Earnings Transcript for IMB.L - Q3 Fiscal Year 2015

Executives: Alison Cooper - Chief Executive Officer Oliver Tant - Chief Financial Officer Matthew Phillips - Chief Development Officer

Analysts: James Bushnell - Exane BNP Paribas Martin Deboo - Jefferies Catherine Farrant - JPMorgan Cazenove Adam Spielman - Citigroup Chris Wickham - Oriel Securities Owen Bennett - Nomura Michael Lavery - CLSA Chas Manso - Société Générale Fulvio Cazzol - Goldman Sachs

Operator: Good day and welcome to the Imperial Tobacco quarter three IMS for nine months to the end of June 2015 conference call. This conference is being recorded. At this time, I would like to turn the conference over to Alison Cooper. Please go ahead.

Alison Cooper: Good morning, everyone. Thank you for joining us. I'm Alison Cooper, Chief Executive. I'm joined by Oliver Tant, Chief Financial Officer; and Matthew Phillips, Chief Development Officer. After brief opening comments, I'll hand it to Oliver to take you through the detail of today's updates. This has been another good quarter, and I am pleased with the progress we continue to make against our strategic agenda. We further strengthened the portfolio by building the contribution of our Growth and Specialist Brands. Growth Brand results were particularly strong with volume, revenue and share, all increasing. We've also been very active with Fontem Ventures. There's a real buzz around the business now that we have blu, and the team is very focused on realizing the brand's growth potential. From a footprint perspective, we delivered good performances in a number of Returns Markets, and maintained positive momentum in Growth Markets. And in terms of the U.S., I am pleased with the initial contribution from ITG Brands. The enhanced portfolio is performing in line with our expectations and we've made a great start with the integration. Effective cost and cash management support our growth strategy, and we've made further good progress in both areas. Our focus on complexity reduction, improved ways of working and cost efficiencies has kept us on track for our FY '15 cost saving target. And by continuing to invest stronger capital discipline, we are improving the management working capital and driving strong cash conversion. We are consistently building the quality of our results and remain on track to deliver the full year and to create further value for our shareholders. I'll now hand it over to Oliver.

Oliver Tant: Thanks, Alison, and good morning, everyone. As you've just heard, this has been another good quarter, in which we continue to make progress against our strategic priorities. I'll add a bit more color around our performance in each area in a moment, but let me start with a few general comments. Underlying tobacco net revenue was up by 1%, excluding Iraq and Syria, which has suffered further significant market declines, given the continued political, social and economic unrest. Underlying volumes, excluding the Iraq and Syria effect, continue to run slightly ahead of our market footprint. In addition, our planned price increases were weighted towards the second half, when we started to see that positive impact come through. Turning now to our portfolio. Our Growth Brands continue to outperform the market. On an underlying basis, net revenue increased by 14%, volumes increased by 10% and we have improved market share by 100 basis points. Growth Brands are benefitting from organic growth and brand migrations. The success of our migration supports our drive for sustainable quality growth and is a key driver of our cost optimization program, simplifying the portfolio and removing complexity. Investment continues to support the development of our Growth Brands. The Vive le Moment campaign for Gauloises is enhancing the brand's performance in Germany. And a new campaign for Davidoff is being rolled out across a number of key territories. Specialist Brands are also on a positive trajectory. Underlying revenue was up 3%, driven by strong performances from snus and premium cigar. Together, Growth and Specialist Brands now account for almost 60% of tobacco net revenue, an increase of 6% than the last year, further improving the quality of our business. The team at Fontem Ventures have been delighted to welcome the blu brand to the fold. It's a great brand that's gaining traction in the U.K. and has a strong presence in the U.S., where an enhanced strategic approach is staring to be rolled out. From a footprint perspective, we continue to make positive progress in Returns Markets, increasing revenue by 1%. This was driven by good results in division north, supported by some improvements in the south. Australia remains a real success story for Imperial. The level of volume and share growth has slowed, as expected, but revenue and profit growth remain strong. Price increases have strengthened our delivery in Germany. Whilst in the U.K., which continues to be a very competitive trading environment, we have further increased our share in the growing sub-economy segment. Market conditions in Morocco remain difficult, but are showing some signs of improvement in France and Spain. In both countries there has been a moderation in the level of market declines, and we've added to our portfolios with successful fine cut tobacco launches. In Spain, we're also stabilizing profits and continuing to hold our share in the blonde cigarettes segment. Elsewhere in the Returns division, I have been pleased with the progress we are making in Ukraine, Belgium, the Czech Republic and a number of our African markets. In Growth Markets we grew revenue by 3%, after excluding the impacts of Iraq and Syria. Looking forward, we expect the deterioration there to impact us for a couple of more quarters. Elsewhere in the division, we continue to build momentum across a number of territories. Recent price increases in Russia will support growing revenues and we expect to see this continue to offset volume declines going forward. We improved our share position in Taiwan and delivered an excellent snus performance in Scandinavia, with share and revenue gains in both Sweden and Norway. Premium cigar delivered another good performance, growing sales in Europe and the U.S. We completed the U.S. deal towards the tail-end of the quarter, and we are pleased with the initial contribution of ITG Brands that has been made to our results. We are starting to introduce our new retail programs for implementation in November and the migration of plant and machinery under the Reciprocal Manufacturing Agreement has started with minimal disruption. We expect this transfer process to take about 18 months. It's early days on integration, but progress-to-date has been excellent, with all elements of the plan moving smoothly ahead in line with our time table. On costs, we're on track to deliver our planned savings, which will add a further £85 million for the full year. Beyond that, reducing complexity and implementing new ways of working for the continual refinement of our operating model is creating a more cost-conscious culture and opportunity to maintain and develop our industry-leading margins as well as a stronger, more agile business that can more quickly response to changing dynamics. Our commitment to capital discipline, debt repayment and cash management is a key priority. We are on track to deliver cash conversion of around 90% for the full year through continued improvements in working capital management. In mid-July we successfully issued $4.5 billion of new bonds with an average duration of seven years, which have replaced a large proportion of the bank term loans, put in place during financial year '14 to finance the U.S. acquisition. The total blended average cost across the four bonds was 3.75%, and we now expect our average group cost of finance for FY '15 to be in the region of 4.4%. Based on interest rates, as they are today, we currently expect our finance cost in FY '16 to be broadly similar. Given current rates, we now expect movements in foreign exchange to impact earnings per share by around 4% for the full year. This has changed very little over the past quarter, with the addition of U.S. earnings post-acquisition and rounding, bringing it down from 5% guidance at the half year. Thank you. And I'll now hand back to Alison.

Alison Cooper: As I said in my opener, this has been another good quarter, and I am pleased with the progress we are making against our strategic agenda. We are enhancing the contribution of Growth and Specialist Brands, Fontem's actively progressing plans for blu and we're maintaining positive momentum across our footprint. The initial contribution from ITG Brands has been very encouraging, with the portfolio performing in line with our plans and the great start we've made on integration. Complexity reduction, cost optimization and capital discipline continue to support our strategy. We are consistently building the quality of our results. We remain on track to deliver the full year and create further value of for shareholders, including another 10% increase in the dividend. Thank you. I'd now like to open up the call to Q&A.

Operator: [Operator Instructions] We'll take first question from James Bushnell.

James Bushnell: Two questions, please. My first one is on the new U.S. retail program, which you mentioned being introduced in November. If you could maybe just explain a bit more what that might entail and also mention whether any prices have been changed yet? That's my first question. And my second question is around your expectation for EBIT growth for the full year. I think in the first half we saw constant currency growth of 5%. Would you still expect that to grow in H2, excluding the acquisition in the U.S.?

Alison Cooper: I will hand over to Oliver in a second on the EBIT growth, but let me just talk a little bit about the retail program. I was out with the team in U.S. last week and had a great session with them, going through where we are with our plans. As I mentioned, the integration is progressing phenomenally well. And the plans they have and they are putting in place to take the business forward are very positive. The retail program piece has literally just kicked off. The nature of the agreement that we made with Reynolds, around how we would transition with retail in the marketplace, is that we had an initial standstill period. We were just adjusting the display's point to sale. And now we're going into a period whereby we are looking and putting the new retail contracts in place. The retails contracts are very much aligned with a very similar approach that Lorillard would have taken historically, and actually a approach we were adopting with Commonwealth Brands as well, which is to make sure we've got a program that's uncomplicated, a single sheet of paper rather than award of the document, so it's simple and clear for retailers. We want it to be responsive, so that actually retailers get a direct line of sight in terms of what they need to do for us and the rewards that can accrue. And then also, we want to demonstrate our commitment, our financial investment to drive growth in the marketplace. So without going into the ins and outs of all the detail of the program, that is what is now going into retailers and being negotiated in with retailers as of Monday, so a little bit too early to update on progress. These programs will not be effective until mid-November, which is in line with the agreement that we have with Reynolds, and then they will become live. So that's a very active area for the sales force currently within the U.S. market. Oliver?

Oliver Tant: James, on the second, to your question on the EBIT growth numbers, I mean clearly, Marvel has an impact on our existing business, because we're creating substantial gains out of the combination of Commonwealth and the U.S. assets that we've acquired. So it's quite difficult to actually separately identify a component, which is purely the ongoing business and distinguish it from the acquisition impact, because there is an overlap that occurs as a result. What we do, however, remain confident about is that we believe the consensus is broadly in the right area for our overall full year performance, as things currently stand.

James Bushnell: If I could just go back to the U.S., could you just confirm that no prices of any of your brands have been changed yet?

Alison Cooper: No. Again, that's part of the overall standstill approach. What we have continued with is the price positioning that we inherited on the June 12. And as you may well be aware from comments from Reynolds, there were a number of buy-downs in place that they put in place ahead of the deal completing, particularly in relation to Winston and Kool, and they are still in places as they were as of the June 12.

Operator: We'll now take the next question from Martin Deboo.

Martin Deboo: It looks price mix was very strong in Q3, could have been double digits. Just would value your color on that, particularly in terms of what was the pure price versus mix split and what was sort of going on in that number? Things on my mind are Iraq would have had an impact on that, perhaps Russia. Just value your color on the price mix performance?

Alison Cooper: Oliver?

Oliver Tant: Well, you're absolutely right to say that it's been stronger, and we were signaling this at the half year, the dynamic for FY '15 was very much strong price mix in the second half with slightly weaker price mix in the first half overall average broadly in line with what we've experienced over the last couple of years. So we have experienced in the third quarter stronger price mix and we anticipate that that will continue into the fourth quarter. It certainly wasn't as high as double-digit in the third quarter, but it will continue to be strong as we move forward. So how and what is the complexion of that? Well, we've seen strong price performance in a number of markets and to some degrees this has had an impact on volume growth, which is why we once again trail this, at the half year, the expectation was the impact of stronger price would result in a weakening of volumes. But we've seen strong performance in Australia, in Germany, in particular, where we've had price increases come through that have improved performance strongly in the third quarter. Also, clearly, in Russia, where we found a cumulative impact of a number of price increases in October, January and April and where there has been a further one in July, which will impact where we are moving forward. Its worthwhile noting, of course, that in the context of price mix Iraq has an impact too, because it changes the mix complexion of the price mix equation where in Iraq, in broad terms, our price metric is, or our pricing position is broadly half the average across Growth Markets as a whole. So by taking out a volume of the lower contributing revenue component of that business, you end up with impacts on the price mix equation.

Martin Deboo: Oliver, just one quick follow-up. When you said strong Australia, Germany, Russia, that was a price mix comment, not just a general comment. Am I correct?

Oliver Tant: No, it is specifically a price mix comment.

Alison Cooper: Although, we're performing well in each of those markets as well.

Oliver Tant: Yes, but it was specifically -- I mean, in Australia we've seen our March NPI leading to stronger pricing for us across parts of the portfolio. In Germany, it's been the similar case with increase in July. So we've seen pricing come through, which has also inevitably have affected the performance of the business in terms of its net result as well.

Operator: We'll now take the next question from Catherine Farrant.

Catherine Farrant: Firstly, on the U.K. I was wondering if you could sort of -- you did comment on the competitive dynamics in the market remaining difficult there. I'd just be interested to get a picture of sort of how your share is overall? And sort of what you've managed to do to just kind of increase the share that you have in the sub-premium area there? And then, secondly, on the progress of Fontem Ventures. You talked a little bit at the half year about the introduction of JAI in France and Italy. I'm just wondering if there was any update on how that is going as well as sort of how you're finding the market developing in the U.K.?

Alison Cooper: I'll hand over to Matt on JAI and also the U.K. blu business shortly. If I talk about the U.K., I mean first of all I think it's worth putting the context and reminding of the context of the U.K. market. It's one of our Returns Markets, so the strategy is to broadly hold market share. It will clearly bip up, bip down again at times, but looking to therefore drive returns and profitability from the U.K. market. Now, the competitive environment we've spoken about a few times over the last year or so in terms of Rothmans' positioning in the market in particular, but also Philip Morris are active, particularly with Chesterfield at the moment. So there's lot of activity in the sub-economy segment, so one of our key decisions and objectives for the current year has been to invest behind our position in the sub economy segment. And you'll see in the release that we've talked about very positive progress with Carlton and Players in that segment. And clearly, our strategy when you've got a market that is down-trading, we anticipate it will continue to down-trade. Looking at EUTPD or plain packaging environment going forward, it's very important that we have at least our fair share in that segment. So that's really been the focus of the strategy in the U.K. and that's when we continue to invest behind in the current year. Overall, in share of performance terms, our share is slightly down year-on-year. But from the perspective of the strategy we're looking at employing in the market and the focus in terms of improving our position to sub-economy segment, we're achieving the goals that we were looking to achieve in that segment, so that's broadly where we are currently with the U.K. market dynamics in cigarette.

Matthew Phillips: From a Fontem perspective, I mean just as a reminder, the four markets that we're focused on, being France, Italy, U.K. and the U.S., over 70% of the total global market, which is exactly why we're focused there. The performance is good in Italy from JAI perspective. France is also progressing well. I mean Italy is progressing better than France if I was to evaluate the two of them. From a U.K. perspective, we're really pleased. We've been distributing blu since earlier this year. And blu is progressing really well in the U.K. market. And as we've said in the release, one of the exciting opportunities that we've got now is that we've picked up brands in the U.S., which is the biggest market by far of the four, and which had really good fundamentals, but where the execution haven't been that good, and so we've now got an opportunity to refocus the offering in the U.S. market. So we're very excited to have blu on board and to put that together with the R&D pipelines from both Fontem and blu to create an experience, which we think consumers will be interested by.

Catherine Farrant: Can I just ask you a little bit follow-up on the blu in the U.S.? You sort of talked a little bit about improving execution there. Does this tie in with what you're doing with the cigarette brands as well or is this about sort of broadening distribution and that kind of approach, or is it more product-related?

Matthew Phillips: Well, the e-vapour model in the U.S. has been and is primarily a distribution-push model. So there is high awareness of brands. There is broad distribution. But what has not been really focused on is trial and consumer experience. I mean, we are very focused on improving that consumer experience. I mean, it is tied in with the approach we're taking with the cigarette brands, but it is distinct from it. I mean, it's not exactly the same approach. They are different products with different target audiences. So I mean it is very consistent. It has all been thought about holistically, but it's not the same execution mechanism for the two products.

Operator: We'll now take the next question from Adam Spielman.

Adam Spielman: I guess, one very simple. I've got a number of questions, but the most important one is to think holistically. You did 0% underlying revenue growth in tobacco this quarter and this nine-month period. And I was wondering really, how you think about that? Do you think it could guide for what we should expect in future years from the existing business? Are you happy with 0%, given the context?

Alison Cooper: If we step back and look at the results, I think the first point I'd make, Adam, is we're in the middle of a strategic transition agenda and I think we've tried to highlight in the result one of the key priorities for me with this business is to improve the quality of our topline. And you can see a lot of metrics within the results here that show what we're achieving within that in terms of improving that topline performance. There is within that flat revenue metric, clearly is the impact of the Near East that's coming through that. And therefore that is holding back the overall revenue metric in the current year. But we are looking at moving the revenue forward more strongly than that. You know what our broader guidance is around the revenue metric going forward. But for right here right now we've worked very hard and we continue to work very hard on the quality of that overall revenue performance. You will see returns where we had number of challenges over the last few years, particular in return south. We're beginning to see a slightly better environment there, which should has helped our overall trajectory. And still again, excluding on the Near East in the Growth Market, you can see we're driving revenue around the 3% level. So really it's been the returns piece that has held the overall metric back a bit recently. So therefore, as we see that improving that's going to take the whole group into a better position in terms of the overall revenue development going forward.

Oliver Tant: And I'd add a little bit. The Iraq effect, Adam, has actually reduced it by broadly speaking 1%, so actually the reality is over the first three quarters we're up 1% in revenue excluding that factor and we've been very clear in our guidance that actually the price mix component of our revenue over the course of that FY '15 is weighted towards the second half. So in broad terms, and in underlying performance, we'd expect that to be improving. And that brings us back to what Alison was referring to in terms of the algorithm around revenue where we're expecting volume declines and strong price mix contribution to give us small revenue increases moving forward.

Adam Spielman: And just following on the point that Alison said, the quality is getting better, so thank you for that answer. You obviously have reported extremely strong growth for the Growth Brands, but that's obviously helped by migrations. And I was wondering, if you could give some metrics on underlying sales growth or underlying volume growth of those brands, if you exclude all migrations?

Alison Cooper: You can't fully exclude all migrations, because there's a mix in here between migration and then the benefits of that migration as the brands move forward. But absolutely, the growth of those Growth Brands in the three quarters has been hugely boosted by migrations. And I make, that's absolutely the case, because migrations are absolutely critical part of the strategy around what we're doing at the moment. You're aware, I know, Adam, of the extensive portfolio we've inherited over the years from the M&A that we've done, and therefore this migration program, taking brands and moving them into our stronger equities is essentially to that quality of growth agenda. I mean, our success in migration has been phenomenal and we're over 90%, in fact, over 100% with some of our migrations. And therefore migration program is a really very successful element of the strategy forward. I mean in terms of the organic growth, if you try and make some sort of adjustments to see what the actual organic growth of the brands is doing, it's significantly ahead of the market. We're growing share organically as well. But the lion's share of that growth will be the migration program for the current period.

Oliver Tant: And you can see the strategy in action with very clear examples in certain territories. I mean, you see the performance of JPS, which is a strong contributor to our growth in Australia. You see the performance of Gauloises in Algeria, which has been a strong contributor to our performance in that market. And as Alison has said, we are achieving outperformance on our Growth Brand portfolio against our market footprint. Although, the rather dramatic numbers in terms of overall Growth Brand performance are clearly also benefiting from a substantial contribution from our migration activity, which is itself incredibly successful, in that we are migrating consumers at rates of a 100% or above, which demonstrates the strength of the brand equity that we enhanced in the number of our key brands.

Adam Spielman: And just one final, simple factual question, which is a following up on something Catherine said. Can you give us spot market share in the U.K. please?

Alison Cooper: Roughly 44%.

Adam Spielman: In volume terms, I assume that is?

Alison Cooper: Yes, its not value share, its volume share.

Operator: And I will take the next question from Chris Wickham.

Chris Wickham: Just want to follow-on just on the question that you had about e-cigs and then talk a bit more about your main mature markets. You're obviously talking about 70% of world volume in e-cigs coming from these four markets, where you're focusing your attention. But we're still in a situation, I think, where you've got a lot of regulatory uncertainty, and then you've got what you've always described as product uncertainty. Are you seeing, within those four markets, a sort of groping towards anything that is actually giving you a greater sense of where this is actually going, in terms of what the products are going to be like, and how they're going to be regulated? And then secondly, obviously you've got a very small headwind in terms of ForEx compared with other U.K. SMCG companies, and that's because you've got such a mature market focus. Can you give us just a model of where we are now in terms of if you take those four key markets in Western Europe, and add Aussie to that, of what we're looking at really, in terms of the price, volume-type model?

Matthew Phillips: In terms of taking the e-vapour question, the debate from a regulatory perspective still rages on. I mean, you all have seen on the front pages of some of the newspapers today there has been a step forward in terms of how some of the advisors to the U.K. government are thinking about e-vapour products. We've been consistent all along. We believe that there will be a role for both medically licensed products and for lifestyle products and therefore we need to be able to operate in both categories. I'm pleased that Public Health England have actually come out in the last couple of days and have started to provide some independent views of the evidence that is out there to try and depolarize some of the statements that are made in this category. So my sense is that there is going to continue to be, both the lifestyle and a licensed offering. I think we're very well placed to play in both of those categories. The experience across the two of those things is likely to be different, which is why we're thinking about them as different categories. In order to get a medical license, the testing that is required to go through in advance is a very, very high hurdle and it sort of locks in the technology at a certain stage of development, which is linked with the license that is granted. There is going to be more freedom to be able to innovate and to be able to continue to move forward the consumer experience on the lifestyle side. So we're very focused on the two of them. And I think developments like the one that we've seen in the last 24 hours with independent reviews of evidence, is very helpful to the category as a whole.

Oliver Tant: Thanks, Chris, for your question on ForEx. I mean, clearly key to our footprint strategy has been the recognition that part of our role within most people's investment portfolio is to provide what I'd best describe as a widows-and-orphans income earning opportunity, and therefore what we are looking for in terms of managing our footprint to achieve that outturn for our investors is to have sort of high component of our, both revenue and profit stream, that has relatively low volatility and relatively lower risk. And in that context, footprint decisions to invest in places like the U.S., which as we've said in our statement today, has impacted the negative effect of ForEx more generally on our existing income stream by reducing it. And that is part of that strategy around ensuring that we ameliorate risk from a ForEx and from an earnings perspective by investing in currencies and environments where the volatility is less great. Now, we've clearly seen the benefit of that in the terms of how U.S. acquisition and the way it's impacted our expectation for ForEx in FY '15 and we would expect that to be a recurring feature of the performance of our business from an exchange perspective that we will have less volatility. And then one or two other investments opportunities that may will have a great preponderancy towards jurisdictions that offer maybe higher potential growth in local currency terms, but where inflation risks or sociopolitical risks maybe higher, and where therefore exchange risk maybe greater.

Chris Wickham: What I was really just trying to get a handle on is, if you strip back to that sort of those core, those sort of big four Western European markets and add Aussie in there, I appreciate its early days in the U.S., and you've obviously got far bigger share opportunities in there. I mean, what makes for variation in those tends to be levels of illicit trade and then sometimes where you've had sort of economic savagery like Spain. But ultimately, you do expect to get back to a normality where you've got a price elasticity, demand is at a 0.4, and then you've got sort of a revenue function, and obviously a volume trading off of that, and then that will sort of spit out some sort of model. And I was just wondering really where you'd summarize the growth model in terms of those five markets, in terms of what sort of you should still think in the back of your mind, as of revenue, and then with some, perhaps some potential sort of cost savings on top of that, but really the revenue line.

Oliver Tant: You're asking a lot of questions.

Chris Wickham: It's really just one question, isn't it?

Oliver Tant: Well, I mean, what we are doing is focusing high proportions of our overall revenue and profit opportunity in those sort of four European markets that you referred to, Australia and U.S. And as a result, we are seeing growth opportunities and profit opportunities in those markets, which provide a resilience and robustness to our overall earnings proposition, which is much, much more stable in nature. And if we go back to the sort of more generic position from a revenue perspective that we were talking about in answer to one of Adam's questions that we're expecting to see consistent growth in both revenue, and on an aggregate basis underlying profit out of those businesses, which as part of a broader principally return strategy is providing resilience in terms of our ability to commit to a consistent dividend proposition to our shareholders.

Operator: We'll now move to our next question and it comes from Owen Bennett.

Owen Bennett: I just wanted to, you talk about outperformance of the industry for the nine months, but by my calculation, the implied 3Q numbers shows you were down around 6% versus the industry down 5.9%. I was just hoping you could comment on this slowdown, and is this reflective perhaps of increased share pressures in markets that you may want to call out?

Alison Cooper: It's very, very slight in terms of Q3. But again I would point back to what we're trying to do strategically with the markets here, which is we've got Returns Market where the strategy is to broadly hold share, while looking to drive profitability. And then in the Growth Markets, clearly we're looking for share opportunities to move the business forward. And we called out a number of markets where we're seeing some good share performance in the quarter. But between the overall total for Q3 versus where we see year-to-date, it's a very, very slight slowdown from the first half, but we're still seeing outperformance versus the market in Q3. Cumulative, we're looking at a 4.5% market decline ex-Iraq and we're down about 4%, so as you see, there's a slight outperformance there in terms of our overall market share performance.

Operator: We'll now take up the next question from Michael Lavery.

Michael Lavery: Could you just clarify the down 1% in the U.S., it sounds like that's not a pro forma number. If that's right, could you give what the pro forma number might have been?

Alison Cooper: We haven't got a pro forma number for the current period. I mean that is really the existing or preexisting Commonwealth-Altadis business, which continues to be impacted by the pressure in the mass market cigar business, plus the small contribution for a couple of weeks of £40 million from the new brands that we've acquired, offset by roughly again the £40 million additional MSA credit we had in Q3 last year.

Michael Lavery: And then just looking at your brand migrations, obviously you've got the simplicity that you'd benefit from once now they're complete, but is there enough transition costs that you sort of get the double benefit of also losing those migration costs that you're in the midst of now or is this not really very material?

Alison Cooper: No, there are some migration costs associated with the transition of the consumer, so yes, and in some markets they can be bigger than others. So that does benefit going forward. But I think the bigger benefit of the migrations and the concentration of our focus behind brand equity is really through the whole supply chain. So it's through complexity that we're taking out of manufacturing and how we can therefore reduce manufacturing costs going forward and at least offset inflation, but then look to reduce manufacturing costs going forward is through the focus of the sales force, at point of sale, through customer engagement, all those key areas of activity that get more and more important in highly regulated markets in particular. And yes, it's through our equity investments, as well behind the brands and the activation the focus as well. So I see knock-on benefit through this focus and therefore my point about focus on quality of growth throughout the P&L effectively and the activities of the business. And that's why we really have this program embraced by the business. As you might imagine, some market managers to begin with were worried about the risks to their profits in migrating particular brands, but now it's very much a pull from the business around and we see the benefit of this. And we are really driving this program through the business.

Oliver Tant: It is worthwhile. I mean, you're right in the presumption that there is a business strain associated with migration. So when Alison talks about risk, the risks that's obviated is the clear longer-term benefit that comes from migration, which has been seen consistently to be to the benefits of markets in terms of longer-term revenue growth against the existing brand propositions. But we do end up in the period that we're affecting the migration with an arms cost as a result, and actually the net effect in the short-term is strength for us in terms of our P&L account. So if we were to abandon migrations, we probably enhance short-term profitability at the expense of the longer-term growth and profitability.

Michael Lavery: And then just one last one. You obviously now are post deal closed and have the debt to show from it. Looking ahead, you've said obviously you want to pay that down and that's a priority, but do you have a target net debt to EBITDA or is there at least a point at which the debt repayment doesn't become the top priority and how do you think some of that?

Oliver Tant: Well, I've been asked this question in the past, and I've always been a bit vague in response to it, to be honest with you. And there clearly is a point, when we would get to a stage where we would regard the position as sub-optimal. I mean, we're clearly at the moment looking to reduce levels of indebtedness. We have got various expectations from our rating agencies that require us by FY '17 to get to multiples of less than 3.5, for example. And we are very focused in the short-to-medium term on delivering against their expectation and reducing the level of leverage that we've got. We will, as that process progresses, and we have no intention of taking our foot off the pedal in terms of ensuring that we manage our cash and our cash flow in a very constructive way from a balance sheet management and from a business perspective, but as that process continues, it will obviously leave us with some opportunities and decisions to make. And we will at that point in time review whether and how we wish to progress in terms of multiple levels of debt around options that maybe available to us to either acquire further profits or enhance our returns to shareholders.

Operator: We'll now take our next question from Chas Manso.

Chas Manso: A couple of questions. On the U.S., can we just check what the sort of U.S. spot share is right now and maybe some color on what the brands are doing? You've mentioned a couple of times in the call that you're pleased with the early stages of the U.S. integration. Can you just enlighten us what's particularly pleased you and whether it bodes well for future performance? So that's the U.S. question. The migration question, you were saying your Growth and Specialist Brands are at 60%. I think you once mentioned 80% being a target. Does that mean that there's -- I'm sure there's much more to come, but from 60% to 80% doesn't seem that much. And on the organic sales growth, I think part of this has been answered already. But maybe teasing out volume and pricing going forward, from what Oliver was saying early on, I think he was intimating that the H2 strong pricing was starting to come through. So does that imply that you expect even stronger price mix in the coming quarters, but is that just going to be offset by steeper volume declines in places like Russia? And if I can squeeze in one more. I think you mentioned new campaigns for Gauloises and Davidoff, and perhaps you can give us some more color on those?

Oliver Tant: I'll pick up on the organic growth revenue, I think, to kick off with.

Alison Cooper: Okay. Dive in.

Oliver Tant: The answer to the question, Giles, is very clearly yes. We are expecting in the fourth quarter to see continued improvement in the price mix dynamic. We have had this feature in FY '15, where actually a lot of that benefit due to the proposed timing of price has been back-end loaded. But we are expecting therefore for that to have some impact on volume, as you would expect, but be broadly beneficial to our bottomline. It's also worthwhile just pointing out, since I'm talking about sort of volume element as well, we do anticipate that sort of Iraq/Syrian position will continue for another couple of quarters to impact our performance from a volume perspective, before we actually end up lapping sort of outset of the challenges which the social, political and economic environment in that part of the world is presented as a result of the recent troubles there.

Alison Cooper: If I pick up on integration and where we are with the U.S. overall, I mean, in market share terms, the market share hasn't really moved significantly. USA Gold continues actually to increase in its target state, which has a small impact, but broadly the market share of the brands we acquired is holding. As I said previously, some of the buy-downs that Reynolds put in place before the deal completed are still in place. And therefore we're saying a fairly steady market share position currently, which is a good place to be, considering that we haven't been able to active anything significant in terms of our brand and retail plans at this point in time. On the integration side, this has been a very complex integration. The sheer number of tasks that had to be completed to be successfully off the ground on day one, that was incredible list basically, and was really executed almost flawlessly by the team. Now, the focus is on the ongoing integration. So things like getting the sales force aligned in the right locations for the business, and that all progressed exceptionally well on the manufacturing side and supply side, more importantly for our new products, making sure that we've had no out-of-stocks or issues in terms of supply in the marketplace. But I think, also the team coming together and their focus, the work they're doing with the brands and the products and with the retail agreements and everything else, I think for me that is really the very encouraging piece that I'm seeing really coming together very rapidly in a very positive way for the business going forward. And there's a lot more boring stuff that has to work, like IT and all those sorts of things. Again, that's just all in place and happening and has moved forward exceptionally well. So a very, very positive report from the U.S. team. On migrations, the 60%, as you mentioned, broadly we're 59%, where we're at currently with Specialists and Growth Brands and the 80% target. We've got some work that we are completing at the moment around the U.S. business and the changes that clearly impacts on the Growth and Specialist Brands, because we've now got Kool and Winston to build into the mix as well. So there's some work there to look at the percentages and see how we see those develop going forward. We are really looking therefore to still move ahead in terms of that percentage over the coming years, as we complete further migrations, and then continue to build the organic growth of the brands with a focus in market behind the key brands for those markets. Which question have I missed so far? The Gauloises and Davidoff campaign, yes?

Chas Manso: Yes.

Alison Cooper: Gauloises has been around there for a little bit of time. It's mainly being pushed in Germany at the moment. It's won awards in Germany as the top tobacco campaign in the market. It's really starting to help build the equity and the progress of our brands in Germany. It's starting to get rolled out in other markets as well. The Davidoff campaign it's actually been rolled up pretty rapidly into a number of markets. It's called For the Hunters. And it's probably something that's better to see some execution of, rather than try and explain. But again, excellent new consumer research and starting to get traction in market supporting, for example, what we are doing in Taiwan with Davidoff; and markets like Greece, where we actually continue to grow share of Davidoff, despite the environment and that continues to progress well for us. We've also got the JPS, one that's being rolled out, which I think you saw at the half year. And the final one that we need to conclude at the moment that we got a great execution on is the west campaign, which is going to be reinvigorated next year.

Operator: We'll now take a follow-up question from James Bushnell.

James Bushnell: It was just a quick one. On your overall market share, I think you mentioned that Growth Brands are up 100 basis points year-on-year. And I think with Owen's question, we obviously alluded to the fact that your volume performance was better than the industry. But I just wondered if you could give us a number for what your Group market share, either with or without the acquisition is looking like year-to-date?

Alison Cooper: It's going to have to be without the U.S. acquisition. I'm just trying to think if I can give you something with it. But I think it's best for now I give you it without. It's around 12.3% footprint.

James Bushnell: And how does that compare to the same period last year?

Alison Cooper: It is up slightly.

Operator: We'll now take the next question from Fulvio Cazzol.

Fulvio Cazzol: Just a follow-up question on the brand migrations. I was just wondering, the current run rate, is that sustainable for the next year or two or will it accelerate or decelerate? And my second question, which could be related to this, is on the stronger price mix. Obviously, that you're seeing now and obviously in Q4, yet you suggest that performance is going to be in line with expectations. So I just was wondering the margin benefit from the stronger price mix. Should we be assuming that some of that benefit is being reinvested in some of these to develop or push further forward your strategic agenda? How should we think about that?

Alison Cooper: In terms of the Growth Brand growth, yes, I would expect to see some deceleration after current year. We've done some very significant migrations in the current year. And as a result I think as we go through the next few years, I would see a bit of a deceleration in that coming through. On the price mix point, overall, I mean price is offsetting clearly some of the volume declines that we're seeing in market. Overall, in margin term for the current year, we're not expecting any great shift in margins. But with the cost initiatives we've got coming through, there maybe some uptick, a little bit, in that as we look into the out-year.

Oliver Tant: I mean, it is interesting, Fulvio, the sort of price mix equation we've seen, whereas in FY '14 we saw a very sort of consistent quarter-on-quarter impact of price mix -- in '15, as we've been saying quite frequently through the call, it's been very much back-end loaded. As things currently -- looking forward, I suspect we are going to see actually to some degree the reverse with price mix being stronger in the first half.

Operator: As there are no further questions, I would like to hand the call back over to your host for any additional or closing remarks. End of Q&A

Alison Cooper: Well, thank you everyone for joining us today and updating you on progress. As I started out, well, this has been another good quarter for Imperial, really building the quality of growth in the business, and we're on track for the full year. So thank you and have a good day.

Operator: Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.