英美煙草 (BTI) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the BAT conference call. My name is John and I'm your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. [OPERATOR INSTRUCTIONS]. I will now hand you over to Mr. Ralph Edmondson, Head of Investor Relations for British American Tobacco, for opening remarks.

Good morning, everyone. Thank you for joining us and welcome to the British American Tobacco first quarter results conference call. Joining me on the call are Paul Adams, Chief Executive, and Paul Rayner, Finance Director. This morning, we'll be discussing the first quarter results and, for those of you participating by phone, you'll have the opportunity to ask questions later.

But first, there'll be some opening remarks and comments from both Paul Adams and Paul Rayner. There are slides to accompany those remarks and these may be downloaded from the investors' section of our website, bat.com. If you are listening via the website, the slides will accompany the commentary. Paul Adams will now start the presentation.

Good morning, everyone. With a 10% growth in adjusted earnings per share, we have described the Group's performance during the first quarter as a solid start to 2007. As you can see from this slide, which shows the key drivers, we have lower volumes, which were affected by the shipment distortions we discussed at the preliminary results presentation in March. Revenue was lower, due to the adverse currency movements we have been warning shareholders about since last year's interim results. And while profit from operations has been strong, exchange rates have masked an outstanding performance at constant rates.

So it's worth spending a few minutes taking you through the numbers to get greater clarity and explain why we believe the Group has made a solid start to the year, but why people shouldn't get too carried away with some of the headlines. Group volumes, at 156b, were down 3%, mainly as a result of the high level of shipments in some markets in the fourth quarter of last year, ahead of excise-driven price increases.

At the preliminary results presentation, I noted that volumes in Russia had been unusually high, ahead of the January excise increase. I also noted the supply chain disruptions in the Middle East and the loss of StiX in Germany, which had previously been included in our cigarette volumes.

We estimate that underlying growth, excluding StiX and the shipment distortions, was around 1%, broadly in line with our expectations. And we expect volumes during the remainder of the year to grow at around 1%, but, clearly, the volumes for the year will be affected by the first quarter.

The loss of StiX in Germany also had an impact on the global drive brands, particularly the Pall Mall volumes, which rose just 2%. Nevertheless, global drive brand volume rose 6%, with Dunhill up 9% and Kent up 10%, putting in the best performances. Remember, these are both premium brands and this has contributed to an improvement in our mix.

Lucky Strike was down 1%, affected by the industry dynamics in Japan, Netherlands and Germany, which more than offset good performances in Spain, France, Argentina and the Czech Republic. In Germany, we estimate that approximately half of the StiX volume has gone to roll-your-own or make-your-own products. Pall Mall has had a strong position in these segments and we estimate that Pall Mall volume in the first quarter would have been up 9%, if sales of its fine cut in Germany are included.

Moving now to the volume and revenue chart. Revenue at constant rates of exchange rose almost 6%, despite the 3% decline in volume. During the quarter, we have seen volume increases in a number of large markets, which have also had the benefit of price increases, such as Brazil and South Africa, while the volume decreases have been in relatively lower margin markets, such as Russia, Ukraine and Iran. Combined with the improved brand mix, revenue growth at constant rates has been strong.

Volume in Europe was 7% lower than the comparable quarter in 2006, with Russia accounting for 2b of the shortfall and the absence of StiX in Germany accounting for a further 1.3b. Lower volumes were also recorded in the Netherlands and the Ukraine, which were partly offset by increases in Spain, Romania and Italy. Revenue at constant rates was down just 2.4%, with good growth in a number of markets following price increases. This was offset by a decline in revenue in Germany, reflecting the shift to lower-priced RYO products and illicit trade. In Italy, revenue was affected by the sale of the cigar business last year, while shipment distortions in the Netherlands, ahead of an excise increase, also had an impact.

In Asia Pacific, revenue at constant rates grew strongly, up 9%, due to a combination of price increases, improved mix and higher volumes. In Latin America, there was very strong growth in revenue at constant rates of exchange, up 17%. This was driven by price increases in several markets, particularly Brazil, partly offset by the effect of lower volumes in Mexico following the introduction of higher excise taxes.

In Africa and Middle East, revenue at constant rates grew 10%, driven mainly by significant trade buying in South Africa ahead of a price increase in February. The disruption of supply in the Middle East had an adverse effect on volume and revenue for the region. In America Pacific, lower volume and revenue in Canada was largely offset by growth in Japan.

Turning to the slide on volume and profit. The 6% rise in revenue, combined with cost savings, produced a very strong 18% increase in operating profit at constant rates of exchange. However, the quarter was flattered by the exceptional performances in Brazil and South Africa. Prices rose in Brazil last October, ahead of an excise increase expected to take place in July of this year. In South Africa, there were shipment distortions in anticipation of a price increase in February and these will unwind in the second quarter. Therefore, the very strong increases in profit in Latin America and Africa and the Middle East should not be extrapolated over the remainder of the year.

Having said that, there were good performances in many markets, reflecting stronger prices and cost savings. Of the key markets in Europe, Russia, Italy and France saw good increases in profit. Profit in Germany was down slightly, for the reasons I've already outlined, and the shipment distortions in the Netherlands resulted in a significant impact on profit.

Strong performances in Australasia, South Korea, Vietnam and Pakistan saw profit rise in the Asia Pacific region 15% at constant rates. Cost savings and volume growth were important contributors to profit growth. Japan continued to grow volume and share and profit was well ahead, but more than offset by lower profit from Canada, which was affected by illicit trade, direct distribution costs and down-trading. On a more positive note, Imperial Tobacco Canada's market share, at 53.4%, was up on the fourth quarter of 2006, driven by the growth of Peter Jackson.

The excellent 18% growth in Group profit from operations at constant rates of exchange translated into 6% growth at current rates of exchange. Paul Rayner will now take you through the drivers behind our earnings per share growth.

Thank you, Paul, and good morning, everyone. The strong profit performance at constant rates of exchange was the main driver behind the growth in adjusted earnings per share. Net finance costs, at GBP58m, were GBP10m lower, principally reflecting the impact of derivatives and exchange differences, as well as higher levels of cash during the quarter. However, the full year net finance costs will be affected by the higher levels of dividend paid and the increase in the share buyback program, so we expect the charge to be slightly higher than last year.

Associates contributed almost 4% to the growth in adjusted earnings per share, with good results from Reynolds American, which was GBP3m higher despite exchange, and this was due to unusually high margins and the inclusion of Conwood. ITC continued its strong performance, up GBP4m to GBP27m. At constant rates of exchange, the contribution would have been GBP7m or 34% higher than last year, with the growth assisted by some one-off costs in the comparative quarter.

For the purpose of the adjusted earnings per share calculation, the underlying tax rate was slightly favorable, at 31.9% for the quarter, compared to the 32.4% during the comparative quarter last year. We are still targeting a rate for the year of between 31 and 32%, assuming that there are no one-off developments.

The higher profit from Brazil was the main reason for a GBP5m increase in the minorities charged to GBP43m. The share buyback benefited earnings by 0.8% and the calculation was based on 2,057m shares. And we intend to resume the share buyback following the publication of today's results. The adverse foreign exchange rates had a 14% impact on the adjusted earnings per share, bringing the figure down to GBP0.2431, a rise of 10%.

That concludes the opening remarks and we'll open up the teleconference to questions.

Thank you. [OPERATOR INSTRUCTIONS]. The first question we have this morning comes through from the line of Mr. Jonathan Fell of Deutsche Bank in London. Mr. Fell, please go ahead.

Morning, everyone.

Morning, Jon.

I was having a look through some old papers yesterday and I noticed that, when you bought ETI in 2003, that represented a purchase multiple of about 12 times EBITDA. Now, on my figures anyway, Imperial's approach to Altadis represents around the same kind of multiple. So, with Altadis now arguably in play, is it time to reassess your view that large-scale M&A isn't attractive at current prices? After all, I think France and Spain do fit with your strategic criteria, being markets where you have low share.

John, it's Paul here. Just on the multiple, I think the important thing to realize was that I think when we bought ETI, we announced it was on a multiple of 10.8 times EBITDA the previous year. But we always said that wasn't the right number to look at and, since that time, we've sold off parts of the business we don't want, we've increased price levels dramatically, reduced cost levels.

On last year's profit alone, we bought it on an EBITDA of somewhere between 6 and 7. So the 10.8 is not the relevant figure to look at, because we always knew that we could substantially improve the business. So we're not going to comment at all, I don't think, in relation to any developments in relation to any acquisitions, but I think you need to take that point into account.

Okay, thanks a lot. Can I ask another one? You remarked again - it was in the statement - that Brazil and South Africa flattered their results this quarter. Can you give us any kind of feel for what that meant in EBIT terms, in terms of increased profit contribution?

I think the way to look at it is the profits for both of those businesses were up around 50% on last year at constant rates of exchange, which was significant. If you took out the increased profits for Brazil and South Africa for the quarter, you would come back to a healthy underlying rate of growth for operating profit, which is around high single digit. And I think that's more the relevant number to look at from an ongoing point of view.

So that's the extent to which it distorted the numbers. So we had operating profit at constant exchange up 18% for the quarter. You strip those businesses out and you'll get back to something close to very high single digit.

Okay. So is that if you stripped out the total profit gain in those markets or just the unusual profit gain?

If you strip out the unusual profit gains, you'll come back somewhere close to that.

Okay. Thanks very much.

The next question we have comes through from the line of Mr. David Hayes of Lehman Brothers in London. Mr. Hayes, please go ahead.

Morning, everyone. Hi. Just two questions, if I can. Just on Brazil, you mentioned the expectation of this tax rise in July. Is that a formal comment from the government and do you know the extent of that tax rise that's expected? And also, just based on the comments you were just making, should we assume you're not going to pass that through any more, in terms of the retail price going up any further from the increase we saw at the end of last year?

And then, secondly, just in Europe, there's obviously this pretty impressive bounce-back in the average sales per unit on an organic basis. I think it's up about 5% in the first quarter. I'm guessing maybe a little bit of that might be the mix impact, the fact that Russia volumes were down because of the de-stocking. I just wondered whether you can give us a feel for how much of that 5% is that mix and how much of it is underlying price increases across the region. Thanks very much.

Okay, David. My understanding in Brazil is that it's July and that's a formally expected price increase, so I think that's formal. I believe the rate is 30%. And what we intend to do on pricing, I don't think the authorities would like me to say what we're going to do on pricing.

Fair enough.

I don't think I'm allowed to tell you that. All I will say is that we took a price increase in October of last year in anticipation of that excise increase.

In terms of Europe, Paul, do you have anything on Europe, in terms of the mix? In terms of Russia, let me just talk around Russia for a moment. Russia volume was down and obviously our premium brands were impacted by the high level of shipments in the fourth quarter of last year and therefore reduced volumes in the first quarter. But the lower price brands, the local brands, principally Alliance and Yava, were more substantially hit in the first quarter than our global drive brands.

So mix in Russia improved significantly. So although the volumes were down in Russia, our revenue was up and our profit was up significantly in Russia, even though the volume was down, which gives testimony to a, the mix, but also the price increases around that.

I wasn't quite sure of your question, David, but, coming back to the Europe result, it was strong. The volume performance dragged it down, but offsetting that was very strong price performance, which just about offset the volume performance. But then it went into a positive, because of the costs were down, so we are getting the effect of the productivity savings coming through and it did have positive mix as well.

So those things meant that the Europe result overall was up 11% at constant, even though volumes were down 7%. So you had strong price really offsetting the volume, and then the cost savings and the mix improvement coming through.

Okay. I guess from what you've just said, both on Russia and that broader comment, that that 5% bounce in -- or the 5% average price per unit organic, it sounds like there's no one-offs that you would flag, basically, that's driving that. It's just basically better pricing and mix across the board. Is that a fair conclusion?

Yes, I guess it is. I think you do have some timing of spend issues as well. If you look at marketing spend, I think, in terms of timing - and that's really just due to the individual programs within the end markets - I do think the timing of spend was lower in some markets, especially, say, Italy and Russia, in the first quarter compared to what it's going to be in the next three quarters as well. And that also contributes a little bit to the results.

Okay.

It's worth mentioning, though, that our marketing spend in the first quarter was in fact higher than the marketing spend in the first quarter of last year. What Paul is referring to is that, as a proportion of our planned spend on marketing, the first quarter was relatively low, even though it was up versus the first quarter of last year. In other words, marketing expenditure is going to go up for the next three quarters.

Okay, great. Thanks very much.

Thank you. The next question we have comes through from the line of Mr. David Ireland of ABN Amro in London. Mr. Ireland, please go ahead.

Good morning to all of you. Two questions, in fact. The first one was just on price mix, which is unusually strong in the first quarter. I wondered whether was solely a function of this combination of the high margin countries having volumes up, the low margin ones being down, or whether there's some sort of structural improvement.

And secondly, you are, not unreasonably, trying to pour some cold water on the outlook expectations for the rest of the year, but equally your volumes will be up 2 to 2.5% in the final nine months. So I wondered whether you are still reasonably upbeat about the outlook for the full year.

David, let me pick up on the volume. We may have mis-communicated. What we meant to communicate was that, for the remaining three quarters, volume will be up round about 1%.

Oh right, okay. Sorry, [I now understand]. Yes, okay.

So with the decline of 3%, the volume for the year will be lower than 1%.

Right, fine. Okay, sorry. Thank you.

In terms of price mix, this is a confused quarter, as long as we don't get confused. What's happened is you've had positive product mix and you've had a relatively benign geographic mix. As you will recall, geographic mix has tended to - for everybody, all manufacturers, major manufacturers - tended to be working against us, as volumes move towards third world rather than first world. But relatively speaking we've had, for our business in the first quarter, a relatively benign geographic mix.

In other words, where we have lost volume, impacting that 3% decline, it's been in Iran and the Ukraine and Serbia. These are low margin or relatively low margin markets. Russia as well. Whereas where we've had growth, it's been in Brazil and South Africa, where not only are the margins better but you've had good price increases.

Let me just talk about the price increases for a moment. What you had was you had a load in South Africa in the first quarter, but you also had price increases from the middle of last year tracking through. So on a quarter by quarter basis, you're picking up those price increases. And the same in Brazil. We had price increases in Brazil, good price increases in Brazil, in October, which is rolling through. Now, we will lap those as we go through the year, so those price increases that we saw impacting first quarter won't impact the second half. And that's what we're flagging.

So we've had a sort of very benign confluence of events in terms of product mix, which will tend to be ongoing, geographic mix, which will be slightly one-off, and pricing, which was very strong in the first quarter but will unwind as we go through the year. Hopefully, that answers your question.

Fine. Okay, thanks very much.

And just to add to that, not only do you have the pricing being lapped in the second half, in the second quarter -- and we referred to this in the Chairman's comments. In the second quarter last year, we did get a significant [figure] from a lower tax rate, because we settled some tax issues in Canada. We had some significant fair value gains on interest in the second quarter last year. And we also had a very strong Reynolds result in the second quarter last year, where they had some trade loading volume positives in the second quarter last year.

You add all those figures up and you get a significant variation second quarter this year versus second quarter last year, which is going to work against us in the second quarter as well, below the operating profit line.

Fine. Okay, thank you.

Thank you. The next question we have comes through from the line of Marianne Barriaux of The Guardian in London. Please go ahead with your question.

Hello, everyone. I guess this is a question more for Paul Adams. Paul, you've repeatedly said you find it hard to see value of [current] M&A at current high share prices, and I guess this is obviously in relation with Altadis. So does that mean that you're ruling yourself out of what could potentially become a bidding war for Altadis?

Yes, we don't comment on specifics, so I won't comment on Altadis. The comments that I make, in terms of asset prices being high at the moment and difficult to see value for BAT shareholders at those prices, is a generic comment, which would obviously include Altadis but is not specific to Altadis.

Okay. And so, given that, then, what sort of acquisitions would you be looking for?

I think, as we've said before, there are acquisition opportunities. There are privatization opportunities. Turkey, if it comes onto the market -- It's been on and off for a few years now, but Turkey is a possibility. North Africa, we're interested, potentially, in Egypt, possibly Algeria. So North Africa would interest us. And there are potentially some acquisition opportunities in the Far East, for example, Taiwan.

So acquisitions is still very much part of our growth strategy and we do continually look at acquisition opportunities. We have a full-time mergers and acquisitions department here in Globe House. We're continually looking at acquisitions, but at the moment we see asset prices quite high.

Okay. Thanks a lot.

Thank you.

Thank you. The next question we have comes through from the line of Eileen Khoo of Morgan Stanley in London. Please go ahead.

Hi, morning, everyone.

Good morning.

Hi. I just had two questions, really, one on Canada and one on the Middle East. In Canada, I was wondering if you could give us the overall split at the moment in the market between premium and price and your share in each segment and also the average retail price for each segment. And then, on the Middle East, you mentioned supply chain problems. I just wondered if you could give us some color on that. Thank you.

Sorry, I missed the last part of that.

Sorry. Middle East, I think you mentioned that there was some supply chain problems.

Okay. Let me give you the information you wanted in terms of -- For the first time, now, value for money is higher than premium in the Canadian market. Total premium in the market accounts for about 49% of the market and value for money represents 51% of the market. We -- Premium, Imperial Canada had 66% market share of premium, which was stable with the fourth quarter, down one percentage point versus the first quarter of last year.

In value for money, we in fact grew share, again through a very good performance from Peter Jackson, where we were up almost two percentage points. So we went from 39% of value for money in the fourth quarter up to 41% in the first quarter, relative to a 39% share in the first quarter of 2006 as well. So we're up on sequential quarter and the quarter a year ago in value for money, driven by Peter Jackson.

Those two together meant that we grew share in Canada, as I mentioned, by about a percentage point -- sorry, half a percentage point in Canada, overall, first quarter on fourth quarter.

Okay, cool. But we should expect that sort of negative mix down-trading to continue, then.

Yes, I think we're still seeing the decline of the overall market. It declined by about 15%. That's the legal market I'm talking about. The legal market declined by about 15%. Overall consumption in Canada is down 2, 2.5% and the balance is being fed by illicit. We consider that that will continue in Canada and the down-trading will continue, yes.

Okay.

And in terms of the Middle East, we changed distributor, or one of our distributors that supplies two markets in the Middle East, and we had to take back some stock from him. The stock was higher than we thought we would have to take back, which has meant that the planned sales or the sales that we had last year didn't happen.

Okay.

It's a one-off.

Okay. Cool. Thank you.

Thank you. The next question we have comes through from the line of Mr. Jonathan Leinster of UBS in London. Mr. Leinster, please go ahead.

Thanks. Hi, yes. A couple of quick questions, if I may. First of all, depreciation amortization charge is quite a bit lower than last year. Is that a factor of the rationalization or, more likely, the currency? And is that figure of 74, is that a reasonable guide for the rest of the quarters?

And, secondly, back to Canada, I'm afraid. Did the direct store distribution, I mean, you are still talking about the high costs of that. Has that program been as successful as you thought it would be, or has it proved to be more difficult to implement?

No, we're pleased with what's happening on DSD. Let me just talk about that, Jon, while the other guys look at the amortization number. We're now at a situation with DSD where we have got the levels of delivery service that we wanted. Our out-of-stocks are either down to what they were before DSD and in a number of cases are below where they were.

So, in fact, DSD has helped us reduce the amount of out-of-stocks overall. It has given us speed to marketplace, which is very important in a market where price is an important criteria. And it enables us to get the contact with the retailers that we want, which enables us to get good display, which also is very important in a very restrictive market.

Where we're running at the moment, the costs of DSD are higher than we want, higher than we had originally planned. We had some system glitches, as you will recall. To overcome those system glitches, which are now principally overcome, we've had to put in more people. We are now culling those people back, so the costs of DSD will come down.

And also, DSD was predicated on two things. One, a recapture of trade margin, which we've principally done, although there's still a couple of large accounts to move into DSD. But, principally, we've captured trade margin. And also to pick up market share.

So where are we on the status of DSD? The costs of running the DSD need to come down and will come down some more. We have yet to see the kind of share growth that we wanted from DSD. That is still to come, but we're reasonably confident that we'll get that. And we've still got to recapture some of the margin from some of the accounts that we've yet to bring into DSD. All of this says that we won't have DSD where we want it to be until towards the end of this year.

And on the first question, Jon, yes, it is a reasonable guide. The reason it's come down is that a lot of the restructuring costs that we've had as we've closed factories, that has meant that we've had significantly lower depreciation as a result of that. And also you've got exchange coming in as well, which has reduced the figure. So that's the main two reasons why it's lower, which I think you guessed. And, as a guide for the future, that's the best number.

Thanks. Thank you.

Thank you. The next question we have comes through from the line of Elise Badoy of Goldman Sachs. Miss Badoy, please go ahead.

Good morning.

Morning, Elise.

I have just two questions. One on Brazil - if you could just quantify the decline in illicit trade. And then, on Germany, perhaps if you could elaborate a bit on the various segments, where you stand with potential new product launches, etc.

Okay, Brazil, I think illicit trade in Brazil has decreased slightly.

[Inaudible]

Yes. It's about 28, 29%, the amount of illicit trade, from a high of around about 32% a few years ago. So the amount of illicit trade as a percentage of the market is coming down slightly, all of which is good news and is the result of a lot of work, both by us in Brazil and by the government. So that's Brazil.

In Germany, the German market, overall, total tobacco, is down round about 12%. Cigarettes are up around about 2%, and roll-your-own is up around 60%, I think, if I remember correctly. But, overall, the total tobacco market is down, which is, of course, not good news. And that is largely driven by people going across the border to shop or buying illicit product coming in from eastern Europe into Germany.

And we reckon that the amount of illicit trade now - or not so much illicit trade but duty non-paid consumption, i.e. consumption of products which haven't paid duty in Germany - to have increased from around 17% to around 22, 23%. And, in fact, during the quarter, we estimate that it went as high as 30%. But it's coming down from that 30%. So there's still a fair amount -- Consumer buying patterns have not settled.

So the cigarette market is slightly up. The RYO make your own market is well up. We are well placed in both. Our market share, in terms of Nielsen consumer off-take, is up in cigarettes. We're down slightly in RYO. We've got slightly out of kilter on pricing in RYO, so we dropped slightly on share in RYO. But overall, our share for total tobacco in Germany is up slightly, as a result of those two.

And we're waiting to see patterns settle down. We think we have a very good brand in Pall Mall, strong in both cigarettes, the value for money end, and also in RYO make your own. We launched Quix at the back end of last year, in about in November, which seems to be doing well, and so we feel that we have a competitive proposition in Germany.

Thank you very much.

Thank you. The next question we have comes through from the line of [Dervol Jordan] of The Times in London. Please go ahead.

Thank you. Hello, it's Dervol Jordan here at The Times.

Hi.

Hi. Just wanted to ask you about Turkey. I know the political situation there is extremely precarious, but just on Tekel, the state-owned tobacco company, have you actually made any concrete progress on acquiring that company at all, on the preliminary steps taken to acquire it? Have you undertaken any kind of due diligence? Do you know how much you'd be prepared to bid for it?

The -- Okay. The Turkish government have yet to put it on the market.

Right.

There was an announcement about two months ago that they were going to put it on the market and then, about three weeks later, the Minister for Privatizations went on TV and said that they weren't going to put it on the market.

Right.

And this has been the situation, frankly, for the last three years, where they've said they're going to put it on and then they take it off again.

Right.

So we don't actually know what it is they're putting up for sale.

Right.

And until they do that, we can't really take a look at it.

I suppose it's very difficult to say when you could actually make any progress on it.

I don't -- We don't think it'll be this year, because of the political situation.

Right.

But that is a very tentative guess.

Okay, fine. Okay then. And just a couple more questions. Just -- Can I just ask how much of your revenue is actually generated from the U.K. market?

Actual amount of revenue? You'd probably have to go to one decimal if not two decimal places to find that out.

Right. Really? I was -- Because I was just curious as to whether you've factored in, this year, any effect from the smoking ban.

It wouldn't even begin to be material for our Group business.

Right, okay. And, just finally, have you examined the books, Altadis' books at all?

Don't comment on specifics. Sorry.

Okay. Okay, alright, fine. Alright, thank you.

Thanks.

The next question comes through from the line of Rogerio Fujimori of Credit Suisse in London. Please go ahead.

Hi, everyone. Two --

Hi, Rogerio.

Hi there. Two quick questions. My first one on South Africa and how should we think about second quarter volumes, given the trade [buy-in] in the first quarter? And my second question is on Malaysia. If you could give us an update on the pricing situation there and share trends and industry duty-paid volumes. Thanks.

Okay, volume in South Africa in the second quarter will probably be down, given that there was a lot of loading in the first quarter. I haven't got a number to give you though.

In Malaysia, situation in Malaysia is pretty positive. The market is beginning to show signs of stability. There was only very small decline in the Malaysian market in the first quarter, having had three years of strong decline. I wouldn't take that away and bank it. It's just reasons to be cheerful, rather than any seismic shift, I think, in the market.

Our share, overall, was slightly down in Malaysia, driven primarily by our tail brands at the value for money end of the market, where we're losing out to the very cheap whites in Malaysia. But our share of Dunhill, obviously a premium brand, grew. In fact, we believe that it's the highest ever share for Dunhill in Malaysia, so a cracking performance by our major premium brand in Malaysia. So all of that bodes well for our Malaysian business.

Thank you very much.

Thank you. The next question we have comes from through from the line of Nico Lambrechts of Merrill Lynch in London. Please go ahead.

Thank you. Hello, Paul.

Morning, Nico.

Just a question on the allocation of revenue between the Latin America and America-Pacific region. Could you just explain exactly what's done there? Is it the first quarter where there is actually a revenue allocation for the Mexican production?

Well, I mean, the -- We give numbers in terms of location of manufacture and location of sale, when you [go to the report]. But basically, the numbers we look at, at the end of the day, I think you should look at in terms of location of sale.

So, I mean, what you'll have in terms of profit is a slight profit in Mexico in terms of the margin [based] on the manufacture, but most of it would go through into Canada. And in terms of revenue, you look at it in terms of the location of sale, which are the numbers we focused on, so the revenues that are associated with Canada are in Canada, basically. Does that answer your question?

It does, but there has been a significant drop in the -- sequentially as well as year on year in the drop for the Asia-Pacific. So that's all organic?

In America-Pacific?

In America-Pacific, yes.

Yes, I mean, I think you've got net turnover in America-Pacific. I mean, net turnover, if the volumes are down 1%, but net turnover at constant is flat, the reason it's down is because of exchange, okay? And net turnover at current is down 12% and that's because of the weakness of both the yen and the Canadian dollar. So I mean the main reason turnover's down in America-Pacific was because of currency.

Okay, got it. Thanks, Paul.

Thank you. The next question comes through from the line of Mr. Chas Manso of Dresdner in London. Mr. Manso, please go ahead.

Yes, hi, everyone.

Hi, Chas.

I've got two questions, I suppose, one on sales and one on costs. On the sales, at constant currency, up 5.6%. You've helped us with the lumpy positives in Brazil and Africa on the profit line. Could you help us what it might have been, constant currency revenue, without Brazil and South Africa?

Yes, I think that 5.6% is a little steamy. As I said, we had some very good pricing, which will start to lap towards the middle of the year, start to lap itself. So I think that 5.6% is a little steamy and it's more likely to come down to a long term trend of round about 3.5, 4%.

Great, okay. I mean, you're getting some good price mix momentum in many of your geographies. Could you just go round where you see the best price mix and the most sustainable price mix?

I think the main benefit is in Europe, not so much because of where it currently is, but more relative to where it's been, if you see what I mean. Everybody knows the pricing situation, particularly in western Europe, but it extended into some markets in eastern Europe as well -- We all know where that was last year. And what we've seen are some significant price increases taken by the price leaders, whoever they happen to be, and followed.

So we have seen pricing improve, particularly, for example, in Spain. But we've also seen it in Russia, where not only was there an excise increase in Russia but there was the implementation of the maximum retail price, which is very beneficial in terms of trade margin. So we see the pricing situation in Russia is very beneficial, although, in the short term, it isn't. But longer term, that's going to be very beneficial.

We've seen pricing -- more pricing stability in Poland and, indeed, in Romania. We're now out of the problems, I think, in the Netherlands and Belgium. So generally, in Europe, the pricing environment is much better and we hope that that continues.

We have seen some little skirmishes around the world, but, generally, in Latin America, we've seen prices go up. We've seen prices go up in South Africa. In Malaysia, whilst it's still fragile in terms of pricing and there's still some down-trading going on, it's not as bad as it was. There's a little bit of skirmish going on in Australia at the moment, but we hope that won't get out of hand. So, generally speaking, prices are going up. And it's around the world, but particularly in Europe.

Great, thanks. And the costs question, I know you don't like to quantify these things quarterly, but could you just give us a feel whether the Q1 cost [of] delivery, cost [savings in] delivery is on trend or is it abnormally high or abnormally low? And also, often, you guide that most of your margin build is based on the back of cost savings. There's little leverage, apparently, from sales. Is -- Does that continue to be the case or, as you get greater pricing through, that that comes down to the margin more?

I'll attempt to answer the question. The costs savings programs are on track. And you'll see, when you refer to the narrative in the business review, we refer to a number of markets where cost savings have come through this quarter and have contributed significantly to the result.

However, if you come back and look at the overall things that have driven the result for the quarter, pricing has been far more significant, which I referred to in one of the earlier questions. And that has been really strong. And so price has been more of a mover, in terms of driving the results of this quarter, than costs. But the cost savings continue to come through.

Other than that, I don't think I can really add to that at this stage. As you know, we'll give far more detail at the end of this year in terms of how the cost savings are going specifically, but we are pleased with progress.

Okay, thank you.

Thank you. The next question comes through from the line of Mr. David Hayes of Lehman Brothers in London. Mr. Hayes, please go ahead.

Alright. Sorry, gents, just to come back with a couple of follow-ups, if I can. I saw a headline this morning of FX impact. I assume that the profit level of GBP180 to GBP190m, if we assume current rates continue for the rest of the year -- I just want to confirm that I've got that correct. I couldn't see exactly where it was sourced from.

And, also, just to come back on the D&A line, can I just confirm that there's also -- My assumption was that there's an element of an impairment charge one-off in that figure, when you were comparing the first quarter of this year with the first quarter of last year, due to that disposal that you talked about in the release. Is that an element of it as well? Have I looked at that right? Is that why it comes down from 104 to 74, I think it is, something like that? Thanks.

Yes, in terms of exchange, I think -- What did you say, you saw a number of about GBP190m, did you say, David?

Yes, the headline GBP180, GBP190m it was quoting, yes.

I don't think it's quite as bad as that. I mean, exchange, and if we're talking at operating profit level -- We're still obviously looking at significant adverse exchange for the year and we refer to that in the Chairman's comments in terms of the outlook going forward. But a couple of currencies have improved a little bit since we went through the full year results, Canada and Australia specifically.

And I think I said, when we got together with the full year results, that, if we'd taken 2006 at the exchange rates at that stage, we would have been down 5%. Now, if we did the same exercise again, it would be somewhere between 4 and 5%, but a touch better. So it's GBP190 -- It'll be below GBP190m if exchange rates stay where they are today.

So more like GBP120m -- sorry, go on.

Does that answer the question?

Yes, I guess it's more like GBP120, GBP130m then, based on 4 to 5%?

Well, I'm not going to give a number but that would be closer.

Okay. Okay.

Okay? And that's at the operating profit level. You've got to obviously bring in there's a significant exchange hit, also, at the associate level, David, which you'll have to bring in as well.

Yes. Sure, okay.

Okay? In terms of -- I think the question in terms of the reduction in depreciation amortization, yes -- You've got both the restructurings and I also think we had the Toscano business, I think, we sold in the first quarter last year, which had some depreciation amortization costs. So it's not only closing of factories. It's also sale of businesses and some of the loss associated with that will go through depreciation amortization.

Okay, great. Thanks very much. Thank you.

Thank you. The next question we have comes through from the line of Mr. Erik Bloomquist of JP Morgan in London. Mr. Bloomquist, please go ahead.

Hi, good morning. Just one question. Very strong performance in Japan. Could you give us some more color on what happened there and then, also, what your outlook is for potential pricing in Japan in the current year? Thank you.

Morning, Erik. Yes, I mean, we're doing very well in Japan. Our volume is up, despite the fact that the market is down. Therefore, obviously, our share is up. We're doing particularly well on Kent and Kool, driven by a lot of innovation behind those brands in that market. And of course we're rolling on the price increase from the middle of last year. So things are going very well for us in Japan. We're not price leaders, so I'll duck on price increases in Japan, but we remain hopeful.

Okay, thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We do have a question coming through from the line of Mr. Adam Spielman of Citigroup in London. Mr. Spielman, please go ahead.

Hello, good morning. A more general question. As I observe your results, they've obviously been very good. And that, as you say, following Chas' question, is mainly driven by price increases, which have mainly occurred, as far as I can make out, in markets where you're price leader, except for some like Spain and Russia you may not be, but in general that's true. And they mainly occurred in last year, when currencies were beginning to move very heavily against you.

So with that observation, to what extent, when you're setting prices in markets like Brazil or South Africa, are you thinking, 'Oh my word, the rand is dropping, we will put our prices up'? And to what extent are you just thinking about the local situation?

We think about the local situation and we tend to be driven more by the consumer than anything else. So the price increases that we take are the price increases that we think that are sustainable. And they're not price increases to make up for exchange negatives or for any other reason. We're driven by consumers. And that may sound a little trite, but it --

There's a slight concern that people think we're managing all of this to overcome exchange rates. We operate the business very much in a constant currency basis and we do what we think is best for the long term. And we do what we think we can do with the consumer, rather than aiming [off] for translation back into sterling. And we think that's the best way of having a sustainable business in the mid to long term.

It's just so happened that we've had a good first quarter because of prices. And we were joking earlier that this is the problem with having quarterly results, because people will look at a quarter and try and extrapolate from it. And we've been trying to give some kind of underlying feel, so that any extrapolations are wise extrapolations.

If you look at -- To try and put this all in a nutshell, if you look forward, I think, as I said at the preliminaries, we see less volume growth but more -- a more beneficial pricing environment. And I said at the time that, net, I saw that as being beneficial to revenue. I still hold that view. So I think you will see volumes down but pricing -- not down, but it won't be the same level of volume increases we've seen historically. And I see a better pricing environment and revenue will be slightly buoyant versus what we've seen historically. For the year, I'm talking about.

I think, in terms of our cost savings, we are substantially on track. Let me leave it like that, but we've got some big excise increases to come. We had a very strong second quarter last year, both operating and below the line and you need to bear that in mind. And I think, at the end of the year, what you will see is a very familiar pattern and I don't see anything too different from our long term trend. Maybe slightly more buoyant, but a very familiar trading pattern at constant currencies for BAT for the year. That's what I see going forward.

Thank you very much.

Thank you. The next question we have is again from the line of Mr. Chas Manso of Dresdner in London. Mr. Manso, please go ahead.

Thanks. Yes, I just had a question on the global drive brand performance, that 6% volume growth. I was just wondering how clean that was, whether any disturbances there, and seems to have come down from last year's growth rate. Is it just that it's lapped itself and this is the growth rate to be expected going forward, or is there anything in particular this time round?

No. As I said, I think you'll find global drive brands, by the end of the year, will look a familiar growth rate. High single figure volume growth for the year, possibly a percentage point or two more. The -- They grew by 6%. They would have grown by 8% had we been able to take into account the Pall Mall StiX in Germany that migrated into roll-your-own. So if we had just taken the roll-your-own increment, instead of the -- to compensate for the StiX loss, Pall Mall, the total global drive brands would have been up about 8%, rather than 6%.

But the global drive brands in the first quarter were impacted by the one-offs. A lot of that volume in Iran was Kent. And, of course, in Russia, that 2b hit, some of that was Kent and Pall Mall. So I think, over the year, it will revert back to its longer term trend.

Thanks.

Thank you. We now have no further questions, so we'll go back to Mr. Paul Adams for his closing remarks.

Well, thanks, everyone, for listening in this morning. As we said earlier, we think it's been a solid start. And looking ahead to the year as a whole, obviously the adverse exchange rates are expected to hold back our earnings per share growth. But we'll be back on July 27 for our interim results presentation, which we will hold as normal at Globe House in the normal way. Thanks very much. Goodbye.