英美煙草 (BTI) 2009 Q2 法說會逐字稿

Well, good morning everyone and welcome to our results presentation. I'm Jan du Plessis, Chairman of British American Tobacco and with me this morning, I've got Paul Adams, our Chief Executive and Ben Stevens, our Finance Director.

This morning, we'll be taking you through the half yearly results. After which, there will, as usual, be an opportunity for people in the audience to ask questions; and good morning also 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 the headline numbers.

Overall volumes rose 5% to GBP349 billion, driven by last year's acquisitions of ST and Tekel. Excluding the acquisitions, volumes were down 2% mainly reflecting declines in markets such as Russia, Ukraine, Japan and Mexico. Much of this volume decline was in the low price segment. Global Drive Brands rose 5%, of which just over half came from brand migrations.

As we all know, sterling has declined relative to where it was a year ago, so revenue and profit benefited from favorable exchange rates, together with the contributions from the acquired businesses and strong pricing momentum.

Reported revenue was up 24% and profit from operations rose 23%. Nevertheless, growth at constant rates of exchange at 14% and 13% respectively was an excellent result, particularly in the current economic environment.

Our Associates volumes were GBP94 billion. And our share of the post-tax results, after adjusting items and the absence of a contribution from ST in the current period, increased by 19% to GBP279 million in current rate and declined by 5% at constant rates of exchange.

Adjusted diluted earnings per share grew by 25% to 77.3p, broadly in line with the growth in profit from operations.

We continued to reward our shareholders with increased dividends. Our established policy of paying an interim dividend representing one-third of the previous year's total dividend results in our interim dividend being increased by 26% to 27.9p.

12 months ago, we reported on the completion of the ST and Tekel acquisitions. This year, we've announced the acquisition of Bentoel for GBP300 million. This deal represents our first steps into the significant Indonesian kretek market and should present us with a good platform for long-term growth in that market.

As you'll hear from Ben, the business continues to be very cash generative and the balance sheet remains strong.

Moreover, despite the difficult economic and trading conditions that we have seen in some markets, the continued market share growth from our Global Drive Brands, our ability to innovate and our broad geographic spread should continue to stand us in very good stead indeed. We are confident about our ability to deliver another good year.

Paul will now take you through the first half performance in more detail.

Good morning everyone and thank you Jan. It was the economist, JK Galbraith who remarked that the only function of economic forecasting is to make astrology look respectable. And as we peer into the second half of 2009 and beyond, the divergence of economic estimates suggests forecasters may be using a range of tools from horoscopes to tarot cards.

However, as far as we are concerned our business is performing remarkably well, despite the impact of rising unemployment, excise driven price increases and the consequent growth in illicit trade. Much of the decline in our volume has been in low price and our premium volume is holding up well.

On an organic basis, our premium volume is down just 1%, mid price is flat and low price is down 5%. The point is premium is not necessarily the casualty in a down trading market. Mid price can go into the low price and low into illicit.

The net effect is that organic volume is down by 2% for the six months. Reported volumes, however, rose 5% as a result of the acquisitions of ST and Tekel a year ago. We've experienced good volume growth in Pakistan, Bangladesh, South Korea, Egypt, Uzbekistan, Nigeria and the GCC. But this growth was offset by declines in Russia, Japan, Ukraine, Brazil, Mexico, Italy and South Africa.

The fact that our premium volume has held up so well is due to the strength of our Global Drive Brands, which grew 5% during the first half of the year.

Dunhill was up 8%, the brand experienced volume growth in the GCC, specifically Saudi Arabia, as well as in Russia, South Korea and Brazil, partially offset by declines in Malaysia, Taiwan and South Africa. Market share rose in most of its key markets due to a strong performance and the successful migration from Carlton taking place in Brazil.

Kent volumes fell by 2% with volume growth in Romania, Uzbekistan and Azerbaijan offset by industry declines in Japan and Russia, and despite increasing its market share in Russia.

Lucky Strike volume rose 7% as good performances in Germany, France, Italy, Indonesia, Chile and Brazil were partially offset by industry declines in Spain, Japan and Argentina. Market share was up across all of its key markets except Japan where it declined slightly.

Pall Mall volumes grew 10% with increases in Germany, Uzbekistan, Mexico, Turkey and Chile partly offset by Italy, Pakistan, Russia, Romania and Hungary. Despite lower volumes in Romania and Hungary, market share grew in both markets.

Turning now to the regions; in Asia Pacific profit rose GBP101 million to GBP557 million as a result of favorable exchange rates supported by strong performances in Pakistan, Vietnam, Bangladesh and Australia. At constant rates of exchange, profit was up GBP25 million or 5%.

Volumes were 2% lower as increases in Pakistan, Bangladesh and South Korea were more than offset by declines in Japan and Malaysia.

Higher pricing and lower costs resulted in strong profit growth in Australia, despite increased competitor discounting. Pall Mall and Winfield experienced growth, but overall volume and market share remained in line with last year.

Malaysia is an example of a market where industry volume has contracted but premium, represented by Dunhill, has achieved a record market share. Illicit trade continues to grow following steep excise increases in recent years.

In Korea, a good performance from Dunhill led to volume and market share growth. A weaker exchange rate and adverse transactional foreign exchange resulted in lower profit.

In Japan, industry volumes fell 6.5%. And although our market share dropped slightly, there was profit growth as a result of favorable exchange rates, productivity savings and an improved product mix.

Profit in the Americas was GBP66 million higher at GBP579 million due to Brazil's strong performance. At constant rates of exchange, profit would have increased by GBP57 million or 11%. Volumes were down 5% at GBP74 billion, with declines in most markets across the region.

In Brazil, significant profit growth was achieved as prices rose in anticipation of an excise increase. The actual rise in excise, around 40%, was significantly greater than that anticipated. Although higher prices led to lower volumes, market share rose.

Canada's lower costs, better pricing and currency benefits were offset by lower volumes and an adverse product mix, resulting in a drop in profit. Market share for the last four quarters has now been stable, although it fell slightly compared to the same period last year.

Mexico experienced lower volumes due to an excise driven price increase. Market share was also lower. Pall Mall had a successful migration from Boots, while Montana performed well. Profit declined due to the reduction in volumes and increase in marketing investment.

In Western Europe, profit was GBP509 million, up by GBP175 million. This was achieved by strong performances in Italy, Germany, Spain, Belgium, Poland and the Czech Republic, as well as last year's acquisition of ST. At constant rates, profit would have increased by GBP100 million or 30%.

Volumes were up 18% to GBP63 billion, but were 3% lower on an organic basis.

In Italy, profit increased as a result of higher prices and productivity savings. The contraction of the market led to lower volumes. There was also a small drop in market share, mostly due to MS and tail brands, despite Lucky Strike's growth in share.

Germany's volumes were in line with last year. Pall Mall and Lucky Strike had good performances, contributing to market share growth, despite the tail brand decline. This, coupled with favorable exchange rates, led to an increase in profit.

In France, Lucky Strike and Pall Mall grew volume and market share. Profit benefited from the favorable exchange rate.

Despite the lower industry volumes in Spain, market share was stable and profit increased, following price rises earlier in the year and continuing cost management.

In Eastern Europe, profit was down by GBP16 million to GBP183 million, principally due to lower volumes and the impact of transactional foreign exchange rates on product costs. Regional volumes were 9% lower, as industry volumes declined in a number of markets following excise driven price increases and also due to share loss in Russia during the second half of 2008 when we initiated a price increase not immediately followed by competitors.

Although market share was down in Russia, it was stable in the second quarter this year, as competitors' price increases flowed through to the market. Profit was lower despite price increases as a result of lower volumes, higher marketing investment and transactional foreign exchange impacts on costs.

In Romania, Kent, Dunhill and Vogue put in strong performances resulting in continued market share growth, although higher marketing investment and the decline in volumes resulted in lower profit.

Kent continued to grow its market share in Ukraine, but the rapid currency devaluation and excise increases led to lower volume and profit.

Profit in Africa and Middle East region was GBP84 million higher at GBP336 million. At constant rates of exchange, profit would have increased by GBP53 million or 21% with good performances by Nigeria, the GCC and the Tekel contribution.

Regional volumes grew 37% to GBP64 billion, driven by increases in Turkey, the GCC, Nigeria and Egypt, partially offset by a decline in South Africa.

In South Africa, volumes were lower largely due to an increase in illicit trade and reductions in trade inventories. However, with Peter Stuyvesant's record share and Kent and Dunhill's continuing good performance, market share grew. Profit was broadly in line with last year.

There was a significant growth in profit in Nigeria, following increased volumes and lower costs.

The Middle East achieved significant growth in volumes, with the excellent performance of Dunhill in the GCC.

In Turkey, the Tekel business has been successfully integrated. Kent, Pall Mall and Viceroy all performed well, although total market share was lower as a result of a decline in the Tekel brands.

I'll now hand over to Ben. Thank you.

Thank you Paul and good morning everyone. From the sheer weight of this morning's release, you'll be aware there are some additional disclosures. Pages 22 and 23 provide segmental analysis of revenue at both constant and current rates.

Please note that the adjusted profit from operations at constant rates of exchange is derived using the conventional method of translating profit at the comparative period's average exchange rates. We've not attempted to adjust the numbers for transactional FX.

In the supplementary section at the back of your slide packs, you'll see the impact of currencies on revenue and profit on a region-by-region basis in the usual graphic format.

I'll start by taking a look at margins. On a profit per mille basis, pricing and favorable foreign exchange have resulted in the Group's profit per thousand cigarettes rising from GBP5.26 to GBP6.20. Five years ago at the interim results, the Group's profit per mill was GBP3.40, so we've seen almost a doubling over that period.

Foreign exchange impact on translation and transactional factors has resulted in Eastern Europe's profit per mille being essentially flat, despite the price increases that have taken place in some markets.

The lower profit per mille for Africa and Middle East reflects the Tekel acquisition, which has had a dilutive effect on the region's margins. The Tekel effect can be best seen on the operating margin, which resulted in the Africa and Middle East margin dropping from 35% to 30%.

Pricing dynamics have improved margins in Asia Pacific, the Americas and Western Europe, while higher costs arising from transactional foreign exchange effects have diluted Eastern Europe's margin, which stands at a shade under 25%.

The adverse impact of transactional foreign exchange on variable costs offset just over half of the benefit of foreign exchange on the translation of profit into sterling. The Group margin was similar to last year.

Turning to the income statement, adjusted profit from operations grew 23% to GBP2,164 million. Paul has already taken you through the regional results. Restructuring costs were GBP29 million for the period, and mainly related to restructurings following the Tekel and ST acquisitions. There was also an amortization charge of GBP26 million in relation to trademarks acquired with Tekel and ST. This will be a feature of future reporting.

The gain on disposal rose from the disposal of some trademarks in Scandinavia to meet competition issues. Profit from operations before adjusting items was 22% higher.

Net finance costs of GBP219 million were GBP40 million higher than last year. I'll discuss this in more detail in a moment.

The share of post tax results for associates was GBP231 million, a fall of GBP62 million, reflecting the absence of ST and some adjusting items at Reynolds American. For the purpose of the adjusted earnings per share calculation, we've adjusted for Reynolds American's charge for trademark impairments, and last year's payment from Gallaher resulting from the termination of a joint venture agreement.

Also last year, there was a GBP13 million adjustment in respect of an additional quarter's income from ST. After adjusting for these items, the contribution from associates was GBP279 million, up 19% on last year.

The increase in net finance costs mainly relates to higher average debt due to the ST and Tekel acquisitions in 2008, and the adverse impact of exchange rates.

Profit before tax was 16% higher at GBP2,123 million. For the purpose of the adjusted earnings per share calculation, the underlying tax rate of 28% was lower than guidance, due to a favorable change in the mix of profits. We now anticipate the rate for the year to be around 29%.

Profit for the period rose 18% to GBP1,589 million and the minorities rose GBP44 million to GBP139 million, reflecting higher profits from Brazil and the impact of the foreign exchange.

Here are the drivers of adjusted earnings per share growth. Profit from subsidiaries at constant rates of exchange drove earnings by 12%. Net finance costs, associates, and the minorities charge, were all slightly negative. The lower tax rate of 28% accounted for just over 2p, or 3.4%, of the adjusted earnings growth. The share buyback benefited earnings by 1%, and the calculation was based on 1,993 million shares.

However, it was the strong underlying profit performance and favorable exchange rates that accounted for most of the 25% growth in adjusted earnings per share.

Moving on to cash flow, operating cash flow rose GBP195 million to GBP1,723 million. This reflected the growth in underlying operating performance, partly offset by the timing of capital expenditure and adverse working capital movements. Restructuring costs were similar to the prior year.

Higher net interest payments, due to the timing of a bond coupon payment and FX, tax paid on dividends to minority interests, resulted in free cash flow being GBP100 million lower than last year at GBP848 million.

The share buyback program has been suspended this year, but dividends paid to shareholders rose 30% to GBP1,241 million, which is a 14% increase over total cash returned to shareholders in the first half of 2008. Last month's acquisition of Bentoel is reflected by the GBP300 million outflow.

And finally, net debt, which at the start of the year was GBP9.9 billion, and was GBP0.5 billion lower at the end of June, the principle movement being foreign exchange.

That's the end of the presentation, so I'll hand over to Jan, who will start the Q&A session. Thank you.

Thank you, Ben. Well, ladies and gentlemen, that concludes the formal part of our presentation. And as always, of course, we are now open to Q&As.

When you ask your first question, can I just ask that in each instance you just identify who you are, and the firm -- the name of the firm that you represent. And I will very briefly just identify the questions for the purpose of the webcast to make sure that people pick up your questions.

So who's to go first? Yes, sir?

It's Erik Bloomquist, JPMorgan; two questions. Firstly, with respect to the transaction impact of approximately GBP90 million sterling, about how much of that was in Eastern Europe?

And then second question was with respect to the trademark amortization noted. What's the life on that? And then does that imply that there is a finite life on those brands in Turkey? Thank you.

Two questions; the one relates to the transaction exchange impacts of GBP90 million. And the second one relates to the ongoing outlook for the trademark amortization charge. Ben?

Yes, I'm not going to give you an absolute figure for Eastern Europe. But the majority was Eastern Europe, because you can't hedge for transaction exposure in Eastern Europe. So you can assume that the big majority of the transactional exchange exposure was in Eastern Europe.

On the amortization of the brands, we allocate useful lives of the brands of anything between naught and 20 years. So those -- that amortization charge will just flow through in future years.

[So are --] but to follow-up on that. Does that then imply -- I would have thought that some of the brands would have had an infinite life, or indefinite life I suppose is the correct term. So are these brands different from other brands that you've acquired previously?

This is more to do with IFRS than our true belief in the value of the brands, I have to say. So we've just taken the assumption that we've got to allocate an expected useful life for them, and then chosen to amortize those. So it's between naught and 20 years.

All right. Immediately (inaudible).

Yes. It's Adam Spielman from Citigroup. Just to follow-up on that question about Turkey; obviously you've bought a business, who was losing market share very rapidly; multiple percentage points a year. And my understanding is, Tekel is still losing market share, but a little bit more slowly than before.

And I was wondering [if that rate of] (inaudible) of the Tekel brands, and I was wondering whether you were happy with the trajectory. Whether you could ever see the market share in Turkey for the whole Group leveling out, and just sort of commenting on your hopes for Turkey, I guess, in the light of what's happening in, let's say Italy, where the market share is still declining having bought a declining business to begin with.

Well, the next question we've just [heard] is for Paul. It relates to the acquisition of the Tekel in Turkey and the fact that the Company has been losing market share for many, many years, and has been -- continued to lose market share in the current period. And Paul, you have been invited to comment on the outlook.

Yes. Well, I think the question was more around Turkey. The -- we do anticipate that the Tekel brands will continue to decline. That was part of the -- our acquisition assumptions. We're doing slightly better than we actually had in our -- in terms of market share in our acquisition plan, because of the reasons you've given. They're declining slightly less fast than we anticipated.

But yes, we did assume that the Tekel brands would decline, and indeed, some Tekel brands will decline to nothing. So yes, we do anticipate the Tekel brands will decline. At some point in the future though, once those have declined, they will get down to their core usage or expire, and by then we hopefully will have built our international portfolio to the level that we want to do it, which is the primary reason why we bought Tekel.

Right at the back?

Hi, it's David Hayes from Nomura. Just in terms of the volume profile, it was flat in the first quarter, down about [4%] I guess in the second quarter overall. Is there anything driving that that's changing? I guess the question to a certain extent is the volume outlook for the rest of the year, is it more minus [4%] or is it more flat and what the dynamics are there?

And then the second question just on Western Europe. It's clouded obviously by the acquisition of STK. It looks in the numbers without making the adjustment that 18% volume, 18% price, 18% sales increase, so price is flat. But obviously, Western European price has been pretty good. Can you just maybe break out what that looks like on an underlying basis, or what kind of pricing you're seeing in -- what price [peaks] you're seeing in Western Europe? Thank you.

Two questions for Paul; the first is dealing with the volume progression we saw in the first quarter compared to the volume development in the second quarter, and what it might suggest for the full year?

And secondly, Paul asked to comment on the price volume relationships in Western Europe in the first six months.

Okay. Q1 versus Q2; the first thing you've got to bear in mind is that there were very different comparators for 2008. So we had a soft Q1 in 2008 and we had a very tough Q2 in 2008. Tough in that it was good; tough in comparator terms. So there's that.

I think you've also got to bear in mind that we took some big price increases, because of excise increases in the second quarter, which would have had an impact on volume.

Two thoughts I would give you with; in terms of net revenue, in constant currency terms net revenue growth in the first quarter was very similar to the net revenue growth in the second quarter. So what you're seeing, which is quite big in volume terms, really gets evened out at net revenue. And I think this is the thing we have to bear in mind. I know everyone looks at volume. But we are focused on value and revenue, and that was quite a good equation for us Q1, Q2.

The other thing to bear in mind on volume is that I would think that organic volume in the second half of the year will decline by 1% to 2%.

Does that -- I think that hopefully answers your question.

And then the Western Europe question where -- David also wanted some comment on Western Europe pricing, volume, and how they play. Do you want to talk to that, Ben?

Yes, it's pretty hard to split it out with the acquisition of ST. The organic volume increase in Western Europe I can give you.

3%.

It was 3%, yes.

And I'm not sure we're going to be able to split out the price volume mix in Western Europe, because of the ST impact on the turnover, so --

You'll have to leave that one with us, David.

All right, thank you.

Right, next. Yes, on the left. You are?

Jonathan.

Jonathan.

Jon Leinster, UBS. Just to go back to the volumes, obviously, in the first half your premium was only down 1% and low price down 5%, which seems a bit odd given the fact that some of the markets have now down traded.

Going forward -- can you explain why that's occurred? And going forward do you think you'll still be able to sustain a better performance on the premium side than on the low end side?

(Inaudible) relates to the differences that we've seen in growth rates or change with regard to, on the one hand, premium volume, and on the other hand, the low price volume. Paul?

Yes, I think you've got to look at the brand and geographic mix here. Our -- in the first half our volume declined by 7 billion sticks. 5 billion of that was Russia. So over 70% of our volume decline was Russia; and that's a function of the Russian market decline, 3.5%, and a function of our market share decline of 2% from 22% to 20%.

75% of the market share decline was because of low priced brands in Russia. So what you're looking at is a volume decline principally of low price brands in a relatively low margin market. And when we took the price increase in Russia in the middle of last year, when Russian pricing had not been really keeping up to the pace for five years, we thought that was a good value equation, and that's why we took the decision.

Now -- so, it's principally low price volume; some of that driven by ourselves, some of that driven by down trading. And we think we can continue to do better on premium than we can on low price, because of the innovation, because of the strength of the brands.

We've got an innovation program kicking off in the second quarter. We've put a fair amount of marketing oomph behind that in the second quarter, and we should see the benefits of that coming through in the second half.

Right, next?

Yes, hi. Chris Wickham from Mainfirst. In your presentations in Italy in 2005, which occurred in the immediate aftermath of Philip Morris making an acquisition in Indonesia, I remember you - members of the team making a comment that that wasn't the sort of acquisition that you would make, because you were concerned about the regulatory backdrop on the kretek side. Could you perhaps give us some update on what in the last four years has changed, in your opinion, about the prospects for the regulatory outlook for kreteks?

Yes, I think if Paul can --

Carry on. You carry on. You -- because it's obvious.

Yes, frankly, what happened was we were surprised when a major international competitor went in and bought a kretek company. We had been wary of kretek, because we thought that there were some health issues around kretek, and that had come out of the people who control this in R&D. So we were surprised.

We then went back and spent a lot of money looking at the research again on kretek, and came to the conclusion that actually, we'd made the wrong call and that we'd got it wrong. And so we justified -- after a lot of examination, justified kreteks to ourselves and, therefore, have decided to go into the kretek market.

Next? [You].

It's Julian Hardwick from RBS. Just back on the volume price issue, most consumer products companies value volume more highly than revenue. And clearly, there is a tradeoff here and a point at which you can't absorb too much volume decline. Are there instances where you think you have priced too much at all and you need to revisit your pricing strategy going forward?

And secondly, could I just ask a question in terms of the dividend policy? Your approach is to pay 65% of sustainable earnings, which you've defined as adjusted earnings. I wondered if you could just talk about how you look at the impact of currency in the context of what is sustainable earnings. And should we be thinking more in terms of constant earnings -- currency earnings rather than currency inflated earnings as the base on which you will be driving your dividends?

Paul, I think I'll take the dividend question later. But the first question, Paul is asked to comment on is again the question of volume and price. The proposition being that many [F&C] companies rate volume more important (inaudible) than revenues. And what -- how do we see that tradeoff? And have we possibly overplayed the pricing game at the expense of volume? I think that's sort of your question. Paul, why don't you take that, and I'll pick up the dividend point.

Yes. We're not indifferent to volume. Volume is important to us, particularly quality volume; Global Drive Brand volume and premium volume. So I just want to make that point. But occasionally, you have to make tradeoffs between volume and value, and we tend to favor value.

Have we got pricing right? It's a very good question, and one that we are focused on, and one that we want to make sure that we get right. We think we've got it right. There's nothing where we felt that we've overcooked it.

I think we got out of line on pricing in Russia, but that was simply because we believe the competition was very slow in following. But they're now at the same prices as we are in the marketplace. And it's interesting that when that happened, our market share has now stabilized and, indeed, is beginning to tick up. But it took a while to get there.

So I don't think there's anywhere where we are saying, no, we've overcooked it on price or, indeed, the competition who have led pricing have overcooked it. But it's something we have to watch for. You can't get too far ahead of the consumer and we have to be careful.

In terms of your dividend question, I think to some extent what you're asking us is, when we say our dividend policy is to pay out approximately 65% of sustainable earnings, how do we define sustainable earnings? And I think my answer would be that what we've done for many, many years is to exclude from our reported earnings per share, things that we really think are non-recurring. And by that, we mean things like what we used to call exceptional items. We're no longer allowed to call them that, exceptional items, non-recurring things, profits and losses on sales of assets or, for example, amortization of goodwill. That is how we arrive at our adjusted EPS.

In terms of currency, look, currencies fluctuate, of course, over time we all know that. But it's very a difficult game. There may be some people around at the moment who suggest that sterling is possibly too weak. I'm not going to express an opinion, because I've been in this game long enough to know that whatever I say, I'm bound to be wrong.

So at some point there may be some sort of reversal. That may next year. It may be the year after. It may be in five years time. So to be quite clear, we are confirming to you that when we refer to sustainable earnings for the purposes of our dividend policy, we would target that by reference to our adjusted earnings per share number.

And is that adjusted for currency or amortized --?

No, it's not adjusted for the currency, no. It is currencies as we have translated them in conventional terms from the local currencies into sterling. We've, of course, not adjusted in that number -- I think I want to be quite clear. We've not attempted to adjust so-called transactional costs, amongst other things because accounting conventions don't really allow for that. You get into subjectivity and so on and so forth, so we've not done that.

So our adjusted EPS number in a given year is reported EPS adjusted for exceptionals and amortization of goodwill and so on, as they came out in a given period.

In which case --

And that is the target by the reference to which we will determine our dividend payout.

In which case, given this is a year when you've clearly benefited from currency, what happens as currency swings back? Would you be prepared to allow your payout ratio to rise in that event?

Look, in the long run I think is purely speculative. I think, of course, many things will determine our earnings next year and the year thereafter. Currency will be one. But volumes, and price, and costs and other things will determine that as well.

Therefore, I still think what we've got is a quite sensible policy and I think it's somewhat speculative. I think what I am prepared to say to you; it will be difficult for us ever to cut our dividends. But that's not saying we will never be prepared to do so, because I don't think I should say that. But it will be hard for us to cut our dividend.

Investors in British American Tobacco love us for many reasons, amongst others because they can trust our dividend. And our message to you today is that to the extent we are able to say so, trust our dividend.

Right; right at the back.

Can I ask about your free cash flow performance? You had (inaudible) a ratio of 55% in the first half. You alluded to some [timing] factors in your presentation, so I was just wanted to confirm for the full year if a more normal conversion rate of close to 80% which is the -- it's too (inaudible)?

Yes, we --

The question relates to free cash flow and operating cash flow conversions and comparing the first half and the second half, Ben?

Yes, we like our free cash flow to be sort of 80% to 90% of our adjusted earnings. The figure at the half year was artificially low because there was quite a big stock build ahead of the price increase in Germany. So normal service will be resumed at the full year.

Right next if we haven't -- Jon.

Jon Fell, Deutsche Bank, a couple of things. First of all, you gave us a 2% organic decline figure for the first half. Are you able to help us with what would have happened to revenue and to profit from operations, excluding the currency and excluding the acquisitions?

Ben, your challenge is to comment on the revenues and profits and other things, excluding the impact of acquisitions in the first half.

Yes, we can't really split out the acquisitions, because they are fully integrated now, so they're all BAT brands now.

If you want to get an order of magnitude, then I'd just ask you to look at the figures we did give at the second half last year results, where we said the turnover of ST in total was GBP410 million and the profit was GBP118 million. That's the acquisition impact in the second half of last year. The impact this year is just impossible to say because they are totally integrated into the BAT business.

And a follow-on question on the interest charge as well; if I take a crude average net debt, second half last year and first half this year and those net interest numbers you give us, it looks like average cost of debt was high five's second half last year and low four's first half of this year. Is there anything funny going on there or --?

No, our broad feel for the cost of debt was about 5.5% last year coming down to about 5% for this year. The interest paid figures were -- in terms of the cash flow was just the timing of interest payments that's all. There was a big coupon on one of the bonds.

About 5% would be --?

So assume around 5% for this year.

Okay, thanks.

Who have I missed so far? Right in front, yes sir.

Yes, Chas Manso from Evolution. On the Americas figure, obviously you've had the benefits of the early price increase in Brazil. It seems as if most other places were on the soft side. Could you try and give us a bit more detail about the exceptional side of the Brazilian performance in H1?

And on Turkey, I think there's been quite a big excise increase recently. Could you sort of update us on that and what's happening to pricing following that excise increase?

And you mentioned a new wave of innovation kicking off and marketing spend being quite high this half, could you give us a sense for the phasing of marketing spend? Is it going to be higher in the second half?

Paul, can I quickly just summarize for the web cast? Chas Manso has asked three questions. The first relates to Brazil; the timing of the Brazil price increase, which was taken in anticipation of the excise increase and what that means in terms of profitability for the first six months and going forward.

Secondly, we should deal with Turkey; the recently announced excise increase in Turkey and what that means for us.

And thirdly, Paul is asked to comment on marketing spend and the phasing of marketing spend in the first half and the second half.

Okay, well let me handle the first two and Ben, perhaps you can have a look at Brazil. On Turkey, yes, there has been a significant excise increase in Turkey.

In terms of what that means for pricing, Chas I don't really want to talk about that, I don't -- my lawyers start looking at me very strangely if I start talking pricing in particular markets. So in terms of what it might mean for pricing, I think I'm going to duck on that one. But as a general rule, we like to take prices up to cover excise increases.

It hasn't settled yet?

Well again, I would be talking about pricing in a particular market if I was to answer that question.

In terms of marketing spend, generally speaking we weight our marketing spend towards the second half of the year. That will be the case this year. But it'll be less second half weighted this year, because we have increased the spend reasonably significantly in the first half of this year. So there has been a significant increase in spend in the first half, but it will still be back weighted.

The second question Ben.

Yes, well on Brazil as you know, we had a big excise increase in Brazil, which we offset with pricing. The profit performance from Brazil has been excellent in the first half of the year. It'll still be good in the second half of the year, but not quite as good as it was in the first half of the year.

The other thing that helped Brazil, of course, was the fact that they export leaf in dollars and that's been quite helpful to the Brazilian profits in the first half.

Next any more? Sorry?

Adam's over there.

Adam. Sorry, Adam, I didn't see you over there. I do apologize.

Don't worry, it's Adam Spielman again. I'd like to ask a question about the impacts, if any, of a recession on the business outside Russia. You've given us the mix overall. And you've said in Russia, it was very heavily weighted with various factors in Russia.

I was wondering just roughly speaking if you excluded Russia and, let's say, Ukraine from your business, what that split would be premium versus mid versus low?

And I'm also interested to get your impression about whether the recession if it is having an impact, if the impact over time is getting gradually worse as unemployment builds up, or whether it's beginning to pickup if there is -- the impact is beginning to get less bad as economies pickup to some degree.

Okay Adam -- sorry do you want --?

No, Paul -- Adam Spielman wants Paul to talk about the impact on the recession on the business and on volumes, and not necessarily referring again to Russia and the Ukraine, but elsewhere in the world.

And secondly, Paul is asked to take out his crystal ball and gaze into the rest of the year and speculate as to what the impact of recession might possibly be (multiple speakers).

No, no, I'm talking about the first half, whether the impact was getting -- by the end of the first half was less bad or the same or worse, as it was at the beginning of the half.

I think the markets are declining at a slightly higher rate as a result of the recession. And I think that's entirely to be expected. I think a lot of it is driven by unemployment. Everyone's got their pet figure that they all look at. I was talking to a senior banker the other day and he said, it's all down to house prices in the US; that is the key indicator.

I think the key indicator is unemployment. And I think, from a consumer point of view and from a down trading point of view, it's unemployment. And the thing to bear in mind about unemployment is that it lags. So even if GDP starts growing and even if the stock markets start growing, if you've got significant unemployment, the consumer disposable income is going to be impacted negatively.

Secondly, even if unemployment starts to reduce, assuming that those people unemployed were borrowing money while they were unemployed, I think you've got another lag on that as well as they try to repay. So I think we've got, from a consumer goods point of view -- a fast moving consumer goods point of view, I think we've got a way to go before we start pulling out of this recession.

And I would think the second half of 2010 is the earliest and we're probably into the first half of 2011 before we start pulling out of it. And I think that's going to have an impact on all consumer goods. I don't want to speak for others, but I think it will. And I think it will impact on us.

Just bear in mind -- just to try and put this into context, supposing you've got a smoker and he smokes five packs of 20 a week okay -- five packs of 20 a week, so that's around 14 cigarettes a day on average and that's relatively low against a world average of average cigarettes per day. Now supposing he just chooses to smoke one less on a Thursday and one less on a Sunday, you're down 2%. So it doesn't take much and I think that the markets are going to be, in volume terms -- in volume terms soft and they're going to be soft for a while yet.

Now is that catastrophic? No. Can that not be overcome by pricing? No. But I think we've just got to adjust ourselves to the fact that in volume terms, the markets are down and will continue to be soft.

If you -- coming back to the business ex. Russia and Ukraine, roughly. I'm not expecting you to quote numbers, do you think mix -- you would say in general mix has deteriorated, so premiums have done worse than, let's say, low stuff?

No. Ukraine, perversely, which is an absolute basket case from the economic point of view, if you take super premium and premium together in the Ukraine it's growing. In Malaysia premium is growing. In Brazil premium is growing. So I think there's a lot of mileage left in premium and as our figures demonstrate.

Thank you very much.

I'm trying to see where Nico.

Thank you, Nico Lambrechts from Merrill Lynch, two questions. One is on A&P, I think you previously indicated 45%, 55%. Would a reasonable (inaudible) assumption be 47%, 53%, question one? Was that a yes?

And the second question is you have given the organic volume decline -- you have given the organic volume decline in Western Europe. Would you mind giving us the organic volumes for Eastern Europe and Africa Middle East, because you have to have a figure for that to get to your Group number?

Sure, I know the [out view].

Encouragement to Paul or Ben to be more specific in terms of their guidance on the first half, second half split of AMP.

And secondly, Ben some information on organic volume developments in Eastern Europe and also in AME.

Let me just talk about marketing expenditure. When pinned up against the wall with hands around our throat, we've admitted to a 45%, 55% split --

(Inaudible).

As a rough order of magnitude, so I wouldn't take that as that's what it is every year. We don't do our marketing against some sort of mechanistic we can only spend 45% of our total spend in the first half.

It's about a two point difference this year versus last year, but I wouldn't -- so that would get you to a 47%, but you'd probably be wrong on the number because that 45% isn't --.

Ben, are you going to talk to the volume question?

Yes, just on volumes, in Eastern Europe, we had a volume decline of 7% and a bit in the first quarter and 9% and a bit in the second quarter, which came out at the 8.5% for the first half.

And Africa Middle East organic volume was tremendous. It was up 14% in the first quarter, up 8% in the second quarter and up about 11% for the first half.

And was there any organic differences in the other regions?

Not really. But you've got the organic figure for AME. Western Europe we've given you, which is the figure we've given and the rest is all organic basically.

Yes. Thank you very much.

Yes.

Hi, David Hayes again. Just on the migration of Global Drive Brands it was 50% for this period. It was 25%, I think you said, in 2008. Clearly the growth base changes that as well. But is there a move to quicken migration to those brands and, therefore, do we see more cost saving potentially coming through in the next 18 months, two years, going back to your point about offsets maybe to the slowdown?

And then the second question was just on Russia. We should clearly have visibility on Russian tax, but there's been a couple of rumors recently around indexation of that tax outline in the next few years, and also there was a rumor yesterday in [beer] that the Government were going to renege and change the numbers anyway. Have you got any visibility on the stability of that tax level that's been put out for the next two or three years, and whether there's a risk to that going up do you think? Thank you?

So migration of Global Drive Brands and the impact of migration on the growth of the Global Drive Brands, and then the outlook for that; and secondly, a question on the Russian tax developments.

We're not going to speed up migration in order to achieve cost synergies. Migration is very much a case-by-case, brand-by-brand, market-by-market debate. It's down to a lot of research as to whether the brand that you're -- whether you can migrate the brand that you want to migrate. So they're very much on a case-by-case thing rather than a policy to try and migrate.

In fact, I would think that the level of migration will start to tail-off rather than speed up as we run through the opportunities that are available to us. That's on migration.

Russian tax, yes, you get a rumor a day out of Russia on tax. I have to say that talking to our Russian management, they're not particularly worried about it and that they think it's quite manageable. There's nothing there that's bothering them at the moment, any more than usual anyway.

Okay, thanks.

On the left is?

Hi, I'm Eileen Khoo from Morgan Stanley, one question on emerging markets. You've always talked about there's a long-term pricing potential in emerging markets, because cigarettes are much more affordable compared to other consumer goods.

I just wonder whether given the trend towards tax hikes that we've seen, whether you feel this is still the case or whether your pricing power is perhaps somewhat limited in the next one and two years or so, because of the economy and also because of the tax increases? Thanks.

So your question relates to pricing power, but do you mean the impact of tax just in emerging markets pricing power or globally?

Well, emerging markets specifically, but you can comment globally as well.

Paul?

Yes. No, I understand the point and it's a fair question. I really have to go back to the answer that I gave before. You have to take it on a market-by-market basis. We're very alert to just how much you can push prices, but there are no red lights flashing that says, okay boys this is as far as we can take it. I think there's still opportunity for price increases.

As some of you know, I've said for many years, it's not the consumer that's stopping price increases. It's industry behavior that's stopping price increases. And, thankfully, for the last two years that hasn't been the case. But no, I still think that there's room to move and particularly in some markets there's room to move on pricing, for example, in Japan. So I don't think we're up against any buffers or constraints on pricing.

And just following-on from that could you comment a bit about Poland maybe, because that's maybe one market where pricing hasn't worked?

Well, it hasn't worked, because the Polish Government has to produce a certain excise rate in euros. And as the Polish zloty has devalued they've had to keep increasing the excise rate in Polish zlotys to maintain their requirements at a euro rate, and that has pushed prices up a lot.

That's not an altogether bad thing, because it means that the German consumer is now buying in Germany rather than in Poland. And therefore, you've had a decrease in the amount of duty not paid consumed in Germany, which is generally good news.

It's Roger (inaudible). Nico, I think and I'll come -- Nico, you go first.

Paul, just on PMI they've stepped up innovations or pack variations or effort in innovation, do you see they're making inroads in terms of market share, or do you see it more as a -- do you see it as a risk or is it a positive signal that they're competing on innovation not on price? Could you elaborate your thoughts maybe on the new dynamic?

I think it's good that Philip Morris are competing on innovation rather than price. We tend to think that that's the right way to do it anyway, and that's the model that we've been employing, so it's good to see Philip Morris doing that.

I think they have done some innovations which have been successful, particularly in Japan and Korea. So they have stepped up to the plate and they've had some good innovations, which have brought to bear and that's given them some share growth. And we're just delighted to meet them on the pitch.

You're not scared?

No. We think we've got some pretty good innovations ourselves.

David?

Hi, sorry. I've just two other quick ones. More speculation (inaudible) -- there's been speculation about Souza Cruz, a minority. I know when you did Chile you said that you'd looked at that before and didn't feel that was something that was sensible or valuable? Has that position changed at all or whatever comment you can make around that?

And then just in terms of cost saves; if I broadly divide by 10.5 years, are we looking at that kind of cost save phase? I know you don't talk about the cost saves generally at the half year, but is there any kind of one-off big cost saving or less cost saving in the first half that we should know about?

Two questions for Ben; the first he is to comment on speculation with regard to Souza Cruz minorities, and minorities elsewhere in the world; and secondly, cost savings, Ben?

Yes, just on cost savings, the answer's no. We'll talk more in the full year. I'm trying to guide people away from the cost savings anyway, just look at the margin. So I anticipate a growth in the margin at the full year, but there are no big one-offs in costs in the first half relative to the second half.

On minorities, we continue to look at minorities all the time and if there is ever a situation when the stars align we might do something, but there's nothing particularly special out there at the moment.

Sorry, Jon Leinster again; a couple on Canada really. First of all you paid quite a lot of money as an industry (inaudible) Canada to try and tackle illicit trade. [Can you actually say] anything about that, because I see volumes are still dropping?

And secondly just again on Canada, they were obviously one of the first provinces that banned in-store advertising in-store (multiple speakers).

(Inaudible).

Brand. So do you do your own direct store distribution over there? Has that caused any noticeable change in trends in Canada, or not really?

We did pay over some money to the Canadian Government, you're quite right. Difficult to see any change in behavior, in terms of restricting the amount of product flowing out of the first nation reserves, I think that's about as far as I can say on that one.

In terms of -- yes, the point is that we have now had stable overall market share in Canada for the last four quarters which, whilst I'm not calling time or stumps on Canada, after four years of market share decline it's rather nice.

And I think a good portion of that improved performance, i.e. stability, is down to the fact that we have DSD. But we're not satisfied with that, it would be nice to start growing share a little and I think that's where direct store distribution will help.

In terms of the display ban, as you know, I think that if you're able to talk directly to a retailer who can talk to consumers, I think that's an advantage where you have display bans.

But has it led to any obvious consumer changes from your perspective?

No. No, not that I could quantify.

I think we should close unless somebody, one or two people have one desperate -- one or two more questions; Nico yes?

If I may, Nico again. You previously alluded that leaf costs are going up, but there's been a lot of changes in commodity prices, etc. Would you mind giving us an update in the movements in your costs, and maybe relate that through to how do you see the gross margin panning out for '09? And is there potential for opening in the gross margin in 2010? Thank you.

Okay, we said this time last year that we were facing quite a large increase in costs, leaf costs particularly. The good news is that the crop that's just coming in at the moment, that we'll be using next year, the price we expect to be broadly flat. So that's good news for the next year.

You've got to remember, of course, in costs in the second half, they will be slightly higher than the first half, because we hedged some of our transaction effects costs in the first half. So, we do expect to see a slightly higher cost base in the second half of this year than the first half.

Would that be offset by the price as price momentum also increases?

Well, if we can; if we can. And then FX, of course, if we keep the exchange rates as they were at the half year and flow them through for the full year, we had a 10% gain on FX in the first half. It looks like we'll have about a 6% gain in the second half, so around 8% for the full year.

So, the second half of this year won't be quite as good as the first half of this year in terms of FX gains. So I'd guide you to sort of 8% FX benefit on profit for the whole of year in 2009.

Right, well, ladies and gentlemen, I think I should close. Can I just say to you, I hope that what you've seen this morning is a business that continues to do really very well? I think, in a quite uncertain world in economic and trading terms, this business is in good shape.

And I hope what you've seen is a considerable degree of confidence in our ongoing ability to deliver a good earnings curve over the medium to long-term. And in particular also for this year I think we're well set to deliver another good set of numbers at the end of the year.

Thank you for coming.