil can sort of generalize beyond just British Columbia to talk about Ontario and the other cases.

Sure okay. Right a couple of other questions added to that. Why don't you come up Neil?

So the other questions added were what are the implications if any for the UK companies in terms of the litigation in BC.

Will the litigants as they go through the appeal process be able to halt dividends remittable from Imperial back to the UK?

And what's the situation or possible situation on the other provinces?

Morning. Trial date probably a year or so before the case gets to trial. Don't forget the Supreme Court of Canada's ruling was on the constitutionality of the statute which then allows the litigation to proceed. So the litigation has to proceed in the way that all litigation proceeds, and particularly in common law jurisdictions where there is the production of documents, the taking of evidence and various interlocutory matters that may arise during the course of that process. So that could take some time. It's very difficult to give a precise timing on it, but that seems to be a pretty fair order of magnitude.

How long would the case last? The case itself is very difficult to say. If you look at the DOJ case, six to nine months in trial. But if what you mean is how long would the entire process take before all appeals may have been exhausted, that's extraordinarily difficult to put a precise time on that because you're never quite sure which issues are going to arise on appeal. It would be some years.

If you look at the Caputo class action that was filed in Ontario in the late '90s which was finally de-certified a year or so ago, that took around eight years and that was before the judge gave a certification ruling at first instance; a particularly long period of time. But it will be some years before the matter is resolved finally if at all in my view.

As far as the parent companies are concerned, there's still an outstanding issue as to whether or not what is called the so-called ex-jurist's defendant, so for the non-Canadian resident manufacturers, are still part of this litigation. It's expected that there will be a ruling on that some time in the first quarter next year is the current thinking.

In terms of some way of restricting dividend or cash flows, it's very difficult to answer that sort of question at this sort of distance. The case hasn't even started yet particularly, and there's been a complaint there hasn't been discovery on the matters, we just have to look at what order, in what circumstances, how it was expected to be pursued. But I would have thought that that would be a bit of a long shot. We'd have to look at it and it would depend on the circumstances. Sorry it's a bit of a hedging answer but there's no definitive answer to that question. It's a very tough question.

And as far as the other provinces are concerned, Nova Scotia and Newfoundland have been looking to put similar statutes on the books but not all provinces have been looking to put similar statutes on the books. I think there will be element of wait and see. So that's the current situation in Canada on the back of BC.

To come back on that, we could reasonably expect from your comments to get a preliminary ruling in about two years' time, in other words say the first court case. In other words we're going to take a year to get to trial roughly, and then you said the DOJ case was six or nine months --

It may take longer than a year to get to trial. It's very difficult for a precise timing on it. It depends what issues are going to be litigated as the matter goes through and what documents are going to be produced. There are some defendants in the case that it's not even clear whether they're in the case at all. There's only been very limited discovery so far, that will take a period of time, and there will be issues that will arise out of that that may or may not get appeal. So it's very difficult to put a precise timing on it. A year or two for trial to commence is probably the best guide that I can give you.

Thank you.

Anything else?

Thank you Neil. What else? Yes?

Chris Witton from [inaudible]. Just going back to Canada, clearly we had a step shift down in profitability in 2004 and then we had some sense of sort of, there are various ways of ameliorating that in 2005. Are we in danger of another step shift down in profitability in Canada in the light of your slightly cautious comments? And if so, I guess what will you then -- what can be done about that in 2006/2007?

Okay the question was around Canada and given the sort of fragility which appears to be breaking, is there going to be a step down in the level of profitability coming out of Canada. And what can be done if that's the case.

I don't know whether we're going to have a step down in profitability. All we're advising at the moment is caution. As I've said there were no excise increases in the third quarter. We know that Ontario and Quebec are looking at excise increases so it depends on the timing and the extent of those.

Secondly I mentioned that we've got this new embryonic budget segment within VFM. I'm not sure what mileage that's got and how competitive it's going to be down there. So it's very difficult to be even broadly precise in terms of extent, only that the outlook is not comforting.

Just to add to that, just in terms of the very short term Chris, the fourth quarter for Canada last year was quite strong. There were some one-offs in there so when you look at the discrete fourth quarter this year for Canada it will certainly be down.

Simon Bowers with The Guardian. Can I ask a parochial question on the UK? You've got the health bill, there looks like it's going to be some kind of compromise on smoking. I wonder first of all how you regard that outcome.

And on Italy whether you see any [inaudible] through from the experience in Italy to the UK market?

Okay two questions. How we regard the outcome on the public smoking restrictions legislation in the UK.

And also a view on Italy and how that may impact, or what color that might give to the UK.

Any [inaudible] there.

Oh I see in terms of market?

Yes.

Okay, were there any learnings in terms of reduction in market size coming out of Italy. I think our view is that any legislation where both smokers and non-smokers can be reasonably accommodated is a good thing. And so we're encouraged by the outcome as you might imagine.

In terms of Italy I think our view on the Italian situation was that particular law came in place in Italy rather unexpectedly and perhaps was not given the greatest deliberation by the Italian cabinet. They have made some suggestions that they may want to re-look at that. The Italian market has taken a dip as a result of it, down about 6%.

Our view on smoking bans or public smoking bans is that there will be an immediate dip in the market which will vary but will be low single digit decline. And then the long term trend will resume.

Andrew Johnson from The Daily Express. I've seen the statement you put out last night regarding the smoking ban. You'd still prefer ventilation and sealed off smoking rooms as a way forward rather than food and smoking pods as it were. First of all I'm just wondering why you prefer that route.

Secondly what sort of [assets] are you going to lobby ministers to convert them to the cause of ventilation?

And thirdly if they agree with your point of view and decide to go for better ventilated pubs and public smoking areas, would you subsidize the pub industry or the airports or whoever to install those ventilation systems? Because that's going to be quite a large capital cost for them.

Okay the question was, let me see if I remember them, was don't we prefer ventilation and segregation.

Your [inaudible].

Yes just checking your question rather than answering it. Secondly what lobbying will we do on ventilation. And thirdly are we prepared to pay for it, I think that was basically the gist of --

[Inaudible].

Yes I think we do prefer segregation and ventilation because we think that is a more workable solution that can be applied across all outlets rather than separating outlets which is the current proposal. So we do think it's a more workable solution. We have invited the government to come and have a look at ventilation systems and we have some here in Globe House if you're interested in looking at them, which we think are very good and very practicable and not that expensive.

Are we prepared to fund ventilation systems? I think the safe answer to that at the moment is no.

Yes?

Michael Smith from JP Morgan. Three questions. The first one on tax rates. The guidance of 31% to 32% in the last few years the fourth quarter has taken some one-off tax benefits. Do you have any visibility that this fourth quarter you'll find any tax benefits?

Second the adjusted earnings growth driver shows 9.8% profit performance which you did mention the benefit is from favorable FX. Is it a fair observation that that will be equally true in the fourth quarter? And if anything more positive in terms of FX and therefore if anything should we expect no deceleration in that number?

Thirdly just on marketing spend, obviously a discretionary spend increase in the fourth quarter is possible. To what extent would you expect some of your business managers to take the opportunity now they're well ahead of budget to reinvest in marketing?

Okay three questions. One is on the tax rate what are our anticipations around one-off tax benefits in the fourth quarter.

Secondly the profit growth so far has had a benefit from foreign exchange. What do we believe may be the foreign exchange impact on profitability in the fourth quarter I think was your question.

Yes is the 9.8% number a reasonable figure to be expected in the fourth quarter and given FX is benefiting more [inaudible]?

Yes okay I understand the question. And I think the other question was given that the business looks like it's in bed already are the general managers going to be spending a little more on marketing. I'll take that question.

Do you want to handle the first two Paul?

Yes I think it's unlikely that we will have any one-off benefits from the fourth quarter this year. It's not impossible but it's not impossible that it could be a one-off cost as well. And we continue to look at opportunities to get savings on our tax rate, it's just a coincidence over the last couple of years we've resolved some major issues with the tax authorities in the last quarter. And we've had one-off credits because we've provided for disputes that we've resolved slightly successfully in our way.

I don't see anything like that happening in the fourth quarter this year. I think what's more likely is that the tax rate in the fourth quarter could be slightly above the 31% to 32% because it's been running below that because it's a interest gain in IFRS and so far for the fourth quarter they've gone slightly the other way. And you get a double whammy the other way because the interest losses if you have an incentive are non-deductible. So unlikely but not impossible is the answer to your question.

In relation to the FX gains you're right, for the first three quarters we've had 9% growth at current -- [6] at current on operating profit and that translates to the 10% growth on the driver page when you include the effect of the associates' ITC, excluding Reynolds, that's where the 10% comes from as opposed to the 9 on operating profit. But actually so far for the fourth quarter FX is not going as well. So whereas we had a positive effect of FX of 3% moving the operating profit growth from 6 to 9 for the first three quarters, so far we've still got a favorable movement for the fourth quarter, but not as favorable as for the first three. So if the rates stayed where they are today you wouldn't get a 3% differential between constant and current full year despite [inaudible].

Yes on the marketing, the nature of marketing in the tobacco industry these days is very different from what it is for other FMCG companies, so it's not a case of well we've got the money let's go and put few extra spots on air or put some press ads in. What we do tends to have to be planned some months in advance because you're buying infrastructure, you're buying furniture. So if there is an uplift in the fourth quarter on marketing, and frankly I can't remember, but if there is an uplift it will have been a planned uplift rather than an opportunistic uplift.

John Lang, UBS. A couple of things. First of all I was wondering if you had any early indications of how the German market has taken the large tax increases?

And secondly related to that, clearly within the EU we know what's happening in terms of tax [incentives]. Is there any sort of potential for big tax increases in the markets we're less familiar with? And [inaudible] major proposals? Anything you'd like to flag on that?

Okay there are two questions. One was any early indications from what's happening in the German market as a result of the excise increase that went through on September 1. And then generally any big potential excise increases that we foresee, certainly in Europe, but I think the question was anywhere in the world really.

[Inaudible question - microphone inaccessible].

Okay outside of the UK. Okay thank you. If I can take the German situation, with the very strong caveat that it's early days, I think our feeling is that the optimism that was there because of the way that this excise was passed through, through a reduction in the number of cigarettes per pack rather than through taking a price increase. In fact the absolute price per pack went down as a result of it but somehow this would slip in under the consumer's radar. I don't think that optimism looks as if it was justified and we're not expecting any strong consumer reaction but they have noticed.

Outside of the EU on excise increases, there's nothing there that we think is coming up unexpectedly.

And we wouldn't tell you even if there were because it gives a point [inaudible].

Okay anything else? Yes Kenneth?

Can I ask a couple of questions. One on the breakdown of the margin improvement, if you could give us some guidance on how much the margins have improved on the back of cost saving and what's the swing factor on your AMP to sales ratio year on year.

Sorry can you repeat that?

What's been the swing factor on your AMP to sales ratio year on year and how much has been driven by cost savings?

And on the global drive brand, could you tell us -- the 1473 is very strong, how much of that is flattered by the shipment issue that was mentioned earlier? And how important is the shift to global drive brand in your margin improvement at the moment? How big are the associated roll out costs?

Right okay, two questions. One to try and break down the margins and the margin improvements A) from the cost reductions and B) from the AMP to sales ratios. So how much of those are driving margins.

And secondly what are the global drive brands doing in terms of margin and how much of that uplift on the global drive brands in the third quarter are down to the extra volume in the third quarter from Malaysia. You could also in France to that question.

Do you want to have a go at the margin one?

To answer the question, the main things we look at in terms of indicators are operating profits per thousand movements, and I'll come back to that. But another good one I think to look at just the operating profit growth compared to the net turnover growth at constant. And if you look at some of the reasons, you certainly see substantially higher improvements in operating profit growth than we have in net turnover growth, and we know the reasons for net turnover growth because of the volume and favorable mix.

But if you look at Europe where net turnover is up 2 but profits are up 8 you see the effect of the cost savings coming through; if you look at AsiaPac, you've got the same numbers of 6 and 8% so -- and if you look at AME, African Middle East net turnover's up 5 and operating profit's up 17. So they're some of the markets where we've been closing factories and focusing on overheads and indirects.

Latin America, turnover and operating profits are up the same, but they were slightly more efficient in some of these areas than the other regions when we started the cost saving programs, so that's not a surprise.

And in terms of the operating profits per thousand, they are well up, that's obviously a combination of the cost savings and the mix improvements, but they are up 8% in Europe, they are up 8% in Latin America, up 8% in Africa and Middle East. And up 4% overall, obviously it's impacted by what's happening in Canada which hit some of the numbers. But overall, operating profits per thousand and constant rates are still up 4%.

So they are the main factors that we look at to make sure that the cost savings are coming through, and that's despite the fact that some of the cost savings have been invested in increased marketing.

We did get some uplift in the third quarter, because there was an industry load in France ahead of the general strike, or there was a strike on October 4 that delivered a [blow] there. And also in Malaysia in anticipation of the excise increase. So they were industry loads that we participated in. I can't give you an exact figure as to what they would have represented, but I'm pretty sure that our global drive brand growth would still have been in double digit growth, but obviously lower than the 14%.

Mark Cohen from Goldman Sachs. You made some comments about volume earlier running at 2% being above trend. [Inaudible] we take from that that you think [inaudible] this next year?

And also on price mix elements of turnover, what's your thoughts on the direction of that? I think it's about 1.8% in nine months, do you think that's going to go up, go down or stay the same looking at 2006?

Yes, I think -- I thought this question on 2006 may come up. I think the best indication that we can give, and I'll come back and address the question specifically you asked on volume and also price mix. We clearly had three good quarters, but our view is that they are above trend, it's not the start of a new trend. And so our guidance is still very much along the lines that we've given for some years now, both in terms of volume and in terms of EPS which is our medium to long term growth on average. So I still think that on average over the medium to long term, volume growth will still be 1 to 1.5%, perhaps over the medium term it might be closer to 1.5 than 1, but we're still looking at that level, and the same for earnings per share growth. So I think we've had a good nine months, and we're above trend but I don't think you should be questioning the trend itself, if that makes sense to you.

[Inaudible] price mix [inaudible] because it seems to me, I may be wrong, but if you go back over the last couple of years, price mix has actually come down a bit, your volumes have picked up a bit, your net turnover growth hasn't changed a huge amount, I think it's quite low actually. And if the pick up in volume actually [inaudible] that's maybe a bit more competitive positioning because your price mix has come down.

Can I just understand what you mean by price mix?

Well the difference between the volume and the net turnover.

Okay right. Yes, the difference between volume and the net turnover, you've got two other factors in there. One is the geographic mix which is going to impact that, and secondly is the brand mix which is going to impact that. Now our brand mix is improving because of the global drive brand growth; our geographic mix is deteriorating. It's difficult to know where those two trends are going at any one point in time, but let's say they cancel each other out as a very broad simplification. My guess is though that the geographic mix is probably the slight winner on that one.

Yes, I think it has become more price competitive. We're seeing a lot more launches of low price brands around the world by our competition, and it's tougher to take price increases, and indeed some excise increases are swallowed as we've seen in Spain recently. So it is getting tougher. But we still aim to achieve net turnover growth on average of around 3, maybe 3.5%.

[David Hayton] from [inaudible]. Just coming back to the answer before about the margin breakdown. You mentioned particularly Latin America [inaudible] quite efficient, although clearly there's no operational leverage there with the net sales up nearly 12 and profit only up 9.2. Can you give us a feel for what you'd expect the operation leverage to be generally in the business without any of the cost [inaudible] coming through? Is that actually lower, the operating profit level growth, because of [inaudible] in AMP selling. So what sort of a general pattern for operation leverage excluding cost base?

Okay, the question was on margins, and trying to get a feel for what the operational leverage would be within the margin.

I'll try and answer your question; I think I understand it. The operating profit growth for LatAm this year has been very strong. A lot of it's been off the back of strong price increases. And I think it's unlikely that you could expect that those would continue going forward. So the net turnover growth of 12% which we've had for the three quarters this year, I think it's fair to say is unusual, okay? And that's off the back of volumes that were just slightly up, just slightly under 1%. So huge price increases, though I don't think you could forecast those coming through, so you've got to back those out, and you come back to a more normal level of operating profit growth, I would think. There are still some opportunities for cost savings in LatAm, perhaps not as substantial as some of the other regions, so that will help along a little bit. But one would expect it will come back. I'm not going to give any specific numbers.

Adam?

Just to build on that question, I suppose to rephrase it. If you weren't doing the cost cutting program, what do you think your margin expansion would be? Would there be any at all?

I would expect we would still get some, hopefully as Paul said, hopefully still get some improvement in net turnover that would be greater than the volume movement, because if we get net turnover improvement of 3 or 4% as he said, and volumes up 1 to 1.5, there's a chance that that might drive some margin improvement. So any improvement's going to come from that. But obviously a lot of the improvement's off the back of the cost savings. Obviously if you've got volumes going up as well you can get some slight economies of scale which might improve as well. But -- so you may still get some.

Just to come back on that again then. Just on Latin America, so we understand that, you're saying a big proportion of that 11.9% sales growth is due to positive price mix. I'm just surprised that that's not coming through to a larger growth in the operating profit growth level, given that you'll get operational leverage on that growth and it's not volume growth driven, therefore the variable costs wouldn't be going up; it's just price mix benefit. Is there a reason why it's -- why that level's not 12% growth, in LatAm rather than --

Yes, there is, because we have invested quite a lot on marketing expenditure in Latin America, there's been a lot of launches of global [programs] in Latin America. And that would be I think the main reason.

Okay, I think we'll call it a day. Thank you very much for coming.