英美煙草 (BTI) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the BAT results conference call.

My name is Louise; I'll 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'll have the opportunity to ask questions.

(Operator Instructions).

And now I'm 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 British American Tobacco's nine months results call.

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

In a few moments, Paul and Ben will give an overview of the results.

On our website www.bat.com, you'll 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 the instructions on how to ask those questions.

A particularly warm welcome to those listening in South Africa.

Earlier this week, British American Tobacco shares began trading on the JSE.

Before I hand over to Paul, a word or two on some changes in 2009.

In line with most UK companies, we'll be moving to interim management statements at the quarter one and quarter three stages, rather than producing a full revenue statement.

The interim management statement will contain information about the performance of the Global Drive Brands, as well as regional volumes and trends in market share.

We will of course continue to publish full income, balance sheet and cash flow information at the full year and interim stages.

Also with effect from January, we will report on the Europe businesses through two separate regions, Eastern and Western Europe.

As a reporting entity, America Pacific will disappear and Canada will join the new Americas region, which also includes Latin America and the Caribbean markets.

Japan will report into Asia Pacific.

We will, of course, restate the 2008 results on the basis of the new regional structure when we publish the preliminary results on February 26, 2009.

I'll now hand over to Paul and Ben, who'll take you through the results.

Well, good morning everyone.

Let's first look at the headlines and then some of the detail behind them.

2008 has been an extraordinary year.

The financial markets have been in turmoil, economies have slowed, indeed some are slipping into recession, and confidence in the short term has been shaken.

Despite these conditions, 2008 is shaping up to be a very good year for British American Tobacco and quite possibly a vintage year.

Looking at our key metrics, volume, revenue, profit and earnings, they are all strongly positive, helped by favorable currency.

We have also completed two acquisitions, which are both on track in terms of integration and meeting financial targets.

But perhaps more importantly, our Global Drive Brands have strong momentum and our premium volume growth at 7% has been outstanding.

The headline volume growth includes three months of Scandinavisk Tobacco and Tekel.

The organic volume growth is 1.2% ahead, with Global Drive Brands up 17%, or 13% excluding brand migrations.

This is well above our long term target of high single figure Global Drive Brand growth.

Each of the Drive Brands contributed to this growth, with Pall Mall up 25%, Kent up 21%, Lucky Strike up 9% and Dunhill 5% ahead.

This growth is a result of continued investment in the brands, the rollout into new markets, our unrivalled innovation pipeline and migrations.

A vibrant brand portfolio with real momentum puts us in a far better position to face the uncertainties out there.

Reported revenue, up 19%, reflects favorable exchange, improved pricing, a better product mix and the acquisitions.

Similarly, profit from operations, excluding exceptional charges, was 20% higher.

Excluding exchange and the acquisitions, revenue would have been 6% higher and profit would have risen 7%.

Associates do not include Scandinavisk in the third quarter.

The Reynolds American contribution at GBP225 million, excluding exceptionals, was GBP5 million ahead at current rates, while ITC was 8% ahead at current rates of exchange.

Adjusted earnings per share were strongly ahead, up 17% at 96 pence; and Ben will take you through the drivers behind this increase later.

Let's now look at revenue and profit on a region-by-region basis.

Volumes were mixed across the Group, with both Latin America and America Pacific reporting declines.

In Latin America, volume declines in Mexico and Venezuela offset good performances elsewhere, notably from Brazil and Chile.

The ongoing industry declines in Canada and Japan contributed to the 3% fall in volume in the Am-Pac region.

In all regions, there was a positive price and mix, evidenced by the 8.6% rise in revenue at constant rates of exchange, on the back of a 3.9% increase in volume.

At current rates of exchange, there is strong revenue growth across all regions, although Europe and Africa and the Middle East benefited from the Scandinavisk and Tekel acquisitions.

Now looking at profit on the same basis, the Scandinavisk acquisition, favorable pricing, improved product mix and exchange rates resulted in a strong performance from Europe, with Russia, Romania, Spain and Germany, in particular, performing well.

Good performances from a number of countries in Asia Pacific helped the region post strong profit gains, both in current and constant terms.

In Latin America, profit rose 6% at current rates of exchange but at constant rates was 7% lower due to Brazil, Venezuela and Mexico.

Remember that Brazil last year had very strong profit growth due to price increases taken in anticipation of an excise increase.

Venezuela experienced high excise driven price increases in Q4 last year and Mexico was affected by reduced market share and volumes.

Africa and the Middle East improved profit, both in current and constant terms, despite the weakening of the South African rand.

The region's very good volume growth was driven by Nigeria, Egypt and the GCC, and the addition of the Tekel volumes.

Despite the reduction in volumes in America Pacific, the region posted profit gains, aided by positive exchange and pricing.

Ben is now going to take you through the drivers behind the 17% increase in adjusted earnings per share.

Thank you Paul and good morning everyone.

As Paul has just outlined, the strong profit performance at constant rates of exchange was a key driver behind earnings growth.

There were a number of adjustments to EPS, which are described on page 18 of the announcement, which net out to GBP22 million.

Profit performance contributed 6% growth to the EPS and the acquisition of ST and Tekel, after financing, costs were marginally accretive during the third quarter.

Our strong cash flow contributed to a reduction in non-acquisition net finance costs at constant rates of exchange, leading to an increase in EPS of 1%.

Associates were marginally positive.

ITC continued its strong profit growth and its contribution rose 5% to GBP81 million at constant rates.

After adjusting for certain exceptional items, the Reynolds American contribution at GBP220 million was the same as last year at constant rates of exchanges.

ST ceased to be an associate at the half year.

The underlying tax rate at 30.4% is 0.6% higher than the equivalent '07 tax rate.

This is a result of a one-off deferred tax credit in Germany in 2007 not being repeated in 2008.

This is partially offset by a reduction of the national tax rates in a number of countries, including South Africa, Canada, Malaysia and Germany.

The minorities charge is slightly higher due to the good performance from Malaysia.

During the nine months, 17 million shares were bought back and the adjusted diluted earnings per share calculation is based on 2,009 million shares.

Finally, a favorable exchange accounted for 9% of the 17% rise in adjusted earnings per share.

In summary, the adjusted EPS reflects an excellent performance, driven by the underlying strength of the business, enhanced by favorable exchange.

Thank you and at that point, we'll ask the operator to explain the questions and answer process.

Thank you.

(Operator Instructions).

Our first question comes from the line of Adam Spielman from the Citigroup.

Go ahead Adam.

Hello, thank you very much.

Good morning.

Morning Adam.

Can I ask you a couple of questions please?

First of all, are you able to say the actual profit contribution from Tekel and separately from ST, so we can work that out?

And secondly, I know -- obviously a lot of people are asking us, can you give us some sort of indication of the split in terms of profit into east and west?

I know that's a little bit ahead of time, you're giving us more details in the future, but that would be very helpful now.

Okay Adam, yes it's Ben here.

What we've said is that excluding the Tekel and ST, the trends will be very much the same as last year.

So, constant rate, the reported revenue for the third quarter is up 9%, probably 6% excluding acquisitions and profit up 10%, probably 7% excluding acquisitions.

But it's getting more difficult to exclude ST and Tekel from the results, because we're actually integrating the businesses as we speak, so there are the same products flowing through our distribution channels.

It won't be long before we're making our brands in their factories and their brands in our factories.

At the full year, we'll publish a pro forma P&L account for ST and Tekel but after that, it's going to be extremely difficult to split out.

Adam, on the split of east and west, yes, you're right.

We don't want to split out east and west until we start splitting out east and west, which will be in January.

But to try and give you some flavor, Eastern Europe was a driver of the growth in Europe overall.

And volume was up in Eastern Europe about 4% and net turnover and profit both grew very strongly.

So a lot of the growth driver for Europe as a whole, the numbers that you're seeing were principally driven by Eastern Europe.

Okay thank you very much.

Thank you.

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

Go ahead Erik.

Hi, good morning.

Morning Eric.

Could you give us a little more color then on how the integration is proceeding, particularly with respect to Turkey and the prospects for stabilizing those brands and moving that forward?

It's quite encouraging to hear that you're well on the way to integration, but if you could give us more detail, that would be very helpful.

Okay.

The integration of both acquisitions are going very well and we're pleased.

And I would say that in Turkey, the integration is going exceptionally well and better than our expectations.

We've got the factories up and running at good efficiencies now.

They're producing well and producing good quality products.

We've got the people that we need and they're being obviously trained in the BAT way of doing things and that's paying off in terms of the quality and the efficiency.

In terms of integrating the distribution, we have moved the Tekel volume, or in the process of moving the Tekel volume into our direct store distribution system in the cities where we do it, and we have rationalized and integrated the two volumes into a smaller and better group of distributors.

So the distribution is going much better and we're able, therefore, to address some of the problems that the Tekel brands had at retail in terms of out of stocks and shelf presence.

So, on those two paces, the integration is going well.

Indeed, our Global Drive Brands, if you like, the BAT brands before the acquisition, are doing very well.

In fact, we're over 10% share now on those brands, up from about 7.5% 12 months ago.

So, the BAT brands are doing very, very well.

In terms of slowing the decline of the Tekel brands, and as you know, in our acquisition plan we assumed that those brands would continue to decline, but we will try and slow that decline.

Plans are in place, and I've seen them, as to how we might address that, but obviously wouldn't want to go into too much detail around what and when.

Okay.

Terrific.

And would -- is part of the reason why the BAT brands have been taking share is that a shift towards premium within the Turkish market?

Yes, there is a shift towards premium in the Turkish market; one of a number of markets where the premium segment is still growing.

Okay.

And then, with respect to the Group and spending back behind the brands, am I correct in remembering that there was an increase spend anticipated for the second half?

And can you confirm that that happened, so that these results are incorporating even a higher spend back?

Yes.

We will be spending more on marketing this year.

And relative to last year our spend, as a proportion of the year, is slightly less than it was this year year-to-date.

So, our spend is going up, and our proportion of spend is slightly less this year, for the first nine months, than it was last year.

So, there has been no reduction in firepower.

To the contrary, there has been an increase in firepower.

Okay.

Great.

Thank you.

Thank you.

Thank you.

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

Go ahead, Eileen.

Hi, morning.

Morning Eileen.

Morning.

Two questions, please.

First, on Turkey, there's been news that they're talking about raising taxes on tobacco again.

Is this much of a concern at all for that market?

And also, in general, can you talk about any other excise tax increases that might be coming up, or any risk of that happening?

And then the second question is on Canada.

Could you comment on the prospects of competing against PMI going forward?

Thanks.

Okay.

Excise, yes, I don't think there's any heightened concern around excise.

There's nothing out there that is particularly worrying us.

As you know, it's excise shocks that bother us, and it's very difficult to predict excise shocks.

So, I'm not sensing any concern around the patch in terms of excise increases.

Obviously, it's a risk as governments become fiscally challenged, as they will look to increase excises at a more accelerated rate but we haven't seen that yet.

In Turkey, yes, there is a talk of an excise increase in Turkey, but we'll wait to see whether that materializes.

And, as I've explained, we have very good momentum in turkey, so we'll handle that if and when it comes.

As far as PMI in Canada is concerned, as you know, they've already taken a price increase on the lower priced brands in Canada, which was, obviously, a pleasing move to see.

And we will continue to compete and do what we need to do in Canada.

So, I'm not majorly concerned about PMI taking over RBH in Canada.

Okay.

Thank you.

Thank you.

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

Go ahead, John.

Morning, a couple of things.

One, first of all, specific on Russia.

I got wind that you're thinking of changing your distribution arrangements in Russia.

So I'm just wondering what's behind that and whether we're likely to see any impact of that in terms of strange shipment or volume patterns in the fourth quarter.

And then a more general one, if this has a chance of being a vintage year, are you planning around 2009 being perhaps more of a table wine year?

And I know we haven't seen it yet in the third quarter, but are there any signs, at the start of the fourth, that things have got noticeably more difficult?

Are you seeing your distributors cutting down inventories, things like that?

Okay.

Let's talk about Russia.

No.

There was a review of our distribution arrangements in Russia, but we're staying where we are.

We're pleased with our distributor and things are going very well indeed for us in Russia, so there are no plans to change.

In terms of vintage to table wine, I suppose that is the key question.

Undoubtedly, you can't ignore the fact that there is an economic, and, therefore, consumer downturn going on, and it would be foolish to ignore the fact that that may well have an impact.

At the moment, we're not seeing that impact, and it's difficult to predict what that impact may have, if any, in terms of our business.

We have very good momentum on the business in terms of the Global Drive Brands, and in terms of our premium volume growth.

Premium segment is still growing in a number of important markets for us, such as Brazil, South Korea, South Africa, Romania, Russia, so premium segment is still growing.

So, as regards next year, we're not seeing anything in terms of distributors, and not really seeing anything as far -- in terms of the consumer so far.

And so, we're not particularly worried, but we recognize the risk.

Alright.

Thanks a lot.

Thank you.

Our next question comes from the line of Bruce Davidson from Blue Oar Securities.

Go ahead, Bruce.

Thanks.

It's just a detailed question on the financing.

I notice in the notes that the facility taken out in February expires tomorrow.

I just wondered what your plans and thoughts were about refinancing, and rolling debt over.

Well, we're pretty strong on liquidity.

At the moment, we've got a 1.75 billion revolving credit facility, which is undrawn.

In terms of being able to dip into the bond markets, we'll do them but not at the rates we see at the moment, I think.

So, we have no need to go into the bond market at the moment.

We've got a very strong position in terms of our cash flow this year.

We've got a very strong position in terms of our revolving credit facility, so we're not particularly concerned.

Thank you.

Thank you.

Our next question comes from the line of David Hayes from Nomura.

Go ahead, David.

Good morning, all.

Hi.

Three questions, if I can.

Just, firstly on Europe, obviously, if we look at the nine-month performance, the average sales per unit jumps quite dramatically from the second half, I think it's 6 to about 9.5, obviously, there's STK in there.

I just wondered if you could split that out.

How much of that jump up in average price in Europe is the STK, and perhaps or how much of it is just better pricing and mix?

And, if that is the case, where are you seeing that, in particular?

What are the key drivers?

The second question was on the premium brand growth of 7%.

I don't know if you look at it this way, but can you split that out in emerging and developed?

Is it 14/0, is it 7/7?

I'm just trying to get a feel for where that slant is.

And then the last question, just coming back to the last question we had about the refinancing, given the bond market rates, etc., the buyback commitment of 400, I think you've only got about 40 to go with all the commitments in place, but is that still 400?

Or do you cut that until we get some clarity as to whether exactly these commercial paper-type markets get to in terms of availability?

Thanks very much.

If I do the buyback question first, on the buyback, we review the buyback at the end of each year.

We, as you say, have got about 40 million to complete this year, which we will carry on and complete.

At the end of the year, we'll take a look at the marginal cost of debt financing, we'll take a look at our EPS estimates, and we'll take a look at what acquisitions are out there on the horizon, and we'll take a view on the buyback at that stage.

So, more news at the end of the year I think.

On the Europe question of what's driving that growth is, principally, Eastern Europe, and particularly Russia and Romania.

If you look at Russia, our net turnover in Russia is, year-to-date, up over 20% and our underlying profit in Russia is up over 80%.

We're growing very nicely in Russia.

Premium brands are up 10% year-to-date, and our Global Drive Brands are up -- sorry, I beg your pardon, our premium volume is up 20% year-to-date and our Global Drive Brands volume up just a shade under that at 18%.

So, Russia's really growing for us, and that's helping us.

In Europe, we took a price increase in the third quarter, which has helped drive some of that -- those numbers.

So, it's Eastern Europe.

And broadening that out, it's really the emerging markets which are driving the growth in terms of volume.

If you cut emerging markets and developed markets aside, our volume was up around 4% of our overall volume growth year-to-date, emerging markets were up 4.7% and developed markets were up 0.7%.

And in terms of profitability, emerging markets were up 16% -- 16%, 17%, and the developed markets were up 26%.

So, emerging market's growing well for us.

Okay.

Great.

And then just in terms of the 7% split, have you got that as well?

You talk about the 4% total volume growth.

The 7% premium growth, is that not dissimilar then?

No.

I have to say, I don't have premium volume split that way.

Okay.

No worries.

Right.

Thanks very much.

Thank you.

Thank you.

(Operator Instructions).

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

Go ahead, Rogerio.

Good morning, everyone.

(inaudible) reflect the good growth of premium cigarettes, but the growth for Global Drive Brands is low compared from 20% in the first half to 17% in the nine-month period, it's a little bit of lower brand migration.

So, any color on this or it's more normal quarterly fluctuation?

So, that's my first question.

And my second one is could you please comment on the [USM] output for West Central Europe, some volume price and also your recent market share momentum, [please]?

Thank you.

Yes.

Sorry, just remind me the first question again.

It's just about --

GDP growth.

Sorry, okay.

Yes.

No.

The -- if you look at our GDP growth, you're right, it's slightly slowed in the third quarter.

I wouldn't get too excited about that.

That really reflects a couple of things.

Firstly, as you know, what we try to do is to grow our Global Drive Brands by high single figures, and the third quarter growth was well in excess of that.

The other thing to bear in mind is that we're now lapping a lot of the Global Drive Brand activity that we started off this time last year.

If you remember, around this time last year, we had launched and were rolling out, Kent Nanotek.

We had launched the Dunhill resealable pack, and we'd just launched Kent Blue.

So, those were very much engines of growth for us over the last 12 months, but we're now lapping those.

And that has slowed our growth, but that was entirely anticipated, so there's nothing macabre in that slightly slowing growth on Global Drive Brands.

And on West Central Europe?

Yes.

No.

Things for us seem pretty stable in Central Europe, I have to say.

Our market shares in Czech Republic is -- our market share is growing; in Hungary it's stable; in Germany, slightly softened, but not significantly so.

I'm not sure exactly what your definition of Central Europe is but our business is pretty good in Central Europe.

Thank you, Paul.

Thank you.

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

Go ahead, Chas.

Yes, hi.

I'm just trying to get a bit of color, I suppose, on the isolated Q3 performance.

If organic growth was about 7 both for the six months and the nine months, obviously, there was a big swing in LatAm, which was a drag in the first half, and is a little bit positive in Q3, on that basis, it's sort of appears as if there's been material slowdowns in the isolated Q3 in various of the other regions, America Pacific, Africa/Middle East, Europe, Europe had a tough comp.

Could you maybe go through what's happening in those divisions in Q3?

All of them?

Well, it just seems as if there's a slowdown, and could you just confirm that, or, if there's a reason why, maybe go through that?

We don't see much of a slowdown in Q3.

What -- if you look at our revenue, profit, and adjusted earnings per share, in constant, excluding the acquisition, they're pretty much what they were at the half year.

So, constant, excluding acquisitions, the numbers are pretty much the same so we're not seeing much of a slowdown.

Yes, there are some ups and downs around the regions, but they all net out pretty much as were at the half year.

Right.

But America Pacific seems to have gone flat in Q3, Africa/Middle East has gone to, like, 1% in Q3; no comment?

Well, in terms of America Pacific -- sorry, AME, we had -- we put provisions in for the supply chain difficulties we've had, which would have slowed the profit growth in Africa/Middle East.

Canada's trading pretty well I have to say, in local currency.

Yes, the profit is down slightly, as we said that it would be.

Remember, that they had abnormally high profits in the first half -- sorry, in the first quarter, but those weren't translated into the second quarter or the third quarter.

So, if you're comparing Canada third quarter discreet to the first half, you've lost that first quarter out performance.

Japan is trading well.

We're increasing our share in Japan.

Our innovations are working well, which is driving that share growth.

But the overall Japanese market is down, principally driven by the third quarter last year where there was a load in the third quarter of last year ahead of an excise increase.

So, we're tracking against a load last year.

So, you add that all up and there's nothing in trading there that is impacting the third quarter.

Right.

And on an accounting point, on the amortization of the new acquisitions, I think it's GBP12 million in this quarter, is that now going to be a recurrent amortization from now on for 20 years?

Yes, well, for the [useful life] of the asset

To utilize an asset.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Rey Wium from Afrifocus.

Go ahead, Rey.

Hi.

Good morning.

Just a quick question on the Africa/Middle East region.

You've been talking of good growth in your price and mix numbers, but in the Africa/Middle East region I see that there's actually been a decline of about 1%.

Maybe if you can just elaborate on that.

And then, I see you still refer to Australia where there's some competitor activity, maybe if you can just give us some feedback on that as well.

Thanks.

Yes.

Africa/Middle East, the thing to bear in mind is the Chesterfield trademark in South Africa reverted back to Philip Morris, so we lost 2.5 share points in South Africa as a result of that compared to this time last year, which, obviously, affected our volume and revenue in South Africa.

And, as I mentioned, we did put some provisions in for the distribution difficulties we're having in Africa and Middle East in that third quarter.

Both of those would have impacted.

But other than that, price mix is pretty good.

And at the third quarter, remember, you've got Tekel in Africa/Middle East, which is why revenue is probably up more than profits.

Okay.

And what was the second question again, sorry?

Just on Australia, just some feedback on the competitive activity in that market.

Sorry, give me a clue.

What do you mean by feedback on --?

Well, you still referred, in the commentary that the Australian market you still see competitor activity, and I just want to know if that has eased or what's the situation on that?

No.

Thank you.

Okay.

Yes, there is some discounting going on, which we've matched in Australia, which has cost us a little but it's not escalating, and it appears to be easing.

So, it's cost us a little bit but it's not something that we're overly concerned about.

Okay.

Thanks.

Thank you.

Our next question comes from the line of John Leinster from UBS.

Go ahead, John.

Morning, guys.

Yes.

A couple of quick ones.

First one, Canada.

Obviously, the industry came to an agreement with the government recently with some sort of payments for the government should they cut down on elicit trade.

Have we seen any actions, effective actions from the Canadian Royal Police Force or the Canadian Government to try and cut down on elicit trade yet?

And also, in a sense the same question for Brazil is; the Brazilian market, how much of that is elicit trade, and is that growing or declining currently?

Yes, you're quite right.

We haven't seen any actions yet on behalf of the Canadian Government.

I think there is increased political receptivity that something needs to be done, and, obviously, we are working hard to bring this to their attention again to get something done.

But I think this issue is moving up the political agenda in Canada but, as yet, nothing has been done.

It is a growing problem in Canada.

One-in-three cigarettes sold in Canada now is elicit.

And in Ontario and Quebec it's approaching one-in-two cigarettes are now elicit.

And, as you know, the Canadian Government is very keen to regulate tobacco and are a world-leader in tobacco regulation.

And we keep pointing out to them that one-in-two of their cigarettes or half their tobacco industry is not regulated at all in Canada, and that seems to be gaining some traction.

But, to answer your question, no actions as yet.

And in Brazil, yes, the proportion of the Brazilian consumption, which is elicit trade continues to come down each year, which has helped Souza Cruz in terms of growing volume and growing share of consumption.

So the Brazilian share of consumption is now up 1.7% to something around 63% of total consumption in Brazil, which is good.

And that was one of the reasons why we increased direct distribution in Brazil in the fourth quarter of last year, you'll remember, because we wanted to push further out into the rural areas to pick up that share which was presenting itself.

So Canada nothing yet; Brazil continues to be good news.

And just secondly on Brazil, just a quick one on farming; clearly, there's been more problems in Argentina really than Brazil.

Has there been any impact on the tobacco leaf crop because of the, well certainly formerly high prices of other commodities?

In other words, has there been a switch of farming within Brazil or does that leaf crop remain very strong?

No it still remains good and Souza Cruz is able to get the leaf grown that they want to get grown.

Great, thank you very much.

Thank you.

Thank you.

Our next question is a follow-up from the line of Adam Spielman from Citigroup.

Go ahead Adam.

Yes, thank you very much for taking a follow-up.

You talked about the increasing macro risks and I was just wondering is there a rule of thumb that you have in your mind that goes something like if a GDP in an emerging market is down to 0% or minus 2% it doesn't really have a big impact, but if it's -- we start to get worried if it's minus 4% or minus 5%?

Can you just give us some feeling for how bad an economy has to be before it really starts to affect you?

And a second follow-up question if I may.

Could you just give us a feeling for what's happening with your innovations, whether there's new rollout of the [Blue's] product or whether Nanotek is going into more markets we should be aware of?

And any sense of where we are on the whole innovation story.

Thank you.

Okay.

Adam, as I think explained at the half year, we've gone back and we've looked at what happens to our business in previous economic downturns.

Principally we looked at the Asian crisis and the ruble crisis, and it's not really driven by GDP.

What tends to happen is if there's an economic pinch, consumers will switch where they shop for a brand rather than the brand that they use.

So, they'll stay with their brands but they'll choose a cheaper retailer.

Then if the economic pinch continues, then there may be some slight down trading.

Now people talk about down trading, but there are many streams of down trading.

So you can have down trading from premium to mid price but still have up trading from low price to mid.

Alternatively you can have, and we've seen this in markets now -- we were looking at the Hungarian figures recently, premium segment is growing in Hungary.

And what's happening is the people are trading up into premium, but people are also trading down from mid price into low price, so you get a dual economy.

And this really -- and this is explained really by what -- when we do tend to get hit is if there are big spikes in unemployment.

And so, if you're still employed and you will still continue to buy and you will still up trade, but if you're unemployed then you'll trade down.

And it's not really the GDP that drives it.

It's unemployment that drives any impact on us.

The other thing to bear in mind is that, of course, with a third of our volume in premium, a third in mid price and a third of our volume in low price, if there is down trading, we're very well placed to pick up that down trading.

And one of the other lessons that we got from looking at previous downturns is that we tend to pick up at least our fair share of down traders.

And the reason for that is we have very strong portfolios, indeed, arguably stronger portfolios in mid and low price than we have in premium on a global basis.

So it's not really GDP.

It's unemployment.

And the thing to bear in mind is that whilst there may be down trading, there can be different forms of that down trading and, indeed, there can be up trading when there is general down trading in a given market, which I hope I've tried to explain well.

Yes.

So I suppose -- actually that's incredibly clear in a situation -- it's a very clear answer for a situation, which is obviously incredibly complicated.

If I can just sneak in another question.

I know that in Russia, you've been very explicit about the relative profitability of premium and mid price and low price, but if you had to try and say that generically around the world, would you say that premium was per pack four times the profitability of low price?

Or is there a figure like that that you can give or is -- and I'm talking obviously for relative unit volume?

No I think -- if you look at our gross margins, generally speaking, the low price would be about half the gross margin of premium.

But there's no rule of thumb.

Yes.

Because it will depend on the excise structure in any particular market and also on the range of prices in the market.

That's fair enough.

Just on innovations Adam, again can't get into too much detail as to what and when but there's a lot we can do in terms of taking the innovations that we've done, and you know what those innovations are in terms of Nanotek, Dunhill, Fine Cut, resealable packs, [cool boost].

There's a lot of geography that we have which has not had those innovations yet.

So we can rollout the successful innovations that we've had so far and roll them out to more geography, and then there are more innovations in the pipeline that we can start to put into the geography where we've already got the innovations.

The idea is to keep refreshing those brands with product innovation and that will continue whether it's by brand or by geography.

Are there any particular anecdotes you can give us what happened in the third quarter that were particularly successful or not?

Well, as I said, most of the big uplift that we got on the Global Drive Brands was as a result of the activity that has taken place over the last 12 months.

So the activity in the third quarter will be less -- sorry, was less than it was say in the first six months, which is why you saw a slight trade off on our GDP growth.

But there's plenty more in the pipeline and you'll have to watch this space.

Thank you very much.

Thank you.

Our next question is a follow-up from the line of David Hayes from Nomura.

Go ahead David.

Hi, thanks again.

Just following up on that last question.

When you look back at Asia and Russia in those crisis years, what did you find, what were volumes moving from and to in that year of economic downturn and what was that sales in local currency moving from and to, in that period of extreme financial -- sorry, extreme economic crisis?

And then secondly if I can as well, sorry.

I know you talked before Paul about the average price mix, which the nine months year-to-date underlying which is about 5%.

Yes.

You talked about geographic mix offsetting underlying mix and then the price being what drives that 5%.

Is that still the shape and can you give us a feel for what the geographic mix negative is?

Is it minus 2%, minus 4%?

That'd be great.

Thanks very much.

No, we didn't work out a mathematical formula from the previous crisis that we can apply going forward.

You can draw some lessons and some learnings, but in terms of using predictive models, we didn't find them terribly useful.

That's the first thing to say, so I wouldn't draw any learnings or lessons other than the ones I've already given from those reviews.

We were asked in South Africa if we'd also looked at the economic crisis in the 1930s in terms of applying the lessons and our records don't go back that far.

In terms of price mix, I've looked at the absolute numbers and basically our brand mix slightly outweighs the negative geographic mix.

Now I don't have a percentage for that off the top of my head, but I know that in absolute sterling terms, our brand mix is more than compensating for the deteriorating geographic mix.

Okay great, thank you.

And sorry just to keep going back to this '98/'99 precedent you say, which I know it's difficult to say whether it's going to be like that or not this time around.

But if you take the Asian performance, let's say, in '98/'99 looking at the dates and not even just looking at the relationship just the dates, do volumes drop 5% and sales 10%, because of the mix that you talked about, or was it we're talking 1% drop over what was the previous underlying -- I'm just trying to gauge for the absolute rather than the relationship of what you saw in '98/'99 for example in Asia.

Is that something you've got?

No.

The reason why it was difficult to tease out the variables because from what were macro impacts versus what were, if you like, trading impacts.

If you remember about that time we had a lot of volume out in the Far East that ended up in China.

Right.

And so that was a variable that was difficult to subtract from any conclusions that one could draw.

So no, I don't have an answer to that question.

Okay, alright, sure.

Thanks very much, thank you.

Thank you.

(Operator Instructions).

We have no further questions coming through so I'll hand back to your host to wrap up today's call.

Well, thank you very much for your questions.

The Investor Relations team and the press office, as ever, will be available for further questions.

If I could just conclude with the Chairman's comments in the press release today on the uncertainty that lies ahead.

I think these results demonstrate that there has been no discernible effect on British American Tobacco from the economic downturn.

Moreover, the impact of any consumer downturn on our business should be mitigated by our balanced and innovative brand portfolio which cover all price points.

In addition, we continue to benefit from the extent of our geographic adversity, which will also help to protect shareholders from the impact of volatility in the foreign exchange market.

Thanks very much for tuning in.

Ladies and gentlemen, thank you for joining.

You may now replace your handsets.