Good morning, everyone. I am Nicandro Durante, Chief Executive of British American Tobacco, and with me this morning is Finance Director, Ben Stevens. This morning, we will be taking you through the half-yearly results. Like last year, we'll be doing our Q&A via conference call following this presentation when there will be the opportunity for you to ask questions. And now to the headlines. I am pleased to report that we have delivered another good performance against a difficult backdrop of global economic uncertainty, more challenging industry volumes and a currency headwind. On a constant currency basis, these are strong numbers with growth in revenue and profit. We are continuing to deliver on our commitment to high-single figure EPS growth. Total tobacco volume in the first half was down 3.2%, although this result was impacted by a number of one-off factors, including trade inventory movements in Brazil and the GCC, and the impact of the leap year. Excluding these factors, underlying volume was down around 2%. This is slightly better than the industry, which we now expect to be down 2.5% to 3% this year. The difficult economic conditions in a number of markets in Western Europe, softer volumes in Brazil and Russia as a result of the excise-driven price increases, and ongoing instability in the Middle East and North Africa have resulted in lower overall industry volume. The Global Drive Brands continued to perform well, with cigarette volumes up over 2%, or 3.5% excluding one-off factors, against a declining overall market. This demonstrates the continuous strength of the brands. We have carried good share growth momentum from 2012 into the first half of this year. Overall market share in the Top 40 markets is up strongly, and importantly, our share of the premium segment is also growing strongly, up…

Thank you, Nicandro, and good morning, everyone. Before I get into the detail, I'd like to point out that the 2012 comparatives have been restated to take account of the revised IAS 19 Employee Benefits. Profit for the 6 months to June 2012 is reduced by GBP 21 million, and earnings per share by 1.1p. The full year effect in 2012 was GBP 46 million and 2.3p, respectively. Obviously, while this affects reported profit, there's a compensating entry in other comprehensive income and the balance sheet values do not change. As you know, currency headwinds during the first half impacted both revenue and adjusted profit by 2%. The impact on EPS was also 2%. I wouldn't like to speculate on currency movements for the rest of year given the recent volatility, however, if spot rates were to stay as they are for the balance of the year, the impact on the full year EPS would be 1.6%. Operating margin for the group grew by 100 basis points in the first 6 months of the year. At constant rates, this was 80 basis points. All regions contributed to this improvement with the exception of Western Europe. Asia-Pacific, in particular, Australia, and the EEMEA region once again performed well. This was mainly driven by higher pricing and lower costs. Americas also continued to improve despite already high margins in the region, although this benefited from foreign exchange. Western Europe margins were slightly down despite good cost management, due to the impact of lower volume. This is another good achievement on top of a significant improvement last year. We reiterate our objective of growing margins by 50 to 100 basis points a year. Turning now to the income statement, adjusted profit from operations grew 4% to GBP 2,944,000,000. At constant currencies, growth was…

Thank you, Ben. In summary, the underlying business continues to perform well despite the pressure on industry volume and the adverse impact of exchange rates. Our growth strategy continues to deliver. Constant revenue growth of 4% reflects continued good price mix of over 7% and a strong performance from the GDBs. At 109.1p, EPS is up 8%. Excluding the currency impact, it would have been -- would have grown 10%. These are good results at the upper end of our strategic metrics, and I remain confident of another year of high-single figure earnings growth. Now on a personal note, I'd like to mention that this will be John Daly's last half-year results briefing. John has decided to retire, and he'll step down from the Management Board at the end of December, although he'll remain a member of the main Board through the first quarter of next year. Over nearly 20 years with BAT, John has played a very large role in the success of this company. The Board and I wish John the very best for a well-earned retirement. We'll all miss John's passion, commitment, energy and great humor. He really leaves behind him a true legacy, a true leadership legacy. Finally, thank you for watching this webcast. We'll be shortly starting with your question. But before asking your question, please do not forget to state your name and firm. Thank you.

[Operator Instructions] Our first question is from the line of David Hayes at Nomura.

David Hayes from Nomura. Two areas, if I can. Just firstly, on Russia, you talked about the increased marketing investment mainly, and profits were flat. But we've heard one of your competitors talk about increased spend in Russia. I just wondered whether you can talk about that marketing spend and whether that is a rise in competitiveness, whether that's just a phasing issue that will drop away a little bit in the second half? And then, I guess, I want just to confirm that you took a price rise in July and what's the quantum of that? And then the second area of questioning was just on the cash flow. Obviously, as you say, seasonally, you like an outflow in the first half as expected, but I noticed that the inventory actually was an inflow. Is that the benefits of SAP coming through and work on the inventory side starting to benefit? And is that something we can expect to see as a trend for the next couple of years?

Well, let me try, let me answer the first question, Dave, and Ben, you take the second one. Regarding Russia, yes, we have a lift on load on marketing investment in the first half, nothing unusual. In our case, it just supported the launch of Rothmans. We launched Rothmans there the second half of last year. And with the continuous support we should scale the distribution of the brand across the country. By the way, the brand is doing extremely well, with our market share now is around 1.7 in the Russian market. And on the back of the performance of Rothmans, on the back of the performance of Kent, we are growing market share big time in Russia, and we are extremely confident in the performance of those brands. As you know, Russia was declined 7% the first half of the year. And in the case of BAT, we declined just 1% because of the market share growth. So the marketing investment is working and -- but I think that the load in the first half is pretty much on the back of the Kent -- the Rothmans launch in the second half of last year. So nothing, I would say, exceptional.

Yes. Dave, it's Ben here. Obviously, we buy leaf stock at the half-year, so you'll see an increase in inventory in the half-year. But the effect of stock builds also has an effect. So sometimes, stock builds appear in inventory, but more often, they appear as trade receivables. So you've got 2 offsetting effects there. So I think you've got to look at working capital as a whole, and that's been broadly similar to last year in terms of the shape of it. We do expect that to reverse slightly as obviously leaf stocks come down for the full year. It's a little early for inventory reductions to be seen as a result of the SAP implementation. Remember, we're only live in Malaysia at the moment. But it is certainly one of the areas that we're looking at over the next couple of years to squeeze harder, partly because, on the one hand, you'll see excise credit coming under pressure from governments, but also partly because we're going to have a reasonable period of higher CapEx as we invest in next-generation products, as we invest in innovations and obviously, as we spend the money on the SAP program rolling out.

Our next question is from the line of Erik Bloomquist of Berenberg.

Erik Bloomquist, Berenberg. Could you discuss the NGP initiatives, and certainly with the launch of Vype yesterday, how that fits into the prospective regulatory environment proposed by the MHRA and kind of where the European Union seems to be going? And also, the product that Kingsley mentioned earlier today, which I believe is the Nicoventures offset product. And then if you could expand as well as part of that on your -- Nicandro's comment that e-cigs account for about 0.5% to 0.8% of the tobacco market?

Well, we launched Vype 2 days ago in our limited Internet distribution, as I told you, and we intend to expand this in the second half during the next couple of months in U.K. and beyond. The market today, Erik, is unregulated. And I think that there is a market out there, and we want to participate. That's why we have launched Vype. It doesn't mean that as soon as we have the MHRA approval of the 2 products that are going through regulation now, we are not going to launch them. MHRA has said already that it's going to grow further for around 3 years the current products in the market. We didn't think that we need -- we should be out of this market even if it's unregulated one. When we have the approval, we will launch our products, regulated products, according to the legislation that's going to be in place. In terms of the size of the market, as I said, it's a market that's growing. We see a consumer interest for e-cigarettes. Nowadays, it's a quite small market. You can split the European market in 2 categories. The one that developing markets, in which the conception in terms of adult smokers that have some loyalty, the category is around 1%. And then in markets such as France and markets such as Germany that you have a little bit more developing, which we have 3 or 4% of smokers smoking e-cigarettes. So we thought that there is a market out there and we should participate. But the loyalty is very low because the products do not deliver. We believe that with Vype, we'll have a better consumer acceptance. We think that's a better product, that's why we are there.

Okay. And then with respect to your comments on Australia, you noted that the low price segment was increasing and suggested this was due to competitor activity. Is that the whole reason for the down-trading, or is it possible to just aggregate competitor activity from any plain packaging effect? And then related to that, the Australian press is suggesting there's a tax increase coming in Australia. If you had any further detail on that, that would be helpful.

No, regarding the potential excise increase in Australia, I have no details, to be honest with you. We heard something this morning that it may come, but I have no -- probably, I have the same information that you have, same piece of information that you have, so I don't have anything to add on that. Regarding Australia plain packaging and then I'll go to the down-trading. To date, we have not seen any change in consumer behavior as a result of the plain packaging legislation. What we see in Australia market is some down-trading, but this has been a feature of the market in the last couple of years. And this has been driven mainly by price increases, and also some competitors have launched some brands in the low-price segment. But this has been happening in Australia for the last 4 or 5 years. So we have seen some down-trading in Australia, as I said, for some time. So nothing unusual. So, so far, after 8 months of implementation of plain packaging, we have seen no influence. The size of the market is declining, but it's declining more or less the same level as it used to decline with the size of price increase that we have implemented. So nothing has changed.

Our next question is from the line of Adam Spielman of Citi.

I've got 2 questions. One on Brazil and one on marketing. Can ask the Brazil one first? And it's really to gauge the outlook, particularly for profitability in Brazil or profit in Brazil, profit growth in Brazil. Clearly, we're past the anniversary of the big tax increase. My understanding is there's been no price increases in Brazil since January, in effect. In the statement that Souza Cruz put out yesterday, there was the statement that some costs or cost increases might be higher in the second half than in the first half. And so I was just wondering, on Brazil, how we should think about the second half going forward? And then I'll come back onto marketing.

Okay, regarding Brazil. We, first of all, Adam, as you know, we don't comment on pricing going forward. So I cannot comment anything about how the price is going to evolve. What I can tell you is that we have another excise increase in January next year that's going to be lower than the previous ones, as I said before, because the excise increase will go down in the coming years. The plan was a big excise 2 years ago, a smaller one last year, then a smaller one next year, and even a smaller one in 2 year's, 3 year's time. So that's the situation in Brazil. We don't comment on pricing. And regarding costs, I don't feel that the costs in the second half in Brazil are going to be significantly higher than in the first half, to be honest. I see no reason. We have bought the leaf already, so the leaf that you are using in the first half is the same one that you are using the second half. So I don't see any big, big pressure in the cost base of the Brazilian market. What we may have is that -- is phasing of marketing investments. Sometimes it's a little bit more loaded in the first half, sometimes a little bit more loaded in the second half. I wouldn't be able now to talk about what's the load in Brazil in the first half or in the second half, but I wouldn't say that it's an additional investment. It's just a question of loading 1/2 against another one. So that's the situation in Brazil.

And this could lead-in to the second half of the question. I noticed in a number of markets, you're talking about increased marketing investment. You mentioned this in Russia, you mentioned this in Ukraine, Argentina, for example, and Korea. And I was just wondering whether you could give a global figure, whether marketing investment has gone up as a percentage of sales, whether -- and how we should think about that? And I guess, whether -- also related to that, were there any big offsetting decreases you haven't mentioned, maybe in Australia or somewhere else?

Adam, regarding marketing investments, of course, I'm not going to give you the number, the figure, but what I can tell you, it's growing -- it's lower than the net turnover first. But I don't feel that we have a huge surge in marketing investments. We are trying and we are doing as part of the strategy to invest smarter. So we are investing markets in which needs a boost. For example, places that you just mentioned, or South Korea, and those marketing investments are working quite well. You remember at the beginning of this year when you have the full year announcement, we said that we are going to focus in some markets in 2013 that were facing some problems, such as Indonesia, and such as South Korea, and it's working quite well. South Korea would have 8 months of consecutive share growth. Indonesia, we stabilized their share, we started to grow the last couple of months. Dunhill Kretek is growing fantastically well. So we are just investing smarter. So we are investing less in some markets, and we are investing more in some others. I don't think that total marketing investment is a substantial change. And I think that market investment, you have to look at those things in 3, 4 years base. 3 or 4 years base, we are not increasing dramatically, just refocusing the investments where what we call as high-growth markets or priority markets.

And so just to be clear -- sorry, just to be clear, the marketing investment as a percentage of turnover, I think you said had fallen in this half relative to first half '12?

No, it's very difficult to talk about half-year because you have -- sometimes you have investments in 1/2 that goes against another 1. You have launch of innovations, you have launches of brands. For me, it's much easier to talk in a 2 to 3-years perspective. In a 2 to 3-years perspective, the net turnover is growing faster than the marketing investment, that's what I said. But in a 6-months period, it's very difficult to be precise because it depends on how you implement your pipeline of innovations, depends when you are launching our brands. As you said in Brazil, the first question, the second half probably are going to spend a little bit more, probably because there is a load in terms of implementing innovations behind our brands in the second half. So if I give you a number, a figure for you in the first half, probably it's not going to be accurate. So what I'm saying is that in a 2 to 3-years timeframe, that's how we see these things, marketing investment is growing, is lower than the turnover.

Our next question is from the line of Henry Davies of Bank of America Merrill Lynch.

I've got 4 quick questions. First, on current European volume. How much do you think is being driven by increases in illicit trade? Second, on your margin progression, I'm just interested to know what your margin progression would be without cost saves? And also just what timeframe should we be thinking for the midterm 50 to 100 bps margin progression guidance? Is that another 2, 3, 5 years or even more than that? Third, how much of your volumes at a group level are accounted for by slim cigarettes and menthol cigarettes, including the capsule technology? And lastly, I was just interested reading the interview earlier you talk about e-cigs being a potential opportunity. Now it looks to me like e-cigs being much more competitive than traditional tobacco, which might run the risk of lower price and margins and of tobacco companies getting a smaller share of the overall pie. So I was just interested to hear your thoughts on why that wouldn't be the case and why it is a potential opportunity.

Okay. Let me take 3 out of 4 questions, and I'll pass to Ben to talk about margin progression. So let's go for the third question, volumes of slim, menthol in a global base. To be honest, Henry, I'll get back to you. I don't have the numbers at the top of my head here, but I will get back to you. I think that should be -- so I'll get back to you to this question, if you don't mind. I ask one of my guys here to inform you later, okay? Regarding the first question, European volumes, yes, they are declining this year, pretty much at the same rate of decline that we saw in 2012. But remember, at the beginning of the year, I had several questions about Western European volumes. It seems that the market was a little bit more optimistic about this year. And then we said that we saw no reason at that time to believe that 2013 will look better than 2012 because at the end of the day, it's all about unemployment, it's all about the disposable income, and those things are not changing. So I didn't see any motive to be optimistic about 2013, about European volumes. Regarding illicit trade, yes, illicit trade is an issue. It's growing in some European markets. We are working with the governments to see anything that can be done in order to bring it down. In markets like Italy, for example, illicit trade this year has been stable, has not been growing. On the other hand, in U.K., for example, has been growing. So it's an issue for Europe, but we work as close as possible to the government to inform them about the problems and find common solutions. In the case of Romania, has…

Yes, on margins, Henry, I mean, the way I tend to think of it, is that about 50% of the margin improvement tends to come through from pricing, and 50% tends to come from cost savings. It's different in each period, but that's a broad rule of thumb to go by. On the guidance on margin improvement, we're still confident of the 50 to 100 basis points and we've done well against that over the last few years. I've always said that when we get to 40% operating margin, we'll pause and reconsider that guidance. That doesn't mean that we won't actually still grow margin after that because a lot of the work we're doing, things like the rollout of SAP, won't actually be complete until 2017, and so that will still be driving cost savings. So the quest for cost savings never stops. But I think 50 to 100 basis points is a good guide until we cross 40%, then we'll pause and think again.

Our next question is from the line of Fulvio Cazzol of Goldman Sachs.

So just, yes, as a quick follow up on your comment, Ben, on the cost savings, I was just wondering on Western Europe specifically. I understand that obviously the economic environment has been poor, but in recent years you've been able to deliver better operating profit growth than your competitors from cost savings, and we didn't really see that in the first half. How should we think about the rest of the year and even in 2014 and beyond? Are we going to see a pause in terms of contribution from cost savings until the SAP program is rolled out in Western Europe? I've got another question after that, but I'll just leave it there for now.

Fulvio, yes, I mean, I think you'll find that our profit increase in Western Europe was better than Philip Morris' entire profit increase, so I think that's not a bad performance by Western Europe. We've taken some cost savings out of Europe over the past few years because, as we've said, it is a tough operating environment there. But we are really moving the SAP program into Western Europe next. So we start with Asia and then we move onto Western Europe. So you'll see, in a tough operating environment, the benefits of SAP coming through starting late next year.

Okay. And then my second question was on Vype. I saw that you're selling the product at around GBP 7. I was just wondering, how does that compare to cigarettes on a stick equivalent basis? And also how does that compare to other e-cigarettes in the marketplace? And also as a follow-up question on that, could you give us some details of your -- what your total production capacity is in the U.K. for that product?

Regarding pricing, Vype is being sold for the price that you just mentioned, which is equivalent to a pack of cigarettes. A pack of cigarette, Dunhill, for example, in U.K. is around GBP 8.50, so just to have an idea. If we go to value-for-money brands, it's GBP 2 cheaper than that. So that is a comparable basis. In terms of capacity, we are ramping up our capacity. That's why we started with the Internet sales last week, 2 days ago, and we're ramping up capacity. I don't think that capacity is going to be a problem for us in the second half of this year. In the next 2 or 3 months, we'll be able to expand the distribution for the whole country and going for other channels and capacity is not going to be an issue. So we are ramping up capacity, and we went to Internet first just to see consumers' reactions. In spite of the pilot that we went through in so 1 [ph], we thought that to have a light launch was a good idea, but capacity is not an issue at all.

Okay. Just as a quick follow-up on the pricing, but on a stick equivalent basis, how does that compare? I don't know how you would measure it, whether it's nicotine delivery? How does that compare to, say, a packet of cigarettes on that basis?

Fulvio, as I said, a stick of e-cigarette is equivalent to around 20 sticks of cigarettes. So you can compare a stick of e-cigarette to a pack of cigarettes.

Okay. Okay, fine. So it's comparable.

Is equivalent, okay?

Our next question is from the line of James Bushnell of Exane.

Just on the [indiscernible] tally, is that some SAP coming in there or what else was at play in the margins being up with pretty minimal price mix?

Sorry, you're talking about Asia here. I missed because you came through on the phone not too clearly. Asia will always have a low price mix because quite a lot of the growth in Asia comes from places like Bangladesh and Pakistan. And that's been true for the last 3 or 4 years, not just this first half. So you will see always a lower price mix from Asia. The implementation of SAP, we've done Malaysia. The fourth quarter of this year, we'll see the implementation in Australasia, and then the first quarter of next year, if things go well, we'll see the implementation in South Asia. And then after that, we'll carry on rolling out to places like Japan and Korea. So the SAP-related benefits, you won't see until -- certainly the earliest is the back half of next year. However, we are still seeing some benefits from the new operating model. We're still gathering back office costs together, putting it in shared service centers, taking advantage of labor arbitrage, that sort of thing. So it'll be a mixture for Asia but don't expect a high price mix from Asia because quite a lot of the growth is in lower-margin markets, and that's just the structural nature of Asia.

Okay. And on Europe, your pricing was very strong and also, at the same time, I noticed that of the 9 markets you provided commentary on, only 3 of those you mentioned had higher profits. And I just wondered where is that strong pricing coming from in terms of the price mix in Europe? And can we assume that of those 3 markets that were growing profit, that it must have been very significant to offset what was going on in your other markets to keep that region flat overall?

Well, we have a very good pricing in Europe in several markets. I'm not that sure that I can give a list market-by-market now, where we had pricing this year. But we had it in France, we had in Germany recently, we had Italy at the end of last year, we had in Switzerland, we had in Romania, we had in U.K., we have everywhere. In terms of profitability in the first half, I -- usually, as I said before in other question, you have to take this in a yearly base. Because the half year's result, we always have the load of investments 1 year against another year. But we have been growing profitability in a number of Western European markets. Despite the market decline, the volume decline of 8%, we have been able to deliver profit growth across the region, which I think that was a very good performance.

Our final question today is from the line of Rogerio Fujimori of Credit Suisse.

Rogerio Fujimori from Crédit Suisse. Two questions for me, please. Nicandro, do you expect the big revenue growth differential between emerging and developed markets in the last 5 years to be perhaps a bit less significant in the future, given the greater maturity of important emerging markets like Russia, Brazil and Turkey, if you agree with this statement?

Yes, I think that the margins, if you -- Rogerio, you have to see these things from a perspective. You look at the last 5 years, the gap in terms of margins of developed markets and developing had been reduced, not dramatically but had been reduced, and expect this to happen going forward. That's all part of this strategy to be stronger in the developing markets, in which the potential to grow margins are much higher than in developed markets in which the prices are already very high and the margins are high. So you take prices in developing markets and you end up with higher margins. So, yes, the gap is going to be reduced over time, as it happened in the last years.

So you mean, the revenue -- also, the revenue growth differential should perhaps narrow as margins go up?

No doubt about that. No doubt about that.

And my second question is, do you think the industry profit pool in Western Europe can still grow in the medium to longer term?

Well, let me put into perspective. When you ask this question in a moment that we are in the middle of the biggest economic crisis in Europe since the '30s, the obvious answer is going to be doom and gloom. I believe that the day that the markets stabilize, the day that disposable income start growing again and unemployment is going down, there is no doubt that the profit pool of Western Europe will go up. I think that it's a question of market economy, it's a question of the situation which the markets face themselves today. But do I have the expectations that you go back and we start growing the profit pool? I have no doubt on that.

I guess that was the final question. Nicandro, can I please pass the call back to you to close.

Thank you, guys. Thank you. I think that we see each other at the year-end. Appreciate that you're joining us for this conference call. Thank you very much.