Nov 1, 2007
Executives
Paul Adams - Chief Executive Paul Rayner - Finance Director
Analysts
David Hayes - Lehman Brothers Eric Lundquist - JP Morgan Jonathan Fell - Deutsche Bank Elise Badoy - Goldman Sachs Jonathan Lienster - UBS Limited Adam Spielman - Citigroup Rogerio Fujimori - Credit Suisse Chas Manso - Dresdner Kleinwort
Operator
Good morning everyone and thank you for joining us. I'm Ralph Edmondson, Head of Investor Relations, and welcome to the British American Tobacco's Nine Months Results Call.
With me today, are Paul Adams, Chief Executive and Paul Rayner Finance Director. In a few moments, both Paul Adams and Paul Rayner will give you an overview of the results.
On our website, bat.com, you'll find the slides of the company's presentation together with the earnings announcement released earlier today. After the presentation there will be an opportunity for you to ask questions.
The conference call operator will give you instructions on how to ask this question. I'll now hand over to Paul Adams.
Paul Adams - Chief Executive
Good morning everyone. Let's first look at the headlines, and then some of the details behind them.
Good volume for the first nine months is still down than the last year, due to mainly to the factors we saw in the earlier part of the year; such as the impact of the high level of trade buying in some markets at the end of 2006, supply chain disruptions in the Middle East, and the loss of StiX in Germany. Looking deeper into these results, it is clear that our brand mix is improving, with growth in the higher margin offerings led by our continued strong global drive brand growth.
The global drive brands grew 10%; led by Kent, up 18%, Dunhill up, 7% and a positive contribution for Lucky Strike, up 0.4% and a solid 9% growth on Pall Mall. This global drive brand led growth also helped us improve our premium volume performance.
Premium volume is up over 1%, led by gains in Russia, Romania, Azerbaijan, South Korea, South Africa, Brazil and the Gulf States, among others. Our value for money volume is up even more at 4.5%.
This means our performance in the low price segment is down 9%, due to uptrading in markets such as Russia and Ukraine, and the impact of illicit products on the low-priced segment in a variety of markets across the world. The improvement in mix is reflected in revenue growth, up 1% at current rates and up 6% at constant rates of exchange.
Profits from operations, excluding exceptionals, grew 8%, at current rates of exchange and a very strong 14% at constant rates. When we look across our key markets we're seeing positive trends in cigarettes [ph], improved product mix and lower cost which have benefited operating profit growth.
Adverse exchange movements have partly offset operating profit growth, but the 8% growth at current rates reflects strong underlying trends for the first nine months. Our research headed companies continue to perform well, although our share of that post-tax result was 4% lower at £335 million, reflecting the impact of exchange.
At comparable rates of exchange and excluding the exceptionals, the associates' contribution would have been 8% higher. The contribution from Reynolds American was lower due to the adverse impact of currency and the favorable resolution of tax matters in the third quarter of 2006.
ITC also contributed strongly to the associates results. The contribution was 20% higher than last year, at constant rates of exchange.
Adjusted diluted earnings per share rose 9% to 82 pence. Paul will discuss the drivers of adjusted earning per share growth in a few minutes.
We are turning to revenue and volume, revenue at constant rates grew almost 6%, despite volume being 1% lower. Latin America was the star performer, with revenue up 14% at constant rates and 9% at current rates of exchange reflecting the higher prices in Brazil in the first half of the year.
Prices had risen in anticipation of the July excise increase, and since that excise increase net revenue per mille in Brazil is now significantly lower than the level we saw in the first half, and this will have a marked effect on the Q4 results. Both Asia-Pacific and Africa - Middle East, saw good revenue growth at constant rates reflecting improved pricing and product mix.
However revenue growth in both regions was affected by weaker currencies. Europe was affected by reduced industry volumes in a number of markets, but despite volume being almost 2% lower, revenue at constant rates was ahead nearly 3% due to favorable pricing and improved product mix in Russia.
America Pacific also saw revenue rise 2% at constant rates despite volume being 4% lower, mainly due to the decline in industry volumes in Canada, partly offset by our growth in Japan. Revenue growth benefited from higher prices in Japan.
Now looking at profit on the same basis; the 14% rise in profit at constant rates on lower volume of 1% reflects improved pricing and the favorable timing of marketing spend in some markets. As we highlighted at the interim results, we anticipate profit from operations at comparable rates of exchange will slow down in the fourth quarter, as a result of generally higher marketing spend and the timing of price increases in Brazil.
At current rates the exchange hit was a £130 million, and I am pleased to report that all regions reported profit growth at constant rates, including America Pacific. We also have had strong profit growth in Canada in the third quarter.
We must not overlook the fact that in the corresponding quarter last year there were some significant costs associated with the move to direct store delivery. There was strong profit growth in Europe, mainly as a result of higher margins in some key markets, offset by reduced volumes in a number of markets and weaker exchange.
Asia-Pacific posted some very good performances in Australasia, South Korea, Vietnam, Pakistan and Bangladesh, although profit was low in Malaysia due to the effect of recent excise increase on industry volumes and the growth of the low price segment and illicit trade. In Africa and the Middle East, strong performances in South Africa and Nigeria were significantly impacted by weaker currencies and the distribution issues in the Middle East.
Paul Rayner will now conclude the presentation by taking you through the drivers of adjusted earnings per share growth.
Paul Rayner - Finance Director
Thank you Paul. The strong profit performance at constant rates of exchange up 14% was the main driver behind the growth in adjusted earnings per share.
Net finance costs at £204 million were largely in line with last year, despite the high dividend distribution and share buyback costs. We also expect the fourth quarter charge to be broadly similar to the third quarter charge.
Associates excluding adverse exchange rates and excluding the exceptional tax benefit received by Reynolds American last year contributed 1.6% to the growth in adjusted earnings per share. For the purpose of the adjusted earnings per share calculation, the underlying tax rate was similar to last year at 29.8%.
We are targeting a rate for the year of around 30%. The higher profit from Brazil was mainly responsible for the £ 9 million increase in the minorities charge to £127 million.
The share buyback benefited earnings by 1% and the calculation was based on 2045 million shares. We maintained the share buyback program through the close period and shares bought back are now held in treasury.
At constant rates adjusted earnings per share would have been up around 6%, but adverse exchange rates had a 7% impact, bringing the adjusted earnings per share down to 82P, which is a rise of 9%. That concludes the opening remarks, and we'll open up the teleconference to questions.
Paul Adams - Chief Executive
Okay Tim if you go ahead please. Question And Answer
Operator
Thank you. [Operator Instructions].
Our first question comes from the mode of Mr. David Hayes from Lehman Brothers.
Please go ahead with your question.
David Hayes - Lehman Brothers
Hi morning all.
Paul Adams - Chief Executive
Hi good morning.
Paul Rayner - Finance Director
Hi.
David Hayes - Lehman Brothers
Few questions if I can. Just firstly on the Africa and Middle East performance, if you look at the third quarter particularly I think organic profit was down about 11%.
Obviously you mentioned the Middle East situation and then you mentioned the second quarter is running in terms of the supply chain, can you give us a bit more details about exactly what the drivers were in the third quarter, and if there's anything that we should be thinking about carrying on into the fourth quarter. And then second question is just kind of a clarification on the guidance for the fourth quarter, I assume that the way is what it means that you expect organic profit growth to be lower than the 14% for the nine months as opposed to the 7.8 for the third quarter.
But just to clarify whether it's what the capacity is to gain in terms what is decreasing? Thanks very much.
Paul Rayner - Finance Director
Yes David, its Paul Rayner. Hi, the Africa and Middle East performance for the first third quarter, you are right, was down 11% at constant rates and the major reason for that was problems in the Middle East.
But I think the mainly one-off problems associated with stock write-downs and supply chain problems, mainly Iran and some extra taxes in relation to import of product that came through at the last minute which we provided for but we will dispute. So the Middle East had a particularly bad quarter, but it doesn't reflect underlying service rates with the consumers.
It flows on from some distribution changes we've made, and also we had a lot of stock that was kept under bond for sometime, and when it came out of bond basically was head spotting and had to be destroyed; so some stock write-off. So that was a major reason for Africa and Middle East.
Other than that the region performed on-track for the quarter. In terms of the guidance for the fourth quarter we always said David, if you remember in the first half that the second half was going to be a lot tougher, and as you said, operating profit growth was a lot lower in the third quarter.
I would expect that it would be even lower in the fourth quarter, because of timing of marketing spend which is going to be speed a lot towards the fourth quarter. So that's the way we say it.
So in guidance, I think you should be looking at being lower than the third quarter.
David Hayes - Lehman Brothers
Okay. Great and then just you said on the Africa and Middle East I assume that we kind of go back to on the line profile for the fourth...
I mean all that plays out within the third. It was kind of everything was accounted for in the third quarter?
Paul Rayner - Finance Director
Yes, yes. As far as we know, as far as we know everything was accounted for and the region still had a very good result for the year to-date growing nearly 13% at constant rates and the underlying business are running along very well.
So it has a lot of potential take cost set going forward. There's all the reorganizations we doing.
So it's pretty much a one-off thing as far as we can see.
David Hayes - Lehman Brothers
Okay, great. Thanks very much.
Thank you.
Operator
Thank you. Our next question comes straight from the line of Arlene Kielley from Morgan Stanley.
Please go ahead with your question.
Unidentified Analyst
Hi. Good morning all.
Paul Adams - Chief Executive
Good morning.
Unidentified Analyst
Just on Canada, could you give us an update on your market share and volume performance to date and also how your switch to DST is doing now. I mean your competitor Rothmans commented that they had not seen any material impact of that and what would be your take?
Thanks a lot.
Paul Rayner - Finance Director
Okay. Canada: we talked about a share point in the third quarter in Canada and we got out of Keltron pricing, we tried to take prices up slightly or remove some discounting that we were doing and the competition didn't follow and so we got out of Keltron, and plans are in hand to address that in the fourth quarter.
So we did loose a little share in Q3. The DST is going well, we have now got down to a cost level that we believe is right for that business and we were running heavy on costs as we overcome...
as we try to overcome some of the dealing problems we had early on. We have now overcome those and we are now at a cost level that we are comfortable with on DST.
We have improved the distribution in terms of the number of outlets that we are covering. We have improved the distribution since before DST and we have reduced the number of out of stocks at those distribution points from the situation before DST.
We also have the opportunity to implement our programs that we want to implement much quicker as result of DST. So we are happy with DST.
We got out of Keltron pricing and... but we have got plans in place to address that.
Unidentified Analyst
Okay, fantastic so you still expect profit growth for the fourth quarter in Canada?
Paul Rayner - Finance Director
I don't sure we want to get quite into that but --
Paul Adams - Chief Executive
Well I just will make a quick comment on that, the third quarter was good for Canada but the main reason for that was we had a low level of cost because we had some high cost last year in the third quarter due to the implementation of DST there. So I think for the fourth quarter and the fourth quarter last year we had a couple of minor one-off, items that came through as positives and the fourth quarter this year I think we still got continuing trends in terms of towards the value for money so, continuing mixed problems and illicit trade problems.
So I think frankly we will be struggling for profit to be increasing in Canada during the discreet fourth quarter.
Unidentified Analyst
Okay thank you
Operator
Thank you. Our next question comes from the line of Eric Lundquist from J.P.
Morgan; please go ahead with your question
Eric Lundquist - JP Morgan
Hi good morning two questions; first on Europe where profit growth was meaningfully stronger in the discreet third quarter than I had anticipated. Would you attribute most of that then as you seem to indicate in your comments, to mix offsetting some negative volume in some other markets and is any reason to believe that, that positive next momentum should decrease in the fourth quarter?
Paul Rayner - Finance Director
Now we see the mix improving, no only in the fourth quarter but in 2008. We've got a very positive good momentum on our mix.
As you know we've launched Kent nanotech in Eastern Europe which will certainly improve the mix along with the ordinary Kent growth in Eastern Europe, and our global drive brands Lucky Strike, Dunhill, Pall Mall are also growing in Eastern Europe and indeed Western Europe. So we can, we expect that mix improvement to continue.
Pricing as you know, has been a lot better this year in Western Europe and pricing indeed has been better in Eastern and Central Europe generally. So those are the two big drivers of revenue growth in Europe.
Eric Lundquist - JP Morgan
Okay thank you, and then on the Latin American relation, also significantly stronger than anticipated despite the slowdown in Brazil, due to dramatic increase in tax. Why was that so strong?
Is that is it primarily something going on at Venezuela, as you noted in your release, so if you could explain more about that result that would be very helpful.
Paul Adams - Chief Executive
Yes, sure Eric. What's happened is the effect of the excise increase in Brazil is really going to come through in the fourth quarter, because the excise increase came through basically in the middle of July.
So we still got some positive effect in terms of the net price levels that we are getting for the excise increase in July in Brazil. So you are going to find a significant reduction net to that of mille in Brazil in the fourth quarter compared to the third quarter.
Naturally going to affect the Latin America result in the fourth quarter and the Chairman points that out in his concluding comments. Venezuela did have a very strong third quarter, but since then Venezuela has had the excise increase as well, which is quite a dramatic excise increase and that will come through in the fourth quarter as well.
So the third quarter for Latin America was strong because of Venezuela and a few of the other markets did exceptionally well. But the fourth quarter will come under some pressure because of those two things.
Eric Lundquist - JP Morgan
Okay great. Thank you.
Operator
Thank you. Our next question comes straight from the line of Jonathan Fell from Deutsche Bank.
Please go ahead with your question.
Jonathan Fell - Deutsche Bank
Good morning I have got a couple of questions on Europe. You have been talking for a little while now again today about the improved pricing environment in Western Europe as I looked down the list of your big Western European markets.
An awful lot of them, where you are talking about profit decline so far this year, just wondering, is this the situation we should expect to continue, is it because... I mean it is a profit decline, a result investment value of setting the benefits from pricing.
Just wondering about the outlook for this region or the western part of Europe could be going forward.
Paul Rayner - Finance Director
I think the outlook for Western Europe is good. We've had an improved pricing situation this year.
I still think there's room for price increases. We haven't had a piece increase in Spain for a while.
We haven't had a price increase in Germany for a while, and those were two markets where I think it would be right for price increases; let me put it that way. But we are not leaders there.
So those two markets... we see the potential for pricing improvements.
Our share growth is pretty good in a number of markets in Western Europe; Germany, of course is a problem because of her decline international the market size. I mean that was down about 9% in overall total tobacco terms, because of the well known switch form sticks and the growth of the cross-border trade in Germany.
So Germany; I would hope, would stabilize now. I think we're over the hump of that in Germany and hopefully a price increase.
So I see the future for Western Europe as being pretty good on the profit side.
Eric Lundquist - JP Morgan
Okay thanks, and just a quick follow up on Russia. I think in the fourth quarter last year there was quite an increase in volumes, because of loading ahead of the tax increase which you suffered from a bit this year.
Are we likely to see a similar pattern in the fourth quarter this year or are we going to see a volume drop in Europe, because there is no loading in Russia?
Paul Rayner - Finance Director
You won't see the load in Russia in the fourth quarter that we saw last year. We should see Russian volumes for the year being around flat, and we picked up...
we had volume growth in the second quarter of about 1.5% and about 3.5% volume growth in Russia, in the third quarter. And may be getting a little growth in the fourth quarter but again it's very strong fourth quarter last year it won't be much.
And that should take us to about flat for the year.
Eric Lundquist - JP Morgan
Okay thanks.
Operator
Thank you. Our next question comes straight from the line of Elise Badoy from Goldman Sachs.
Please go ahead with your question.
Elise Badoy - Goldman Sachs
Hi. Sorry my questions have actually been answered.
Operator
Thank you. In that case, our next question comes through from the line of Jonathan Lienster from UBS.
Please go ahead with your question.
Jonathan Lienster - UBS Limited
Hi good morning. Quick one on the structuring; Paul, historically we've sort of mentioned volume growth 1.5% and sales growth sort of 3% to 4% implying the sort of price mix of I think a plus 2, plus 2.5 may be.
I mean given that in the first nine months you're looking at a price mix of plus 7 and then with the ops increasing emphasis on premiumization, are those figures too conservative or is the Brazilian impact so large that that plus 7 is just a distortion and that's for on the medium term basis, sort of plus 2, plus 2.5 points mix continues to be a better guide?
Paul Rayner - Finance Director
I think we still hold to the guidance that we have given because the guidance that we have given were not annual figures, they were what we expect the average to be over the medium to long term as you know Jon. So we still think that is appropriate guidance and rest assured if we can beat it, we will.
Jonathan Lienster - UBS Limited
Okay, thanks.
Operator
Thank you, our next question comes straight from the line of Adam Spielman from Citigroup. Please go ahead with your question.
Adam Spielman - Citigroup
Hello, it's Adam Spielman. I have got three questions if I may.
Firstly coming back to Canada; you said in the discreet third quarter like-to-like to EBIT was up 14%. Are you able to say what it would have been if it had not been for the one-offs we saw last in the year early course.
Did you see there was any partly those one-offs, so it's clearly positive on the underlying basis. Secondly, coming back to Africa and Middle East, you said there are a series of one-off negatives.
Are you able to give us a rough feeling? Are we talking of £20 million here or there about?
As then finally you are increasing as far as I can tell, your marketing spends. I believe that has happened to some already in the third quarter.
You said you will accelerate that in the fourth quarter. Are you able to tell us in broad terms when and on what basis?
Thank you.
Paul Rayner - Finance Director
Hi Adam its Paul Rayner. On the first question, if we take out the difference in distribution costs for Canada, you know the startup costs on DST, take up that favor of it.
Canada would have been slightly up on, if you'd like, a normalized operating profit basis for the discreet third quarter. In terms of the Africa-Middle East one-off problems, your number is good enough ballpark number.
Everyone has remembered what you said.
Adam Spielman - Citigroup
And on those of where that renewed markets having emphasis is?
Paul Rayner - Finance Director
It would have been broadly equal across the first three quarters in terms of our marketing spend. Yes, we said that it's skewed to the second half and it will be skewed to the second, because it's skewed to the fourth quarter; and the marketing spent is against programs that have planned for sometime, principally in Europe and we are rolling out Nanotech across most of the former CIS and growing distribution, particularly in Russia; again extending our distribution capability and ever increasingly Eastern Europe.
So its behind Nanotech and distribution build in Eastern Europe, principally Russia. Also in the UK we've launched Pall Mall, as you may know in the UK and that will take a bit of money and also in Africa and Middle-East, principally around South Africa, where we got a couple of brand programs that are happening in the fourth quarter.
Adam Spielman - Citigroup
Can I ask a follow up on that. I take it that Nanotech is fulfilling everything that you hoped it would.
I think that's one question and the second question is on Pall Mall in the U.K., you have noticed an incredibly aggressive gross price, can you tell us what your hoping to achieve with that?
Paul Rayner - Finance Director
Nanotech is actually surpassing our expectations and it's doing extremely well. I mean it's very early stages and I have to temper my remarks, but its certainly exceeding our expectations initially and it's getting a lot of consumer traction not only in Russia but in other countries, the sort of satellites of Russia.
Probably not a good term but you know what I mean.
Adam Spielman - Citigroup
Yes.
Paul Rayner - Finance Director
And so if you like, that is going extremely well. Of course it is at a super premium price and so that's really helping us drive the mix improvement.
In terms of Pall Mall, we have Dunhill and Lucky Strike in the U.K, and we have Vogue in the U.K. But we didn't have a value for money global drive brand in the U.K.
So the launch in the U.K. is just for filling the geographic rollout of Pall Mall as we have launched it in a number of markets over the last two or three years in Europe and indeed beyond.
So it's just part of the global rollout of Pall Mall. U.K obviously is a profitable market and a sizable market, so it was an obvious choice.
What we are hoping to achieve from it? We are hoping to achieve profitable volume growth, that's what we are hoping to achieve from it.
Adam Spielman - Citigroup
I mean it leaves you sort of 3%, 4% market share with Pall Mall in those European countries, maybe a bit more than that. Is that a realistic target?
Paul Rayner - Finance Director
I would say that our market share growth hopes for Pall Mall in the UK are modest and not expecting too much, the size of that particular segment, if you look at Sterling and --
Paul Adams - Chief Executive
principally [ph].
Paul Rayner - Finance Director
Principally thank you, put those together, they are not a sizeable part of the UK market. So our share projections are suitably modest but still profitable.
Adam Spielman - Citigroup
Thank you very much.
Operator
Thank you. Our next question comes straight from the line of Rogerio Fujimori from Credit Suisse.
Please go ahead with your question.
Rogerio Fujimori - Credit Suisse
Thank you. Rogerio Fujimori from Credit Suisse.
Sorry if I missed but could you please just tell that if you expect flattish volumes versus year ago at group level for the full year. Thanks.
Paul Rayner - Finance Director
Yes. In fact they maybe slightly down.
Somewhere between 0% and 1% down for the full year, probably near minus 1% and then flat.
Rogerio Fujimori - Credit Suisse
Thanks and then just one quick question on Italy. Basically we have ongoing share gains from global drive brands offset by some losses from the local brands.
So should we still think about kind of ongoing small share losses at group level or are we getting closer to stable share at group level in Italy. Thanks.
Paul Rayner - Finance Director
No. I mean we do have overall market share loss in Italy of round about 1 point.
Although we've had good share growth in the global drive brands. Pall Mall is up, Dunhill is up, Lucky Strike is up and we are losing share on the local brands as you say.
MS is down about 0.5 point and SAX is slightly down. We're not happy with the share situation in Italy and it's something that we will be addressing whether that means we will able to stabilize overall market share remains to be the seen, but its not a situation we're happy with or going to accept.
Rogerio Fujimori - Credit Suisse
Thank you Paul
Operator
Thank you, our next question comes straight from the line of David Hayes from Lehman Brothers; please go ahead with your question.
David Hayes - Lehman Brothers
So just a couple of follow-ups if I can. Just picking up on the comment you made about the phasing of AMP spend, you kind of made it sound like it's very much fourth quarter-loaded.
If I look at the third quarter and again organically, I think the sales were up 9 which are pretty impressive obviously, but profit is only up 7.8. Is some of that to the underperformance of profit, if you like that forth to do with the cost savings as well the cost savings not as high in the third quarter?
Does it bounce up again in the fourth quarter to offset some of the spend, back in the fourth quarter? Just trying to get a feel for how much of this is the spend back levels phasing how much with the cost saving level phasing.
Thanks.
Paul Adams - Chief Executive
Let me just start off and maybe Paul chip in. I meant firstly we've had some slowdown in Brazil which was a big driver in the first half of the year, as Paul mentioned and we did have that one-off write-down in the third quarter on Africa and Middle East.
So both of those would have slightly depressed in the third quarter, and our overall ongoing costs... there is no sort of blip in our cost in the third quarter other than what I mentioned.
Paul Rayner - Finance Director
Yes, there is a couple of things; marketing spend, the increase in marketing spend frankly is more in the fourth quarter versus last year. If there is any quarter in the year that's going to be up, it's certainly going to be up in the fourth quarter.
But we had some other costs, I mean there are lot of projects going on associated with restructuring costs that we are not classifying as exceptional, and they were quite high in the third quarter. We've got three regions going through significant reorganizations which result in far more efficient regions and as we bring a number of things above that, some of the essential costs have been a lot higher.
And the other thing which distorts the numbers is the famous fan cards in Latin America. They are quite substantial, now we distribute those fan cards as a principle.
Unfortunately we have to include the costs on our operating costs. If you look at the total costs year-to-date they've gone up 2% but if take up the fan cards if any, they've gone up less than 1%.
And in the third quarter, they are quite substantial. I mean if they are sort of half the Latin America cost increase down from about 9% to 5%.
So you got to take those out as well, they are the main reasons.
David Hayes - Lehman Brothers
Okay but the fan cards accounting change it still lack being like for --
Paul Rayner - Finance Director
Yes it's... we had fan cards last year just as the costs have gone up this year.
David Hayes - Lehman Brothers
Right.
Paul Rayner - Finance Director
Significantly, for the, I think there's something like between £50 million and £60 million extra costs on fan cards this year versus last year for the three quarters, that is significant.
David Hayes - Lehman Brothers
Sure, okay and then so...I just one of the very quick question I think, just in terms you told about the premium volume growth being about 1%. I mean in terms of definition if that, do you have a firm definition, do say anything that's within out of 20% of the premium pricing for in each market, and is there is some its going to consistently used to assess that?
Paul Rayner - Finance Director
Yes it will vary market by market. Let me just say the premium growth was 1.6%.
We increased the premium volume by 2.6 billion stakes in the first nine months. So that's pretty good going I think.
Premium is we defined it in consumer term. So it's really what the consumer perceives as premium; would be the classic definition.
What does that mean in practice, I would think, again, depending on which market. But it would be within normally 7% or 8% of if you like the premium benchmark.
David Hayes - Lehman Brothers
Okay, thanks very much. Thank you.
Operator
Thank you. Our next question comes straight from the line Ray Wareham from Alliance [ph].
Please go ahead with your question.
Unidentified Analyst
Yes, Good morning. Just two questions; First of all may be if you can just talk about Japan.
You've mentioned further market share guidance there and we've also seen that it looks like Japan Tobacco's market share has started to turn the corner. So, maybe just short note on the overall market in Japan and also from the fact that Philip Morris has been losing market share there.
Can we probably expect some pricing issues? And then, just secondly on South Africa, you mentioned market share improvement and now your market share been sort of, trusting low over the past two years.
Maybe if you can just, sort of, expand a little bit more, of what's happening in this market? Thanks.
Paul Rayner - Finance Director
Sure; Japan is going well for us. We're currently running at a market share of 10.5% for the year-to-date, which is up 0.7% versus the year-to-date last year and in third quarter, in fact, we were up to 10.7%.
So market share continues to grow nicely and that's driven really by Kent and Kool, both of which have had a lot of innovation around them, particularly Kool Boost, which some of you'll know of, which is a little capsule in the filter, that is doing extremely well. So we continue to grow share.
They too have in share terms sort of stabilized but are still soft... slightly soft and year-to-date they are 64.6 against 65 last year.
So they have lost 0.4 according to the numbers we have got and Phillip Morris also down that year-to-date 24.4 relative to 24.7 for the nine months last year. And so we are the only major company actually growing share and indeed volumes in Japan this year which we are pleased about and its innovation based.
In terms of pricing, the Japanese market is not a market where there is a lot of price activity. Indeed its remarkable if we can get the price up in Japan.
It's need any price increases to be noted by the Ministry of Finance and its not a heavily discounted sort of market. It's a well-disciplined market and I frankly don't see that changing much.
What drives growth in Japan is innovation rather than pricing. In terms of South Africa, yes we are doing well in South Africa.
We have grown our share in South Africa and we are up about 0.4 of a share point. We are now at about 90% share of market and that's driven by the growth of Dunhill and to some extent Peter Stuyvesant.
Operator
Thank you we have no further questions in queue. [Operator Instructions].
We have a one final question from Chas Manso from Dresdner. Please go ahead with your question.
Chas Manso - Dresdner Kleinwort
Hi, I've got some three questions; firstly you've chatted about the plushy environment, mostly in Western Europe, I think if could you just sort be clear and update us on the pricing environment outside of Western Europe. Are there then any markets remaining that are still spooky [ph]?
Then on the, on the comments about, the three regions going through reorganization and up in the central costs, significantly on the backlight. Could you...
I mean obviously that takes a will to do, could you give us some idea of some how long it will real set for organization as a cost before its starts being a benefit to your P&L and normally you give us some guidance on the FX impact for the rest of the year, if things were to stand still for the rest of the year, which of course they went. What will be your FX impact for the full year?
Paul Rayner - Finance Director
Okay, let me talk about pricing Chas. Pricing outside of Western Europe, we've seen positive price moves in central and Eastern Europe and which is all to the good, which is not to say that its all plain sailing, when we try to lead prices up, competition eventually do follow but it tends to be on occasions slightly slow in following.
It's still pretty sporty and in Argentina it can get quiet tense in Brazil. We saw some significant discounting in Australia and as you will recall in the first six months, eight months of the year, that seems to be easing, and so there are the little outbreaks of pricing, I would include Malaysia in that but that's principally right at the low end.
So, to sort of try and summarize, I would say that amongst the majors, there is a propensity to either take price increases or follow price increases, although that is not always plain sailing. What you're always struggling against of course is the smaller players and the semi and illegitimate players at the bottom end of the market, which can disrupt volume and as we see our low price volume was down can disrupt volume, and also inhibit your ability to take prices.
So whilst the pricing environment remains good both within Western Europe and beyond, it's not where that it concerns.
Paul Adams - Chief Executive
In relation to question Chas, all of the reorganizations we are going through will have a substantial payback and they are phased and so you've got some costs this year. Some regions are ahead of others.
So you'd expect the benefits coming through on the regions which started the reorganization will come through earlier, such as Africa and Middle East. But I think you need for this in the context that there are a number of things that we're doing within the group, not any of the reorganization of the region, opportunities for us to leverage costs in terms of shared services.
We require some upfront costs and running our supply chain on a global basis rather than use separate businesses. There's also a significant upfront costs that we're going for the process of incurring right now.
We have to do this by keeping an overall lid on costs. And so I mean as I said before, costs at a constant rate of exchange were up sort of 2% for the year.
You take out the fans cards its have 1%, that also includes a significant costs which we book to associated with these supply chain disruptions in the Middle East that goes through the costs line. So the reason the Africa and Middle East costs are so high for the quarter is because of that.
So when you pull these factors out cost aren't up that much across the group. But the reason they're up was because of some substantial reorganizational costs, and lot of those costs are picked up in the centers things are centralized, end up charging them back to the regions if we can because that makes tax sense but only if that we charge back on prices, but essentially that's what happening.
But we have to keep a lid over all on costs and as I have said a number of occasions, we watch spin back very carefully to make sure a significant portion of cost saving is drop in through the bottom line, we'll continue to do that. In relation to the FX impact; strangely even now the U.S.
dollars continue to weaken, exchange rates overall, over the last six or eight weeks have their way. So if you were to cap the numbers today for the discreet fourth quarter, we could have out of the slight translation gain or slight translation loss, but at this stage its looking pretty much close to last year in terms of translation to discreet fourth quarter, because most of the other currencies have moved away apart from the U.S.
dollar. So it's been a net favorable movement for us.
Chas Manso - Dresdner Kleinwort
Thanks.
Operator
Thank you we have a follow up question from the line Eric Lundquist from J.P. Morgan.
Please go ahead with your question.
Eric Lundquist - JP Morgan
Hi just wanted a follow up on an earlier question. I wasn't quite sure that was answered in terms of the phasing of cost savings; and if you could address, if we'd likely to see an increase in cost savings in Q4 relative to the run rate we've seen in the previous quarters; or if that be less or more or less in line.
The second question was on Vietnam. I understand there's been a significant excise tax increase.
Does that mean the outlook for the market is less rosy in Q4 in 2008 than previously? Thank you.
Paul Adams - Chief Executive
I can't see any major distortion on the level of cost savings, Q4 versus Q3 to answer your question. The main thing it's going to happen on costs in Q4 as a substantially higher level of marketing spend versus last year.
Paul Rayner - Finance Director
To be honest Eric, I hadn't picked on the Vietnamese excise increase. So, I can't answer that question sensibly.
I know that we were doing very well in Vietnam, our profits are up and market share and volume is up. So we're doing well in Vietnam.
As for the excise increase, I'll have to look at that.
Eric Lundquist - JP Morgan
Great, thank you.
Operator
We have a part of follow up from the line Adam Spielman from Citigroup. Please go ahead with your question.
Adam Spielman - Citigroup
Quickly, you've mentioned in there regions, you've... where up your costs, in the short term to say, in the long term.
Africa-Middle East is obviously one of them I assume; can you just name the other two?
Paul Adams - Chief Executive
No, what I said was that the regions are going through reorganizations and as a result of there are sort of one-off costs associated with those that sort of, fueled us through the result. But when you look at the results in terms of discreet levels of costs for the third quarter, Europe was up a little bit and we had Africa and Middle East up a little bit.
But a large part of that was due to the Middle East problems that I talked about.
Adam Spielman - Citigroup
I am sorry Paul if I summarize what you said wrongly, but the three regions were... where there were some one-offs that weren't taken into assumptions.
Are you going to say what they were?
Paul Adams - Chief Executive
Yes the regions that are going through reorganizations are Europe, Asia-Pac and Africa-Middle East.
Adam Spielman - Citigroup
Thank you very much.
Operator
Thank you. We have no further questions and please.
I will hand back to your host today to wrap up this mornings conference call.
Paul Adams - Chief Executive
Well thanks everyone for joining us. Just to try and conclude, I think we are pleased with the results and we continue to see strong underlying growth driven by a global dry brand growth and particularly, the growth of our premium volume and the pricing environment which is all improving.
So things continue to go well, and I think we have expressed a slight cautionary note on the fourth quarter, which I think is being now picked up on. Other than that, thank you for joining us.