英美煙草 (BTI) 2006 Q1 法說會逐字稿

Good morning, everyone. I’m Paul Adams, Chief Executive. And with me is Paul Rayner, Finance Director.

This morning, we’ll 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.

The three key financial measures -- revenue, profit and earnings -- were all positive in the first quarter. Throughout the presentation, you will hear references to like-for-like numbers. Like-for-like excludes the exceptional charges in Q1 2006, as well as last year’s distortion arising from the new terms of trade in Italy, following the disposal of Etinera. The new Italian terms of trade meant that the 2005 Q1 numbers included 23 million Pounds of additional profit and 3 billion sticks of bullion in the Europe region’s results.

So, on a like-for-like basis, net revenue was up 12% at current rates and up 5% at constant rates, somewhat ahead of trend, which we would expect to be around 3% per annum. Similarly, profit from operations on a like-for-like basis benefited from favorable foreign exchange gains and rose 17% at current rates and 8% at constant rates, also ahead of trend. The strong start to the year was reflected in adjusted diluted earnings per share, being up 14%, at 22.05 pence, a good start to the year.

On a like-for-like basis, volumes were ahead 3%, with strong performances in Europe, Asia-Pacific and Latin America. Lower volumes in Canada and Turkey resulted in volume declines for the America-Pacific and Africa-Middle East region. Global drive brands rose an excellent 18% on a like-for-like basis, with Kent up 14%, Dunhill up 12% and Pall Mall up by a remarkable 47%. Lucky Strike volumes were 7% lower, due mainly to their continuing industry decline in the key market in Germany and competitive pricing activities in Spain.

The drive brands continue to benefit from launches in new markets, growth in Eastern Europe and, in the case of Dunhill, good share growth; and a favorable year-on-year comparison in South Korea. For the first time, our four global drive brand volume accounts for more than half of our international brand volume, which rose 8% during the first quarter. A few comments on the region -- Europe saw like-for-like volumes up 3%, with good growth in Russia, the Netherlands and Spain, offsetting lower volumes in Germany, Ukraine and Italy. On a like-for-like basis, profit was ahead 10 million Pounds, at 168 million Pounds, with good results in Russia, Hungary, France and the Netherlands.

As I mentioned at the preliminary results presentation at the end of February, pricing activity continues to be intense in several European markets. As a result of these activities, we saw lower profit in Germany, Spain and Poland. A year on from the introduction of smoking restrictions in Italy, the market as a whole is recovering. Like-for-like profit in Italy grew, as margins improved with higher industry pricing, although volume and overall market share were lower.

Asia-Pacific regions recorded a 10% rise in volume and a 23% rise in profit, to 155 million Pounds. Profit growth was mainly attributable to Australasia and Malaysia, assisted by generally stronger currencies.

Volume growth was seen in several markets, most notably South Korea, reflecting volume distortions last year as a result of the excise increase at the end of 2004. In market share terms, both Dunhill and Vogue had an excellent quarter in South Korea.

Pakistan and Bangladesh both saw good increases in volume, although profit in Bangladesh was affected by down trading.

Latin America enjoyed a 5% uplift in volume, with growth in most markets. Strong local currencies and generally good performances saw profit ahead 14% at constant rate and 35% at current rate. Volume and market share performances were strong across the board, including share growth in Chile, which is particularly difficult given our historic share. In Brazil, profit was well ahead, with higher cigarette volume, a better product mix and the benefit of a stronger real. However, the stronger local currency also had an adverse impact on leaf margins. Over the past year or so, the global drive brands have been launched in a number of Latin American markets and are making good progress.

Africa and the Middle East recorded strong profit growth, up 17%, but volumes were affected by share loss in Turkey, which has been under increased competitive pressure in pricing activity and new brand launches. [But] Africa benefited from the strength of the rand, cost-savings and good performances from key brands, thereby improving mix. Iran continues to generate good results. And despite share and volume loss in Turkey, industry price increases resulted in significantly reduced losses.

In the America-Pacific region, profit rose 5 million Pounds, to 93 million Pounds; although volumes were 3% lower. In Canada, despite the strength of the dollar, profit was down 4 million Pounds, to 60 million Pounds; largely due to volumes being 11% lower in a total market that declined 9%.

In Q1, the value-for-money segment in Cigarettes had risen to 44%. And Imperial Tobacco Canada’s share of that segment had fallen one share point year-on-year, to 38%; although a share of the Premium segment strengthened, from 68 to 69%. In terms of retail pricing during Q1, the average weighted price per pack of 20 slipped $0.03 to C$7.87 for Premium; and $0.06, to C$6.42 the value-for-money.

Intense pricing activity continues in the Budget segment, led by JTI-McDonald Special. Excise increases were implemented in Ontario in February, and New Finland and Labrador at the end of March. As a result, elicit trade continues to rise.

The key takeaways for Canada are -- the value-for-money segment, at least for the moment, appears to be stabilizing. Imperial Tobacco Canada’s share of the Premium segment has grown slightly, but its share of value-for-money has declined slightly. And profit continues to be affected by declining industry volumes and down trading.

In Japan, the news is much better. BAT achieved a record share of 9.6% for the quarter, with strong performances from Kent and Kool. And profit rose due to volume growth and cost-management.

Before I hand over to Paul, a comment on the Reynolds American announcement last week -- that it is to move into the noncombustible tobacco segment with the acquisition of Conwood and the launch of [snuffs] in the U.S. market under the Camel brand. We see this as a positive strategic move into what is a growing and profitable tobacco segment in the U.S. market.

Paul will now take you through the remainder of the presentation.

Good morning, everyone.

As Paul’s outlined, [we’ve] volume growth, revenue growth, profit growth, and we’ve had earnings growth. And I’m also going to show you how this is translated into positive margin development.

If we return to revenue -- Europe is obviously affected by the terms of trade in Italy. And after adjusting to this, revenue in the region rose 4.6% at constant rate and 5.2% at current rates of exchange. In Latin America, the published numbers show a 31% rise in net revenue, which reflects strong local currency, pricing; higher volume and the inclusion of distribution of phone cards in Brazil. If we exclude the phone cards, the region’s net revenue still rose 25% at current rate.

With the exception of Asia-Pacific, which was affected by shipments around an excise increase in South Korea at the end of 2004, each of the regions have seen an improvement in net turnover [per mill] at constant rate. And that indicates positive pricing and mix. The decline in volumes in the Africa and Middle East region is mainly attributed to the lower-margin business that we’ve got in Turkey.

If we look at profit on the same basis, and at constant rate, America-Pacific profit was 3% lower. But profit at current rates there grew by 6%, mainly assisted by the appreciation of the Canadian dollar.

At constant rates of exchange, Group operating profits grew by 8% on volume growth of 3%. Asia-Pacific, Latin America and the Africa and Middle East regions all had strong double-digit growth at constant rates; while Europe rose 6% at both constant and current rates.

Each region has recorded improved profit [per mill] at current rate. The Group’s profit [per mill] was up 5% at constant rates and up 13% at current rates. And it was over 4 Pounds [per mill]. At constant rates, profit [per mill] was up in each region except for America-Pacific, where it was down slightly.

Paul has already discussed the drivers behind the regions’ operating profits. So a comment on unallocated costs -- these are up 8 million Pounds, at 33 million Pounds; mainly as a result of increased pensions and employee [shares team] costs. Profit from operations was up 12%, at 652 million Pounds.

During the first quarter, there were two exceptional items. Firstly, there was a restructuring charge of 21 million Pounds, mainly relating to the UK and Canada restructurings. The second charge relates to the proposed sale of TOSCANO, which is our Italian cigar business. And on the 10th of March this year, we announced the sale of this business for EUR95 million, subject to regulatory and government approval. This resulted in the recognition of an impairment charge of 15 million Pounds. Taking into account the changes in the terms of trade in Italy, and backing out the various exceptional items, profit from operations on a like-for-like basis was up 17%, at 652 million Pounds.

Net finance costs, at 68 million Pounds, are higher than the prior year by 24 million Pounds. And we’ll cover the details behind this on the next slide. The 32 million Pound increase in Associates is partly due to the favorable resolution of tax matters at Reynolds American. And if we exclude this benefit, which we treated as an exceptional item, [our] share of the post-tax results of our Associates increased by 16 million Pounds, to 104 million Pounds. And if we exclude the tax benefit, the Reynolds American contribution was 9 million Pounds higher due to improved pricing [in] productivity, as well as the impact of the strength of the U.S. dollar.

Net finance costs, excluding IAS 39 and 21, were 70 million Pounds, in line with the guidance given you at the last results presentation. However, total net finance costs were 24 million Pounds higher, at 68 million, principally reflecting the impact of derivatives and exchange differences [under IFR] risk.

The fair value [that’s] foreign exchange gains are distorted by a number of items which at the 2005 year end we decided to exclude from our adjusted diluted earnings-per-share calculation. There is only a 1 million loss in Q1 2006, compared to a 20 million gain in Q1 2005. And if you take this into account for the purpose of the adjusted diluted earnings-per-share calculations, after we adjust for these differences, the net interest charge grows from 64 million Pounds in 2005 to 67 million Pounds in 2006.

The underlying tax rate for subsidiaries is 32.4%, slightly above the guidance we gave in February, which was around 32%. We still expect the [out-turn] for the full year to be around 32% flat.

You will note that the 2005 tax rate has been increased by 1.1% from the 31% reported then to 32.1%, as a result of now excluding certain IAS 21 and 39 gains from the adjusted earnings-per-share calculation. The increase in the underlying tax rate of subsidiaries is predominantly due to mix of profit, including an increase in UK losses, where we have no tax credit. Profit for the period rose 7%, to 490 million Pounds.

Finally, before we take your questions, the drivers of adjusted earnings during the quarter -- these subsidiary profit performance was helped by favorable exchange rates. But even at constant rates, it was 8 to 10 ahead. Associates, adjusted for the Reynolds American tax benefit and the share buyback were also favorable factors. And these were partly offset by the slightly higher tax rate and a higher Minorities charge arising from the improved profitability of Brazil and Malaysia. Further negative was the terms of trade in Italy that were changed last year.

Based on 2,091 million shares, adjusted earnings per share rose 14%, to 22.05 [pence].

I’ll now hand back to Paul for the Q&A session.

Thank you.

Thank you, Paul.

Well, a 3% increase in our volume, a 5% increase in our revenue at constant rates, an 8% increase in our profit from operations at constant rates, and a 14% increase in our adjusted diluted EPS marks, we think, a pretty good start to the year. But it’s only the first quarter.

The Group is performing well. But as we go into the second half of the year, the foreign exchange comparisons will become more demanding. The U.S. dollar, for instance, has weakened significantly since the quarter’s end.

Anyway, it’s question time now. And as many of you will be aware, last week, we set the precedent at the annual general meeting of receiving no questions whatsoever from the audience. This is a precedent that we’re perfectly happy to maintain. But if there is anybody here wishes to break that precedent, would you please let us have your name and the firm or publication you represent when you ask your question. Thank you.

[Yes], hi. David Hayes from Lehman Brothers.

I know you [inaudible] there’s any full year that you give specific details on cost-savings in [EMEA] [inaudible] lot of detail on that last time. Can you give any indication at all as to what the current timing is of those elements compared to what we saw for full year ‘05?

Second question is on the pension costs. You mentioned unallocated, which obviously the unallocated costs jumped. Is that a one-off cost in the first quarter, or is that now the underlying ongoing cost line for the rest of the year?

And then finally, in Germany -- we understand that you started the Singles loose tobacco, branded under Pall Mall, the beginning of the year. Just wonder whether you can give us any idea of how that’s going, and whether you’re seeing people transitioning already across from the Singles -- obviously the tax changing there in March?

Thanks very much.

Okay, thank you. Okay.

Three question -- one was on the -- can we give indication of how things are going on the cost-savings, and what the relative timing is across 2006, I guess, relative to 2005? And the other question is the pensions cost -- that increase -- was it a one-off jump, or was that sort of an ongoing increase in pensions cost? And how are the [States] tobacco going in Germany?

I’ll handle the third, Paul. Do you want to handle the first two?

Yes.

David, we will give a similar analysis for the full year on the cost zone. But we haven’t got one for the first quarter.

I mean, the productivity programs continue. I guess the thing I would point out -- that there are going to be significant cost-savings coming off the two major factory restructurings. But they’re not going to really come through until next year. I mean, the Canada and Southampton factories will close sometime this year. But the savings aren’t going to really come through until early next year or the last quarter of this year. And there is roughly 80 million Pounds associated with those two factors. So they’re not going to really figure below 7 [in debts to] [inaudible]. Other than that, the programs continue on, and we’re quite happy with them.

In relation to pensions costs -- I would expect that higher pension costs would continue for the full year. We’ve basically had to apply reduced discount rates to the liabilities. And we got increased life expectancies when we actually [last run out] the numbers. We’re mainly talking about the UK pension scheme. And a lot of those costs relate to UK employees, and therefore are unallocated to the region. And that’s a higher [costing issue] [inaudible].

On Singles, I’m tempted to be [abusive]. But I think it would be fair to say that there’s no meaningful information I can give on Singles, [and it’s too early]. [inaudible]

[Others?] Michael.

Yes, thank you. Michael Smith, from JP Morgan.

I guess Brazil now is one of your top three markets. I wanted to ask -- in respect to Brazil, the declining cross-border trade has clearly been a big benefit to you. It was more than 30% of the market [inaudible]. I wanted to understand how that’s moved over the last few years, and what [comp sentient] that the government can continue to reduce that level of cross-border activity.

Okay. The question was Brazil. And Brazil has been successful -- both the government and the company -- in reducing cross-border trade. What of the -- what’s the prognosis like going forward?

I think the good news about Brazil is that the cross-border trade, A, has not increased; and second, it has come down slightly. It was slightly above 30%, as you say, and it’s come down maybe a percentage point or two. So I don’t know -- 31 to 29, something in that order – % of the total market [be] cross-border. So there has been some improvement in that.

Of course, the other thing is worth bearing in mind in Brazil -- it’s not just cross-border. A lot of it is to do with manufacturers, small local manufacturers in Brazil, who don’t pay excise, or don’t pay all the excise. It’s not just cross-border from Paraguay. And I think there’s been some tightening up there, too.

Prognosis going forward is, I think, good. But I wouldn’t expect there to be sort of transformational shift in that. And it’ll be a percentage point or two, rather than 10 percentage [point].

Yes, David?

David Ireland, from ABN AMRO -- two questions.

First of all, when you reported on the full year of [all potential bad stuff] that for this year was limited to Canada, and maybe [pricing] in Europe -- I don’t know if you could update on those items in terms of cost per year, or whether that’s it.

And then, there was [on serve] a press report yesterday on your Netherlands plant. And obviously, nobody -- you don’t want to make announcements until you tell the resident workforce. But I don’t know if you can give us any more information on that.

Yes, the two questions -- one was, any update on 2006 [bad stuff], beyond Canada and possibly pricing in Europe. And also, a bit more information on the plant in the Netherlands, following the article in the Financial Times yesterday.

Just on [bad stuff], it is principally around Canada and pricing in Western Europe. Western includes Central Europe these days. It’s still those. I like to think -- but this may be just hope over realism -- I like to think that the prognosis on pricing is more positive than negative going forward. [But] there’s no additions to those two.

On the Netherlands, the situation is that local Dutch management are reviewing the options for manufacturing. That would include downsizing the factory, that would include closing the factory, and that would include attracting more volume to that factory. So they are reviewing that situation. Once they have reviewed it and taken a decision, that is when they will start an information and consultation process with the [works councils and unions], if appropriate. And at that point, if appropriate, we’ll make an announcement. At the moment, it’s just being reviewed.

[Yes, Adam]?

[Couple] -- I’ve got three questions, if I may. Firstly on South Korea -- any [talk of] quantifying profit zones -- obviously has, in the third quarter ‘05 [inaudible].

Secondly on Turkey -- I’m -- Turkey volumes were down [since] becoming a more competitive market, which is absolutely disappointing, because it was a market where [inaudible] had expectations for [lower-volume growth], but you take market share from [cattle]. I was wondering if you can give a prognosis for that. Are we going to see more and more competition there, [inaudible] much [better] profitable market than perhaps it should be?

And then finally on Canada -- you obviously had more down trading, which is [per] profit. Is it that we’ve just seen the impact of the pricing [limits] we saw in 2005? Or have there been yet more price cuts, restructured price cuts, during 2006? [inaudible] playing out the prior situation we were in before, or whether we’ve taken yet another [step down].

Okay, three questions. One was, can we quantify the financial impact of the distortion in the first quarter of last year in South Korea? In Turkey, can we sort of give some feel for what the competitive environment is there, and what the likelihood is of that competitive environment on industry profitability gain [ord]? And thirdly, Canada -- obviously down trading. But is pricing -- is it just the flow-through of last year’s pricing, or has there been new pricing activity this year? I think those were the three questions. [Want to have a crack at] South Korea?

Yes.

[I’ll have a crack at] South Korea. I think the number’s probably around 12 million Pounds, if we take the [profit] [inaudible] as a result of the [inaudible].

Turkey -- yes, it has become more competitive. We have a European tobacco company in there. Imperial has just gone in, relatively recently, tackled by their own standards of raising their [gain]. So it has become more competitive, in terms of companies, brands and activities.

The good news is, though, that the government has settled on an excise system, which -- from the middle of 2005 they settled on an excise system -- which they’re keen to maintain, and we’re keen for them to maintain [inaudible] [the] settled excise system in Turkey is quite a luxury, if you’ll recall, [when] they had about four or five excise changes in as many months, in one period.

And as I mentioned, although it’s become much more competitive in terms of activities, prices have gone up, and therefore margins have improved. So we’ll -- I can’t tell you what the prognosis is, but I’m not alarmed, from a financial point of view, [in Turkey].

In terms of Canada -- yes, I think JTI-McDonald have got very competitive, with JTI-McDonald Special. And I can’t remember whether that happened in December or in the first quarter of this year. But it’s relatively recent. So competitive environment is still intense in Canada. And we’re certainly not relaxed about the situation; we remain concerned. But I don’t think we’re hemorrhaging in Canada. Our share of the total tobacco market in Canada was pretty much the same, on the sequential quarter, Q1 on Q4. We did increase our share of Premium. So I remain concerned about Canada, but I’m not losing sleep over it.

Yes, [Chris]?

Yes, it’s [Chris Wickam], from [Mind First] -- just two questions.

One, [looking] at your last slide, if you wanted to [produce, say,] an adjusted EPS to currency, would it be fair to just [inaudible] just reducing it by the same amount that [comps] the number, produces the current number? In other words, [truly just knock] 800 basis points off the EPS growth rate, to get [you to sort of] high single digits in first quarter?

Okay. Your question is, I think, trying to look at EPS without the benefit of exchange gains, and with a figure that is not uncomfortable projection. But -- Paul, do you want to answer that?

If you wanted to do that, [Chris], it would turn out that that would give you pretty close to what the answer is. Yes. And coincidence, but it does. Yes. It comes out to round about six or seven, if you want [to just] sort of calculate that purely from a –

[inaudible] [feedback just from] -- [I know you’re] Reynolds’ associate -- I mean, are you surprised by how long it’s taken to get resolution on these two outstanding court cases in the U.S.?

Well, I’m tempted to answer that -- so the question was, are we surprised by the amount of time it’s taking to get a decision from the two outstanding court cases in the U.S.? I’m tempted to bring Neil Withington up at this point. But I suspect the answer is fairly short.

You want to come up, Neil, and just -- if there [are any other] legal questions, now’s a good time, when Neil’s on his feet.

No. No, seriously, not really. [Have] to expand on it somewhat.

It’s not surprising that the situation on Engle -- I guess you’re talking about Engle [inaudible]. Engle took a long time to work its way through the court system; took a long time to get through the District Court level on appeals. The Supreme Court of Florida is an extremely busy court, and they’ve got other things to look at as well. I doubt whether this is a huge priority for them. But [it’s a matter for] Reynolds and [the U.S.] [inaudible] case [couldn’t strike] [inaudible] huge amount of relevance in that case, very complex legal issues. As you know, not much money at stake, in terms of how the law sits at the moment. And therefore, [I think there’s] some work [to do] in terms of reaching [a] settlement. And [we’ll] await it with interest.

Any other legal questions?

[inaudible] [Canadian] [inaudible]?

No. [inaudible] [work]. Nothing. Very quiet. The case -- as I said, some months ago -- it started. It will take some time to work its way through. There are many different procedural steps. And the disclosure of documents [inaudible] considered. And at the moment, it’s not moving [inaudible].

[On] the disclosure [inaudible] started [inaudible] procedural terms [inaudible]?

Well, the case is [filed in third], but not really.

[What gain] [inaudible] on the case? What [of the staging] [inaudible] hearing, about whether the [current] defendants may remove themselves –

Yes.

-- from that case? When can we reasonably expect some ruling on that [starting petition]?

Well, the hearing was in February -- [we’re] in May. [inaudible] I mean, I would have thought, in the next couple of months or so, but we’ll wait and see. These things do take time. I mean, what you have to bear in mind with these cases is that they hear evidence or they hear appeals submissions, they’re hearing maybe two, three, four cases a day. And they’re just working their way through their docket. So I would have thought [been] a month or two’s time. But can’t really predict with any accuracy.

Thanks, Neil.

Okay. Yes, [please] --

I’m –

That’s all right, no.

[inaudible]

[Ms. Janine Bedlow], from Goldman Sachs.

Just pushing [a promo] on the very strong volume growth -- [can] you give a little more granularity on [U.G.]? And also perhaps [I’d like to] [inaudible] market share days gains, and [whether], in your view, reflects a, perhaps, specific pricing positioning? [What’s] going on?

Okay. The question was Pall Mall -- can we give some more granularity on where the growth is coming from? And is it do with the price positioning of Pall Mall, which I guess is a sort of Western European question?

[inaudible] if there are any other regions where [the holding goods] coming from that you’d like to highlight –

The bulk of that growth, of Pall Mall -- I would think three quarters of the growth of Pall Mall is coming from growth in its ongoing market. So Russia, Malaysia -- that is a brand that’s doing very well. There’s been relaunch activity behind Pall Mall, new packaging, new blend. So it’s relaunches in its main ongoing market. And also, there’s been launches into new markets. In Latin America, as I mentioned briefly; Nigeria, Taiwan -- so about three quarters, I would say, of that volume growth that come from existing markets and new market interests.

A small amount of that is coming from market growth in what you might call the markets where there’s [sporty] pricing, as I alluded to last time. So we’re getting growth on Pall Mall in Spain, in Poland, in Germany; to name three. But that would be a relatively small proportion of the growth of Pall Mall.

Does that answer your question?

Yes, [sorry]?

[inaudible] And I was just wondering [if you] can update us on how [inaudible] [stuff on gain] in South Africa. [inaudible] [flooders of our ecelevin market]. And just third question on that front -- do you think [inaudible] European Union [throughout this separation shot] [inaudible]. [inaudible] in China [inaudible] have [they given us in the market, or what] [inaudible]?

Okay.

Those trials in South Africa -- and we were into a pilot market in [Taikam]. We are now looking at another pilot market, having learned the lessons and the learnings from one pilot market, where we got some things right, we got some things wrong. We’re now going into another pilot market.

And the purpose of these pilot markets is really to learn. We’re not even at the stage of testing the commerciality, but are learning about the product, learning about the interaction of the product with the consumer; what the consumer likes, what the consumer dislikes. Because remember in South Africa, it’s a totally new category. They don’t -- not aware of or understand some of the [talk]. So you’re trying to explain the category at the same time as launching the brand. But you really have to learn. And if you like, that is a -- to some extent -- a global pilot. Because most of the markets in the world do not understand [Swedish Nurse].

So we’re going to stay in those pilots and learn all [that] we need to learn, before we start extending beyond South Africa. That’s the situation in South Africa.

In Sweden, we’re still in pilot. We’re slightly extending that pilot. And we’re learning the learnings there. But nothing to report yet on that.

Terms of the European Union -- yes, I think we’re now beginning to be able to put forward our views on [Swedish Nurse] to the European Commission. What will happen we don’t know. But at least they’re open; they’re listening.

China -- I’ve been updating people on China; certainly updated at the year end. As you may recall, the Chinese government made it clear recently, a few months ago, that they were not going to entertain any more factory joint ventures, which we took as a clear signal we’re not going to be able to do the investment that we’d hoped for in China. So that won’t go ahead, or at least in the foreseeable future won’t go ahead. And we are exploring other opportunities with the Chinese.

[inaudible] Yes?

Sorry – [Arinku], from [Motor Study]. I was wondering if you could give us an update on your policy for share buyback. Do you see the rate of buybacks increasing [inaudible] [strategy] --?

Yes.

Our policy [inaudible] is that we’re basically distributing most of the free cash flow back to shareholders by way of the dividends, which [were not talked mid-last] year in share buyback. And the share buyback level for the last couple of years are [running] about 500 million Pounds per year. And that’s what you [should have seen] this year.

We look at it from year to year. We take into account not only our interest cover -- interest cover’s important. I’ve always said we wanted to maintain an interest cover between 5 and 9. And [it’s sores that] pop into that range now at gross interest cover. But we also look very carefully at gearing levels, cash flow as a proportion of net debt. And that’s mainly the ratio that the credit rating agencies look at.

And so we take into account credit rating agencies, because we want to maintain minimum investment growth credit rating. And currently [couple of these plus that were] two notches above that. But we don’t want to drop more than one notch below where we are today. And as far as Moody’s is concerned, we’re still on negative watch for our current credit rating with them.

So our interest cover is strong. But the credit rating agencies would say that our gearing is not as strong as you might think it might be.

You also have to take into account the level of reserves that we have. So even if we had substantially stronger gearing than we had today, we couldn’t substantially increase the level of share buyback over the level we have today, because we don’t have the reserves.

So we look at it from year to year. And we think [they’re] doing the right thing now by basically distributing a little of our free cash flow back to shareholders. And not all of [our competitors are] doing that.

[Phil Lon], [TVS].

[I’m curious to sort of] [inaudible] [tax districts in] EU now control subsidiaries withholding tax notes [these losses]. Given your tax structure, would any of those have any particular implications for you?

Yes, they do. I mean, without getting into the details -- because they are in the court -- I mean, the consistency of the UK tax [written] with the EU countries is something that has hurt us in the past. I mean, we’ve paid advanced corporation tax in the past, which we haven’t prepared for. We’ve had to [gross up] dividends in the past to shareholders. And we are part of a Group Litigation Order to try and claim some of that tax back. And it’s in the court. And other than that, we can’t add [anything] to it.

[inaudible] withholding tax [make a difference] [inaudible] [country now, or] --?

We are part of the Group Litigation Order Tax Case. And really can’t add anything to that. And I think you [had] a lot of publicity, I think, two or three weeks ago, in the press. And we’re in there with a number of other companies.

Thanks. It’s a follow-up question.

[Mel] talked about using [STK] -- [you guys file STKs, just reduced a lot of them] [inaudible] bringing out in the States for the Conwood deal. Just wonder whether that prompts you maybe to look to take control of that business, in terms of ownership, or there’s anything that you think needs to be done around that.

And then finally, on another question just on acquisitions -- is [it] explicit financial criteria for [BAT works during transactions] in terms of [the sar capital beating, cost of capital of the deal], EPS accretion periods, et cetera?

Thanks very much.

[inaudible] Okay, there are two questions. One was, is there any attempt for us to take control as of the source of [snuffs] and [Bedford] sales than for Reynolds American? And secondly, what’s our acquisition criteria? And [inaudible] the first one is -- wouldn’t want to comment on that. [And] wouldn’t speculate on a particular company, terms of acquisitions. But [we] generate acquisitions [inaudible]?

Yes, our acquisition criteria’s been fairly consistent, [David]. I mean, basically, look at each project on its merits. And we look to get a return based around our weighted average cost of capital. It’s around 7.5%. But [we’ll] either increase the required rate of return -- it might be slightly decreased, but usually slightly increased, depending on the project risk and the country risk associated with the cash flow that we’re acquiring on the deal.

So you could be looking anywhere between required rate-of-return growth, 6.5% up to well over 20%, on a [risky greenfield] project. And we just have to look at each one on its merits.

Generally speaking, [do] look for acquisitions to be EPS-accretive, [even] the first full [year] of the deal. We’d like that to happen. And we obviously look at a whole range of other things in terms of the effect on the [inaudible] [shares], et cetera. But the required rate of return really [does vary on the] [court case].

[Chez]?

Yes, [inaudible].

Could you give us a feel for the profit swing from your [sporty] pricing markets? And [inaudible] [the same,] whether that’s going to be much [worse] [inaudible]. And given [accounts being] such a big factor in these results, could you update us on your hedging at the moment?

Two questions -- one, could we give some kind of profit impact on the [sporty] pricing markets? And secondly, an update on [hitting].

Not really, [Chez], because it really depends on what happens in the pricing in those markets, both in terms of what happens to pricing per se and what happens to our volume performance in those markets where things have become competitive. So far, as I mentioned, in most of those markets, we’ve done quite well in terms of share. We’re growing our share, and -- which is pleasing. And so that will, to some degree, mitigate the profit impact.

We have given a figure for Spain, which is around 25 million to 30 million Pounds impact. But that assumes to some degree benign pricing going forward this year. So it’s a tentative figure, because it does assume that. And the others -- I wouldn’t want to speculate on what the impact will be. It will depend.

[inaudible] cash flow, basically. And each individual business will cover its transactional exposure through hedging. So if they’re exporting, they’ll cover their export receipts, [and loten have input approximated] these. So [they’ll all] be covered by hedging. And then we hedge cash flows [in the percent of the] [inaudible] given [more interest flow].

But basically -- I mean, BAT -- you’ve lost the translational exposure. And I think that’s well understood. The main exposure is through the U.S. dollar. Somewhere between 35, 40% of our profit is exposed to the U.S. dollar. And that is an exposure. It’s mitigated to a slight extent by hedging the cash. But that’s essentially what you’re buying into. The translation gains for the first quarter have been very strong, [inaudible] at 46 million Pounds. And if the currency stays where it is today, we’ll still have translation gains for the full year greater than the first quarter. But obviously, given what’s happened to Sterling strength over the last couple of weeks, the variation between profit growth at constant and profit growth at current for the full year is nothing anything like it was for the first quarter. More or less, it went from 8% constant to 17% current.

For the full year, if the rates stayed where they are, the favorable variation from currencies [becoming] like 2 or 3% in [addition]. [So] you could make an assumption whether it’s going to stay [there] or not.

But that’s the position today.

[inaudible] from ABN AMRO.

I [might put just some variation] on [Chez’s] questions on Spain. Your 25 million to 30 million indication’s obviously for the full year. I don’t know any figure for the first quarter.

And then Poland -- I just wondered whether your approach this year has actually -- sort of net-net -- sort of materially improved your position, or with [PMI] also reducing the price of L&M comes as sort of a bit of a [variation] on gain there.

Well, let me think -- on Poland. So the question was, have we -- I think, have we --

[inaudible] top price of L&M, where everybody sort of just [comes out and still] on the level, and nobody makes any net progress.

Right. Okay. And so the question is, has there been any sort of net gain in Poland as a result of pricing activity as far as we’re concerned? Or is it a sort of zero-sum gain? No, we’ve increased our share in Poland. And we’re pleased with that.

We were in a situation--and I realize there’s been some finger-pointing, which is disappointing. I mean, just to give you the background on Poland, if you went back to the middle of last year, we had Pall Mall at PLN5.85, and Viceroy at PLN4.35. So write that down - 5.85 and 4.35. Imperial came in with Paramount at PLN4 and they were joined by Galahad with Ronson at 3.95, well below the price. They then increased their prices, or Imperial did with Paramount, but still $0.10 lower than Viceroy. Then, Philip Morris then joined in with Red and White at that low price and the whole low price segment got very competitive in price and grew, squeezing the mid-priced brand, including Pall Mall. So we had to do something to remain price competitive, so we reduced the price of Pall Mall.

So if at--suddenly at one point in time somebody said, ah hah, it's Pall Mall, we don't see that situation at all. The one thing that I've said on price wars is that everybody hates them and nobody stops them. And one--the other thing I would say is that everything is interrelated. You can't--I won't point fingers. But they are all interrelated. But I'm certainly not going to accept a finger pointed at me.

Just a quick follow-up question. Clearly, the [indiscernible] with some of its bigger prices in the quarter [indiscernible]. I wonder though, excepting our expectations for Q2, were there any January effects in there that we should exclude? And did you add the Q1 at that rate of growth? And can we see that same approach going into Q2 and avoid that?

I think we've got--the question is, we had good volume growth in Q1. Is that momentum going to continue in Q2? That was really the question. We had good momentum and I don't see us hitting a brick wall anytime soon in terms of our volume growth. And I think you have to bear in mind that purely in terms of volume growth, I think the first half is going to be stronger than the second half, simply because that's the way that the excise increases [indiscernible]. And that way, you're going to more of an excise impact--an official excise impact in the first half of the year than you're going to have in the second one. And it all depends again what happens on the pricing. But the way we're looking at it at the moment is that the first half is going to be stronger than the second half in terms of volume growth.

Okay. I suppose a slight precedent--we're several minutes early. I'm going to call it a day there. Thanks very much for coming.