英美煙草 (BTI) 2011 Q2 法說會逐字稿

Good morning, everyone, I am Nicandro Durante; I am the Chief Executive of British American Tobacco. And with me this morning is, Finance Director, Ben Stevens. Also, in the front row, there are a number of my colleagues including Richard Burrows, Chairman, and John Daly, Chief Operating Officer.

This morning, we will be talking you through the half-yearly results, after which there will, as usual, be an opportunity for people in the audience to ask questions.

And a warm welcome to those of you who maybe listening on the conference call, or watching via the webcast.

The headline numbers don't always tell the full story, so we'll focus on the organic development, adjusting for one-off charges and the like.

Our reading of the global market, excluding China, the US and India, suggests that the volume declines we have seen in recent years, are now moderating. Industry volumes are down a little over 2%, which is an improvement over the 3% plus declines we have seen during the recession years.

Our volume, both reported and organic, was down 1%, which implies continued share growth. Our top 40 market volume share rose by 60 basis points. This also implies that our mix has continued to improve, and this is reflected in our organic premium volume, which rose 0.3%, while below premium, was down 1.6%.

The Global Drive Brands and our innovation strategy are the key drivers of mix improvement. With GDBs growing 11%, they now account for 31% of Group volume.

Group revenue rose 2%, but on an organic basis, at constant rates of exchange, revenue grew by almost 7%, largely driven by continued Group pricing momentum. The situation in Japan was also a factor, which I'll cover later.

Adjusted profit rose 12%, with all regions contributing to this good result.

Organic growth, at constant rates, was 11%.

The Group operating margin improved by 340 basis points, and Ben will comment on this later.

Adjusted earnings per share rose 10%. The difference between the 10% increase in adjusted earnings per share, and 12% increase in adjusted profits, is mainly due to a higher tax rate.

The interim dividend has been increased by 15% to 38.1p, in accordance with our practice of paying out one-third of the prior year's total dividend.

These are good numbers, and we are on track for another very good year.

Returning to the Global Drive Brands, the 11% growth followed the continued rollout of innovations, particularly capsules, reloc packaging and the nano-king size superslim format. There were no significant contributions from brand migration to these results.

Dunhill grew volume by 1%, with good performances in Brazil, Taiwan, Russia, Romania and the GCC, offsetting the share loss in South Korea, following the recent price increase.

Kent continued its strong performance from Q1, up 16% in the first half, following the strong performances in Japan, South Korea, Russia, Romania and Ukraine. Capsules volume continued to grow, and nanotek volume was up 10%.

Lucky Strike volumes were up 8%, with gains in Spain, Japan, Brazil, Germany, France, Italy, and the Americas, with Click and Roll driving volume and share gains. More recently, Lucky Strike has been launched in South Korea, to compete with international brands in the KRW2,500 value-for-money segment.

Pall Mall grew 14%, with a number of markets driving growth, in particular Pakistan, where it more than doubled its volume. This has helped to offset declines in Mexico and in Spain.

Looking at the volume and revenue in more detail, we saw organic volumes ahead 1% in Asia Pacific; down 5% in Americas; marginally down in Western Europe; and marginally ahead in EEMEA.

Higher volumes were recorded in a number of top 40 markets, including Pakistan, Vietnam, Poland, Romania, Egypt and Nigeria. Japan showed a sharp increase in volume, due to the disruption of domestic production, following the tragic events in March. The additional Japanese volume accounted for 0.5% movement on Group volume.

Organic volume declined in the Americas region, due to declines in industry volumes in some key markets. Revenue, however, in both constant and current terms, remained strong.

Western Europe saw a very slight overall decline in organic volume, with growth in Romania and Poland, offset by declines in Italy and in Spain. Our volume share in the region grew by [0.5 share point]. Although reported revenue was down 12%, organic revenue, adjusting for the loss of Gauloises and the sale of Lyfra, would have been flat at constant rates.

EEMEA reported a 7% improvement in revenue, at constant rates, on the back of strong pricing and improved mix.

Each of the regions contributed to the Group's 11% growth in organic operating profit.

In Asia Pacific, the strong performances from Japan and Indonesia were partly offset by lower profits in Pakistan, South Korea and Vietnam.

Pricing in Brazil and Mexico were the main drivers behind the Americas 9% increase in profits.

The strong performances in Germany, Switzerland and Romania were partially offset by declines in Denmark, Italy and in Spain. Organic profit growth in Western Europe was 2%.

Profit in EEMEA saw good performance in Russia, Middle East, South Africa, and the absence of the currency restatement in Uzbekistan, which affected half one last year.

Looking at some of the markets in more detail. In Australia, industry volumes were impacted by the steep excise increase last year. However, profit improved due to pricing, cost savings, and the favorable exchange rates, despite last year's strong first half, following excise shocks in Q2 2010.

In Japan, following the tragic events in March, and the disruption of domestic production, by Japan Tobacco, the management team did a remarkable job air freighting shipments to supply retailers.

This resulted in an increase, in a significant increase in volume and share, during the second quarter. I do expect Japan Tobacco to recover a substantial part of its share in the second half of the year.

In Korea, we led with a price increase at the end of April, the first in over six years. Volume and share were impacted, because the price increase was not followed by all competitors. Profit was down, as a result of lower volumes and higher marketing spend.

In Brazil, higher pricing and improved product mix and favorable exchange, helped increase profit, with share gains continuing in the premium segment.

In Canada, profits improved, but volumes were impacted by rising illicit trade, particularly in Ontario, where we have a higher market share.

In Mexico, industry volumes declined sharply, as a result of excise-led price increases. Market share was flat in last year, but profits improved, driven by pricing and lower operating expense.

In Italy, our market share has stabilized. However, despite an improved product mix, coupled with a price increase and lower costs, profits decreased as overall industry volumes declined.

Elsewhere, profit has increased in Germany, France, Switzerland, Romania, Poland, and the UK. In Spain, market share rose strongly, driven by Lucky Strike and Pall Mall. Industry volumes were lower, following the excise increase in December, and profits deteriorated following the price war that begun in May.

Market share grew in the majority of EEMEA markets. Russia continues to perform well, with higher volume, profit and market share.

In South Africa, we strengthened our market share and volumes were higher, which, combined with exchange rate benefits, resulted in good growth. Despite the ongoing turmoil in the Middle East, this area continued to perform well, with an increase in volume and share.

Turkey continues to suffer from illicit trade post the 2010 excise increase, and competitor pricing. However, both Pall Mall and the recently launched Lucky Strike, performed well, helping to offset volume losses in the tail brands.

Profits continue to be impacted by lower volumes and price reductions, despite an improved product mix, and cost savings. That brings me to the end of the regional review. I will now hand over to Ben.

Thank you Nicandro, and good morning everyone. For the benefit of those still wading through the earnings release, can I draw your attention to the appendix on page 37.

There you'll find a reconciliation of reported revenue and profit from operations, to the organic movements at constant exchange rates. This appendix should answer many of the questions asked at these presentations.

As mentioned at our 2010 full-year presentation, we're now focusing on margin expansion rather than gross cost savings targets. This is obviously notwithstanding the fact that cost savings are a major contributor to margin expansion.

The near 7% growth in revenue, and 12% growth in operating profit, has seen the Group's operating margin rise from 33.7% to 37.1%. On an organic basis, the growth was an impressive 1.9%.

I'm pleased to note that each of the regions have reported improvements in operating margin. Let me caution you that that operating margin for the first half is invariably higher than the year as a whole. The phasing of marketing and other spend tends to be weighted more towards the second half of the year.

The sale of the Lyfra distribution business in Belgium, and the loss of Gauloises Blonde in Germany, have also enhanced Western Europe's margin.

Excluding these businesses, the region's underlying margin would have risen from 32.9%, to 33.3%. On an organic constant currency basis, Group operating margin would increase from 35.2% in the half year 2010, to 36.7% in the half year 2011.

I'm confident that we'll comfortably reach our 35% margin target this year, one year ahead of schedule. With continued tight control of costs, and further cost reduction initiatives, we aim to increase the Group operating margin, as we've done in recent years, by 50 to 100 basis points a year.

Turning now to the income statement. Adjusted profit from operations, grew 12%, to GBP2,760 million. Restructuring costs were relatively low, GBP40 million, and mainly related to factory closure and downsizing activities in a number of markets, including Denmark, Poland, Italy and Turkey, and the continued integration activities in Indonesia.

Unadjusted profit from operations grew 18%, to GBP2,691 million. I'll cover net finance costs on the next slide. Associates were 38% higher, at GBP329 million.

For the purposes of the adjusted earnings per share calculation, the adjusted contribution from associates, is GBP9 million higher, at GBP315 million, which has been affected by the weakness of the US dollar and Indian rupee against sterling.

The adjusted profit from associates was up 8%, in constant currency terms. Profit before tax was 22% higher, at GBP2,787 million.

Net finance costs were marginally higher at GBP233 million, with lower gains on derivative contracts largely offsetting higher investment income.

The underlying tax rate, based on an adjusted profit, is 31.4%, against 30% last year. This is higher than our previous guidance of 30% to 31%, due to a change in the mix of profit, decreases in income arising in the UK, increases in some statutory tax rates, and an increase in the effective tax rate in Brazil. My guidance for this year is now around 31% for the full year.

Profit for the period rose 21%, to GBP2,006 million, and the non-controlling interest charge rose 5%, to GBP136 million. The adjusted earnings per share is 96.1p per share, an increase of 10%.

The two key drivers of adjusted earnings per share growth were operating profit, which was up 11%, and the higher effective tax rate reduced earnings by 2%, with all other drivers broadly cancelling each other out.

Moving onto cash flow, operating cash flow rose GBP202 million, to GBP2,104 million, reflecting the growth in the underlying operating performance.

The growth in cash flow was offset by higher tax outflows, of GBP198 million, largely due to higher taxable profits, timing differences, and a tax credit received in 2010.

Also, another GBP32 million in dividends were paid to non-controlling interests, mostly in Brazil and Malaysia.

All of this resulted in free cash flow of GBP956 million, 4% below the same period last year.

Dividends paid to shareholders rose 13%, to GBP1.6 billion. The share buyback program has bought 13 million shares to date, at a cost of GBP335 million, of which GBP317 million had been paid out by June 30.

And finally, net debt, which has increased from GBP7.8 billion at the start of the year, to GBP9.3 billion at June 30. Apart from the net cash flow already explained, there was an adverse foreign exchange impact of GBP332 million, due to the weakness of sterling.

That's the end of the presentation, and I'll hand back to Nicandro, for some final remarks.

Thank you Ben. In summary, we are on track for another good year. Our growth strategy, delivering constant organic revenue growth at 7%, reflects improving volume trends and continued good pricing momentum, despite the odd skirmish here and there.

We are achieving share growth, driven by our Global Drive Brands, and the rollout of innovations across all four regions.

The productive element of our strategy is delivering. That's evidenced by the continuing improvement in operating margin. We are still pursuing acquisitions and recently announced a deal in Colombia.

And looking further out, we have set up Nicoventures to explore new nicotine technologies, and those of you who saw our R&D facilities in Southampton will have seen the fascinating work we are doing on harm reduction.

So let's start with your questions. Please remember to state your name and firm, for the benefit of the webcast.

Japan was really a big help in the first half. Could you comment on the outlook in the second half, and in particular, on your outlook for the underlying volume decline in Japan?

And secondly, I was wondering if you could comment on Turkey, and in particular, what the actual share loss was, and what the mix now is between BAT's international brands, relative to the Tekel brands. Thank you.

So the first question is about Japan, and how the second half is going to play in terms of volume reduction. And the second question is about Turkey and what's the size of the share losses we have there and the size of our international brands in the portfolio.

Regarding Japan, if you look at the first quarter of this year, what we saw is that after the price increase in October last year, driven by an excise hike, we saw a decline in the market, playing around 17% to 18%. If you remember, at the beginning of the year BAT was talking that our expectations was between 15% to 20%, so it's moving according to the expectation. So this is what we expect that's going to be Japan in 2011.

Of course when you look at the volume by players, it changes a lot because of what we saw with the tragic events in Japan in the second quarter. So this is Japan; I hope that I answer your question.

Regarding Turkey, the share losses in Turkey, if I remember well, I think that I have this here, we have lost this year against last year, around three share points. . Still, our international brands in Turkey -- our market share in Turkey is around 24%. Our international brands are around 11.5%, so almost 50% of the portfolio nowadays.

And of course we are trying to strengthen our portfolio, looking at the sustainability of the business for the mid, long term. We just launched innovations behind Kent, Kent Switch, which is performing quite well, so we are growing the premium segment, although from a low base, but we are growing. So we are growing the right segment.

We launched Lucky Strike in the mid-price, which is doing very well but it's early reading because we have this launch which happened 10 weeks, eight weeks ago so it's too early to say but the first readings are quite good.

So we building the portfolio for the future and I believe that you have a turnaround in Turkey in the coming two years, two to three years; a similar process that we went through in Mexico that's bringing results right

Two questions. If I could just follow-on on Japan firstly, can you give us a feel for what your average share for the first half in Japan was and what it is currently?

And then secondly a question on Lucky Strike. In Western Europe I've been used to thinking of Lucky Strike as a brand in the mid-price or below premium and in the Cantos interview, Nicandro, you referred to its very good performance in the low-price segment in Spain. I note that it's only about EUR0.10 now above Pall Mall.

Has the positioning of Lucky Strike in Western Europe changed and can we expect, in markets where it still is in that mid-price territory, like Germany, to see Pall Mall adjusted downwards over time?

Okay. The first question is about Japan and asking about our share, and I think that's mainly due to the out-of-stock situation that we saw in Japan.

And the second question is about price positioning in Lucky Strike and focus on what I said in the Cantos interview, which I don't think that I said about low price there but I will cover this.

Regarding Japan, our average share is -- I think that's very difficult to look at the share in Japan from the shipment point of view because there are a lot of movements after the price increase in terms of stock levels, inventories and things like that.

What I like to read is the off-take share in the convenience channel that covers 65% of the market and this is a very good reading because this is consumption. It's not shipments. Because when you go to shipments you see a big difference, four or five share points in a given month, just because of inventory; so I like to look at off-take share convenience.

That's a good reading when you have a normalization of the market; you can say so without all these issues, you see that there is a good relationship between convenience share, off-take share and shipments in a longer period of time.

So convenience share for BAT Japan in April, May and June, which were the months most affected, we had 20.8% in April. We had 18.7% in May and we have 16.2% in June. So the second quarter we have 18.4% share on average.

I have to say that we left 2010 with 10.7 share points in Japan and we were growing the first quarter of the year before these tragic events that we saw in Japan. So it's very difficult to differentiate what's just out of stock situation and what's share growth. Just a word of caution here, but we are growing before that. That's the first question.

The second question about Lucky Strike. Lucky Strike has been positioned below premium throughout the world. That's the situation. It happens everywhere in the world, so we don't have many markets in which Lucky Strike is positioned in the same price point as a brand like Dunhill that's a premium brand, so it's below premium.

It depends on the market and the elasticity in the market. It depends on the price point that's in the market. It can be moving towards premium or a little bit lower than premium, so it's the situation in Japan. In Japan basically we have a low-price brand and then you have mid-price brands and premium brands and Lucky Strike is exactly in the middle. It's what I call a medium-price brand.

But overall what we see around the world is below premium is the position of Lucky. I don't foresee, I don't see that we are going to change our strategy, as you said, in Western Europe. No, I don't see anything like that for Lucky Strike. I think that we have the brand positioned already where it should be.

My question is for Ben. Looking at the P&L, Ben, I've looked at the raw materials and consumables line, [if you look at the value], it was substantially lower than last year. So I was just wondering if a bigger crop in Brazil resulted in better leaf costs or was there any other factor --?

No, I think you have to look at the organic costs. This is the schedule at the end of the announcement because in there you've got all the raw material costs from Lyfra last year. So I'd guide you to look at the difference between revenue and operating cost in the organic constant currency schedule. And there you'll find the costs are growing quite normally.

A couple of questions. First of all, I think a couple of years ago we were saying that with the end of the factory restructuring and the move towards, more in terms of implementation of a better working capital, that the costs of restructuring would start to decline a bit. But the restructuring costs, certainly on a cash basis, still seem to be quite high and I was wondering whether we should expect those to decline over time.

And secondly, just regard to the -- we've obviously had a significant rollout of the capsule volume. Can you actually quantify how much of the volume these days is capsule-related and how that's grown over the last year?

We have two questions. The first one is about the cost of factory restructuring and if it is going to decline over time or not. And the second is the cost of rollout of innovations, especially capsules. Ben?

Yes, I'll show you the factory costs. The exceptional costs coming in from factory closures have gone down and we have closed -- the major restructurings have already been done. That doesn't mean there aren't any more factories to close. There are still a couple more that need to be closed, but the major factory restructuring is done.

We see a temporary lull in adjusting items at the moment but you've got to remember after that, there are still other initiatives to improve our operating margin. So we've got the implementation of our target operating model. There'll be an exceptional costs related to that. We've got One SAP coming in so there'll be some write-off costs of existing software as a result of that.

So I wouldn't envisage a substantial reduction in adjusting items going forward in the next four or five years, but you are seeing a change in the nature of them from the factory closure and restructuring type costs to the next phase of cost reduction.

Would a lot those be non-cash?

No, some of them will be cash. Some of them won't be cash. Some of them will be writing off things like existing software, but there will be cash costs in there in terms of, say, redundancies as we move people into shared service centers.

Regarding the cost of capsules in terms of running out of innovation, I wouldn't be able to precise to you what's the exact cost of capsules and we can work on this after this conference call.

What I can tell you is that costs are coming down because as much as you roll out capsules and roll out innovation of our portfolio, because of the volume, costs will come down. But I think that if you look at, in terms of contribution, the contribution we believe that it's positive. So capsules do not add costs or does not hurt our margins because through the capsules' implementation, we grow volume and in some of the cases, it takes prices up. An example of that, in some of the markets such as Korea, we are taking prices up, so the benefit in margin is positive.

So we are rolling out innovation, not with the objective of having additional volume. It's just to have better margins, and this is happening. So it's very difficult to precise to you the additional cost in capsules. We can work on this to you but I will say, in margin terms, it's positive.

Sorry, you misheard. All I was asking really was how much of the volume is actually now related to capsules and how much --?

In terms of volume that's driving by capsules nowadays? 12%.

(microphone inaccessible).

Yes, but we are saying about Global Drive Brands. Of the Global Drive Brands, 12% is driven by capsules nowadays, so a long way to go.

Two questions. One on the margin-add and one on working capital. Nicandro, you've cautioned that the second half was traditionally less progressive on margin than the first. With respect to last year, it wasn't that big. How do you expect this year to play out and can you give us some color on that?

And the second one, Ben, is working capital is quite well up at the half-year so the implication is working capital base has grown, why and what's the outlook on that?

Let me take both those. Margins up at the half year, which is good news obviously, but our spend split as I said in the presentation isn't evenly spread between the first half and the second half. If you go back to the organic margin for last year, you'll find that the half year margin was about 1% higher than margin was for the full year. And I don't expect it will be substantially different this year. So margin for the full year will be lower than margin at the half year, but we're still confident of hitting the target this year.

In terms of working capital, working capital always grows at the half year because of the leaf purchases we do. And you're not really seeing anything unusual in working capital this year. It's simply just the higher cost of leaf coming through the balance sheet.

Two questions or maybe three, depending how you count them. Just very quickly, can you say how your market share in the T40 markets? I don't think you've given any figures so if you can just say how that's moved, that would be lovely.

Secondly and perhaps more importantly, volume trend seems to be improving and I was wondering in the next six and 12 months looking forward, you would expect those volumes trends to continue to get better. And as they get better, do you think the very strong pricing mix that we've seen will continue or do you think it will ease off a bit?

Okay. The first question is about how is our market share in the top 40 markets. And the second one is about volume trends in the next six months. And the third one is about pricing mix with the volume trends changing.

Look at the market share in the first six months, Adam, we grew the top 40 markets 0.6%. Last year we were growing 0.4%. You have to consider that the 0.6% has been influenced by Japan. If you take Japan out of these numbers, then Japan influences, I think that is around 0.2%, 0.3%, so it's almost half of that. So it's still growing market share strongly and in the top 40 markets.

Looking at the volume trends, first half of last year we are talking about a little bit over 3%. Overall the industry declined outside China, US and India and this year, in the first half of the year, we are talking about 2%, so it's improving. So the rate of organic decline is moderating.

How do I see this playing out for the rest of the year and for the following? As we said in the May Investor's Day, I think it is very difficult to predict how the volumes are going to play, because at the end of the day, it's all about the economy. So the economy recovery in the countries, unemployment rates and everything related to that, so it's very difficult to predict.

What I can say is that our expectation is that its moderation in terms of decline will continue but with what rate is very difficult to predict. So I wouldn't be able to answer that in the next six months or 12 months.

Regarding pricing mix, we have a very good pricing momentum and as you could see, our mix has been quite, our pricing mix has been quite solid. I'd like to point out that the mix has been an important component, even more important component for BAT, because it's all about the strategy that you are driving. As I said during my speech, we are growing volumes in the premium segments and declining in the sub-premium segments. What improves the mix?

So Global Drive Brands are growing 11% most of them, more in the premium segment than anything else, so mix has been a very important factor of that.

I believe that if you look at short term, of course the second half probably is not going to be as strong as the first half because obviously you have the timing of the price increases during the year. And as you saw in the last year, in 2010 or 2009, usually the first half, in terms of price mix, is a little bit stronger than the second half.

So I think that, if you look at the last five years, price mix has been around 5.5% to 6%, so it seems a good number.

Can I just follow up on that? Are you able to say what price mix would have been somehow excluding Japan because Japan is such a strange situation, both in terms of the magnitude of the price rise and the strange volume effects?

Yes, I think Nico asked me the same question as we did a quick calculation outside. I came out at a rough 6% rather than the 7.5% we've got in the half year, but that's a pretty rough estimate.

With respect to margins in your guidance, you changed your margin guidance from 35% by 2012, and you moved it forward again this year. You said it will be a little bit more than 35%. What changed in order for you to have a better margin performance or should we just read that you guide very conservatively?

I don't like issuing targets and not hitting them, so that's a background to that. We're comfortable we'll hit the 35% margin target this year, but I did caution people that the second half won't be as high as the first half, of course.

I think it's -- as we said at the presentation before, the objective is really to grow margins by 50 to 100 basis points a year and I'm confident that we can continue to do that. Some years we will do better, like this year, other years we won't do quite so well. Sometimes you get the mix effect coming through as well, so constant currency margin growth is not quite the same as current margin growth as well. But between 50 and 100 basis points a year. I've been toying with whether to announce a new margin target, but I think 50 to 100 basis points a year and multiplied by the number of years you want and you get the target.

My question relates more to a year ago. Your margin guidance for '11 was 150 basis points below what you would likely hit. My question is what additional costs, did you accelerate cost savings, was their differences in the business versus your expectations? So really just trying to understand why are you overachieving so much relative to what you told us a year ago, on the margin front?

Well of course Japan makes a difference, in terms of the extra volume in profit coming through from Japan.

We're driving pretty hard on cost savings obviously, I think when you get a situation, say in Western Europe, where you've got pretty tough price competition, that focuses the mind on taking costs out. And also remember we've restructured the businesses from before we announced those original margin targets. So selling Lyfra was a help, that was a lot of turnover and hardly any profit; and the phone cards business in Brazil as well made a difference.

So it's a part of corporate restructuring, it's a part of responding to aggressive price competition where we find it and it's partly just the ongoing cost reduction process.

Can I ask a question about Korea? With regard to your own pricing initiative in Korea, one of your competitors said last week something along the lines of nice try but the timing's wrong. Have you taken a decision yet to pull prices back down and are you hopeful that you might persuade the Government to put in train a more progressive excise policy which makes price increases in the future more likely?

Well, let me talk about Korea, that's a very hot topic at the moment. We took the prices up in Korea, because we think that the right decision is the right thing to do, not only for the people, for the industry.

We haven't seen a price increase in Korea for more than six years, and we don't think that is sustainable. Costs are going up, cost of doing business is going up and we didn't think that was sustainable.

The whole BAT strategy is about driving value, is driving innovation, so we think we can take our brands up and we think that we can gain market share with that.

What's happened in Korea, as soon as we took the price up, as expected we lose some share in the beginning. So if you look at the first two weeks after we had taken the prices up, we lost 3.5 share points in Korea. Since then, the good news that the share has been stable.

So what we are doing now is driving our innovation pipeline in Korea with several launches behind our Global Drive Brands, Dunhill and Kent. We just had one innovation coming to Korea 10 days ago and we have some others coming over.

So the point -- and also we decided to approach the KRW2,500 segment with Lucky Strike, which I have to say, after two weeks, the reading has been outstanding, has been excellent, so we have good expectations about the brands.

So our expectation is that we are going to recover the share, making more money, which looks very sensible; so this is the situation in Korea.

I think you also need to remember that consumers equate price with quality in Korea, so there are risks of taking prices up in Korea, but there are also risks of not taking price up in Korea.

Spain, in your press release you've called it a price war yourself. Could you maybe give us a little bit of your reading on Spain, has it stabilized? What is the scope for actually boosting the profitability in that market from the current levels where it appears that the players are happy with the price differentials, and -- you don't look, maybe they're not happy?

And then what are the risks of similar price wars or price skirmishes happening in other markets, if they want to reposition brands?

Regarding Spain, that is the question, yes, we had a price war in Spain. The profitability of the industry today is lower than last year, the end of last year so it's just some way to go in terms of pricing to get the same point that we were at the end of last year.

You have to consider that we are not price leaders in Spain, we just have 12% market share, despite the fact that you have a very good performance on the back of Lucky Strike in what I call the mid-price segment.

So we are doing well in Spain, we are growing volume, we are growing share, we are growing profitability; from a low base, of course, because we are not big in Spain.

So we had this price war, the prices went back. What I can say from the BAT point of view, we think that we have our brands positioned where they should be, so we are happy with our price positioning in Spain.

I cannot talk about what the competitors think about their price position, but I have to say that we are quite happy where we are today.

That's the first point, and I think that your point is about price war and how is the risk of this spreading to other countries around Europe, for example.

I think that's going to be very difficult and one of the reasons that you have the price war in Spain is because the excise system is almost 100% (inaudible). So the Government pays part of the cost of a price war. So we don't have this same excise mechanism in other countries in Europe; it's very difficult to have a price war when you have a high specific and the industry pays 100% of the bill.

So we don't expect that is happening everywhere else.

What's the next steps in terms of Spain? Well as I said, we are not price leaders; we have to see what the competition is going to do. But as I said, industry profitability now is not -- is still at the same level that it was at the end of last year; is not the same level, is lower.

Do you believe that the market leader should lead the price in that market?

Well, I think that's the very question for them, it's not a very good question for us, I don't know. What I'm saying is that we cannot, with 12% market share, lead again a price increase; don't forget that at the beginning of this year, everything started when BAT decided to take the prices up.

We took the prices up in Spain and the response from the competition was not only to go back to the old price, but went a little bit further. So we had no intentions to lead the price in Spain; we are not leaders in terms of pricing there, we just have 12% market share. It's a good question to ask for the competition.

Could you update us on the situation on plain packaging in Australia, where we stand? And also on the enthusiasm on the part of other countries following Australia, thank you.

Well in the case of Australia, as you probably have heard about, the Government is keen to introduce plain packaging in 2012. It has sent a bill to the Parliament and the Parliament has referred to the Health and Ageing Committee, which should analyze the bill and you have 60 days to come back to the Parliament to a recommendation; that should be in September.

And if everything goes to plan, according to the Australian Government, it can become law at the end of this year and it will be implemented in the middle of next year.

It's very clear our views about that. We don't think that the plain packaging in Australia is going to work. We don't think that's going to reach the public health goals that the Government has set for themselves and we'll do everything that we have in our reach, including looking for legal avenues, to safeguard our assets. That's everything that I can tell you about that.

In terms of other countries, you have to consider that the majority of the countries are on the words in their constitution, they protect intellectual rights and property. And we'll safeguard ours. So it's very difficult to talk country by country here, but we'll do everything that we have in our power to show to the governments that plain packaging does not work and you have an intended consequence such as increasing illicit trade.

So we hope that you have our voices heard in Australia. We will do everything we can to submit our views to the Committee in order to show to them how we see that's going to play out.

A follow-up question on innovation. Can you say roughly, I mean you're rolling out capsules across the Global Drive Brands in multiple geographies, I was just wondering how far we are down that process? Have you basically taken it to 80% of the brands in markets you want to take it to? Is it -- I suppose how many more quarters have we got for this process to go?

The question is about rolling out of capsules. As I said at the beginning of the year, when you have the full-year's presentation and there was a question about what is going to happen with innovation. I said we have a healthy pipeline of innovations due to come, but there's still a lot of work to do in order to roll out the current pipeline of innovation.

So we have work for the next two to three years still in answer to your question.

Some big markets still do not have capsules. We just introduced in places like Turkey, in Russia, in Brazil, but an innovation like capsules, it takes some time to mature, because this is not a promotion, this is a long-term strategy in terms of driving innovation.

So as soon as we have capsules in a place like Russia, you take one year, 18 months for the consumers to understand the proposition and it start working, so there is a long way to go.

I think that the next two to three years we'll have our hands full with rolling out capsules, reloc,, but we have some new stuff coming out in the market in the next, I hope, 18 to 24 months as well. So a long way to go, it's just 12% of our --. So in terms of -- JDB's, (inaudible), is confirming the number now, is 6% only; so it's very low, it's a long way to go.

On innovation Imperial rolled out a slide pack which was quite unique and I can see how consumers want to play with it. Are you seeing that product taking share from your brands in markets where it has been launched?

It's very difficult to answer that question like that, because it's not about what the competition does with innovation.

Let me start by saying that when the competition announces innovation or announces new developments for their brands, this is good for the industry because then we can play with innovation, then you can play with brands, you don't need to play with prices.

So we think that's good. But how this is going to play out, it depends a lot what we are going to do in the markets as well with our brands at the same time.

If the competition comes with innovation and we don't do anything, we don't do any innovation and we just sit and see, of course you have an impact in our portfolio.

But usually at the same time they introduce the innovation, we introduce ours and we think that we have a much powerful, much more powerful pipeline of innovation. And I think that from a consumer point of view, I think that we have a better proposition.

So at the end of the day we'll keep growing share, even when they roll out their innovation, because we roll out ours. And I think from a consumer point of view ours are more powerful, that's our belief. It's for the consumers to answer the question.

Okay can I have a final question; we're running out of time, everybody's happy? Yes.

Just a question quickly on Dunhill, a bit of a slowdown from the first quarter. Was it just South Korea or were there other markets that may be weaker?

No, the answer is that was just in South Korea. South Korea is quite a big market for Dunhill and I have to say that Dunhill is probably the brand that grew everywhere in the world with the exception of South Korea.

Because of the relevance of the South Korean numbers in the Dunhill numbers, you saw a small growth of 1%. But the brand has done extremely well across the world in places like the GCC, in places like South Africa and Romania, everywhere, even in France; it's doing very well in Paris. So the brand is having an outstanding performance. And as I said it was a cautious decision that we took in South Korea, we don't like to lose share, but was a conscious decision even though the brand is growing.

Thank you, thank you very much.