英美煙草 (BTI) 2008 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the British American Tobacco first quarter results conference call.

My name is Stephanie and I will be 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 am now handing over to Ralph Edmondson to begin today's conference.

Good morning everyone and thank you for joining us.

I'm Ralph Edmondson, Head of Investor Relations, and welcome to the first quarter 2008 results call.

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

In a few moments, both Paul and Ben 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 will give you instructions on how to ask those questions later.

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.

Reported Group cigarette volume for the first three months rose 1.3%, due mainly to the absence of the negative one-off factors we saw in the first quarter last year, such as the impact of the high level of trade buying in some markets at the end of 2006.

At this point, it is worth remembering that we disposed of some businesses last year, primarily some cigarette brands in Italy and the Chesterfield trademark in Southern Africa.

Our organic volume growth was therefore 1.6%.

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

The global drive brands grew 23%, led by Pall Mall up 31%, Kent up 30%, Lucky Strike up 16% and a solid 8% growth on Dunhill.

Brand migrations accounted for around one third of the 23% rise in global drive brands and that was largely Pall Mall in Pakistan.

The growth of our global drive brands has resulted in premium volume rising 6%, value for money rising 7% and low price offerings being 8% lower.

Premium volume now accounts for around one third of Group volume.

The improvement in mix is reflected in revenue growth, up 14% at current rates and 6% at constant rates of exchange.

Profit from operations excluding exceptionals grew 18% at current rates of exchange and a strong 10% at constant rates.

After two years of currency headwinds, we are now benefiting from the appreciation against sterling of many of the key currencies in which we operate, with the exceptions of the US dollar, which is broadly flat and the weaker South African rand.

Of our associate companies, ITC and Skandinavisk continued to perform well.

But Reynolds American had a difficult quarter, with adjusted earnings down 11%, reflecting lower volumes during the first quarter.

The Reynolds American unadjusted result included the benefit from the termination of a joint venture agreement this year.

The associates' contribution, excluding exceptionals, rose 3% at current rates of exchange to GBP114 million.

Reynolds American has recently announced a $350 million share buyback program over the next 12 months, which we have agreed to participate in, to maintain our shareholding at 42%.

Adjusted diluted earnings per share rose 17% to 28.4p.

Ben will discuss the drivers of adjusted earnings per share growth in a few minutes.

Looking at revenue and volume in more detail.

Every region saw revenue growth at constant rates and each region, with the exception of Latin America, saw volume growth during the quarter.

In Europe, the absence of the effects of the speculative trade buying in Russia on last year's volumes, together with higher volumes in Romania, Switzerland and Spain, resulted in Europe's volumes rising 3%.

Higher volumes, pricing and improved mix drove revenue up 8% at constant rates and 19% at current rates.

Asia Pacific benefited from good volume increases in Pakistan and Bangladesh, despite lower volumes in Vietnam and Malaysia.

The 4% rise in volume translated into a 6% rise in revenue at constant rates and 10% at current rates.

In Latin America, volumes were down 4% at GBP36 billion, with declines in Brazil, Mexico and Venezuela only partly offset by the increase in Chile.

Higher prices resulted in revenue growth of 1% at constant rates across the region, despite the weaker volumes.

Stronger currencies resulted in a 10% increase in revenue at current rates of exchange.

Africa and Middle East saw volume increases in Nigeria, Iran and Turkey, partly offset by declines in South Africa.

Improved product mix, higher volumes and pricing, were behind the 7% increase in revenue at constant and current rates.

In America Pacific, volumes were up 1% and revenue rose 7% at constant rates, mainly due to Canada.

At current rates, revenue was up 22%.

Looking at profit on the same basis, the 10% rise in profit at constant rates on volume growth of 1% reflects improved pricing and product mix together with cost savings in many markets.

Favorable exchange rates added a further 8% to profit from operations before exceptional items.

In Europe, profit was 16% higher at constant rates, mainly as a result of the excellent performances in Russia, Romania, Switzerland and Spain, partly offset by profit decreases in Germany and the Czech Republic following the industry volume declines in those markets.

Asia Pacific's 4% volume growth drove a 9% improvement in profit at constant rates, mainly attributable to strong performances in Pakistan, Vietnam, Bangladesh and Malaysia.

Latin America's profit decreased 1% at constant rates, although it was 7% higher at current rates following the impact of lower volumes.

Brazil posted lower profit in local currency as price increases were not sufficient to offset the impact of lower volumes, higher excise and the timing of marketing investments.

At constant rates of exchange profit in Africa and Middle East improved by 7%, although the weaker rand pulled back profit growth to just under 6% at current rates of exchange.

In South Africa volumes were lower following the termination of the Chesterfield License at the end of 2007.

However, Dunhill continued its strong performance, while Kent performed well following the brand migration.

Profit was ahead in local currency.

America Pacific benefitted from a significantly stronger contribution of GBP64 million from Canada.

Overall share was down 1.2 share points to 52% as the decline in the premium segment was not offset by the growth in the value for money brands.

Q1 last year was also depressed by higher direct distribution and trade costs.

Volumes in Japan were flat, but share grew driven by the strong performance of Kool and growth of Lucky Strike.

And at this point I'd like to hand over to Ben Stevens who, in his new role as Finance Director, will take you through the drivers behind the growth in adjusted earnings per share.

Thank you Paul.

The strong profit performance up almost 10% at constant rates of exchange was the main driver behind the growth in adjusted earnings per share.

Net finance costs at GBP95 million were GBP37 million higher than last year, GBP15 million in net interest and GBP22 million in foreign exchange differences and fair value changes.

The increase in net interest is mainly driven by the translation of the Group's euro interest cost, as we hold a substantial proportion of our debt in euros to match the currency of the underlying earnings.

The foreign exchange differences and fair value changes are principally due to an GBP11 million charge due to the stronger Swiss franc which has meant a revaluation of our Swiss franc debt that is in place to fund our Swiss franc assets.

Consistent with our previous treatment in 2005 when we excluded a gain of GBP23 million, we've excluded this charge from the adjusted earnings per share calculation.

The balance relates to higher than normal foreign exchange movements due to recent market volatility.

On this adjusted basis net finance costs rose from GBP58 million to GBP84 million and impacted earnings per share by 3.6%.

Associates have no impact on adjusted earnings per share while the lower underlying tax rate of 30.8% benefitted adjusted earnings per share by 2%.

The lower tax rate arises from a change in the mix of profits and the reduction in the national tax rates in several countries.

This is in line with the 30% to 31% guidance given you at the preliminary results presentation in February.

Minority interests at GBP48 million were GBP5 million higher than last year, but had a negligible impact on adjusted EPS.

The share buyback program recommenced in March at the lower annual level of GBP400 million a year.

The share buyback benefitted earnings by 2% and the calculation was based on 2,015 million shares.

We have maintained the share buyback program through the closed period.

We announced last week that R&R had breached the 30% level, but following shareholder approval and a waiver by the panel they are not obliged to make an offer for the remaining shares.

Finally, favorable foreign exchanges boosted adjusted EPS by 7% to 28.4p, a 17% increase over the prior year.

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

Thank you.

(OPERATOR INSTRUCTIONS).

The first question comes through from the line of David Hayes from Lehman Brothers.

Please go ahead.

Morning gentlemen, hi, two questions if I can?

Just firstly on the European pricing per unit, a pretty strong number again.

If I look back over the last five quarters the average is about 4.7% organic increase, and that's been pretty consistent over those quarters as well.

Is that 4.5% plus what we should be expecting moving forward in Europe now, or is there anything that you'd warn against me thinking about that moving forward to the rest of the year?

And then secondly just in terms of phasing on A&P spend and cost savings, you mentioned a couple of markets where A&P was slightly high; I guess in others it's down.

Can you just give us a feel for whether you think quarterly-wise A&P and cost saves have been pretty constant, pretty consistent or whether there's going to be some lumpiness to either of those two lines and whether this quarter particularly, was high or low in either of those areas?

Thanks very much.

Okay thanks David.

Yes pricing per unit in Europe, trying to forecast what the pricing per unit will be going forward is always tricky because it depends on what the competition do.

But to talk about pricing, pricing momentum tends to be good; it's still continuing.

I think it's slightly sticky in terms of Spain and Germany at the moment, but generally I would say the pricing momentum is good.

It doesn't seem unreasonable to use that assumption going forward, but with the obvious caveat that we don't know what pricing will be.

Sure.

In terms of A&P spend it's a fair question.

As we look out over the year, if you remember last year we were slightly heavier weighted to the second half of the year than is normal.

That will continue in 2008, but won't be quite so heavily weighted towards the second half.

In terms of the first quarter, A&P spend was up generally versus the first quarter of last year, but would be a slightly lower percent in that quarter for the year as a whole, if I'm making sense.

So it was up, but we think that as a percentage of the year it was slightly lighter than normal.

Right.

Which if you take it that we're going to be more front half loaded than last year and the first quarter was slightly light, it might give an indication about the second.

Sure, okay and cost saves are they pretty constant, quarter-on-quarter?

I know you don't talk about that in numerical terms in the quarters, but no particular lumpiness, is that evenly spread?

There'll always be some lumpiness on costs by quarter-by-quarter.

As you know we don't like to look at our results quarter-by-quarter too much; I know you have to.

But no, there's nothing untoward.

Okay thanks very much, cheers Paul.

Thank you.

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

Please go ahead.

Hi there, morning, a couple of quick questions.

One, if you could give us any update on Canadian litigation if there's been any developments there?

And also just in general what you're seeing in emerging markets, is your premiumization strategy pretty much still working, do you see any slowdown in the last month or are things still pretty much going strong there?

Thanks Eileen, Neil Withington is here the General Counsel so why don't I let him answer the first question and I'll handle your question on emerging markets.

Okay.

Morning everybody.

No significant developments in Canadian litigation to be concerned about.

There have been filings in New Brunswick of a recoupment case based on similar provisions to a local statute to that enacted in British Columbia.

But that's at very, very early stages and the issues that it presents are very familiar to us.

And in fact there was a win in Ontario in a [fire safe class] action called (inaudible) last week.

So things pretty much in a steady state.

On emerging markets, no I don't see any change to, or threat to our premiumization strategy.

It was interesting; I was looking at the numbers just before I came down on our global drive brand growth in Latin America.

And our global drive brands in volume terms grew in Latin America by 8%.

And that was despite a very slight decline in Pall Mall, so it's not Pall Mall that's driving that 8% growth in global drive brands, so the balance would be premium orientated.

So we haven't seen any slowdown anywhere really in terms of our premiumization strategy, which is not to say that it won't happen, but it hasn't happened yet.

Okay.

Thank you very much.

Thank you.

The next question comes through from the line of Rey Wium of Afrifocus please go ahead.

Hi good morning.

Just a few questions.

First of all just in terms of the brand migration in South Africa.

I know Benson & Hedges' market share was about 6%, 7% and you've converted that now to Kent.

Maybe if you can just give us an idea of the rate of success of that migration?

That's the first question.

The second one, just in terms of the share buyback, you have bought back only GBP35 million worth of shares in the first quarter, will you accelerate that in order to achieve that GBP400 million for the full year?

And the final question just revolves around the reason why you're participating in the share buyback scheme of Reynolds American.

Is that maybe, I don't know if I read between the lines, but given the problems that are actually facing with the growth brands, is it a vote of no confidence in the stock?

Why are you not keeping your existing shares in the company?

Thank you.

Okay, early days on the Benson & Hedges to Kent migration in South Africa, but it's tracking well.

We're certainly hitting our retention rate targets and it's doing well, so no issues there.

I'll let Ben talk about the share buyback program and the rate of share buyback program.

But just to pick up on Reynolds American, we participated because, as we've often said, we're happy with our 42% shareholding which means we neither want to see it go up nor go down, so we were happy to participate.

Yes on the share buyback, of course we had access to inside information in January and February because of the STK deal, so we couldn't go into the market in January and February.

So we started again in March and you can anticipate the share buyback coming through at about GBP40 million a month for the next ten months.

Okay, thank you.

Thank you.

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

Please go ahead.

Hello, good morning.

A question about Canada; obviously had a strong result driven, as far as I can see, by low like-for-likes in the year earlier quarter.

As you look forward should we expect local currency profit, which I suppose is Canadian dollars in Canada, to be up on year earlier quarters?

And I suppose I'm trying to get to the question, do we think we've finally stabilized profit in Canada?

Well you're right, we did have a good first quarter in Canada, Adam.

I think there were a couple of one-off factors.

We had four more selling days in Canada in the first quarter of this year relative to last year which tended to push volume and therefore revenue slightly higher, and we have got the benefit of price increases.

And you're quite right, there were some higher costs in the first quarter of last year including some one-off costs, so slightly flattering.

I know everyone's very anxious for me to call the bottom of the Canadian market and I'm not doing so yet, simply because I have a great respect for the challenges that that business is facing in Canada, in terms of the down-trading, the smuggling and the pricing environment.

So cautiously optimistic in Canada; I think we're seeing some encouraging signs.

We saw whilst first quarter on first quarter share was down, first quarter share on fourth quarter share was up.

And that share growth is being driven by John Player Standard and Viceroy coming into the markets and doing well.

So we're certainly encouraged by the performance, but I'll wait a few more quarters before calling it, Adam.

Fair enough.

And is there any sign the governments are taking the first nations sales more seriously now than they were or are they still fairly inactive?

I think they give us a sympathetic hearing, but they haven't done anything.

Fair enough, thank you very much.

Thank you.

The next question comes through from the line of Robin Pagnamenta from The Times.

Please go ahead.

Good morning.

I was just wondering, given the proportion of your earnings that are earned overseas, has any consideration been given to shifting your domicile outside the UK?

I think we're going to wait and see what the government comes out with.

We're consulting with the government; we're being involved; our views are being heard.

So we'll wait to see what comes out from the government, and I think we remain cautiously optimistic that something sensible will come out.

Okay, but to me it sounds as if it is something that you've been thinking about then?

I wouldn't say that we've been thinking about it, but we clearly recognize the issue.

And the thing to do is to try and consult with them and give them our views and let them know what could be the potential ramifications for British business and then see what comes out.

So we haven't given it any serious consideration yet.

Okay, thank you.

Thank you.

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

Please go ahead.

Morning.

Morning Jonathan.

Just a quick one from me.

Comments in Australia refer to increased competitor discounting activities, and I think we have something like this around the same stage last year.

I'm just wondering if you could expand on what is happening there and how you're responding to it?

Yes the pricing situation is -- or the discounting situation in Australia is still rumbling on.

It's a lot better than it was last year; the level is not so intense, or the pervasiveness is not so broad, but it is still there.

And it's crimping us a bit and inhibiting our ability to move up, but we're managing it.

And is there any particular competitor who's causing that bother or is it everybody?

Well, the issue is when someone starts pricing activity.

There are two laws about price wars, not that this is a price war, but one, everybody hates it and secondly no-one admits to starting it.

So other than the fact that we tend to be more sinned against than sinning I would say in Australia, I won't point the finger any more than that.

Okay, thanks a lot.

Thank you.

The next question comes through from the line of [Bruce Stevenson] from [Blueawa].

Please go ahead.

Thanks, most of my questions have been asked.

Just one last one.

In what seems to be a very benign environment for the tobacco companies, are there any major tax excise increases that are programmed for the rest of the year that you can tell us about?

I don't think there's anything out there that's substantial that we need to worry about that we know about at the moment, but of course with excise you never quite know what's going to hit you around the corner.

Okay, thanks.

Thank you, we've got a follow-up question from the line of Adam Spielman from Citigroup.

Please go ahead.

Thank you very much.

A very simple question for modeling.

It looks like we should be modeling the Tekel acquisition that's to occur in the middle of the year, is there any reason to do anything different with SGK?

I know you're subject to EU regulation, but is that the best thing to model it?

Yes, it's very difficult to say because we're waiting to see what happens to competition clearance from the EU.

If everything goes well then we could easily do the deal by the half year, but we've just got to wait and see I'm afraid.

Okay, thank you very much Ben.

The next question comes through from the line of Elise Badoy from Goldman Sachs.

Please go ahead.

Yes, good morning.

I just had a question on the outflow for Russia given the forthcoming potential tax increase in '09 and '10.

I saw some press articles suggesting that the scope of the increase might be even higher than originally anticipated and I was wondering if you had any comments to make on that?

We're well positioned in Russia, Russia has the advantage of being a growing market where we're growing share on the back of a premium portfolio; it's also an uptrading market.

So we have no particular insights to offer you on that, but we're very comfortable with the position in Russia.

The only other thing I'd say on Russia is that we had a stunning first quarter in Russia, but of course the comparatives will get more difficult during the course of the rest of the year.

Okay because the scope of the increase looked like it was higher and I was wondering, given the inflation levels in Russia etc., if you had any views that actually the numbers that have been put in, talking about over 24% I think increase in every year, I was wondering if actually given the inflation etc., if that was reasonable, or if those numbers looked a bit high?

Inflation is from memory about 10% in Russia, but the currency is appreciating and we're doing well.

So I'm not sure that there's a particular issue there for us in Russia.

Okay, thank you.

Thank you.

The next question comes through from the line of [Gerry Gallagher] from [Austin Friars].

Please go ahead.

Morning guys.

Just a couple of questions the global drive brands.

I jumped on the call late so maybe you've given these figures, but bear with me.

You did 23% volume growth I think in the quarter, but there was a lot of migration going on there.

I appreciate it may be a difficult number to come up with given that migration, but do you have a feel for what the underlying growth in the global drive brands was ex that migration factor?

And perhaps what you think you can do moving forward on the global drive brands?

And what percentage of the total volume is now global drive brands?

And finally, it may not be a big number, but presumably your GBP800 million cost savings that you're projecting over the next five years, any further migration into global drive brands and benefits of scale that that may provide would not be included in that GBP800 million figure, would I be right in saying that?

Okay, Gerry, let me give you the numbers.

Global drive brands were a shade over GBP40 billion in the first quarter.

That equates to 25% of Group volume.

Migration was about GBP2.3 billion, which would have brought the 23% down to 16%.

We've often talked that medium to long term volume growth of the global drive brands should be around high single digit, a well known phrase, but we think that applies to global drive brands as well.

So excluding migration 16% was a good quarter.

Just on the saving side, the marketing economies of scale from having a bigger proportion of our global drive brands in the portfolio obviously aren't part of the GBP800 million.

But having a more global drive brand based portfolio does allow us to make savings in overheads, of course.

And some of the above market savings we're able to extract, particularly in terms of say brand management and things like that, are part of the GBP800 million savings.

So I think in summary the GBP800 million excludes any marketing spend savings from having a higher percentage in global drive brands, but will include some overhead savings from having a more consistent portfolio.

Okay, thank you very much.

Thank you.

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

Please go ahead.

Sorry, gents, just a couple of quick follow ups.

Just on Japan, the top line looked pretty healthy talking about flat volumes and pricing, but if you look at the organic it looks like it was flat profit-wise.

Are you seeing a change there in terms of competitive intensity?

And I guess in terms of a wider question, PMI are obviously talking a good game about increasing [Marlboro] brand support, etc.

Are you seeing anything from them any different at this early stage of the year, or is it pretty much business as usual in that sense?

Thanks very much.

Okay, just to generalize first and then come back to your specific question.

We went into the year recognizing that two things had changed; one because of consolidation and the Philip Morris spin-off competition had got bigger and stronger and so we were anticipating a much tougher competitive environment.

The other thing heading into the year was, of course, a concern about the economic slowdown and how that would impact us, particularly in developed markets, less so in emerging markets.

And I have to say so far, so good.

We haven't noticed any major increase in competitive activity, which perhaps is a reflection that it was pretty competitive last year as much as that anyone's got slacker in 2008.

And so far not really being impacted by the economic slowdown and what impact that may have on consumers in terms of buying and uptrading.

So, so far, so good on both of those things.

So hopefully that puts some context on Japan where we've seen a heightened level of innovation, particularly around menthol products in Japan from both of our major competitors there.

Haven't had a major effect yet, but it's early days; they would be the first to say that.

But we're still growing share; our volume is flat in a declining market.

I think costs may slightly go up.

Remember that there's still a big program, or running to the end of a large program on age verification on vending.

It's clear that more volume will be sold through the convenience channel in Japan going forward.

And that may tease up trade costs around that particular channel, not in any huge way, at least as far as we're concerned.

As you may remember, from our trip to Asia in May last year, we are relatively strong in convenience channel.

We saw that move in convenience channel two years ago and we've been building relationships and putting in place contracts with the convenience chains over the last two years.

So whilst I think costs will go up, and certainly our costs will go up, as well, in terms of handling that increased volume through convenience, I don't see it as being a substantial increase.

Okay, great.

Thanks very much, cheers.

Thank you.

Ladies and gentlemen, we've got no further questions in queue.

(OPERATOR INSTRUCTIONS) We've got a question coming through from the line of Erik Bloomquist from JP Morgan.

Please go ahead.

Hi, good morning.

Good morning, Erik.

I just wanted to follow up on two things; one with respect to the volume growth, organic growth of 1.6% is a terrific number.

I was wondering if you could do two things; one, talk to us about the split in that volume growth between premium and value-for-money and low price.

And then secondly talk about how that affects the outlook for volume growth in the year.

A second question with respect to Latin America, it looked like there was a 3% negative price mix in that market.

Is that something we should attribute to A&P spend in markets like Mexico and Brazil?

And is that something where there's going to be a continued impact through the rest of the year, will that follow the phasing you described earlier in the call?

Thank you.

Okay.

Thanks, Erik.

If you look at our volume split, premium is now around about 32% of Group volume, an increase by 6.2% first-quarter-on-first-quarter.

Value-for-money is round about 35%, that increased by 6.6% Q1/Q1.

And low price is around a third, and that decreased by about 8% Q1-on-Q1.

I think you're saying -- at the moment we still see premium growing for the balance of the year.

Not sure it's going to be growing at 6%, but still see growth for premium for the balance of the year as we improve our mix.

But that's all subject to whether there's any marked consumer slowdown, which we haven't seen yet.

I'm not quite sure I understand your question on Brazil.

The issue was that we were making, if you like, super profits in Brazil last year because we had taken price increases ahead of excise.

And so we had that very benign pricing situation in Brazil for about the first seven, eight months of the year.

And we're not enjoying that now because the excise kicked in, in the second half of last year.

So that super normal profits has gone away, which is the main issue for us in Latin America relative to last year.

But I'm not sure I understood your question around A&P?

Okay.

I'll circle back with Ralph later then.

And then with respect to foreign exchange, is it something that we should expect to be, again, sequential like it was last year or is it something that appears given where spot rates are now that we could continue to see benefiting through the rest of the year?

Yes, if spot rates stay where they are now you'll see some benefit for the rest of the year.

But you've got to remember that sterling declined during the course of last year; it didn't all happen on January 1.

And therefore, we're going to be lapping some more difficult comparatives in the rest of the year.

But as things stand at the moment with current spot rates we see an FX gain for the year.

Okay.

But we should see the benefit of FX moderating as we go through the year?

Yes, somewhat.

Great.

Thank you.

Thank you.

The next question comes through from the line of Virginia Heeribout from Natixis.

Please go ahead.

Hi, good morning.

I have three questions, actually.

First one on Germany; you said in your press release that profit is down in Germany, I just wondered if it is in local currency or at current rate of exchange?

And if you can give us some details about what's happening in Germany and what's the outlook for the rest of the year?

Second question about Latin America.

You have volumes down 4%, I understand mainly driven by Brazil.

Can you give some details about what has driven this volume decrease and what's the outlook for the rest of the year?

You also speak about timing in terms of marketing expenses in Brazil.

Can you talk about what are your plans for the moment in there?

And last question about the profit in Turkey.

I just wonder if you are still making loss in this market or not, thank you.

Okay, wheeling us around the globe on those questions.

Can we just talk about Germany outlook and perhaps Ben can answer the question on profitability.

In terms of the outlook on Germany, I think Germany's going to have a tough year, I'm talking for the industry, in 2008.

We have the rollout of smoking bans, we have the impact of the increase in age of smoking from 16 to 18 years, which I think happened in the third quarter of last year, so that's rolling forward.

And we had the Schengen Agreement, which meant there are no border controls between Germany and Poland for one.

And so there is some concern that the level of duty not paid product being consumed by German consumers will increase.

So that was the negative side.

And so far, I have to say, those concerns, those worries have not transpired as strongly as we thought but they're still there, particularly around the smoking ban and its rollout.

So the market was down 3% to 4% in the first quarter.

I think we'll be lucky if we see for the year that the market is only down 3% to 4%.

We saw, on the other hand, price increases in value-for-money at the beginning of the year and for roll-your-own which was helpful, but we've yet to see price increases on high priced and premium brands.

That still remains an issue.

So that's the outlook for Germany.

The main issue for us in the first quarter was reduced volumes and a little down-trading.

Just in local currency terms, Germany's profits were down somewhat but you've got to remember, of course, that the price increase only came through at the end of the first quarter on roll-your-own, so we're anticipating a slightly better performance than that for the year.

On Latin America, yes, the reason why the volume is down in Latin America is because there was some thumping excise increases in Venezuela and Brazil, which led to higher prices in the fourth quarter of last year, which is rolling through into the first quarter and indeed for this year.

So that's principally why the volume is down in Latin America.

Ben?

[When you compare] the marketing expenses, we're tweaking our DSS operation there, but it's not significant in terms of the performance out of Brazil.

And in Turkey, we're breaking even now in terms of our local business there.

Okay, thank you very much.

Thank you ladies and gentlemen, we've got no further questions on queue.

(OPERATOR INSTRUCTIONS)

We have a question coming through from the line of Rogerio Fujimori from Credit Suisse.

Please go ahead.

Hi there, two questions please.

First, were there any material trading inventory movements in any of your top markets in the quarter?

First question.

And the second on margins; obviously the performance in the first quarter was very good.

So my question is whether this is sustainable and a good rough indication for the full year, or should we bear in mind the marketing step up in the second quarter four or any extra costs of the year assuming the global competitive environment remains okay?

Thanks.

Just on inventory movements, I think the only significant one is in Switzerland, where we had very good shipment share because we're putting in a new EAS system in Switzerland.

So we shipped a bit of volume at the end of the first quarter just to make sure that we overcome any potential hiccups on implementing that system and that will reverse out in the second quarter.

I think also we, along with our major competitors, there was quite a bit of trade load in the fourth quarter of last year in the Czech Republic, which meant that the industry sales were well down in the first quarter in the Czech Republic, but those are the two major ones.

I'm not sure we'd call the Czech Republic a major market though.

Was there another question, remind me?

Yes, on margins, the first quarter performance was obviously very good, so just trying to get a sense if it's a good indication for the full year, or should we bear in mind timing of marketing, or is it a good rough indication for the full year?

Yes, operating margin was over 32% in the first quarter, which was up from 31% in the first quarter of last year.

I think that's slightly flattered by the timing and marketing spend.

Good, thank you.

Thank you.

The next question comes through from the line of Chas Manso from Dresdner Kleinwort.

Please go ahead.

Yes, good morning.

Hi Chas.

Hi, I was wondering whether you'd help us tease out the one-offs in Q1.

What's your sense of the profit impact of last year's one-offs, both positive and negative?

The second question would be on innovations, like your menthol capsule in Japan, could you just update on what innovations you've brought through in this quarter, or where you've been focusing more on migrations this time?

And I suppose the last one would be on price increases, really trying to tease out between prices and mix I suppose.

But post the usual January cycle, whether there have been any noticeable price increases in your portfolio in the last couple of months?

Well let me just do price mix.

There are a lot of price increases happening either at the end of last year or the beginning of this year, but they're the normal price increases that one would get.

So there's nothing that stands out.

The good news is that the price increases are occurring and continue to occur, but there's nothing special or big price increases that's worth mentioning.

In terms of innovations, we're focusing on Kent Nanotek, bedding that in in Eastern Europe and we continue with Cool Boost in Japan.

And we're rolling out the resealable pack, what we call the [walrus] pack, the resealable pack for Dunhill in two or three markets.

So the innovations that you know about, we're focusing in on rolling those out.

Yes, and we're not really able to tease out every individual movement in the markets.

But remember Russia did very well against the first quarter last year because of the loading at the end of '06, and Brazil did not so well at the start of last year.

So I guess those two wash out somewhat.

I think if I was trying to characterize the first quarter, which maybe the underlying question you have, Chas.

It is a good first quarter, and driven by the volume growth that we don't anticipate we'll see for the year, but there's nothing untoward or particularly different in our costs or our marketing expenditure.

It's a fairly ordinary quarter, other than the fact that we got more volume and that lifted the quarter.

I think over the balance of the year, over the next nine months, you won't see the growth over those nine months that you saw in the first quarter.

The growth will slow down, but not to any untoward degree.

Okay.

Thank you.

The next question comes through from the line of Patrick Schwendimann from ZKB.

Please go ahead.

Patrick Schwendimann, Zuercher Kantonalbank.

I have a question regarding Richemont Remgro.

Could you update us on your planned listing in South America?

Thank you.

South Africa I think you mean, yes?

I think we've had no further information from R&R on what their plans are, so everything stays much as it was at the year end.

So for you it's still a wait and see?

Yes, absolutely.

Okay, thank you.

Thank you.

And we've got a follow-up question from the line of Eileen Khoo from Morgan Stanley.

Please go ahead.

Hello there, just another quick question on your Group tax rates for this year.

Could you just remind us what your guidance is for this year?

Yes, we anticipate the underlying tax charge, to be between 30% and 31% for the year, which is pretty much where we were in the first quarter.

Okay, but then there'll be an extra deferred tax charge for Tekel, right?

Is that correct?

Yes.

There's a GBP20 million deferred tax charge for Tekel which we'll pick up when we do the acquisition.

Okay.

Thank you.

Thank you.

Ladies and gentlemen, we've got no further questions in queue so I hand back to the host to conclude today's conference.

Well thank you everyone for tuning in.

I suppose just to finish, to try and summarize the first quarter, I can do no better than to use the quote that Jan Du Plessis used in the announcement, which is that the year has clearly got off to a great start with profit growth in all our regions.

While the normal caveats about not reading too much into any particular quarter still apply, the Group's unrivalled spread of business between developed and developing markets should continue to serve shareholders well.

Thanks very much for listening.

Bye bye now.

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