英美煙草 (BTI) 2016 Q4 法說會逐字稿

Good morning, everyone, and welcome to British American Tobacco 2016 full-year results presentation. I am Nicandro Durante, Chief Executive of British American Tobacco; and with me this morning is Ben Stevens, Finance Director.

As always, a warm welcome to those of you who may be listening on the conference call, or watching via our website, bat.com.

After taking you through the results presentation there will be an opportunity for those of you in the audience here, and also, this time, for those of you dialing into the conference call, to ask questions.

Before I start the presentation, I will take it as read that you have all seen and read the disclaimer on slide 3 and 4.

I am pleased to announce that the Group delivered exceptional good results in 2016, with strong growth across all our key business metrics, despite the continued difficult economic environment.

EPS for the full year was up nearly 19% at current rates, and over 10% at constant rates, exceeding our high single-figure earnings growth target. This is an excellent performance, given the fact that we have absorbed a 6% transactional ForEx impact on operating profit. Excluding this, currency-neutral EPS would have been up around 16%.

In addition, I am very pleased about the progress we continue to make from our significant investment in the NGP category. We are now present in the five largest vapor markets in Europe, and we are already the leading international vapor business.

Our recent launch of our tobacco-heating product, glo, in Japan is going well, and early results are very promising. I will provide more detail on this later.

I'm also excited about our recent announcement, regarding the proposed acquisition of Reynolds American. Strategically, this is a great deal that will create one stronger, truly global tobacco and next-generation products business, with a world-class portfolio of products and brands that can be leveraged on a global scale.

The Board believes this is an attractive transaction for both Reynolds and BAT shareholders.

In recognition of the underlying strength of the business, and demonstrating our commitment to grow shareholders' returns, we have increased the dividend by 10%; in line with our constant currency EPS growth.

I will now hand over to Ben, who will take you through the detail of our 2016 results.

Thank you, Nicandro. Good morning, everyone. As Nicandro mentioned, 2016 was an outstanding year, driven by strong volume, revenue, and share growth.

The relative weakness of sterling resulted in a transactional FX tailwind; however, as previously highlighted, transactional FX remained a challenge, impacting operating profit by approximately 6%.

This slide shows some of our key business metrics. Reported cigarette volume grew 0.2%, and organic volume was down only 0.8%, outperforming the industry, which we estimate to be down about 3%. This reflects our continued strong share growth of 50 basis points.

The GDBs delivered another excellent performance with overall share growth of 100 basis points, and volume up 7.5%.

Price/mix was 6.7%, driven by good pricing across our markets.

Reported revenue was up 12.6%, and at constant currency was up 6.9%, with organic revenue growth of 5.3%.

Operating profit grew 9.8% at current rates of exchange, and 4.1% on a constant basis, despite the absorption of a 6% transactional currency headwind. Excluding this, organic operating profit would have risen by around 10%.

Operating margin was down 90 basis points, due to the impact of transactional FX. Excluding this, and with organic adjustments, underlying operating margin was up around 160 basis points. I'll give more detail on this, later.

Constant currency EPS was up 10.4% to 230p, benefiting from our investments in the enlarged Reynolds American business and the buyout of the Souza Cruz minority.

With transactional FX turning in our favor in the second half, reported earnings per share increased strongly to 247.5p; up 18.8%.

Currency remained a key feature of 2016. With the devaluation of sterling following the Brexit vote, the 4% transactional headwind on operating profit in the first half of the year turned into a 15% tailwind in the second half and a 6% tailwind for the full year.

However, transactional FX remained a challenge and was a 6% impact on operating profit for the full year. This was due to the timing of hedges rolling off, and the scale of FX movements relative to the US dollar in a number of countries, including Russia, Japan, and Ukraine.

Based on current spot rates and the timing of hedges, we'd expect a transactional headwind of around 2% on operating profit for 2017; however, translational FX should remain a tailwind of 9% on operating profit, and 10% on earnings per share, at current rates of exchange.

Turning now to margins, we continued to make good progress on the margin during 2016 with an underlying improvement of around 160 basis points. This was driven by pricing, together with significant product cost savings, and the benefit of TaO efficiencies. However, this was more than offset by the transactional currency impact of around 210 basis points.

Organic margin was down just 50 basis points, and the effect of acquisitions in the prior year left reported margin down 90 basis points.

As you know, on average over the years we aim to grow our operating margin between 50 and 100 basis points per year, and I remain confident in our ability to achieve this.

Turning now to the regions, Asia Pacific delivered its fourth consecutive year of strong share growth, up 30 basis points. This was driven by the continued momentum of the Global Drive Brands across the region with strong performances from Dunhill in Indonesia; Kent in Japan; Lucky Strike in Indonesia; and Rothmans in Australia and South Korea.

Volume in the region was down only 0.9%, despite significant excise-driven industry declines in Malaysia and Pakistan.

Regional revenue was flat at constant rates, and profit was up 1%. This was mainly due to the impact of the excise increases and associated downtrading in Malaysia and Australia. This masks strong revenue and profit growth at constant rates in a number of countries, including Bangladesh, Pakistan, Vietnam, and Sri Lanka.

Excluding the impact of transactional FX, regional profit would have increased around 6%.

In Australia, despite the downtrading environment, market share increased, driven by another strong performance from Rothmans.

In Malaysia, corporate share declined as Dunhill, in the premium segment, was impacted by the excise increase and growth in illicit trade. However, Peter Stuyvesant, the fastest-growing brand in aspirational premium, performed well, partly offsetting the decline.

In Japan, BAT grew share, driven by Kent, in an industry down around 5%, due to strong growth in next-generation products. Including next-generation products, the industry declined around 2%.

Overall, reported revenue and operating profit in the region grew strongly, as a result of the translational FX tailwind.

In the Americas, reported revenue grew 5%, and profit was flat, driven by good performances from Canada, Chile, and the Caribbean.

Volume was down 8.8%, largely due to industry decline in Brazil and Venezuela; however, volume increased in Mexico and Columbia.

At constant rates, regional revenue grew 11%. Profit grew 3%, and would have increased by around 6% excluding the impact of transactional FX.

In Brazil, continued excise and VAT-driven price increases, together with a weak macroeconomic environment, led to a significant industry volume decline, downtrading, and growth in illicit trade.

Although overall share was down, [Minstra] grew share strongly, capturing its fair share of downtrading; and Dunhill increased its share of premium segment by 50 basis points.

Canada delivered its fourth year of strong profit growth, driven by Pall Mall, and a stable performance from du Maurier.

Profit in Mexico was flat, due to delayed pricing, but volume and share grew. Strong pricing offset currency devaluation and inflation in Venezuela, driving a decline in industry volume.

The Global Drive Brands performed well across the region with volume up 7.7%, and share up 150 basis points. This was driven by good performances from Lucky Strike in Brazil and Chile, Pall Mall in Mexico and Canada, as well as successful migrations, including [Consul] to Pall Mall in Venezuela.

Western Europe delivered a strong set of results as the economic recovery in the region continued. Revenue grew strongly and was up 21% at current rates, 8% at constant rates, and 3.6% on an organic basis. This was largely driven by pricing in Germany and Romania, and a good volume performance across the region.

Volume was up 6.7%, or 2.4% on an organic basis, strongly outperforming the industry, which we estimate to be down around 1.5%.

Share continued to recover and grew 10 basis points, driven by good performances in Romania, Poland, and France.

Profit growth in Romania, Germany, and Italy helped increase regional profit by 8% at constant rates, and 21% at current rates. On a constant organic basis, profit was up 6.9%; and excluding transactional FX, would have increased by around 9%.

In Romania, corporate share was up 130 basis points, reaching 54.4%, reflecting record shares for Dunhill and Pall Mall.

In Germany, good profit growth was driven by pricing and a strong performance from Lucky Strike.

In Italy, Global Drive Brand share grew, driven by Rothmans and Lucky Strike. Profit was up, following good pricing.

The integration of the TDR business is substantially complete, resulting in strong share growth of 120 basis points in Croatia.

EEMEA delivered another strong underlying performance, despite continuing economic and political challenges in the region.

Share growth of 140 basis points drove organic volume growth of 2.1%. This reflects an excellent performance from the Global Drive Brands, in particular, Rothmans in Russia and Ukraine. Together with strong pricing, this led to constant currency organic revenue growth of 8.6%, and profit growth of 4.3%.

Currency devaluations in Russia, Ukraine, and Nigeria again resulted in a large transactional FX impact. Excluding this, organic operating profit would have grown by around 19%.

Corporate share in Russia was up 140 basis points, largely driven by the success of Rothmans, as well as growth in Java, and a stable performance from Kent. Profit was up significantly, despite the impact of transactional FX, as a result of strong pricing and volume growth.

Volume declined in South Africa, where trading remains difficult due to a weak macroeconomic environment, currency devaluation, and political instability.

In Turkey, share grew for the third consecutive year, driven by Kent and Rothmans. Volume growth, together with good pricing, led to significant profit growth.

Adjusted earnings per share of 247.5p at current rates was up nearly 19%, driven by growth in operating profit, together with excellent results from our associates, in particular, the enlarged Reynolds American business, and an 8% translational currency tailwind.

Net finance costs increased, mainly due to M&A funding.

The effective tax rate was lower at 29.8%, due to a change in the mix of profits.

Non-controlling interests were lower, as a result of the buyout of the Souza Cruz minority.

Now, on to cash flow. Overall, free cash flow was GBP3,389 million, which is GBP92 million lower than last year. However, excluding the non-recurring receipt in 2015 of GBP963 million in the UK related to the franked investment income Group litigation order, free cash flow was GBP871 million, or 35% higher.

This was mainly due to higher operating cash flow conversion, up 1.7 percentage points to 93.5%; lower dividends paid to non-controlling interests; and higher dividends received from associates.

Depreciation is the main component of non-cash items.

Working capital outflows were slightly below last year at GBP254 million, and were mainly due to stock builds, linked to the timing of excise-driven price increases.

Gross CapEx was GBP652 million, with GBP61 million higher than 2015, largely due to investments in next-generation products. This was partly offset by asset sales, giving a net CapEx of GBP559 million.

Based on currents rates, we expect gross CapEx in 2017 to be around GBP700 million, due to additional investments in next-generation products.

Net interest paid was slightly higher at GBP537 million, due to the full-year impact of additional financing costs, arising from prior-year M&A activity.

Tax outflows were marginally below 2015, mainly due to the mix in taxable profits and payment timing.

Dividends paid to non-controlling interests at GBP147 million were GBP88 million lower, due to the full-year benefit of the acquisition of the Souza Cruz non-controlling interests.

Restructuring and settlement outflows were GBP231 million higher, primarily as a result of deposit payments linked to the Quebec class action lawsuit.

Dividends from associates were GBP392 million (sic see slide 15, "GBP985 million") versus 2015, reflecting the full-year benefit from the prior investment in the enlarged Reynolds business, as well as participating in Reynolds' share buyback program.

This delivers free cash flow of GBP3,389 million.

I'd like to finish off by touching on financing and shareholder returns. Net debt increased by GBP2 billion to GBP16.8 billion. The increase was primarily driven by a GBP1.7 billion FX impact, due to the devaluation of sterling against the US dollar and the euro. This leaves net debt-to-EBITDA at 2.9 times.

Following the announcement of our recommended offer for the remaining 58% of Reynolds American, S&P and Moody's confirmed the Group's credit ratings at BBB+, Baa2 stable. Given the highly cash-generative nature of the business, we'd expect to recover to BBB+, Baa1 in the medium term.

We've increased our full-year dividend in 2016 by 10%, whilst, at the same time, reducing our payout ratio to 68%. This is consistent with our stated intention to gradually return to our long-term payout policy of 65%, once currencies turned in our favor.

We remain committed to rewarding shareholders with an increasing dividend and continue to see 65% as a sustainable long-term payout ratio, given the investment opportunities in the business.

Thank you. And I'll hand back to Nicandro.

Thank you, Ben. BAT has a very successful track record of developing strong brands and growing market share through our consistent growth or superior consumer understanding, product quality, and innovation. I am pleased to say that this continued during 2016, with a record year of corporate share growth of 50 basis points, as measured by independent third-party retail audit data.

This performance continues to be powered by the GDBs, which grew share by impressive 100 basis points and volume by 7.5% in 2016. This is on top of the 120 basis points of share growth, and 8.5% volume growth for the brands achieved in 2015.

Since 2010, our GDBs have added 520 basis points of share globally, with all five brands contributing to this strong performance. The GDBs now represent nearly 49% of our portfolio.

Dunhill performed well in a number of key markets. The brand held share overall and grew slightly within the premium segment. This was a strong performance, given the impact of industry volume decline and downtrading in Malaysia and Brazil, as a result of excise-driven price increases.

In Indonesia, Dunhill continued to grow both volume and share and is now the largest international kretek brand in the market with a 4.9% share; up 0.5%.

In Romania, Dunhill also achieved strong volume and share growth to reach a record market share of 6.5%.

Kent grew volume 1% and share 10 basis points, as a result of good performance in Japan, Russia, and Turkey, as well as the migration from Belmont to Kent in Chile.

In Russia, Kent grew premium share, segment share, driven by nano, maintaining premium leadership.

In Turkey, Kent Spark demi-slims and Kent Switch are driving share and volume growth. Kent Spark and slimmer volumes helped Kent reach a record-brand share of over 8% in Japan.

Lucky Strike had another excellent year with volume up 13.5%, and share up 10 basis points. This was driven by strong performance in Germany, France, Chile, and Italy, where the Black series continuing to drive growth. The brand was launched in Indonesia in May and had already achieved a share of nearly 0.5% by August.

Following the migration of [Club Mayo] in the second half, Lucky Strike has grown significantly, reaching a market share of 1.4% in December.

Pall Mall continued its good performance with share up 10 basis points, driven by Pakistan, Romania, South Africa, Poland, and Canada.

In Romania, Pall Mall remains the fastest-growing brand in the market, driven by Extra Cut, and reached a record share of over 17%.

In Poland, following the successful launch of tubes, the brand also reached the record share of 9% in December.

Finally, Rothmans delivered another outstanding performance, growing volume nearly 37%, and share 70 basis points. Rothmans is our second-largest GDB based on volume, and maintaining this growth rate as the brand gets larger will clearly be more challenging.

Rothmans demi-slims continued to drive the growth of the brand, and launches, such as Demi Click in Russia and Ukraine, have become a major driver of Rothmans' success in 2016.

In Turkey, Rothmans became the fastest-growing brand in the market and in December reached a 4% share, after only two years.

In Ukraine, it's also the number-one brand in the market.

And in Russia, Rothmans is the fastest-growing brand for the third consecutive year.

Turning now to NGPs. We have already said it, that our strategy is to invest in a range of products across the risk continuum that satisfy different consumer moments: that's why we are investing in both vapor and tobacco-heating products.

BAT is already the largest -- the national company in the vaping category with a portfolio of products and an estimated combined share of 8.2% in the five largest vapor markets in Europe.

Vype is now available across 10 markets worldwide, with leadership positions in the UK and Poland.

In December last year, we launched Vype Pebble online in Italy, UK, Germany, France, and Poland. Pebble starter-kit sales are already 2 to 3 times higher than e-Pen sales were in these markets over the same period.

In the UK, Vype is one of the fastest-growing brands in the UK retail, growing significantly to 9.5% at the end of the year. And our retail share of the UK vapor market is now nearly 40%.

Vype distribution has expanded rapidly in other European launch markets. It is now available in 5,300 outlets in Germany, and 7,800 outlets in France.

In Italy, Vype is now available nationwide, reaching 2.7% category share of retail in the first month of national presence.

Vype also continues to grow in Poland with share in retailing increasing from 4.7% in Q1 to 6.6% in Q4, largely driven by growth in liquid sales. In addition, we already work on the next platforms of the e-Pen and Pebble.

In the tobacco-heating products area, we have also made excellent progress. As most of you will know, in December 2016 we launched glo in Sendai, Japan. Our results to date have been very encouraging.

At the end of the first 10 weeks, glo already has a 5.4% share in a leading convenience chain, Sendai, and a 4.9% share in the second chain, in just six weeks. The two chains represent approximately 40% of the total tobacco category sales in Sendai.

Consumer feedback is that they appreciate the simple and intuitive design, the back-to-back uses between charge, and the easy-to-clean feature.

The [sensory] experience of both the tobacco menthol variants also resonates with consumers with prevailing excise rates, [narrow] fixed margins at around 2.5 times higher than Kent Convertibles Japan.

We are pleased with these results, and will be rolling out glo nationally in Japan in the second half. [There is already] the version 1.2 of glo, which incorporates a number of product upgrades.

In Romania, iFuse, launched last year, continues to perform well with awareness, trial, and sales growing. The product now is available in 800 outlets across Bucharest. We'll launch an upgraded version in the coming months.

We have always said that we see a significant opportunity in NGPs, and we are making great progress. We continue to believe that we should offer consumers a range of products in both the vapor and tobacco-heating products as we believe that both categories have significant long-term growth potential.

Our investment in NGP continues to increase and we plan to double our footprint in 2017, and we aim to double it again in 2018. With a strong portfolio of products, we believe we are well on track to capture a significant share of this growing market.

In summary, 2016 has been a very strong year for BAT. Excluding translation and transactional currency effects, revenue, profit, and EPS were up 7%, 10%, and 16%, respectively. This is a very strong performance, which was underpinned by record corporate share growth, driven by an outstanding performance from the GDBs.

We have increased the dividend by 10%, in line with constant currency EPS growth; recognize the underlining strength of the business, and demonstrating our commitment to growing shareholders' returns.

Although it's only early in the year, the trading environment continues to be tough with challenging conditions in markets such as Brazil, South Africa, Malaysia. But much like last year, we expect profit growth to be skewed to the second half. This is mainly due to the phasing of volume shipments in a number of key markets, including Pakistan; as well as the timing of [March] spend and NGP investment. Nevertheless, at this stage, I am confident of another good year of constant currency earnings growth.

Thank you. I'll now open it for questions. First, we'll take questions in the room; and after that, we'll go for those who dial in.

(Operator Instructions).

(multiple speakers) geographic mix impacted 2016 revenue space.

The second one is on NGPs. Could you give us also an indication of how much these contributed to 2016 net revenues for the Group?

My final question is on the outlook on excise duties across your key markets. Should there be anything, in particular, that you wanted to highlight for 2017 that would impact the volatility? Thank you.

In terms of portfolio and geographic mix, there was a headwind in both. Geographic, because we grew substantially in places like South Asia, which is great for the business, the potential is fantastic, and some of the high margin markets decline a little bit faster.

So I see that impact in our numbers for geo, plus portfolio mix, this year was around the headwind, or around [3.5%], both together; more on the geographic mix than the portfolio mix, of course, much more.

The second question is about excise duties. Well, excise duties, we always have some headwinds at beginning of the year. We had some this year. You have an excise increase in Colombia in January 2017; that's going to be a headwind.

We have one, potentially, in the GCC, in Saudi Arabia, that has not been confirmed yet, but there is a possibility that around March or April. The government has released already their tax plans and they are talking about a substantial excise increase there.

The third one is in Russia. It's going to have a higher excise increase this year than last year. The [percent] in excise last year in terms of pricing was already -- around RUB10. This year, it's going to be around RUB13 to RUB14, to cope with the excise increase, or a little bit higher. I am not that sure that in terms of consumers' price it's going to be that different, but we'd expect that Russia will decline a little bit faster next year, around 6.5%, this year was 5.5%, because of that.

So those are the main headwinds that we have. In places like Brazil, we will have a better excise environment, so we think that the industry is going to perform better in 2017.

In terms of industry decline, that performed last year, that was around 9% decline. We expect for 2017 the industry decline 2%, because excise price increases are going to be much lower.

The third question is about NGPs. I think the impact of NGP's in our numbers was extremely small in 2016. 2017 will depend a lot on our performance in the market. But in 2016 was very small, really small.

Adam Spielman, Citi. First of all, a question on margins. You're reiterating the 50 to 100 basis points, can you just talk about that, in the light of the fact that where we are with TaO, the savings from TaO; and also, I guess, what that means for the 2% transaction headwinds 2017?

And then, a separate question, you said on the footprint for NGP's you're going to double it and double it again, can you just explain what you mean by footprint? And can you just be a bit more specific about (multiple speakers)?

I answer the second question, if you don't mind. We are in around 11 markets in December 2016. We think that you can be in another 10 to 11 markets in 2017, and you can be in another 20 markets in 2018. So it's doubling 2017, doubling 2018 the number of the markets that you be present.

And that is in the (inaudible - microphone inaccessible) markets?

This will be [18] plus tobacco-heating products. For tobacco-heating products, we expect, by year end 2017, we will be able to launch in around five markets, with further expansion next year.

We are learning with the launch in Japan. I have questions, I had some before coming here today, about why we don't roll out in Japan faster, why you don't rollout the other markets faster.

But you have to understand that we launched this in December, there will be a lot of learning's that you are taking, not only about the product, but also about the marketing mix. That's why we are going to rollout nationally in Japan second half, more the beginning of the second half than the end of the second half; and then, we will launch in other markets at the end of the year.

We will come with an improved version of the glo, because we learn a lot. Despite being outstanding performance in the market, but we think that we can do even better. And so that's the plan.

Yes, on operating margins, obviously, we're delighted by growing underlying margin by 160 basis points this year. That's a tremendous achievement, I think.

The TaO program, we finished the rollout in Indonesia and in the Balkans in January this year. So even the acquisitions like TDR are already now on the TaO program, and we've got better and better at deploying TaO as we've got more and more experienced on it. But, of course, that's just deploying the IT system. The actual cost savings come from how well you use that.

For example, we're driving out now HR shared services, which is in addition to the TaO platform. That will have margin implications for us. We're getting better and better at sales operations planning as a result of the TaO program; that means we carry less stock, we make less mistakes in terms of write-offs, things like that.

There are other services we can transfer into the shared service centers. Things like tax compliance, for example, can be done out of shared services.

Anything that's rule-based activity should really sit in the shared service center; and anything that's judgment-based activity should sit either in the center, or in the end markets. And we've got a long way to go to do that still. So I'm confident we can continue to grow our operating margin over the years to come.

Now, in terms of reported margin, obviously, we've had a GBP300 million hit on transaction FX this year; that goes down to GBP100 million next year. But it's still a hit, so we've still got to overcome that.

And, of course, the rollout of next-generation products will be lots of turnover. But we'll be investing in that next year, so that won't come through to the margin until 2018.

But despite all of those things, I remain confident that we can grow operating margin.

Owen Bennett, Jefferies. A couple of questions, please. Firstly, pricing and volume outlook in Brazil in this year, please?

And then secondly, just coming back to NGP investment, PM said they're at a point now where they're going to re-allocated resources from combustibles to NGP in certain markets. Will you be adopting a similar strategy, or will investment be incremental to combustible business?

Okay, the first question is about volume outlook in Brazil. I think that I mentioned before, Brazil this year, we had an industry decline of around 9%. We expect next year to be around 1.5% to 2% only, because you have much lower excise increases in Brazil, and much lower price increases in Brazil. We had one in December.

And I think that prices in Brazil is going to be much more manageable, so the impact in the market is going to be much more manageable. So that's the answer for Brazil.

Regarding resource allocation, we do resource allocation on a daily basis in BAT. And we used to do between regions, among markets; now we do markets, regions, and categories.

But it's not about taking money from combustibles, is about allocating resources in the right markets, in the right brands, in the right segments. And when I say segments, I'm talking about different categories. So I don't think that's going to be about -- I'm launching this, for example, in Japan.

I don't take money from the combustible business in Japan and I put back in the NGP, it doesn't work like that. So we will try to be smarter and smarter in a way to allocate investments in a way that you can keep growing, while we keep launching the products.

Jon Leinster, Berenberg. A more general question, one of your competitors has noted that there seems to be very aggressive pricing actions in Russia recently. And when France introduced a turnover tax then some of the major players, including yourselves, didn't pass through that in terms of price to consumers.

In general, do you think that price/mix or price is becoming more aggressive within the industry as people search for market share?

Jon, of course, I'm not going to talk about specific markets in terms of pricing, going forward. We don't talk about that. But what I can say is that we have a solid price environment nowadays. We had a good price environment in 2016.

We are moving to 2017 with a by today we have already 50% of the pricing of the year that we were expecting. So it seems to me a good price environment overall. But I'm not going to be discussing here market by market. But it's a good price environment, not that dissimilar than the one that we had at this time of the year last year.

I think that now you take some questions from the ones that have dialed, if there is any.

Thank you. Rey Wium, SBG Securities.

Also, just a question on the NGPs. I just want to get a feel of, maybe, if I look at numbers from Reynolds, that it has a bit of a drag on operating profit. Now, I just want to get some clarity, at what sort of level do you need to be in terms of volumes or market penetration for the next-generation products to be at breakeven?

And then, I also just had a quick question just on the overall cost of debt. I'm not sure if I missed it, but, Ben, maybe if you can just give an indication if it was in the order of about 3.6%, 3.7% this year.

Okay, let me take your first questions about profitability in NGPs in terms of returns for the Company. It is very difficult to answer your question at a global base. You have to look at this in a market by market.

If you look at, for example, Japan, I just gave you some numbers, our margins in Japan as compared to the consumable margins of tobacco-heating products, as compared to Kent combustible margins, 2.5 times, 2.6 times higher.

It is very clear that is going to have a fantastic return for us in a short period of time; probably not in 2017, because you'll be launching nationally in the second half of the year. But I expect to be accretive in terms of profit for next year.

In terms of vaping, that is easier to talk market by market. Because if I decide next year to launch tin over 100 markets, of course, we are still go losing money because the amount of money that we are investing is going to be substantial.

But, as I said, we expect to launch in another 11 countries this year, another 20 to 25 next year, so it's a very thorough expansion for the markets that will give us the best returns.

But, for example, for vaping, we launched in Germany last year, and we got very good results in terms of market share in Germany; around 7% to 8% after a couple of months. We think that this year we start making money in Russia in vaping. So depends market by market; depends on the launch costs, and thing like that.

We expect that THP will, in the second year, start making money. In vaping, probably, 12 to 24 months later we start making money as well. But the margins in vaping as well are much higher than in combustible. It helps.

Our average cost of debt is 3.1%, Rey.

Okay. Thank you.

David Hayes, Merrill Lynch.

I'm going to go for three, if I can. Just, firstly, on the Global Drive Brands, you made the point of the success of Rothmans and the fact that the scale of that now means the growth may slow. I just wonder whether there's scope or plans for another Global Drive Brand to slot in; and if that was the case, what kind of brand positioning that would have moving forward?

And then the other two, just on the glo 1.2, the variations that you're making to the product, I wonder if you can, I guess, [simplistically] explain, maybe, some of the things that you've learned; and, therefore, what the new products will have that's an adaptation of the original.

And then finally, I think I probably know the answer to this one, but I'll ask it anyway. Just in terms of the Reynolds synergies that you've talked about up 'til now, I just wonder whether you've done any more work on that, any more access at all, following the Board approvals that means you can elaborate on some of the synergy outlooks. Thanks very much.

I think the answer is no, no, no, isn't it?

Yes. Ben just said the answer is no, no, no, but I'll try to elaborate on that.

In the case of Rothmans, the answer is no, we don't expect to have another Global Drive Brand. We think that we have a fantastic portfolio now to meet consumer needs in different price and consumer segments. No, there is no plan to have another one.

In the case of glo 1.2, is the one that's going to be rolled out in Japan, basically, I'm just simplifying, we have two basic features. There are some improvements, but the two basic features is the extended suction length for in terms of smoking; and the second is a better rotation of the consumable on the planned device. Those are the two main changes that you are going to go through.

glo has been extremely well evaluated, but we are always looking for new improvements. In this area, the kind of innovations that you need to go through that products is a little bit different than combustible, because you have to keep improving this every six months.

So we have already, we are working heavily on a glo version, glo 2.0, that should be available at the beginning of next year, with some other improvement. So this will come as natural for BAT.

And, as I said before, last year, when I was quizzed here about why you haven't launched, and I said that you are going to launch when you have the right product to go to the market. And then, we have already 1.2, 2.0, on the [bag].

And the third question, no, we haven't done any more work on synergies. We can't do any more work on the synergies with Reynolds, unless shareholders approve the deal.

I guessed that was the answer. Thank you very much. Cheers.

I will now hand the call back to Nicandro.

Yes. Can I have one last question? You have one more question? You have two more questions. Adam?

Can I just ask a question about innovation excluding next-generation products? This year -- or 2016, volume increased by 12%. I guess, would you hope to achieve, or is it likely you'll achieve, the same sort of volume growth on innovations in the conventional business?

And, I guess, also, in your minds, if you weigh up the relative importance of innovation of conventional business versus NGPs, are they roughly equal importance? Or is one of those two buckets more important in your eyes?

Okay, let me start by the beginning by saying that we think that we can grow another 12%, easily, because we have good plans in place; not only rolling out the innovations that we have already in the market to other markets, to other brands, but also some new stuff coming through the pipe.

Second, when you talk about importance, everything is important. At the end of the day, 100% of the profit of the industry nowadays, more or less, is in combustible. And you look at five years down the road, it's going to be still, by a country mile, the biggest part of profitability. So innovation combustible is very important, because it's what's going to deliver the funds for us to invest in other categories.

We want to keep innovating combustible and we keep offering consumer options to trade up and to commit to our brands.

The strategy is working, by the way. If you look at in terms of operating profit, this has been, and I don't think that I have seen this before, measured by independent panel, Nielsen, the sixth year in which BAT is growing market share, corporate market share, with a strong growth with GDP. I see no reason for slowing this down. So, we will keep investing in combustibles.

But, at the same time, we are investing in next generation. And here, it is not about vaping or tobacco-heating products. I think that both categories are going to be important.

In some of the markets, probably, vaping is going to grow a little bit faster. As you saw in tobacco-heating products, different markets have different profiles, and you have different products available in different markets at the same time; one grew very fast, and the other not. So you'll see markets will develop in a different way, because consumers are different.

So we will keep investing in the three categories: vaping, tobacco-heating products and combustible. And this has a model that has worked for us extremely well so far, no reason to change it.

Chas Manso, SocGen. I think, the first question follows on from that. Maybe, you could highlight a few of the combustible launches that are already out there that you think will feature in 2017.

And then, a couple on next generation. On the Sendai trial, could you say whether your growth has been incremental to the category, or whether it's taking share?

And more generally, I think traditionally you've regarded the opportunities to be greater in vaping than in [heat or burn], especially outside of Japan, and now you're talking about launching into five markets outside Japan. Have your views changed on the potential between the different next-generation formats?

Okay, the first question is about -- you talk about glo share. It's not been totally incremental to the category, but it has helped the category to grow in Sendai. That's the answer.

But we are in the market for 10 weeks. You need to wait a little bit more to have a better reading. We have our reading already after 10 weeks, but I think that's too premature to start drawing a percentage. But it's very clear that it has been incremental to the category, but we haven't taken everything from -- has not been 100% incremental. So the category is growing.

The second question about vaping being bigger or tobacco-heating products being bigger, what we always said is that those two categories have different qualities and they are going to grow at a different pace, depends on the market.

We always said that in some markets, probably, vaping is going to do extremely well; some others, like Japan, tobacco-heating products are going to do extremely well. Vaping nowadays is the biggest category, but I think there is space for both.

But, at the end of the day, it's the consumer that's going to decide which category is going to grow faster in each of the markets. Our role here is to offer the best products that we can offer, with the best marketing mix, in order to win in the category when the consumer decides to jump to one of those. That's my role here, our role here, so we are ready for that.

Your first question, can you repeat your first question?

Combustible launches in 2017.

Well, we have a lot of room to grow innovation by just rolling out what we have out there. You have a lot of innovation, the capsule, with different capsules, flavors, and double capsules, and so on, and so forth; we have the tube; and we have some other innovations as well. So we have a lot [to gain].

But you will be launching some new stuff in the next year. But for obvious reasons, for competitive reasons, I cannot tell you which markets and which innovations we are going to launch. But watch this space.

Taking another follow up, you highlighted GBP700 million CapEx for 2017. Can you give us any indication at all on what capacity you hope to have for the glo refillables by the end of the year? Is that a number you can disclose?

We're not going to disclose the rollout plans for glo. But, obviously, we'll be national in Japan by the end of the year, and we'll have plans well underway for launches in the other markets. And the capacity planning supports that.

Okay? Guys, thank you for joining us for this conference call and being here, present. If you have any more follow-up questions, you can contact our IR department. Thank you very much for coming.