英美煙草 (BTI) 2008 Q2 法說會逐字稿

Good morning everyone. I'm tempted to say from a Chairman who thinks this is a good time to be in the business but that wasn't on my script. I'm Chairman of British American Tobacco, my name is Jan Du Plessis. And with me this morning, I've got Paul Adams, our Chief Executive, and Ben Stevens, Finance Director.

We will be taking you first through the interim results, after which there will as usual be an opportunity for people in the audience to ask questions. And a good morning to those of you who may be listening on the conference call or watching via our website, bat.com.

Before giving you my main impressions of today's results, let me begin by briefly running you through some of the headline numbers. Overall volumes rose 1% to GBP334 billion, and I'm particularly pleased with the continuing growth of the Global Drive Brands which are 20% up on the same period last year.

Our results benefited from favorable exchange rates, with revenue up 15% and profit from operations up 16%. The underlying growth at constant rates of exchange at 6% and 7% respectively was encouraging, particularly in the current economic environment. Our associates volumes were GBP111 billion and our share of the post-tax results, excluding exceptionals, increased by 6% to GBP235 million at current rates and by 4% at constant rates of exchange.

There was a solid performance from Scandanavisk Tobakskompagni and strong growth from ITC. But the contribution from Reynolds American was slightly lower as a result of reduced volumes.

Adjusted diluted earnings per share grew by 16% to 62p. Higher net finance costs and an increase in minorities were more than offset by the improvement in profit from operations, the boost from foreign currency, a slightly lower tax rate and the benefit from the share buyback program.

We continued to reward our shareholders with increased dividends. Our policy of paying an interim dividend, representing one third of the previous year's total dividend, resulted in our interim dividend being increased by 19%. You will also recall we announced last year that we intend to complete our move to raise the dividend payout ratio by reference to the adjusted diluted earnings per share to 65% in this financial year.

When announcing the preliminary results in February, we reported on the proposed acquisitions of the Turkish State owned tobacco business and the cigarette and snus businesses of our associate Scandanavisk Tobakskompagni. Both deals have now been completed and we have started the integration process. Although the transactions have no material impact on the second quarter's trading results and are unlikely to have much impact on this year's earnings, the deals should be earnings enhancing next year.

We've also recently published our first sustainability report. This has taken our engagement process forward to a new level and, if you've not had the opportunity to read it, you may wish to take a break from reading about the turmoil in the financial markets to log on to bat.com to see what we've been doing in this really very important area.

Although our position in the UK market is relatively small, we are reviewing the Department of Health's recent consultation paper. Rather than discussing the issues here, it is appropriate that we reserve our views for the written response which will be submitted before the closing date in early September.

Returning to the results, and stepping back from the detailed numbers, what are to me the three most important features of these results? Firstly, in the context of growing economic uncertainties affecting many markets around the world, these are very good results that underline the [defensive] qualities and indeed strength of the business which arises from the extensive geographic spread of our activities.

Secondly, brand strategy is clearly working despite fears of down-trading by consumers. The focus on our portfolio of Global Drive Brands, and investment in innovation continues to drive a favorable change in sales mix with our premium priced brands consistently outperforming our lower margin local brands.

And finally, and I make no apologies for this, after last year's currency headwind, we have a significant currency benefit that contributed around 8% of the 16% adjusted earnings per share growth. However, if you strip this currency effect out, we are still performing at the top end of our high single figure earnings growth range.

As I said in the release, these very good interim results demonstrate the strength of British American Tobacco's business as a result of the excellent growth from our Global Drive Brands, our leading market positions and our broad geographic spread. Whilst not immune from the consequences of an economic slowdown, we can certainly look to the future with more confidence than most.

Thank you and I hand you over to Paul who will discuss the results in more detail.

Good morning everyone and thank you Jan. Let's start with volumes. At GBP334 billion, volume was up 1.2% and 1.5% on an organic basis, if you adjust for some brand disposals last year. We had volume growth in Russia, Romania, Pakistan, Bangladesh, Uzbekistan, Turkey, Saudi Arabia and Nigeria, partly offset by declines in the Czech Republic, Italy, Germany, South Africa, Vietnam, Mexico, Venezuela and Brazil.

Our premium volume grew 7.6% during the second quarter and 6.9% during the first half of the year. With a 20% rise in Global Drive Brands, the brand strategy is clearly working. If you exclude the brand migrations, Global Drive Brands were 14% higher.

Dunhill was up 7% to GBP17.5 billion, driven by strong performances in South Korea, Taiwan, Australia, South Africa and Saudi Arabia. Volume was slightly lower in Malaysia but Dunhill's share rose. Kent up 26% continued its extraordinary growth momentum with volume increases in Russia, Romania, Ukraine, Kazakhstan and Chile, while benefiting from the significant Benson & Hedges brand migration in South Africa.

Lucky Strike also continued to grow, with volume up 10%, as performances in Spain, Italy, France and Argentina more than offset the impact of industry declines in Germany and Japan. Pall Mall was up 29% at GBP28.5 billion, with increased volumes in Turkey, Romania, Uzbekistan and Malaysia and the rollout into new markets such as Pakistan.

Turning now to the regions. In Europe, profit was 31% ahead, with excellent performances in several markets together with favorable pricing and exchange rates. At constant rates, profit would have increased by 18%. Volumes rose 2% to GBP116.5 billion.

In Italy, Dunhill and Lucky Strike performed very well but overall volumes were adversely affected by the decline of local brands and the disposal of some small brands in 2007. Volumes in Germany were down in line with industry volumes and share was stable. Industry volumes in France fell after the significant price increases last August but market share rose as Lucky Strike and Pall Mall continued to gain share. In Spain, excellent profit and volume performances were achieved following the strong growth of Lucky Strike and the price increase in Q1.

Russia put in another outstanding performance with higher volumes and market share and significantly increased profit. Likewise another excellent performance came from Romania.

In Asia-Pacific, profit rose 20% at current rates of exchange and 13% at constant rates, mainly due to strong performances in Pakistan, Vietnam, Bangladesh, Australia and Malaysia. Volumes at GBP76.5 billion were 3% higher as good increases in Pakistan and Bangladesh were partially offset by lower volumes in Vietnam and Malaysia.

Profit in Australia was higher as a result of higher margins and exchange, partially offset by increased competitive discounting. In Malaysia, share grew, with good performances from Dunhill and Pall Mall. Profit rose due to price increases, mix and lower costs despite reduced industry volume. Volumes in South Korea were in line with last year but market share was up as a result of the good performance from Dunhill. In both Pakistan and Bangladesh, the combination of increased volume and share, improved mix and higher prices led to good profit increases.

Latin America. Profit in Latin America was GBP5 million lower at GBP381 million. At constant rates of exchange, profit would have decreased by GBP48 million or 12%. Volumes were down 4% at GBP71.4 billion with declines in Brazil, Mexico and Venezuela.

Brazil was affected by last year's significantly higher margins, due to price rises in anticipation of excise increases in July 2007. A further price increase was not sufficient to offset the impact of slightly lower volumes, increased excise and higher marketing investment. Volumes in Mexico were lower, resulting in a reduced market share. Price increases in February which did not fully recover the earlier excise increase, along with higher marketing investment, led to a reduced profit. Market share in Venezuela grew but volumes declined following high excise driven price increases in the last quarter of 2007. This resulted in a reduced profit despite lower costs.

Profit in Africa and Middle East grew by GBP10 million to GBP250 million. At constant rates of exchange, profit would have increased by GBP19 million or 8%, mainly driven by South Africa and the GCC. Volumes were 5% higher at GBP49.1 billion, following increases in Nigeria, Egypt and GCC, partly offset by declines in South Africa.

In South Africa, profit grew as a result of improved product mix and pricing but this was partially offset by the impact of the weaker rand. Volumes and market share were lower following the termination of the Chesterfield trademark license agreement at the end of 2007. Kent is performing well after the migration from Benson & Hedges at the end of 2007. Profit in Nigeria increased as a result of higher volumes, improved product mix and price increases, while productivity in supply chain initiatives reduced costs.

In the Middle East, profit and volumes were negatively impacted by distribution difficulties. However, volumes were significantly higher in Saudi Arabia, where Dunhill grew its share impressively. In Turkey, volumes grew strongly, with good performances by Kent and Pall Mall increasing market share. Following completion at the end of June, the integration of Tekel with BAT is now underway.

Profit from America-Pacific was GBP43 million higher at GBP235 million. This was principally due to the improved contribution from Canada and stronger currencies. At constant rates of exchange, profit would have increased by GBP21 million or 11%. Volumes at GBP20.2 billion were slightly higher than last year.

Profit in Canada increased to GBP137 million. This was the result of higher pricing, lower distribution costs and a stronger exchange rate, partly offset by lower volumes. At constant rates, profit rose 14%. Overall market share has been relatively stable over the past three quarters at around 52% although the year-to-date is down 1.4% on the comparative period last year as the decline in the premium segment has not been offset by the growth in the value for money and the budget segments.

In Japan, volumes grew, despite the continued decline in total industry volumes. Market share gains were driven by the strong performance of Kool while market share of Kent and Lucky Strike were stable. Profit was up as a result of higher pricing and volumes, improved mix and favorable exchange rates, partly offset by increased marketing expenditure.

Ben Stevens will now take you through the rest of the presentation.

Good morning everyone and thank you Paul. The next two slides show graphically the impact of currencies on revenue and profit on a region-by-region basis.

Each region saw revenue and volume growth at both constant and current rates, with the exception of Latin America. In Europe, higher volumes, pricing and improved mix drove revenue up 8% at constant rates, and 21% at current rates. Asia Pacific benefited from good volume increases in Pakistan and Bangladesh. The 3% 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% as higher prices depressed volume in Brazil. Stronger currencies resulted in a 12% increase in revenue at current rates of exchange, although revenue was 1% lower at constant rates of exchange. Africa and Middle East saw volume increases in Nigeria, Egypt and the GCC. Improved product mix, higher volumes and pricing were behind the 12% increase in revenue at constant and current rates. In America Pacific volumes were up 1% and revenue rose 3% at constant rates mainly due to Canada. At current rates revenue was up 17%.

Looking at volume and profit. Again you can see good increases from Europe, Asia Pacific and America Pacific. In Africa and Middle East exchange rates were negative at the profit level due to the 7% decline in the average exchange rate of the South African rand. In Latin America profit in constant currency was down 12% due to the high 2007 first half comparatives in Brazil and also a lower profit performance in Mexico where we had lower volume in share.

The Group's profit per mille rose 14% at current rates to GBP5.26 and would have grown 6% to GBP4.87 per mille at constant rates of exchange. With the exception of Africa and Middle East each region recorded good profit growth in profit per mille.

Operating margin grew in three of our five regions. The Latin American region returned to more normal levels, having been over 40% in the first half of last year as a result of taking price rises ahead of the excise increase in Brazil. In Africa and Middle East foreign exchange in the distribution difficulties in the Middle East had an adverse impact on profit and therefore on the region's operating margin which would have been flat in constant currency. Despite this we've held our Group operating margin in line with the 2007 first half level at 32.2%, 2.2% percentage points above the 2007 full year margin.

Paul has already discussed the drivers behind the regions' operating profit so a comment on unallocated costs. These were GBP6 million higher at GBP51 million, mainly as a result of the timing of the expenses in 2007. Profit from operations before exceptionals was up 16% at GBP1,757 million. Restructuring costs were GBP33 million for the period and rose principally in respect of further costs related to the restructurings announced in prior years. The GBP11 million gain in 2007 arose as a result of the sale of the Group's pipe tobacco trade marks to Orlik Tobacco. Profit from operations after exceptionals was also 16% higher.

Net finance costs at GBP179 million were GBP53 million higher than last year; I'll discuss this in more detail in a moment. The share of post-tax results of associates was GBP293 million, an increase of GBP71 million. For the purposes of the adjusted earnings per share calculation we've adjusted for Reynold American's payment from Gallagher resulting from the termination of a joint venture agreement. Our share of this gain amounted to GBP45 million net of tax, and has been treated as an exceptional item.

Also the year end of Scandanavisk Tobakskompagni was June 30, and for practical reasons the Group has previously equity accounted for its interest, based on the information available from ST which was three months in arrears. Following completion of the deal on July 2, the estimated results of ST for the period up to June 30, 2008 have been included in these results resulting in a one additional quarter's income in 2008. This contributed an additional GBP13 million to the share of post-tax results of associates and has been excluded from the calculation of the adjusted diluted earnings per share. Excluding these exceptional items the contribution from associates was GBP235 million, up 6% on last year.

Net finance costs at GBP179 million were GBP53 million higher than last year, GBP26 million in net interest and GBP27 million in foreign exchange differences and fair value changes. The increase in net interest is driven by higher rates, higher financing costs, duty acquisitions and 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. At constant rates net interest would have risen by 8%.

As reported in the first quarter's results the foreign exchange difference and fair value changes are affected by market volatility and 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.

For the purpose of the adjusted earnings per share calculation the underlying tax rate was slightly lower at 30.1%, but in line with our guidance of 30% to 31% for the year. The decrease arises primarily from a reduction in national tax rates in several countries and a change in the mix of profits. The charge relates to taxes payable overseas. The tax charge for 2008 includes a one-off net deferred tax charge of GBP22 million as a result of the acquisition of the cigarette assets of Tekel. This has been excluded from the adjusted diluted earnings per share and consequently from the underlying tax rate shown on the slide. Profit for the period rose 15% to GBP1344 million.

Here are the drivers of adjusted earnings per share growth. Profit from subsidiaries at constant rates of exchange drove earnings by almost 7%. Higher net finance costs have a negative 2% impact on earnings. Associates, taxation and the minorities charge were all slightly positive. The share buyback benefited earnings by 1.7% and the calculation was based on 2,012 million shares. However, it was favorable exchange rates together with strong underlying profit performance that accounted for most of the 16% growth in adjusted earnings per share.

Finally, cash flow. Net cash flow from operating activities before restructuring costs rose GBP166 million to GBP1360 million. This reflected the growth in underlying operating performance, as well as working capital movements reflecting timing and one-off differences in 2007 and 2008. Restructuring costs were similar to the prior year resulting in the Group's net cash from operating activities being GBP168 million higher at GBP1,286 million.

Lower net interest flows, net capital expenditure and dividends to minority interests resulted in free cash flow being GBP215 million higher at GBP967 million. Free cash flow per share increased 31% and the ratio of free cash flow per share to adjusted EPS rose from 68% to 77%. We anticipate the full year capital expenditure being similar to last year.

Dividends paid to shareholders rose 16% but the cash outflow for the share buyback program was lower at GBP137 million, following the decision to scale back the program to GBP400 million this year. The GBP867 million paid for the Tekel cigarette assets and the impact of exchange differences on debt is reflected in gross borrowings rising from GBP6.8 billion at the year end to GBP9.5 billion and net debt rising from GBP5.6 billion to GBP7.2 billion.

That's the end of the presentation. So I'll hand over to Jan who'll start the Q&A session.

Thanks Ben. Well ladies and gentlemen we'll start the Q&A session. Can I just ask, as is our custom, that when you ask your first question at least you just state clearly your name and the name of the organization that you represent. I'm not going to, as I've done in the past, restate the questions for the purpose of the webcast because I'm told that (inaudible) that it actually is picked up on the webcast so I just end up repeating what others have heard already.

So who's to go first? I saw a hand in the middle, yes. Yes, please go ahead.

Erik Bloomquist, JP Morgan. A question on the cost savings program. Could you update us on the progress on that and where we stand?

And then secondly with respect to Turkey. Could you comment on the market there and also the outlook for the Tekel business? You've in fact owned it for about a month, are you happy with what you found? What are the prospects and outlook for that business? Thank you.

You go first and then Paul in Turkey.

Yes okay. Well the cost savings program we'll give a full update with the annual results, but the cost savings program is very much on target and delivering what we anticipate. So we're very comfortable with progress on that.

Yes the integration of Tekel is going well. We've hired all the people or most of the people that we wanted; the factories are up and running smoothly; efficiencies are increasing; we're looking at the brand portfolio; distribution is going smoothly and we're extending the distribution. We've hired significantly more trade marketing representatives to help with that expanded distribution.

Our own brands in the first six months of this year, principally Viceroy and Pall Mall have gone very well. Our share is up in Turkey over the last six months from around 7% to 9%. The Tekel brands obviously over that same six month period declined, as they have historically declined, so we'll be looking to see what we can do to slow that decline going forward, and that's really all around the marketing and the trade marketing.

So we're pretty pleased with the way things are going in Tekel and the situation with the unions appears to be harmonious and we're able to recruit the people that we want, although we still have to get through that. The figure that I heard was that we have 60 vacancies in our plants and we got 8,000 applications. So we think we'll be able to get the people we need, so things are going well.

Okay thanks. Next? Yes, Adam.

It's Adam Spielman from Citigroup. Can I just follow up that question on Tekel? I noticed as I was enjoying reading the [midyear] accounts that had you included Tekel for the half year it would have increased your profit I think by GBP4 million. So if you could just expand on that?

And while I'm speaking can I ask two other questions as well? Can you comment both for Europe and developed markets and separately for emerging markets, are you seeing the decline of the economic situation, which really, as far as I can see, is down trading in Europe and the impact of high commodity costs and fuel prices in emerging markets? Are you seeing any signs of that hitting?

And then finally if I may? In Australia clearly it's a very, very profitable market for you. Margins are very high but you're repeatedly talking about price skirmishing. Do you think that we've got as high as margins are as possible in Australia, because if you go any higher there's too much room for people to come in underneath?

Do you want to just deal with Turkey and then Paul can do the rest?

Yes Turkey it's a bit of technical GBP4 million out, I can reassure you. You've got to remember that that's on the basis of Turkish accounting with the sort of IFRS overlay on it. Then also Tekel has 3,500 employees; we're going to have 800 employees in Turkey. So we're going to have a substantially reduced cost base. They have five factories; we're going to get rid of three of them. And we see some very big synergies coming through between our Turkish operation and Tekel. So I can reassure you that the full year profits will be a bit more than GBP4 million.

You gave guidance before about cost savings. Now you've got your hands on it do you think there's any upside there or downside?

No I think we'll keep the guidance at the level we gave you. It's still early days yet; we only got hold of the company a couple of weeks ago. There's nothing we've seen in either Turkey or STK that disappoints us or leads us to change our mind from the picture we saw prior to the acquisition, so we're comfortable with the figures we gave. The acquisition integration is going very well for both of these deals and we look forward to delivering the synergy benefits we announced.

And just yet again illustrates the tremendously helpful nature of international financial reporting standards.

Yes.

Paul?

Let me just talk about -- I think your question was around two things, mostly related to costs in emerging markets and developed markets. Just talking about our cost generally --

Sorry it was actually about demand, I'm sorry I wasn't been clear at all. In other consumer goods companies in Western Europe we've seen a lot of down-trading. Also separately there's worries that high commodity costs and fuel prices in emerging markets will result in less income or less disposable income and hence less demand for your premium products.

Right okay, got it thank you.

I'm sorry [to go there].

Okay. No in fact our overall Group figures show that our premium volume was up round about 7% for the half year, and in fact our premium volume in the second quarter showed more growth than it did in the first quarter. So we're not seeing any slowdown from our premium brand growth. And indeed if you look at some markets generally speaking you're seeing that replicated. In Eastern Europe there's a lot of up-trading. It's worth pointing out that in a number of economies those economies are growing and are boisterous I would say, particularly in Eastern Europe. We're benefiting from that.

Brazil is going pretty well. We saw premium volume in Brazil increase slightly, despite the fact that our overall volume in Brazil was down. So premium volume is going quite well in Brazil. And in Asia Pacific there's a lot of up-trading even in Pakistan and Bangladesh, things are going well.

So we're not seeing any signs of any significant down-trading. There may be the odd country but that's more related, we believe, to excise increases rather than consumer pressures. So no signs of down-trading to any significant degree on a generalized basis.

Thank you, and the Australian question?

The Australian question. We're growing share in Australia and we're doing quite well and I think, obviously, we're taking share from others. And sequentially we've had both competitors try to recapture some share through discounting. In both cases that's cost them money; it's cost us money too. They've ended up losing share as a result, so not a very successful strategy. So we're hopeful that the discounting will ease; in fact we are seeing the discounting pressure ease on Australia.

To answer your question, can margins go higher, of course. You should see the pricing of the brands in Australia relative to say the UK. We still believe that there is room for upward pricing in Australia, and that certainly wouldn't come amiss for the government.

Thank you.

Right next. Right in the back yes?

It's Rogerio Fujimori from Credit Suisse. I was just wondering if you could update us on market trends and your performance in Mexico, a little bit more color? And the distribution difficulties in the Middle East, should we expect it to continue in the second half of the year, thanks?

Just for the webcast, I suspect that wouldn't have traveled [all the way]. Paul is going to be commenting on this situation in Mexico and secondly on our references to distribution difficulties in the Middle East.

Yes Mexico. We've flagged for some time that we have performance issues in Mexico. The consumption is down in Mexico generally speaking as a market, down around 5%. Our volume was down around about 11% and so obviously we lost share. We've lost about two points of share, currently running at about 38% market share in Mexico. Our portfolio is not as strong as we would like. We think there is the ability to improve our distribution and our trade marketing capability in Mexico and we are looking to address both of those as we speak. So yes, we do have a performance issue in Mexico and yes, we are working to rectify it.

In terms of the Middle East distribution I would think the bulk of the issues will be behind us in the next month or two. They're mostly related to where we've had distribution issues which meant the product has stayed in our distributors' warehouses longer than it should have done, with a result that the product was beyond date code. So we've had to take that back and destroyed it, and that's happened in both West Africa and the Middle East. And so we've had to account for that.

The other one was a sort of happy coincidence. Our Dunhill in Saudi Arabia has done extremely well. We've gone from about 2% market share to 4% market share in about six to eight months and frankly performed way beyond our expectations which is nice. But we had supplier problems, so we had to pay freight premiums in order to get the product out there in time. And that cost us a bit of money, but well worth the expense, we thought.

Right, thank you, Paul. Next question? Yes?

In the interview with Cantos you were discussing the --

Do you mind if I just ask, what is your name?

I beg your pardon. Bruce Davidson, Blue Oar Securities. In the Cantos interview, you were discussing the expected increase in costs in 2008. Given that's a relatively small part of the total price of a cigarette, how much importance should we attach to that warning comment from you?

I meant to convey in the Cantos interview that, in fact, we were in pretty good shape for 2008.

2009 that the warning's about (inaudible).

Exactly. Let me just cover the 2008. Our variable costs in 2008 are in pretty good shape. If you look at our variable costs per mille in constant currency, our costs so far this year are flat versus 2007, and indeed flat versus 2006, as obviously we've improved our cost capability. I think for the balance of the year, we're still going to remain in good shape, but there are obviously some cost pressures coming through around labor costs in high-inflation countries in, of course, energy. But we don't think those will be significant.

In 2009 -- sorry, let me just explain 2008 again. What's happened in 2008 is that we're paying for leaf at last year's prices, because we used last year's leaf this year. So the leaf prices are last year's, in terms of this year. And in terms of our raw materials, we're on annual contracts with most of our major suppliers, so they've still got this year to run, so we think we still basically remain in good shape for this year.

However, next year, of course, we're going to be using leaf purchased this year, and leaf prices have gone up. Internationally traded leaf prices are up around 30% and locally purchased leaf prices have gone up by about 20%. And we'll have to wait 'til we get to the other side of our annual negotiations with our major suppliers as to what's going to happen there.

Our estimate at this point in time is that there will be a rise in our costs next year, but to a level that we think they'll be manageable. In other words, we think we can recover it through pricing without undue difficulty, for the very reason that you outline, which is, although we have our net turnover figures, on top of that, is quite a significant degree of tax revenue. So our cost increases as a percent of what the consumer pays is relatively small, and you're looking at very low single-digit figures.

Right, next?

Jon Leinster, UBS. Clear that the volume growth, certainly in the first half, appears to be considerably better than perhaps what you've indicated at the start of the year and indeed your major competitor seems to be indicating. Is that something that's sustainable, or is this due to a particularly heavy marketing program?

Well, I think I said in the preliminaries that for this year I would see our volume growth for the year slightly below 1% against our normal guidance of -- over the years, we've said 1% to 1.5%, and I've said that, I think, going forward, it's likely to be nearer the 1% than the 1.5%. I said for this year, I think it would be slightly shy of 1%, 0.7%, 0.8%, something like that. And I still think that's right for the year.

What that means is that our volume growth will slow in the second half of the year, nothing skullduggerous in that. That's what we anticipated; that was part of our plan and we still think that will happen. So we see volume growth slowing in the second half of the year and the year outturn being around 0.7%, something like that for volume growth.

Sorry, what was the -- ?

I was just wondering whether the volume growth is due to a particularly heavy marketing program in the first half?

No, our marketing program -- we've increased our marketing in the first half of this year, and indeed our marketing will increase for the entire year, and particularly that increase happened in the second quarter. What we will see, I think, is that we tend to be back-loaded in terms of our marketing spend. That will happen this year as well, but we'll be less back-loaded this year than we were, say, last year. But we'll still see a significant increase in marketing spend this year. So we think our marketing firepower is robust.

Next? The lady on the left?

Hi, Eileen Khoo from Morgan Stanley. Just to follow up on the (inaudible), can you clarify the [phasing] between first half and second half? Is it more 50%/50% this year?

And then, can you also comment on the outlook for FX for full year at current rates?

And finally, can you say anything about display ban in Canada this year?

Okay. I would think the phasing of the marketing spend will be something around 46%, 47% in the first half of this year, with the balance in the second half. Do you want to cover the exchange?

Yes. Obviously your guess at FX is as good as mine, but if we re-ran the numbers at spot rates, we'd have a slightly higher EPS, about a penny higher, for the year. So exchange rates, if they stay exactly where they are now, are slightly favorable compared to the average rates for the first half that we translated the results in.

And it is a bit early to say on the display ban in Canada. Our concern, of course, is around what this might do to an increase in contraband product coming in from the first nation reserves. That contraband level is already running high. It's around 20% nationally, the smuggled element of the Canadian market. In Ontario and Quebec, it's around 33%. And of course, we are particularly strong in terms of market share in Ontario and Quebec, so we get disproportionally hit by that smuggling.

We continue to work with the government, talk to them, about trying to improve that situation as regards the smuggled product, and it continues to be a significant worry for us. And we're not sure what the display ban will do in terms of potentially increasing that. So that's our concern, really, around it, but it's too early to make a call on it.

Any more questions? Yes, Nico?

It's Nico Lambrechts from Merrill Lynch. Just back on the cost pressures, is it possible to indicate, for your first half margin, what the impact would have been if you didn't have cost savings initiatives? Obviously, the cost pressures you saw in the first half was offset to a certain extent through your cost savings initiatives. And then into 2009, are you actually indicating that your cost savings efforts will not be enough to offset the cost pressures, i.e. margin down if you add some of the pricing to what we've seen this year?

And then on the pricing, you do talk a lot about up-trading. The 5% organic price for the Group, is it possible to indicate what portion of that is actually premiumization, or mix, or whatever you want to call it? I know it's a very broad question, just to give me an indication there.

Ben, do you want to talk about cost (inaudible)?

Yes, just to say that costs were pretty much flat in the first half of the year. That's a mixture of the cost savings coming through with the slight increase in costs, but pretty much, that's all of a wash. So I wouldn't say that we had big cost savings on variable costs, because the variable cost portion is all the previous year's purchase, as Paul's explained. So the leaf we used in the first half of this year was the leaf we bought last year. There's been a slight saving, because we pooled all of our leaf supplies globally. So as leaf costs have gone up to buy this year rather then to use this year, we found we had quite a lot of savings and safety stocks of leaf. So that's offset the overall increase in leaf costs that we've been buying for next year.

So overall, if we look at costs for next year, we should see leaf costs going up by about 20%. That's a blended average between the internationally traded leaf we buy and the domestic leaf that we cause to be grown. We're in a slightly better position than our competitors in terms of that, because we cause leaf to be grown in a number of countries, where most of our competitors actually just buy internationally traded leaf. So net/net, that will come out at about a 20% increase in leaf costs next year.

On wrapping materials, we'll see some increases in costs as well, because we have one year contracts. So, again, we haven't seen any increase this year, but that'll flow through next year. That depends a little bit on things like what happens to the price of oil, but at the current high level of oil prices, this is before they came off the top a couple of weeks ago, we were looking at a 7% increase in wrapping material prices for next year.

Because of the cost saving program coming through, the third element of costs, which is manufacturing costs, will be flat next year on this year. So if you add all of that up, you get to a cost increase next year of around 10%. And as Paul said, because those costs are a very small element compared to, say, excise, we see that eminently recoverable through pricing.

The other thing to remember, cost increases are nothing new to us. It may not be input costs that are going up, but for the last three or four years, we faced very significant excise increases around Europe, which is a much bigger element of cost for us than the actual variable cost element, and we've managed to pass those on in terms of pricing to consumers over the past few years.

And then the third element is our cost saving program, which will obviously help us reduce the cost and actually the entire increase in cost next year could almost be absorbed by the cost savings we're expecting coming through. So we are seeing increases in input costs, but we're not particularly worried about it, because we can recover it via the cost saving program and, indeed, via consumer price increases.

The costs components, you refer to leaf, wrapping materials and manufacturing. That's basically the component of variable cost [to energy]?

Yes.

And what proportion of your total costs are variable?

I think the best way to split it out would be to give you -- I'm not sure I want to give you that split actually. No, I think probably best to say, leave it where it is because I don't really want to split costs down between overheads and variable costs for you. The one thing I would say, actually, is if you look at the raw materials' cost in the published accounts, which come out at about GBP2.8 billion per year, don't assume all of that's going to go up as leaf and wrapping material will go up, because a big chunk of that is bought-in costs, things like phone cards and whatever.

I think the question is answered. Did you want to add to that, Paul (multiple speakers)?

Yes, premiumization, roughly speaking, and this is not a precise science; it's very difficult. But roughly speaking, what happens is that our brand mix improvement adds to the degree to which geographic mix deteriorates our margin. So the two roughly balance each other out. And we think we're in pretty good shape on that, because our brand mix is improving very well. And our geographic mix, perhaps, is not going to deteriorate as much as others, because we're already strong in the emerging markets. So by going at it pretty hard on premiumization, we just cover our deteriorating geographic mix.

Would it be fair to say, geographically due to the price difference in lower price in high growth regions, it's about 2% negative offset by 2% on mix?

I haven't got a percentage for you, but in absolute terms it covers it.

Thank you.

Anything else? Any more questions? I see no more questions, in which case can I just thank you all for coming this morning, and see you in about six months' time. Thank you.