英美煙草 (BTI) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the British America Tobacco nine month result conference call hosted by Mr.

Ralph Edmondson, Head of Investor Relations.

My name is Tim and I'll be your coordinator for today's conference call.

Throughout the duration of today's call you will be on listen only, however at the end of the conference you will have an opportunity to ask any questions.

(OPERATOR INSTRUCTIONS)

I'll now hand you over to your host Mr.

Ralph Edmondson to begin today's conference call.

Thank you.

Good morning everyone and thank you for joining us, I'm Ralph Edmondson, Head of Investor Relations and welcome to the British American Tobacco's nine months results call.

With me today are Paul Adams, Chief Executive and Paul Rayner, Finance Director.

In a few moments both Paul Adams and Paul Rayner will give you an overview of the results.

On our website, bat.com, you will find the slides that accompany the presentation, together with the earnings announcement released earlier today.

After the presentation there will be an opportunity for you to ask questions; the conference call operator will give you instructions on how to ask those questions.

I'll now hand over to Paul Adams.

Good morning everyone, let's first look at the headlines and then some of the detail behind them.

Group volume for the first nine months is still down on last year, due mainly to the factors we saw in the earlier part of the year such as the impact of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East and the loss of StiX in Germany.

Looking deeper into these results it is clear that our brand mix is improving, with growth in the higher margin offerings led by our continued strong global drive brand growth.

The global drive brands grew 10%, let by Kent up 18%, Dunhill up 7% and a positive contribution for Lucky Strike up 0.4% and a solid 9% growth on Pall Mall.

This global drive brand led growth also helped us improve our premium volume performance.

Premium volume is up over 1% led by gains in Russian, Romania, Azerbaijan, South Korea, South Africa, Brazil and the Gulf States among others.

Our value for money volume is up even more, at 4.5%.

This means our performance in the low price segment is down 9%, due to up-trading in markets such as Russian and Ukraine, and the impact of illicit products on the low price segment in a variety of markets across the world.

The improvement in mix is reflected in revenue growth, up 1% at current rates and up 6% at constant rates of exchange.

Profit from operations, excluding exceptionals, grew 8% at current rates of exchange and a very strong 14% at constant rates.

When we look across our key markets we're seeing positive trends in share growth, improved product mix and lower costs which have benefited operating profit growth.

Adverse exchange movements have partly offset operating profit growth, but the 8% growth at current rates reflects strong underlying trends for the first nine months.

Our associated companies continued to perform well, although our share of their post-tax results was 4% lower at GBP335 million reflecting the impact of exchange.

A comparable rates of exchange and excluding exceptionals, the associates contribution would have been 8% higher.

The contribution from Reynolds American was lower due to the adverse impact of currency and the favorable resolution of tax matters in the third quarter of 2006.

ITC also contributed strongly to the associates results; the contribution was 20% higher than last year at constant rates of exchange.

Adjusted diluted earnings per share rose 9% to 82p; Paul will discuss the drivers of adjusted earnings per share growth in a few minutes.

Returning to revenue and volume; revenue at constant rates grew almost 6%, despite volume being 1% lower.

Latin America was the star performer with revenue up 14% at constant rates, and 9% at current rates of exchange, reflecting the higher prices in Brazil in the first half of the year.

Prices had risen in anticipation of the July excise increase, and since that excise increase net revenue per mill in Brazil is now significantly lower than the level we saw in the first half, and this will have a marked affect on the Q4 results.

Both Asia Pacific and Africa and Middle East saw good revenue growth at constant rates, reflecting improved pricing and product mix.

However, revenue growth in both regions was affected by weaker currencies.

Europe was affected by reduced industry volumes in a number of markets, but despite volume being almost 2% lower revenue at constant rate was ahead nearly 3% due to favorable pricing and improved product mix in Russia.

America Pacific also saw revenue rise 2% at constant rates, despite volume being 4% lower, mainly due to the decline in industry volumes in Canada, partly offset by our growth in Japan.

Revenue growth benefited from higher prices in Japan.

Now looking at profit on the same basis, the 14% rise in profit at constant rates on lower volumes of 1% reflects improved pricing and the favorable timing of marketing spend in some markets.

As we highlighted at the interim results, we anticipate profit from operations at comparable rates of exchange will slow down in the fourth quarter, as a result of generally higher marketing spend and the timing of price increases in Brazil.

At current rates the exchange hit was GBP130 million, and I am pleased to report that all regions reported profit growth at constant rates including America Pacific.

Whilst we have strong profit growth in Canada in the third quarter we must not overlook the fact that in the corresponding quarter last year there were some significant costs associated with the move to direct store delivery.

There was strong profit growth in Europe, mainly as a result of higher margins in some key markets, offset by reduced volumes in a number of markets and weaker exchange.

Asia Pacific posted some very good performances in Australasia, South Korea, Vietnam, Pakistan and Bangladesh, although profit was lower in Malaysia due to the effect of the recent excise increase on industry volumes and the growth of the low price segment and illicit trade.

In Africa and Middle East strong performances in South Africa and Nigeria were significantly impacted by weaker currencies and the distribution issues in the Middle East.

Paul Rayner will now conclude the presentation by taking you through the drivers of adjusted earnings per share growth.

Thank you Paul.

The strong profit performance at constant rates of exchange up 14% was the main driver behind the growth in adjusted earnings per share.

Net finance costs at GBP204 million were largely in line with last year, despite the higher dividend distribution and share buyback costs.

We also expect the fourth quarter charge to be broadly similar to the third quarter charge.

Associates, excluding adverse exchange rates and excluding the exceptional tax benefit received by Reynolds American last year contributed 1.6% to the growth in adjusted earnings per share.

For the purpose of the adjusted earnings per share calculation, the underlying tax rate was similar to last year at 29.8%; we are targeting a rate for the year of around 30%.

The higher profit from Brazil was mainly responsible for the GBP9 million increase in the minorities charge to GBP127 million, the share buyback benefited earnings by 1% and the calculation was based on 2,045 million shares.

We maintained the share buyback program through the closed period and shares bought back are now held in treasury.

At constant rates adjusted earnings per share would have been up around 6%, but adverse exchange rates had a 7% impact, bringing the adjusted earnings per share down to 82p which is a rise of 9%.

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

Okay Tim if you'd go ahead please.

Thank you, yes.

(OPERATOR INSTRUCTIONS)

Our first question comes through from the line of Mr.

David Hayes from Lehman Brothers.

Please go ahead with your question.

Hi morning all.

Good morning, David.

Hi, two questions if I can?

Just firstly on the Africa and Middle East performance, if you look at the third quarter particularly I think organic profit was down about 11%.

Obviously you mentioned the Middle East situation, which I know you mentioned in the second quarter as well in terms of the supply chain, could you just give us a bit more detail about exactly what the drivers were in the third quarter and whether there's anything that we should be thinking about carrying on into the fourth quarter?

And then the second question, just a clarification on the guidance for the fourth quarter.

I assume that the way it's worded means that you expect organic profit growth to be lower than the 14% for the nine months as opposed to the 7.8% for the third quarter.

But just to clarify whether what the comparison is against in terms of when it's decreasing?

Thanks very much.

David, Paul Rayner.

Hi Paul.

Hi, yes the Africa and Middle East performance for the third quarter you're right was down 11% at constant rates, and the major reason for that was problems in the Middle East.

Well I think they're mainly one-off problems associated with stock writedowns and supply chain problems, mainly in Iran, and some extra tax assessments in relation to imported product that came through at the last minute which we provided for, but we will dispute.

So the Middle East has a particularly bad quarter, but it doesn't reflect underlying sales rates with consumers.

It flows on from some distribution changes we've made and also we had a lot of stock that was kept under bond for some time.

And when it came out of bond basically was head spotting and had to be destroyed, so some stock write-offs.

So that was the major reason for Africa and Middle East, other than that the region performed on track for the quarter.

In terms of the guidance for the fourth quarter, we always said, David, if you remember in the first half that the second half was going to be a lot tougher, and as you said operating profit growth was a lot lower in the third quarter.

I would expect it would even be lower in the fourth quarter because of timing of marketing spend, which is going be skewed a lot towards the fourth quarter.

So that's the way we see it.

So in guidance I think you should be looking at being lower than the third quarter.

Okay great, and just to say, on the Africa and Middle East though assume that we go back to an underlying profile for the fourth.

All that plays out does it in the third, everything was accounted for if you like in the third quarter?

Yes, yes as far as we know everything was accounted for and the region still had a very good result for the year-to-date, growing nearly 13% at constant rate and the underlying businesses running are along very well.

And there's a lot of potential to take costs out going forward; there's a lot of reorganizations we're doing.

So it's very much a one-off thing as far as we can see.

Okay, great thanks very much, thank you.

Thank you.

Our next question comes through from the line of Eileen Khoo from Morgan Stanley.

Please go ahead with your question.

Hi, good morning all.

Morning, Eileen.

Just on Canada, could you give us an update on your market share and volume performance to date and also how your switch to DSD is doing now?

Your competitor, Rothmans, commented that they had not seen any material impacts of that.

What would be your take?

Thanks a lot.

Okay.

Canada, we dropped about a share point in the third quarter in Canada.

We got out of kilter on pricing; we tried to take prices up slightly or remove some discounting that we were doing and the competition didn't follow and so we got out of kilter.

Plans are in hand to address that in the fourth quarter.

So we did lose a little share in Q3.

The DSD is going well; we've now got down to a cost level that we believe is right for that business.

We were running heavy on costs as we tried to overcome some of the teething problems we had early on.

We've now overcome those and we're not at a cost level that we're comfortable with on DSD.

We've improved the distribution in terms of the number of outlets that we're covering.

We've improved the distribution since before DSD, and we've reduced the number of out of stocks at those distribution points from the situation before DSD.

And we also had the opportunity to implement our programs that we want to implement much quicker as a result of DSD.

So we're happy with DSD; we got out of kilter on pricing, but we've got plans in place to address that.

Okay fantastic.

So you still expect growth for the fourth quarter in Canada?

I'm not sure that we want to get quite into that, but --

Well I'll just make a quick comment on that.

The third quarter was good for Canada, but the main reason for that was we had a low level of cost because we had some high costs last year in the third quarter, due to the implementation of DSD there.

So I think for the fourth quarter, and the fourth quarter last year we had a couple of minor one-off items that came through as positives, and the fourth quarter this year, I think we've still got continuing trends in terms of towards the value for money.

So it's continuing mix problems and illicit trade problems, so I think frankly we'll be struggling for profit to be increasing in Canada in the discrete fourth quarter.

Okay, thank you.

Thank you.

Our next question comes through from the line of Erik Bloomquist from JP Morgan.

Please go ahead with your question.

Hi good morning.

Two questions, firstly on Europe where profit growth was meaningfully stronger in the discrete third quarter than I had anticipated.

Would you attribute most of that then as it seemed to indicate in your comments to mix offsetting some negative volume in some other markets, and is there any reason to believe that that positive mix momentum should decrease in the fourth quarter?

We see the mix improving, not only in the fourth quarter, but in 2008.

We've got a very positive good momentum on our mix.

As you know we've launch Kent Nanotek in Eastern Europe which will certainly improve the mix, along with ordinary Kent growth in Eastern Europe And our global drive brands, Lucky Strike, Dunhill, Pall Mall are also growing in Eastern Europe and indeed Western Europe, so we expect that mix improvement to continue.

Pricing, as you know, has been a lot better this year in Western Europe and pricing indeed has been better in Eastern and Central Europe generally.

So those are the two big drivers of revenue growth in Europe.

Okay thank you.

And then on the Latin America division, also significantly stronger than anticipated despite the slowdown in Brazil due to the dramatic increase in tax.

Why was that so strong, is it primarily something going on in Venezuela as you noted in your release?

If you could explain more about that result, that would be very helpful?

Yes, sure Erik.

What's happened is that the effect of the excise increase in Brazil is really going to come through in the fourth quarter.

Because the excise increase came through basically in the middle of July, so we still got some positive effect in terms of the net price levels that we're getting prior to the excise increase in July in Brazil.

So you're going to find a significant reduction in net turnover per mill in Brazil in the fourth quarter compared to the third quarter.

And that's really going to affect the Latin America result in the fourth quarter, and the Chairman points that out in his concluding comments.

Venezuela did have a very strong third quarter, but since then Venezuela has had the excise increase as well, which is quite a dramatic excise increase, and that will come through in the fourth quarter as well.

So the third quarter for Latin America was strong because of Venezuela and a few of the other markets did acceptably well.

But the fourth quarter will come under some pressure because of those two things.

Okay great, thank you.

Thank you.

Our next question comes through from the line of Jonathan Fell from Deutsche Bank.

Please go ahead with your question.

Morning, I've got a couple of questions on Europe.

You've been talking for a little while now and again today about the improved pricing environment in Western Europe.

As I've looked down the list of your big Western European markets, there's an awful lot of them where you are talking about profit decline so far this year.

I was just wondering, is this the situation which you'd expect to continue?

Is it because -- is the profit decline the result of investment by you offsetting the benefits from pricing?

I was just wondering about the out -- what you think the outlook for this region or the Western part of Europe could be going forward?

Yes I think the outlook for Western Europe is good.

We've had an improved pricing situation this year; I still think there's room for pricing increases.

We haven't had a price increase in Spain for a while; we haven't had a price increase in Germany for a while.

And those were two markets where I think would be right for price increases, let me put that way, but we're not price leaders there.

So those two markets.

So I see the potential for pricing improvements.

Our share growth is pretty good in a number of markets in Western Europe.

Germany, of course, is a problem because of the decline in the market size; that was down, what, 9% in overall total tobacco terms because of the well-known switch from StiX and the growth of the cross-border trade in Germany.

So Germany, I would hope, would stabilize now.

I think we're over the hump of that in Germany, and hopefully a price increase.

So I see the future for Western Europe as being pretty good on the profit side.

Okay thanks then.

And just a quick follow-up on Russia.

I think in the fourth quarter last year there was quite an increase in volumes because of loading ahead of a tax increase, which you've suffered from a bit this year.

Are we likely to see a similar pattern in the fourth quarter this year, or are we going to see a volume drop in Europe because there is no loading in Russia?

Yes, you won't see the load in Russia in the fourth quarter that we saw last year.

We should see Russian volumes for the year being around flat.

We had volume growth in the second quarter of about 1.5% and about 3.5% volume growth in Russia in the third quarter.

Maybe getting a little growth in the fourth quarter, but against a very strong fourth quarter last year it won't be much, and that should take us to about flat for the year.

Okay, thanks.

Thank you.

Our next question come through from the line of Elise Badoy from Goldman Sachs.

Please go ahead with your question.

Hi sorry, my questions have actually been answered.

Thank you.

In that case our next question comes through from the line of Jonathan Leinster from UBS.

Please go ahead with your question.

Good morning, yes, a quick one on the structuring.

Historically you've mentioned volume growth 1.5% and sales growth 3% to 4%, implying a price mix of plus 2%, plus 2.5% maybe.

Given that in the first nine months you're looking a price mix of plus 7% and with the increasing emphasis on premiumization, are those figures perhaps too conservative?

Or is the Brazilian impact so large that that plus 7% is just a distortion and on a medium term basis, the plus 2%, plus 2.5% price mix continues to be a better guide?

I think we still hold to the guidance that we've given because the guidance that we've given were not annual figures.

They were what we expect the average to be over the medium to long term, as you know John.

So we will still think that's appropriate guidance.

Rest assured, if we can beat it we will.

Okay, thanks.

Thank you.

Our next question comes through from the line of Adam Spielman from Citigroup.

Please go ahead with your question.

Hello, it's Adam Spielman.

I've got three questions if I may?

Firstly, coming back to Canada, you said in the discrete third quarter, like-for-like EBIT was up 14%.

Are you able to say what it would have been if it had not been for the one-offs we saw last -- in the year earlier quarter?

Because you said it was only partly due to one-offs, so it was clearly positive on an underlying basis.

Secondly, coming back to the question on Africa and Middle East, you said there are a series of one-off negatives.

Are you able to give us a rough feeling, are we talking GBP20 million here or thereabouts?

And then finally, you are increasing, as far as I can tell, your marketing spend and I believe that's happened to some degree already in the third quarter and you said you will accelerate that in the fourth quarter.

Are you able to tell us, in broad terms, where and on what that is?

Thank you.

Yes on the, hi, Adam it's Paul Rayner.

On the first question, if we take out the difference in distribution costs for Canada, the startup costs on DSD, take out that favorable effect, Canada would have been slightly up on, if you like, a normalized operating profit basis for the discrete third quarter.

In terms of the Africa, Middle East one-off problems, your number is a good enough ballpark number.

Everyone has to remember what you said.

And on the where the renewed market emphasis is?

Sure.

We've been broadly equal across the first three quarters in terms of our marketing spend.

Yes, we said that it's skewed to the second half, and it will be skewed to the second half because it's skewed to the fourth quarter.

And the marketing spend is against programs that have been planned for some time, principally in Europe.

We are rolling out Nanotek across most of the former CIS and growing distribution, particularly in Russia, again extending our distribution capability ever increasingly east of the Urals.

So it's behind Nanotek and distribution build in Eastern Europe, principally Russia.

Also the UK, we've launched Pall Mall, as you may know, in the UK and that will take a bit of money.

And also in Africa and Middle East, principally around South Africa, where we've got a couple of brand programs that are happening in the fourth quarter.

Can I ask a follow up, Paul, on that?

I take it that Nanotek is fulfilling everything that you hoped it would; I suppose that's one question.

And the second question is on Pall Mall in the UK, you've launched it at an incredibly aggressive price.

Can you tell us what you're hoping to achieve with that?

Nanotek is actually surpassing our expectations; it's doing extremely well.

It's very early stages, so I have to temper my remarks, but it's certainly exceeding our expectations initially.

And it's getting a lot of consumer traction, not only in Russia, but in other countries, the satellites of Russia; probably not a good term, but you know what I mean.

Yes.

So if you like, that is going extremely well and, of course, it is at a super premium price.

So that's really helping us drive the mix improvement.

In terms of Pall Mall, we have Dunhill and Lucky Strike in the UK.

We have Vogue in the UK, but we didn't have a value for money global drive brand in the UK.

So the launch in the UK is just fulfilling the geographic rollout of Pall Mall, as we've launched it in a number of markets over the last two or three years, in Europe and indeed beyond.

So it's just part of the global rollout of Pall Mall.

The UK is obviously a profitable market and a sizeable market, so it was an obvious choice.

What are we hoping to achieve from it?

We're hoping to achieve profitable volume growth.

That's what we're hoping to achieve from it.

If you, typically you've achieved 3%, 4% market share with Pall Mall in lots of European countries, maybe a bit more than that, is that a realistic target?

I would say that our market share growth hopes for Pall Mall in the UK are modest and we're not expecting too much.

The size of that particular segment, if you look at Sterling and --

Windsor Blue.

Windsor Blue, thank you.

Put those two together, they're not a sizeable part of the UK market.

So our share projections are suitably modest, but still profitable.

Thank you very much.

Thank you.

Our next question comes through from line of (inaudible) from Credit Suisse.

Please go ahead with your question.

Thank you, (inaudible) from Credit Suisse.

Sorry if I missed, but could you please just confirm that you still expect flattish volumes versus a year ago at Group level for the full year?

Thanks

Yes, in fact they may be slightly down, somewhere between 0% and 1% down for the full year, probably nearer minus 1% than flat.

Thanks and just one quick question on Italy.

Basically we have ongoing share gains from the global drive brands offset by some losses from the local brands.

So should we still think about ongoing small share losses at Group level or are we getting closer to stable share at Group level in Italy?

Thanks

Yes, we do have overall market share loss in Italy of around about a point, although we've had good share growth on the global drive brands.

Pall Mall is up, Dunhill is up, Lucky Strike is up.

We are losing share on the local brands as you say.

MS is down about half a point and Sax is slightly down.

We're not happy with the share situation in Italy and it's something that we will be addressing.

Whether that means that we'll be able to stabilize overall market share remains to be seen, but it's not a situation we're happy with or we're going to accept.

Thank you Paul.

Thank you.

Our next question comes through from the line of David Hayes from Lehman Brothers.

Please go ahead with your question.

Hi, just a couple of follows-ups, okay?

Just [in terms of] the comment you made about the phasing of A&P spending, you made it sound like it's very much fourth quarter loaded.

If I look at the third quarter again in isolation organically, I think sales are up 9%, which is pretty impressive obviously, but profits are only up 7.8%.

Is some of that underperformance of profit if you like, therefore to do the cost saving phasing as well?

Were cost savings not as high in the third quarter?

Does it bounce up again in the fourth quarter to offset some of the spend back in the fourth quarter?

I'm just trying to get a feel for how much of this is the spend back levels phasing and how much of it's the cost saving level phasing.

Thanks.

Well let me just start off and maybe Paul can chip in.

Firstly, we've had some slowdown in Brazil, which was a big driver in the first half of the year, as Paul mentioned.

And we did have one-off writedown in the third quarter on Africa and Middle East, so both of those would have slightly depressed the third quarter.

Our overall ongoing costs, there's no blip in our costs in the third quarter, other than what I've mentioned.

Yes, there's a couple of things.

Marketing spend, the increase in marketing spend, frankly, is more in the fourth quarter versus last year.

If there's any quarter in the year where it's going to be up, it's certainly going to up in the fourth quarter.

But we had some other costs.

There are a lot of projects going on associated with the restructuring costs that we're not classifying as exceptional and they were quite high in the third quarter.

We've got three regions going through significant reorganizations, which will result in far more efficient regions.

And as we bring a number of things above market, some of the central costs have been a lot higher.

And the other thing which distorts the numbers is the famous phone cards in Latin America.

They are quite substantial.

Sure.

Now we distribute those phone cards as a principle.

Unfortunately, we have to include the costs in our operating costs.

If you look at the total costs year to date, they've gone up 2%.

If you take out the phone cards, they've gone up less than 1%, and in the third quarter, they're quite substantial.

They halve the Latin America cost increase down from about 9% to 5%, so you've got to take those out as well.

They're the main reasons.

Okay, but the phone card accounting change is still lapping like-for-like isn't it, because that happened in '06 --

Yes, we had phone cards last year, it's just that the costs have gone up this year.

Right, okay.

Significantly, I think there's something like between GBP50 million and GBP60 million extra cost on phone cards this year versus last year for the three quarters.

Right.

That is significant.

Sure, okay.

And then, sorry just one other very quick question I think.

Just in terms of you talk about the premium volume growth being about 1%.

In terms of definition of that, do you have a firm definition?

Do you say anything that's within, I don't know, 20% of the premium pricing point in each market?

Is there something that's consistently used to assess that?

Yes, it will vary market-by-market.

Just let me say, the premium growth was 1.6%.

We increased the premium volume by 2.6 billion sticks in the first nine months, so I think that's pretty good going I think.

Sure.

Premium is -- we define it in consumer terms, so it's really what the consumer perceives as premium, would be the classic definition.

What does that mean in practice?

I would think, again depending on which market, but it would be within normally 7% or 8% of, if you like, the premium benchmark.

Okay, brilliant, thanks very much.

Thank you.

Thank you.

Our next question comes from the line of [Ray William] from Afrifocus.

Please go ahead with your question.

Hi, yes good morning, just two questions.

First of all, maybe if you can just talk about Japan.

You've mentioned further market share gains there and we've also seen that it looks like Japan Tobacco's market share has started to turn the corner.

So maybe just your thoughts on the overall market in Japan and also from the fact that Philip Morris has been losing market share there.

Can we probably expect more pricing issues?

And then just secondly on South Africa, you mentioned market share improvement.

I know your market share has been drifting lower over the past few years, maybe if you can just explain a little bit more of what's happening in this market.

Okay.

Japan is going well for us.

We're currently running at a market share of 10.5% for the year to date, which is up 0.7% versus the year to date last year.

In the third quarter, in fact, we were up to 10.7%, so our market share continues to grow nicely.

And that's driven really by Kent and Kool, both of which have had a lot of innovation around them, particularly the Kool, Kool Boost, which some of you will know of, which the little capsule in the filter; that is going extremely well.

So we continue to grow share.

JT have, in share terms stabilized, but are still soft, or slightly soft.

Year to date, they're 64.6% against 65% last year, so they've lost 0.4% according to the numbers we've got.

And Philip Morris are also down year to date.

24.4% relative to 24.7% for the nine months last year.

So we're the only major company actually growing share and indeed volume in Japan this year, which we're pleased about and it's innovation based.

In terms of pricing, the Japanese market is not a market where there is a lot of price activity.

Indeed, it's remarkable if you can get the price up in Japan.

You need any price increases to be noted by the Ministry of Finance and it's not a heavily discounted sort of market.

It's a well disciplined market and I frankly don't see that changing much.

What drives growth in Japan is innovation rather than pricing.

In terms of South Africa, yes we're doing well in South Africa.

We've grown our share in South Africa and we're up about 0.4% of a share point.

We're now at about 90% share of the market and that's driven by the growth of Dunhill and, to some extent, Peter Stuyvesant.

Thanks.

Thank you.

We have no further questions in queue.

Just a final reminder (OPERATOR INSTRUCTIONS).

We have one final question come through from the line of Chas Manso from Dresdner.

Please go ahead with your question.

Hi, yes, I've got three questions.

Firstly, you've chatted about the pricing environment mostly in Western Europe being better.

Could you just do the tour and update us on the pricing environment outside of Western Europe?

Are there any markets remaining that are still sporty?

Then on the comment about the three regions going through reorganizations and upping the central costs significantly on the back of that.

Could you -- obviously that takes a while to do, could you give us some idea of how long it will be whilst that reorganization is a cost before it starts being a benefit to your P&L?

And normally you give us some guidance on the FX impact for the rest of the year.

If things were to stand still for the rest of the year, which of course they won't, what would be your FX impact for the full year?

Okay let me talk about pricing, Chas.

Pricing outside of Western Europe, we've seen positive price moves in Central and Eastern Europe, which is all to the good, which is not to say that it's all plain sailing.

When we try to lead prices up, the competition eventually do follow, but it tends to be on occasions slightly slow in following.

It's still pretty sporty in Argentina and it can get quite tense in Brazil.

We saw some significant discounting in Australia, as you will recall, in the first six months, eight months of the year, that seems to be easing.

So there are little outbreaks of pricing, I would include Malaysia in that, but that's principally right at the low end.

So to try and summarize, I would say that amongst the majors, there is a propensity to either take price increases or follow price increases, although it's not always plain sailing.

What you're always struggling against, of course, is the smaller players and the semi and illegitimate players at the bottom end of the market, which can disrupt volume and as we've seen, our low price volume is down, can disrupt volume and also inhibit your ability to take prices.

So whilst the pricing environment remains good both within Western Europe and beyond, it's not without its concerns.

In relation to the question Chas, all of the reorganizations we're going through will have a substantial payback and they're phased, so you've got some costs this year.

Some regions are ahead of others, so you'd expect the benefits coming through on the regions which started the reorganization will come through earlier, such as Africa and Middle East.

But I think you need to put this in the context that -- there are a number of things that we're doing within the Group, not only the reorganization of the regions, opportunities for us to leverage costs in terms of shared services will require upfront costs.

And running our supply chain on a global basis, rather than a series of separate businesses is also a significant upfront cost that we're going through the process of incurring right now.

We have to do this by keeping an overall lid on cost, so as I said before, costs at constant rate of exchange were up sort of 2% for the year, if you take out the phone cards it's up 1%.

That also includes a significant cost which we booked associated with these supply chain disruptions in the Middle East; that goes through the cost line.

So the reason the Africa and Middle East costs are so high for the quarter is because of that.

So when you pull those factors out costs aren't up that much across the Group, but the reason they are up is because of some substantial reorganizational costs, and a lot of those costs are picked in the center as things are centralized.

We end up charging them back to the regions if we can, because that makes tax sense, but only if we charge back on an arms length basis.

But essentially that's what's happening, but we have to keep a lid overall on costs.

And as I've said on a number of occasions we watch that spend back very carefully to make sure a significant proportion of cost savings are dropping through the bottom line; we'll continue to do that.

In relation to the FX impact, strangely even though the US dollar has continued to weaken, exchange rates overall over the last six to eight weeks have moved our way.

So if you were to cut the numbers today for the discreet fourth quarter we could have either a slight translation gain or a slight translation loss.

But at this stage it's looking pretty much close to last year in terms of translation for the discrete fourth quarter, because most of the other currencies have moved our way apart from the US dollar.

So that's been a net favorable movement for us.

Thanks.

Thank you.

We have a follow-up question from the line of Erik Bloomquist from JP Morgan.

Please go ahead with your question.

Hi, just wanted to follow up on an earlier question; I wasn't quite sure if it was answered in terms of the phasing of cost savings.

And if you could address if we're likely to see an increase in cost savings in Q4 relative to the run rate we've seen in the previous quarters, or if that would be less or more or less in line?

And the second question was on Vietnam, I understand there's been a significant excise tax increase.

Does that mean the outlook for that market is less rosy in Q4 in 2008 than previously?

Thank you.

I can't see any major distortion on the level of cost savings Q4 versus Q3 to answer your question.

The main thing that's going to happen on cost in Q4 is a substantially higher level of marketing spend versus last year.

Yes, to be honest, Erik, I hadn't picked up on the Vietnamese excise increase, so I can't answer that question sensibly.

I know that we're doing very well in Vietnam, our profits are up and our market share and volume is up, so we're doing well in Vietnam.

As for the excise increase I'll have to look at that.

Great, thank you.

We have a final follow-up from the line of Adam Spielman from Citigroup.

Please go ahead with your question.

Quickly, you've mentioned that in three regions you've put up your costs in the short term to save in the long term.

Africa and Middle East is obviously one of them I assume, can you just name the other two?

No, what I said was the three regions are going through reorganizations and, as a result of that, there are one-off costs associated with those that filter through the result.

But when you look at the results in terms of discrete levels of cost for the third quarter, Europe was up a little bit, and we had Africa and Middle East up a little bit.

But a large part of that was due to the Middle East problems that I talked about.

I'm sorry, Paul, if I summarized what you said wrongly or got the wrong end of the stick.

But the three regions where there were some one-offs that weren't taken as exceptionals, are you willing to say what they were?

Yes the regions that are going through reorganizations are Europe, Asia Pac and Africa and Middle East.

Thank you very much.

Thank you.

We have no further questions in queue so I'll hand back to your host today to wrap up this morning's conference call.

Thanks everyone for joining us.

Just to try and conclude, I think we're pleased with the results, we continue to see strong underlying growth driven by the global drive brand growth and particularly the growth of our premium volume and the pricing environment which is all improving.

So things continue to go well and I think we've expressed a slight cautionary note on the fourth quarter which I think has been picked up on.

Other than that, thank you for joining us.

Thank you for joining today's conference call, you may now replace your handsets.