英美煙草 (BTI) 2006 Q3 法說會逐字稿

Well good morning everyone. I'm Paul Adams, Chief Executive, and with me is Paul Rayner, the Finance Director. This morning we'll be taking you through the nine months 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.

As a set of nine months results, today's announcement is very encouraging. Revenue and profit from operations on a like-for-like basis are ahead of trend as is the growth in adjusted earnings per share. The slackening of exchange rates has had some impact in the third quarter and it is quite possible that foreign exchange benefits will be neutral for the year as a whole.

Looking at the discrete third quarter, the story is quite different. Volumes, turnover and profit are lower than the comparative quarter last year. As flagged at the interim presentation, the third quarter was going to be a tough one, particularly when compared to Q3 2005 which was very strong, helped by exchange and favorable timings. Conversely, Q3 2006 was adversely affected by exchange and the timing of shipments. But for the nine months, Group volumes are ahead and global drive brands show excellent growth.

Throughout the presentation you will hear references to like-for-like numbers. Like-for-like excludes the exceptional charges as well as last year's distortion arising from the new terms of trade in Italy following the disposal of Etinera. So on a like-for-like basis, net revenues was up at 6% at current rates and up 4% at constant rates, slightly ahead of trend. Similarly, profit from operations on a like-for-like basis benefited from favorable foreign exchange gains and rose 8% at current rates and 6% at constant rates.

Our associate companies continue to perform well, with particularly good results from India and the United States. Profit before tax rose 3% and profit after tax and minorities rose 5%. Adjusted earnings per share rose 13% helped by a good performance by our subsidiaries and associates, a lower tax rate and the benefit from the share buyback program which more than offset the impact of higher net finance costs and minority interest. Although exchange rates are expected to deteriorate further in the fourth quarter, the growth in volume, revenue and profit for the nine months shows British American Tobacco is on track for a good year.

Looking at volumes in a little more detail on a like-for-like basis. Group volume was ahead 1%, lower than the 2.6% seen at the interim results with growth achieved across a broad spread of markets. The lower level of growth is largely due to the timing of shipments; around excise increases in Japan, South Africa and Malaysia; a reduction of volume in the Ukraine and crate inventory de-loading in Canada, all of which affected the third quarter.

Despite this, global dry brands continued to grow and volume increased an excellent 16% on a like-for-like basis with Kent up 16%, Dunhill up 5% and Pall Mall up by 40%. Lucky Strike volumes were 3% lower due to industry declines in its key markets of Germany and Japan. Our four global dry brands now account for more than half of our international brand volume and over 20% of Group volume.

A few comments on the regions. Volumes in Europe were up 1% like-for-like driven by the growth of the global dry brands. Growth in Russia, Spain and Hungary helped compensate for the decline in Italy and the Ukraine and lower industry volumes and the loss of stix in Germany.

On a like-for-like basis profit was down GBP8 million as lower profits from Germany, Spain, Poland and the Ukraine offset the strong profit growth from Russia, Italy and France.

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. However, we have grown share in several key markets that are experiencing those challenging pricing environments such as Spain we're up 3.6 percentage points; Czech Republic up 5.3 percentage points and Hungary where we're up 0.7 percentage points.

In Poland while our overall share was essentially flat down 0.2 percentage points, we have an improved portfolio with share growth for Pall Mall and [Berg]. Elsewhere, profit in Russia continued to grow due to higher volumes, cost savings, improved product mix and currency. Profits grew strongly in Italy and France, and the product mix improved across the region with the excellent growth of the global dry brand.

In Asia Pacific, the region recorded a 12% rise in profit to GBP466 million with a 3% rise in volume. Profit growth was mainly attributable to Australasia, Malaysia and South Korea. Strong volume growth was seen in several markets, most notably South Korea reflecting the volume distortions last year following the excise increase at the end of 2004. Market share in South Korea has risen from 13.4% to 15.7% year-on-year.

Pakistan and Bangladesh both saw good increases in volume although profit in Bangladesh was affected by currency devaluation and increased marketing costs. In Pakistan, the Group continued to increase its position as market leader, achieving both strong volume and profit growth.

In Latin America, there were good volume and market share performances across the region leading to a 3% uplift in volume and an 18% increase in profit to GBP447 million helped by strong currencies.

In Brazil, volumes and market share grew as we continued to benefit from marketing initiatives and anti-illicit trade operations. Profit was also up due to an improved product mix, higher leaf margins and the benefit of a stronger real.

Elsewhere, profit grew in Mexico aided by higher margins, efficiencies and a stronger currency. Argentina saw strong volume growth, driven mainly by an excellent performance from Viceroy but profit was impacted by price competition.

Chile and Venezuela continued their excellent performances with growth in both volumes and profits.

Good profit growth from South Africa, Nigeria and Iran helped increase profits for the Africa and Middle East region by GBP54 million to GBP362 million. However, volumes falling 2% to GBP74 billion were impacted by the declines in Turkey and the Levant together with the effect of the supply chain problems experienced in West Africa in the earlier part of the year.

South Africa achieved good profit growth despite a weaker currency. The product mix also improved with Dunhill and Rothmans continuing their strong growth.

Nigeria grew both share and profit due to price increases and productivity gains.

Industry price increases and lower costs resulted in higher margins in Turkey. However, the value for money segment remains competitive leading to reduced volumes and market share.

In the America Pacific region, profit rose GBP5 million to GBP332 million although volumes were 1% lower.

In Canada the key development in Q3 has been the move to direct distribution in early September. The speed and scale of retailers signing up to the new terms is ahead of expectations, which has led to some initial out of stocks, largely in Alberta, as the new supply chain took the strain. This has had some impact on market share which now stands at 53.6%. The cost of the move to direct distribution and lower volume affected profit which was GBP21 million lower at GBP215 million.

The transfer of production to Mexico is ahead of schedule and should be completed by the end of the year.

Looking forward, we have the implementation, direct distribution, together with the lowest cost production and the top three brands in the market, covering the premium and value segment. This puts us in a very competitive position for 2007. However the outlook for trading in Canada remains tough, as the growth of illicit trade puts pressure on the legitimate manufacturer.

In Japan we grew volume in a declining market, led by Kool, while Kent was also slightly ahead. Market share is now at a record high, just short of the 10% level, and profit is well ahead of last year.

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

Good morning. As Paul's just outlined, we've volume growth, revenue growth, profit growth and earnings growth. Delving into a little more detail, let's look at volume and revenue on a like-for-like basis.

Net revenue at constant rates grew 4% and volume growth at 1%. Net revenue has benefited in Latin America from the phone cards distributed by Souza Cruz and also in Europe from a vending business acquired in Switzerland. If you exclude these factors, net revenue would have been up around 2% at constant rates and 4% at current rates which is still good growth.

Looking at profit on the same basis, at constant rates, the 6% rise in profit on increased volume of 1% generally reflects improved pricing and lower cost levels. At the profit from operations level, exchange gains had a positive impact of GBP46 million in the first quarter, GBP24 million in the discreet second quarter, but a negative GBP21 million in the discreet third quarter. At current rates, for the remainder of the year, these exchange gains will be reversed.

As you can see from this chart, with the exception of Europe, each region has recorded improved profit per mille at current rates. The Group's profit per mille was up 7% at current rates, to GBP4.17. At constant rates, and also on a like-for-like basis, the Group's profits per mille was up by 4.4% with growth in all regions except for Europe and America Pacific, where it was down slightly. The Group margin has improved from 28.6 to 29.3% and Europe with its lower profitability is the only region that's shown a marked deterioration in margin.

Paul has already discussed the drivers behind the region's operating profit so a comment on unallocated costs. These were up GBP5 million at GBP77 million, mainly the result of increased pension costs. So profit from operations before exceptional items, was up 8% at GBP2,124 million.

During the nine months there were restructuring charges taken in respect of the Canadian, the UK and the Dutch factory closure programs. The total charge for these restructurings was GBP164 million, which includes the initial cost for the closure of the Dutch factory which were recorded in the third quarter, of GBP84 million.

The sale of the Italian cigar business completed in June, gave rise to an impairment charge of GBP16 million and the GBP68 million gain in 2005 arose from the brands disposable -- the brands that we disposed to Gallaher.

Taking into account the changes in the terms of trade in Italy, and backing up the various exceptional items that we mentioned on the previous slide, profit from operations on a like-for-like basis, was up 8% at GBP2,124 million.

Net finance costs at GBP209 million, are higher than the prior year by GBP47 million, and we'll cover the details of these on the next slide. The GBP71 million increase in associates income is partly due to the favorable resolution of tax matters at Reynolds American, and if you exclude this benefit, which we've treated as an exceptional item, our share of the post tax results of associates increased 58 million to GBP331 million. And if we exclude the tax benefit, Reynolds American's contribution was GBP42 million higher due to improved pricing, cost reduction, the timing of promotional spend as well as the impact of a slightly stronger US dollar average rate. I should also point out that the impact of adjustments to the Reynolds numbers to enable us to report under IFRS will vary from time to time and has benefited the third quarter results in 2006, compared to last year.

Net finance costs overall were GBP209 million, in line with the guidance of GBP70 million per quarter. However, this charge was GBP47 million higher than last year, partly due to higher interest rates, and the balance is mainly due to the movement in the fair value, foreign exchange adjustment of GBP26 million. For the purpose of the adjusted diluted earnings per share calculation, we did back out some of those gains last year.

Here we show the underlying tax rate calculations for subsidiaries. This tax rate is 29.7% which is lower than the tax rate of the interim results, following the conclusion of further tax audits in Canada during the third quarter. If we exclude the tax credits from the tax audits in Canada the underlying tax rate would be 31.5%. We expect the out turn for the full year to be around 30%, but this does depend on the mix of profits, exchange rate movements and some other factors. You will note that the 2005 tax rate has been increased by 0.5% to 30.6% as previously recorded, as a result of excluding certain IAS21 and 39 gains from the adjusted earnings per share calculations and restated results following the change to IAS21. Profit for the period rose 6% to GBP1,565 million.

Finally, before we take your questions, the drivers of adjusted earnings during the period. The subsidiaries' profit performance was helped by favorable exchange rates, but even at constant rates it was 6% ahead. Associates adjusted for exceptionals, a lower tax rate and a share buyback were also favorable factors, and these were partly offset by the higher net finance costs and a higher minority interest charge arising from the improved profitability in Brazil and Malaysia. And a further negative was the terms of trade in Italy that we had last year. Based on 2,080 million shares, adjusted earnings per share rose 13% to 75p.

I'll now hand back to Paul for the question and answer session. Thank you.

Thank you Paul. We'll now move to the Q&A. Could I just remind everybody that just for the purposes of the webcast, could you give your name and organization when asking your question, thank you.

Michael Smith from JP Morgan. A number of your competitors have said that they feel the worst was behind them in Western Europe and the trading should improve [inaudible]. I wanted to get your updated view on the outlook for Western Europe and whether you feel trading will improve. Thank you.

Okay, the question was what's the pricing in Western Europe in terms of the outlook going forward towards 2007. Yes, I think the situation has begun to improve in certain markets in Western Europe. We've seen prices come up at the bottom of the market in Spain; we've seen prices come up in Poland, in Austria. I think Germany still remains; we'll see what happens in Germany in terms of -- it's only really towards the end of this month that there won't be stix any more in the marketplace so we'll see where that goes in Germany.

Italy and France, pricing situation is stable and good in Italy and France. I suppose the only thing that makes me slightly wary is that I think that the situation in the Netherlands is slightly tense. Some amber lights flashing in the Netherlands, some movement of the prices downwards. Nothing has happened yet but I'd like to get to the other side of that before making the call.

So I would say that there are some perhaps early green shoots of improvement on pricing so that gives some optimism for 2007 but perhaps a bit early to call yet.

And perhaps as a follow on, whether you're confident that Russia can trade through the tax increase that's scheduled for the market?

Yes, the question was will Russia be able to trade through the excise price increase scheduled for that market or rumored in that market. I think the answer to that is yes. I think you'll see some slow down in volume growth in Russia. We're already seeing the market beginning to slow, it's still growing in Russia don't get me wrong, but Russia's been pretty steamy for the last two or three years and I think that had to slow at some point. So net, I think there will be a slow down of the growth in Russia but I think it will still grow.

Hi it's David Hayes from Lehman Brothers. Just in Canada, can you give us a bit more detail on the move into direct distribution and whether that's now fully resolved or whether that's something that you think will continue to the fourth quarter because it has been more successful than you thought in terms of the timing of that change?

And then also just looking forward to the fourth quarter, is there anything specific that we should be taking into account in terms of big swings? I mean you mentioned obviously the Mexico, the move in Canada as well that's been progressing. But is there going to be anything substantial that changes in the fourth quarter in terms of maybe cost savings etc., that we should factoring into our thinking? Thanks.

Thank you David. Two questions, one on Canada DSD, has that now been completed, are there are still some teething problems to go through. That's how I read the question.

And are there any big fourth quarter swings that we should flag.

I think we're substantially over the hump in Canada but there's still a little way to go. We're trading pretty well in Ontario and Quebec; in fact our share is slightly ahead of where we were going into DSD. But Alberta is still not good but improving. We dropped about 4.5 share points over four to five weeks in Alberta. Alberta's about 12% of our volume in Canada; Ontario and Quebec is about 65%. We've still got a few out of stocks particularly in Alberta and to some extent British Columbia, but that situation is improving rapidly.

We've still got to move to direct distributions with some of big vertically integrated accounts which will happen over the next month or two. We don't foresee any problems with that but we've still got to get to the other side of that. So generally I think the worst is over in terms of the teething troubles in Canada. Still a little bit of a way to go but I'm reasonably confident that we'll get there.

Big fourth quarter swings, I think we've got possibly two. One is Malaysia. We had a hit on our third quarter volume of about 600 million in Malaysia on timing of shipments. This wasn't a second, third quarter swing, this is a third, fourth quarter swing in Malaysia. What happened in 2005 was the price increase was taken later than in 2006 so in the third quarter of last year you got a load in the third quarter and you got a de-load in the fourth quarter in Malaysia. Now this year, when the price increase was earlier you got a load and de-load, so we're missing -- on the comparative for the fourth quarter we should get an uplift. Have I explained that alright? Do you understand?

And I think we'll wait to see what happens on a price increase in South Korea. If there's a price increase towards the end of the year or early next year in South Korea we may get a load in the fourth quarter in South Korea, an industry load I'm talking about. Now those are the two that come to mind.

Yes David?

David Ireland from ABN Amro. The first question just picking up I suppose on that volume point. You have referred to the influence of the timing of shipments and also de-loading on the third quarter. Do you have a sort of feel for a sort of smoothed out rate of volume progression for yourselves at the moment, would be question one?

And then question two, just to follow up on Canada. The cost of DSD in the third quarter and whether there's a continuing cost in the fourth quarter and beyond, or whether that's sort of done now?

Okay two questions. One was lots of swings and roundabouts on timing of shipments. What's the sort of underlying running rate for volume growth.

And secondly, the cost of DSD in Canada, have we had it all in the third quarter and is there any more to come.

At the beginning of the year David, as you'll know well, I said that I felt that our volume would grow in 2006 by 1 to 1.5%, probably nearer to 1.5 than 1. And I still think that that's a good feel for our underlying growth rate on volume. We're still comfortable with that and still comfortable with that for 2007 if it helps, an early flag.

Cost of DSD in Canada Paul?

Yes, if you look at the results for Canada for the third quarter it was down around 12% at constant. If we didn't have the investment in the DSD it would have been perhaps slightly up, so that gives you an idea of the order of magnitude in DSD costs. And there might be some continuing costs in the fourth quarter associated with some stock disruptions but after that the one-off costs should [inaudible].

Nico Lambrechts from Merrill Lynch. It is possible to give us an indication of incremental cost savings achieved in the third quarter? And maybe an idea regionally? And then what do you expect incremental cost savings in the final quarter, the fourth quarter?

Okay, the question is around cost savings -- incremental cost savings we've got in the third quarter and any we might get in the fourth quarter. Paul do you want to --?

I'd love to but I'll give you that information in the fourth quarter. We give information generally to the market annually in terms of the cost savings that we've achieved, both on the overheads and indirects program where we said we're tracking to 400 million in the five year program at the end of next year; I can say we're on track for that. And in the supply chain program.

I'll give you, when we release the full year results, what we've actually saved for the year in the supply chain program and I'll give you the exact numbers in terms of what we saved under the overhead and indirects, we don't release that quarterly. Suffice to say we're certainly on track with the overheads and indirects and fully expect to achieve the 400 million outcome.

And the supply chain program is going ahead very well. There are some significant one-off costs which you can see coming through. We've taken up the cost this quarter for Zevenaar but the savings are starting to come through. There's some of the savings associated with the factory closures in Canada and the UK have come through this year, perhaps a third of them, but most of them will come through next year. And we expect the Zevenaar factory to close by the end of '08 so we'll start getting some savings in '08 on that.

And we're generally making some significant in-roads in terms of our complexity reduction, in terms of the supply chain as well. But I'll give more detail at the next release on that.

[Inaudible question - microphone inaccessible] if the savings are realized on a smooth basis or lumpy?

Well it's lumpy. It's lumpy from the point of view that the significant savings as far as the supply chain savings are concerned, are when we actually close the factory. So in that respect it's obviously lumpy because it's the timing of closing the factory that gives you -- to give an increase in savings.

From the overheads and indirects, it's certainly more smoother.

[Tom Bell] of The Guardian. Could you give us an indication of how significant your operations in North Korea are? And how destructive any political developments which would cause you to exit North Korea might be for the region?

The question was how significant is our business in North Korea and is that business under any degree of threat because of the political considerations around North Korea at the moment.

We have a good business in North Korea, it's not huge in Group terms but still a good business. At the moment we don't see any interruption to that business but obviously we'll wait to see what happens from the international community and whether any sanctions ensue. There have been no sanctions on our products at the moment and we're not anticipating there will be but we'll keep watching developments.

Yes Adam?

Adam Spielman from Citigroup. First of all, congratulations on a very solid quarter.

Thank you Adam.

Secondly, if I can just ask you about your performance in the capital markets. Iran is mentioned quite frequently as a market where you're growing profits. It's a market that I personally know remarkably little about so if you could just tell us something of the trends there; what brands you're using, what who your competitors are, you have [inaudible] your competitors whatever.

Also in Mexico, Ultra last night said they were gaining market share very rapidly. I wonder if you could comment on that?

And then also if you can bring us up-to-date with where we are in West Africa? Because obviously there were some problems and I think I heard hints that they're now over in terms of the supply chain.

Okay, three questions there. One was Iran, can give a bit of background detail on our Iranian business.

Secondly, can we comment on what's happening around market shares versus competition in Mexico. And secondly, a bit of information on West Africa and the supply chain there. Can you talk about Iran or do you want me to talk about Iran?

I can talk about Iran. Iran is doing well and there is a local brand there, there's Montana, also Kent, it's a combination of local production plus production imported from Turkey. And we have been gradually improving profit over a number of years. Obviously, the higher the profit is, the higher the risk from a political perspective, so that's the sort of downside of trading with Iran. Because volumes are growing and profit's also growing. And it's steadily picked up over the last two or three years. So it's quite substantial now and we are very pleased with the progress and I'd say the only sort of significant risk at this stage is the political risk associated with operating there.

So in terms of Mexico, yes Philip Morris has grown share in Mexico. We've dropped a little share, mostly the local brands that we have in Mexico. The brands that we want to grow, Camel and Boots are growing share but our overall corporate share has declined slightly in Mexico, although, as we mentioned earlier, profitability has increased there.

In West Africa, yes there was some -- if you remember we had an issue where we stopped using a particular distributor in Africa and decided to go ourselves. And there was one particular market, Cote d'Ivoire, where we were having a problem trying to re-enter. That situation has now been resolved, however there is a war going on, which is stopping us putting products into Cote d'Ivoire.

But most of those supply chain problems have now gone and the reference I made to supply chain problems in West Africa were references to earlier in the year, when commenting for the nine months as a whole.

Can I come back to Mexico? It was quite a major acquisition for you at the end of the '90s if I remember rightly. It seems to me slightly odd that you're not going in there with some of your global drive brands. If you're -- everywhere else in the world you wouldn't be saying we're using Camel and Boots, you'd be talking about Kent or Pall Mall or something like that. Have you got any plans to become a bit more aggressive in that market?

Well I wouldn't tell you if we had. But just to let you know we do have Pall Mall in that market and I think we have Kent in that market. They're just not particularly big, as we begin to grow them. So the main progress that we're making are on the two brands that I mentioned.

Okay thanks.

Anything else? John?

Do you think where exchange rates are today with the deterioration we've had in the last 13 months, has that jeopardized [inaudible] figure for '07 or is there enough in the budgeting reserves to take account of that?

Okay, the question is around exchange rate movements and what the impact on 2007 may be.

No, I would hope it doesn't jeopardize it. We have to obviously see where they move from now but you're right, exchange rates are moving against us, the trend is going against us. What we say is on average in the medium to long run, we can achieve high single digit earnings per share growth. If exchange rates dramatically go against us in the one year, there is nothing we can do about it. But I'm not saying that's the case for 2007.

There's another question. Yes David?

Hi, I know you said that singles [inaudible] system but I guess that will be thin on the ground. Is there any feel you can give us of where people are going to when they can't get those products? Is it [inaudible] picking up or are you getting good success with the Pall Mall loose single version that you've got in the market? Thanks.

Okay, the question was is there any feel for what's happening in Germany in terms of where people are now going from stix or portions once they finally run out?

I'll try and give you a feel but let me just preamble that by saying that it's only now that stix are running out at retail. So I think it's too early to make any call as to where consumers may be going. What we've seen for our business is that people are coming to roll your own. So I think roll your own, make your own, fine cut is going to be a big destination for people who can't get stix. I think that is certainly the case. We're very comfortable with that, we've got a leading position in roll your own and we've got the strongest brand in roll your own with Pall Mall so if they all flock into roll your own, we're very happy with that situation.

I think some will go to cigarettes -- low end cigarettes, trade cigarettes as well as value for money cigarettes from the major manufacturers, I think that will also happen. And some will go cross border. Now we've done some research, which is about six months old, but frankly, with all the activity going on and product innovation in fine cut right now, I think you can throw that research out the window and we'll just have to wait and see.

Yes, John?

Out of interest, you've mentioned growing illicit trade a number of times around the world. Is there any actions in Brazil the governments like Canada are taking? Are we seeing any attempts on [inaudible] came to some agreement with the leaf provider. Has that seen any particular success or is this going to be a counterfeit or contraband issue [inaudible] to grow?

It's not all bad news. In Brazil the illicit trade, if you remember it was around a third of the market, just slightly over 30%. It's probably now about 26 to 27% of the market, so there has been a real effort behind that by both Souza Cruz but more particularly the government and that's had some effect. And that has helped us in Brazil. So it can work; the first point.

Secondly, it has happened tremendously well in Hungary, where they tightened the border control in Hungary with the result that the Hungarian market has increased significantly this year in terms of duty paid, which has helped us a lot in Hungary, and volumes are up. So that does work.

I suppose Canada is a problem. In Canada the illicit trade is growing, coming off the Indian reservations. We have put in a tremendous amount of work and publicity around that, talking to governments, talking to the press around that being a real issue not only for the tobacco, but obviously in terms of criminality and social impact. And the Canadian government is very well aware of the issue. I think it is very sympathetic to the problem but at the same time, to be fair, Indian reservations is a very sensitive political subject and I think they're wary of being heavy-handed there.

In Malaysia it's a concern. Illicit trade is growing in Malaysia. We saw very high excise increases 18 months ago, which you will remember. And illicit trade now has gone from about 14% to about 20% of that market, which is hurting our business, and our competitors' business in Malaysia. The government again is working hard on that, and they've instituted a number of measures including tagging inks so that counterfeit contraband can be spotted and put band rolls on. So they are taking steps and to some extent that worked and reduced the amount of contraband coming but then the excise went up substantially and you know, there's only so much you can do trying to buck the market. So Canada and Malaysia are worries.

Yes?

David Ireland again. You've talked in the fairly recent past about trying to migrate some of your local brand smokers to your global drive brands. I think that was in the context of Switzerland and also Latin America. Are there other markets where you're also trying that? Is it making a meaningful contribution to the global drive brand growth?

We've only really done that in the third quarter and it hasn't added as much to the global drive brand growth; probably a couple hundred million additional in the third quarter as a result of that. So it hasn't really impacted on the global drive brand growth but it's something that we've seen so far has worked very well in Switzerland. And we are looking at it for other markets, perhaps not on the scale of Switzerland, but where you've got very small local brands it might be helpful to migrate those into bigger global drive brands. And so we are looking at that but it's still embryonic.

[Inaudible] Asset Management. Could you talk about the sustainability in growth of these drive brands? Obviously this year you're seeing volumes up 16%, which you've obviously -- it's a very significant number. How sustainable do you see that, if you look ahead say, two or three years?

Okay. The question is around the sustainability of the global drive brand growth which has clearly done very well this year. How sustainable is that?

The answer to that is that we see the growth of the global drive brands being very sustainable going out over the medium to long term, but not at the rates of growth that we've seen this year. I think we've said on a number of occasions that what we're looking for, on average over the medium to long term, is again the proverbial high single figures in terms of volume growth for the global drive brands. We're running well ahead of that trend and this year, we think that growth will inevitably decline, we just can't keep that up. But still be good growth going forward.

Yes, Chas Manso from Dresdner. A similar question to the volume question earlier. The underlying profit from operation growth in Q3 has moderated somewhat in constant currency, and obviously there's lot of shipment fluctuations. Can you try and give us a feel for adjusting for those shipments, what the underlying constant currency profit from operations have been, and how sustainable that is?

Okay. The question is around lots of swings and roundabouts, sort of what's the underlying volume growth, but really trying to translate that into profit growth. Is that the question Chas?

[Inaudible] underlying growth in constant currency.

In constant currency.

Well, you can go through a number of markets Chas where you can say that the results of the third quarter was down because of one-off factors. We've talked about Japan which had de-loading by the trade in the second quarter which was reversed in the third quarter which was significant for America Pacific.

Paul's talked about Malaysia where we had timing shipments there, and we also had timing spends against us, that was significant. We had a fewer number of trading days in Australia so the result for Australia for the third quarter was down compared to the strong results for the first two quarters.

We also had in Venezuela, the result was down compared to the first half as well, mainly due to timing spend and again they had a very high third quarter last year, where there was some trade speculation because of price increases. Germany was well down with suspension in stix, and we also had some sort of higher one-off costs for Europe.

I mean, if you strip out all those things, if you strip them all out, the underlying profit growth goes from about 1% up to around 10. That doesn't mean that's the underlying growth because you're always going to have one-off factors in any quarter. The point to make is that there were an additional number of one-off factors in the third quarter which really brought the results down and the best thing to look at is the year-to-date result where you've got profit at constant at 6% to the [count] of 8.

We've talked a number of times about what we're trying to achieve as a trend over the medium to long term of 1 to 1.5% volume growth; round about 3% revenue growth; 6% profit from operations growth, and high single figure EPS growth. And that's what we think we can achieve now in any one quarter or maybe even in any one year. That may dodge around a bit but that's pretty much what we think.

It's a good example of quarterly reporting. We can analyze it all we like but really you've got to look at the longer term trends and this quarter is definitely one for that. But you can see the one-off factors are quite clear.

I think that's it. Thanks very much for coming, appreciate it.