Feb 28, 2013
Executives
John Benedict Stevens - Chief Information Officer, Finance Director and Director Nicandro Durante - Chief Executive Officer and Director
Analysts
David Hayes - Nomura Securities Co. Ltd., Research Division James Bushnell - Exane BNP Paribas, Research Division Jonathan Leinster - UBS Investment Bank, Research Division Eric Musau - Standard Investment Bank Ltd., Research Division Dirk Van Vlaanderen - Jefferies & Company, Inc., Research Division Henry Davies - BofA Merrill Lynch, Research Division
Operator
Good morning, everyone. I'm Nicandro Durante, Chief Executive of British American Tobacco.
And as usual, I'm joined by Finance Director, Ben Stevens. Also in the front row, there are a number of my colleagues, including Richard Burrows, Chairman; and John Daly, Chief Operating Officer.
And welcome to those of you who are listening on the conference call or watching via the webcast. After the presentation, as usual, there will be an opportunity for those of you in the audience to ask questions.
2012 was another very good year for BAT. We met all long-term financial goals.
In was -- in what was another year of financial uncertainty, rising unemployment, with the investors and consumers continue to look for security, the group delivered a strong financial performance across all regions. Reported volume for the group was down 1.6%, and organically, 2%.
This was principally as a result of industry volume declines in Western Europe, Brazil and Egypt, together with volume losses in low-margin brands in Indonesia and Turkey. We have grown our Global Drive Brands by 3%, with all brands contributing to the increase.
Share is up in the majority of our Top 40 markets, with strong performance in many markets including Brazil, Canada, Malaysia, France, Germany, the GCC and Pakistan, offset by losses in Indonesia, South Korea, Italy and Turkey. However, for increased portfolio investments, share in these 4 countries has stabilized in recent months.
And as a result, overall share in the Top 40 is up over the last 6 months of 2012. I am pleased to say that we have good share growth momentum entering 2013.
Currency was a major future -- feature in 2012, with headwinds impacting revenue, operating profit and EPS growth by 5 percentage points. Reported revenue fell 1.4%, but on organic constant basis, grew nearly 4%, reflecting good price mix of 6%.
Pricing remains strong and we have already achieved 80% of our planned pricing for 2013. Adjusted profit on a constant basis was 8% ahead.
We continue to do excellent work in addressing our cost base, with the operating margin up 160 basis points. Adjusted EPS rose 7% to 207.5p, and would have been 12% up, excluding the effects of currencies.
The board is recommending a final dividend increase of 7% to 134.9p. Now onto the brands.
It was another good performance from the Global Drive Brands. Excluding the impact of the one-off in Japan in 2011, the GDBs were up 4% against our markets down 1% to 1.5%.
The GDBs now account for over 1/3 of group volume. Dunhill grew share, and volume was up 2%, with good performances across the globe including Indonesia, Taiwan, Malaysia, South Africa and Romania, offset by a decline in South Korea, as a result of price disadvantage.
Excluding South Korea, Dunhill volume was up 9%. Kent grew 1%, with increased volume in Russia, Vietnam, Ukraine and the Middle East.
Adjusting for the Japan one-off, Kent would have been up 4%. Lucky Strike continued to grow from strength to strength, with outstanding volume growth of 11%.
The brand performs strongly in all regions, with convertibles accounting for 80% of the growth in 2012. Our all-natural version is showing significant growth.
Pall Mall continued to grow volume and share globally. Volume was up 3% during the year, despite declines in 2 of its key European markets, in Italy and Spain, with growth coming from Pakistan, where it reached a record share of 25% in December, as well as Russia, Romania, Canada, and the U.K.
All 4 brands maintained or grew market share and overall GDB share in the Top 40 markets was up 0.3 percentage points or up 0.4 percentage points, excluding the Japan one-off. Total international brands, including GDBs, grew 2% to 377 billion, and now they account for 54% of group volume.
Now looking at volume and revenue. Group organic volume was down 2%.
Excluding the one-off in Japan, it was down 1.7%. This was driven by industry decline -- declines in Western Europe, Egypt and in Brazil, following the excise-driven price increase.
Together with volume losses in low-margin brands and Indonesia and Turkey, organic revenue, at constant rates, was up 4%. Driven by continued strong pricing, all regions contributed to this performance, although Asia-Pacific was impacted by geographic mix and the high Japan comparator.
Excluding Asia-Pacific, price mix across the 3 other regions was strong, averaging 8%. Organically, operating profit grew 8% in constant currency.
Every region contributed to these good results, with EEMEA in particular, putting an excellent, excellent performance, up 15% in constant currency terms. Western Europe delivered good organic profit growth of 3%, despite the economic difficulties in the Southern European countries.
Elsewhere, the Americas region achieved a strong constant organic profit performance of 6%, despite a 3% fall in organic volume, mainly, as a result of Brazil excise-driven price increase. And Asia-Pacific reported strong constant profit growth of 7%, despite a 2% volume decline.
Overall, these good profit performances were adversely impacted by exchange rate movements, reducing the group's reported operating profit growth by 5%, down to 3%. Looking at the regions individually, in Asia-Pacific, strong performances from a number of markets and favorable exchange rates helped profit grow 8% to GBP 1.7 billion.
At constant rates, profit grew 7%. Good volume performance in Bangladesh, Pakistan, Taiwan, and Malaysia were offset by declines in South Korea, Indonesia, and the high Japan comparator.
Excluding the Japan one-off, revenue and profit at constant rates would have been 2% and 9% higher, respectively. Volumes would have been flat.
In Australia, volume was lower. However, profit rose as a result of higher pricing, cost-saving initiatives and favorable exchange rates.
As you know, plain packaging was implemented at the beginning of December, and early indications are that has had no impact on the market. The change in excise structure in Indonesia and excise-driven price increases adversely impacted volumes of the low-margin local brands.
These, together, with increased marketing investments and high clove prices, resulted in a decline in profit. However, our investments in building a new portfolio are beginning to pay off.
With the launch of Dunhill Mild and the relaunch of Star Mild both performing ahead of our expectations. As a result, market share stabilized in the final quarter of 2012.
Malaysia delivered an outstanding performance, with growth in market share and profit. Dunhill continued its good performance, achieving a record share of 47%.
In South Korea, profit volume and share were impacted by price-based competition. However, market share has stabilized during the second half of the year.
In Japan, profit was up, but volume and market share were down, following the high comparator last year. We have successfully retained an increase of more than a full share point over the 2010 exit share, despite significant competitive activity.
As a result, market share is 12%, a record achievement, excluding the one-off distortions in 2011. This was driven by the success of the new innovations in Kent and Kool.
Bangladesh, Pakistan and Vietnam all grew profit, share and volume. In the Americas region, profit was down 2% last year to EUR 1.4 billion, mainly driven by negative exchange rates and lower profit in Mexico.
The lighter-shaded part of the graph on the slide represents the organic numbers at constant rates. As you can see, organic constant revenue was up 4%, and profit, 6%.
Regional volumes was almost flat at GBP 142 billion. The decreases seen in Brazil, due to the excise-driven price increase, were almost fully offset by the additional volume resulting from the Colombian acquisition.
Stripping out this impact, regional volume was down 3% on organic basis. Brazil's profit was driven by an improved product mix and higher pricing.
As I previously mentioned, industry volume was down, following the excise-driven price increase last year which fueled the growth of illicit trades, despite the establishment of a minimum price. Our market share rose strongly, mainly driven by Dunhill and some key local brands.
In Canada volume increased, driven by the good performances of Pall Mall and du Maurier, leading to good market share growth. The absence of significant price increases resulted in the illicit trades stabilizing.
Profit was flat. In Mexico, industry volumes continue to be impacted by the increasing illicit trade, which now stands at 17%.
Lower volumes and a tough comparator at the beginning of 2011 due to the excise windfall, resulted in lower profit. However, market share was up, mainly driven by Pall Mall.
Colombia saw good growth from the GDBs and Mustang, the main brand acquired in the purchase. In Argentina, overall volume was down, market share was flat, but premium share improved to a record-high of 29%, up over 3 share points versus 2011, with Lucky Strike, the fastest-growing brand in the market.
In Western Europe, reported profit was down 3%, but up 3% on a constant basis. Overall, the regions saw good profit performances in France, Germany Switzerland, Romania and the U.K., partially offset by a decline in Italy.
The economic uncertainty in the southern part of the continent continued to put pressure on consumers' disposable income and to impact volume, which declined by 5%, mainly due to Spain, Italy, Poland and Hungary. Share of the Fine Cut market grew, with volumes up 8% versus 5% for the industry.
And Pall Mall strength has positioned as the leading brand in Fine Cut with an 18% uplift in volume. In Italy, both volume and profit were down, as a result of the difficult economic environment.
Shining cigarettes declined, but profit on share grew strongly in Fine Cut. In Germany, volume and share were up, outperforming all other industry players and trade brands.
Lucky Strike extended its leadership of the all-natural segment, and was the fastest-growing brand in the market in 2012. Profit also grew, driven by higher pricing and good cost management.
In France, profit and share grew, despite the market contracting. Lucky Strike convertibles and all-natural offerings were key drivers of share growth.
In Spain, operating profit increased strongly. On the back of price increases and a lower cost base, share declined, despite the growth of Lucky Strike, which is now one of the fastest-growing cigarette brands in the market.
In Romania, industry volume was slightly down. Nevertheless, group volume increased, resulting in a higher market share, mainly driven by the strong performances of Dunhill and Pall Mall.
These, together with good pricing, resulted in higher profit. Market share increased in the U.K., driven by the strong performances of Pall Mall and Rothmans.
Price increases and efficiency improvements led to a strong growth in profit. Profit in the EEMEA region grew 8% to GBP 1.4 billion, mainly due to stable volume and good pricing, which was partly offset by the adverse impact of exchange.
At constant rates, profit increased strongly by 15%. Losses in low-margin brands in Turkey and continued political instability in Nigeria and Egypt impacted regional volume, which was marginally lower at 235 billion.
In Russia, both profit and market share grew. Exit share at the end of 2012 was 0.5 points higher than the prior year.
Rothmans, which was launched in the very formal segment during 2012, has performed well and has already achieved an exit share of over 1%. The group maintained leadership of the premium segment with another good performance from Kent.
Ukraine saw strong increase in both volume and market share, also driven by Kent's good performance. However, a very competitive price environment, coupled with increased market investment resulted in lower profits.
In South Africa, profit grew at constant rates but was flat at current. Despite the continued growth of illicit trades, volume was up although market share was slightly down.
Continued political instability in Egypt and poor law enforcement fueled the growth of illicit trades, resulting in sharp declines in volume and profit but growth in market share. In Turkey, Kent and Lucky Strike performed well, however, losses in the low-priced segment led to a decline in both volumes and market share although share showed some sign of stabilization in the final quarter of 2012.
Lower volume, coupled with adverse exchange rate movements, resulted in lower profits. The GCC markets reported good market share growth due to Dunhill's continued good performance and a strong profit growth, mainly driven by improved products and price mix.
They now will take you through the financial statements.
John Benedict Stevens
Thank you, Nicandro, and good morning, everyone. I'll start with operating margin.
As you know, our medium-term target is to grow operating margin by 50 to 100 basis points, on average, each year. Obviously, some years will be below the average, and others above, but I'm delighted that we've had comfortably beaten this target in 2012, with margins increasing by 160 basis points.
In organic constant terms, the margin increased by 140 basis points. All the regions contributed to the improvement.
Asia-Pacific was well ahead, driven by higher pricing and tight cost management, particularly in Malaysia, Japan and South Asia. EEMEA also grew strongly, with good improvements in the GCC, Russia and South Africa.
The Americas continued to improve operating margin, despite already being above 40%, and Western Europe was also ahead of 2011, despite the challenging economic environment. Turning now to the income statement.
Adjusted profit from operations grew 3% to GBP 5.7 billion, at constant rates, this growth was 8%. Revenue growth at constant rates was 4%, and as you've just seen, our cost program is continuing to improve margins, leading to an 8% increase in operating profit at constant rates.
Restructuring costs were marginally higher in 2011 at GBP 206 million. This is mainly related to the introduction of our new operating model, together with the continuation of factory closure and downsizing activities in Australia, the integration of Colombia, the closure of the Bremen factory in Germany and restructuring in Argentina.
Amortization of trademarks is slightly above 2011, due to the full year impact of Colombia. Profit from operations increased by 15%, aided by the absence of the one-off charges seen last year.
Net finance costs were marginally below 2011, despite the higher closing net debt position. This was mainly due to the absence of a number of one-off interest costs, associated with tax cases and the advantage of low interest rates.
These were partially offset by lower investment income. Associates were 3% higher at GBP 692 million.
For the purposes of the adjusted earnings per share calculation, the adjusted contribution from associates was GBP 38 million or 6% higher at GBP 697 million. The contribution from associates was 10% higher at constant rates of exchange.
The adjusted contribution from Reynolds American was 4% higher at GBP 448 million, at constant rates, the increase was 3%. ITC delivered an excellent performance.
The group's share of profit after tax increased to GBP 237 million, a growth of 9% at current rates, and an impressive 23% in constant currency. Profit before tax was 15% higher at GBP 5.6 billion.
The underlying tax rate was 30.6%, compared to 31.2% in 2011. The key drivers were geographic mix of profits and a positive resolution of some tax audits in Germany and New Zealand.
Our guidance for 2013 is for tax rates around the current level. The non-controlling interest charge was similar to 2011.
At constant rates of exchange, this charge would have increased 8%, with the difference mainly due to the devaluation of the Brazilian real. Profit for the period rose 22% to GBP 4.1 billion.
The share buyback program reduced the average number of shares from 1,982 million to 1,949 million, and as a result, the adjusted earnings per share is 207.5p, an increase of 7%. Earnings per share growth of 7% was adversely affected by exchange rates, at constant rates the growth was an impressive 12%, this was driven primarily by the increase in profit from subsidiaries.
The good performance from associates, the lower effective tax rate and the share buyback program all contributed positively. Moving on to cash flow.
Operating cash flow is GBP 240 million lower, at GBP 5.1 billion, with the reduction driven by 2 main factors: firstly, capital expenditure is higher due to the funding of our innovation strategy, the one SAP build, and the purchase of Globe House. As a result, net capital expenditure increased by GBP 176 million over 2011.
Secondly, you may recall at the half year announcement, we had an increase of around GBP 450 million in working capital, and we anticipated that this would partially unwind. As you can see, the increase at the yearend have reduced to GBP 141 million.
This increase over 2011 was mainly due to stop builds in a number of markets. The lump-sum payments from pension funds, primarily relates to U.K.
schemes, is now shown separately to get greater transparency to cash flows of this nature. Net interest paid was lower primarily due to one-off payments relating to interest on tax cases in 2011, which don't recur, and tax paid increased broadly in line with profit growth.
The main driver of the higher income from associates was the Reynolds share buyback program. Overall free cash flow is GBP 3.3 billion, operating cash flow conversion was 90%, with free cash flow as a percentage of adjusted earnings at 81%.
Dividends paid to shareholders rose 8% to GBP 2.5 billion. Under the share buyback program, 38.9 million shares were repurchased for the cost of GBP 1,258 million, including transaction costs.
Net investment activities relates to the purchase of CN Creative Limited in December and a small increase in our shareholder in the business in Bangladesh. In 2011, the main investment was the Colombian acquisition.
There was a net cash outflow of GBP 637 million for the year. And finally, net debt, which ended the year at GBP 8.5 billion, the increase was limited to GBP 545 million, despite the outflows from the share buyback program.
Given the strength of our balance sheet, we have announced this morning that we'll reopen our share buyback program to a value of GBP 1.5 billion for 2013. That's the end of the presentation.
I'll now hand it back to Nicandro for the Q&A session.
Nicandro Durante
Thank you, Ben. In summary, 2012 has been another very good year for British American Tobacco.
We have met or exceeded all our financial targets. Despite facing a currency headwind and economic uncertainty, we have once again delivered high single-figure earnings growth of 7% at current rate, or an excellent 12% at constant rates.
The proposed dividend per share is 7% higher at 134.9p and we are also increasing our share buyback program for 2013 from GBP 1.25 billion to GDP 1.5 billion. I am confident that the businesses will continue to deliver.
Price remains strong. We have a very good brand portfolio, a proven capability innovation and marketing, good share growth momentum and a diverse geographic footprint.
We now open the meeting for questions. And the -- for the purpose of the webcast, please remember to state your name and the firm you represent.
So, who would like to start?
David Hayes - Nomura Securities Co. Ltd., Research Division
It's David Hayes from Nomura. Just on the margin progression to your point about it being ahead of the target.
What are the kind of one-offs in there that means -- this 150 will suddenly drop to 20s [ph] or brought something forward. Or would you say that it's still a steady progression?
And then secondly, on Brazil, just wondered if you could talk about the resilience of the market, volume-wise, the last couple of months following the official price rise from the tax in January. And I guess, staying in Brazil, just in terms of the limitation on ingredients that's coming in, just wondering if you can talk about if we should factor in either volume or cost, associated with that change towards the end of the year?
John Benedict Stevens
The guidance for operating margin is 50 to 100 basis points a year, and we feel no reason to change that at the moment. If you'd strip out the operating margin increase from Aspac, actually the rest of the group was 0.9%, so it's right in line with the guidance we gave.
ASPAC did have 1 or 2 one-offs and FX, was quite a contributor, so that was about 0.4%. The Japan volumes last year, remember we were flying in products in jumbo jets and that's what hit the margin in 2011, so that's being an increase as well.
We've got the closure of the Australian factory as well, so that's a one-off in Australia, unless it would come every year. But also, you've got good pricing and tight cost management.
So some one-offs in Australasia and that's why I'm comfortable in holding to the 50 to 100 basis points.
Nicandro Durante
Okay. I'll take the Brazil question.
Let's talk a little bit about the impact of excise increase we had last year. As you remember well, what happened in the first half of last year, there was a sizable excise increase.
It's a 5-years plan in Brazil, and every year, the excise increase will go down. So the excise increase that we faced in January 2013 was lower than last year.
And then 2014 is going to be lower than 2013, and '15 is going to be even lower. So in 2015, the excise increase will be around 5%.
The impact in terms of the market, because of the large excise increase, the market was down from the duty paid point of view, 6% last year. And this was mainly driven by the growth of illicit trades.
Despite the minimum price that was introduced, illicit trade went from 20% to 22%. What's happened in Brazil is that local companies, they abide by the illicit trades -- by the minimum price but in comparable, of course not.
So the national companies share went down and the illicit went up. The volume in Brazil, from a consumption point of view, was 3% down.
So the difference between 3% and 6% is the growth in illicit trades. If the question is how much of the market is going to be down in 2013 with the new excise increase, it's very difficult to predict, we'll have to wait and see.
But more importantly, Brazil, despite the large excise increase and despite the fact that the competition usually lags increasing price against BAT, we grew market share big time in Brazil, 1.2%. So it was the highest market share growth that you have in a single year.
It just shows that the portfolios work extremely well. We have up trade in the market, Dunhill is doing extremely well, so the company's in a very good shape.
Regarding the ingredients ban, that's -- the main impact with ingredients ban was the ban in menthol. Don't forget that menthol is a very small segment in Brazil, accounting for less than 2% of the market.
So we don't force -- the ingredients banned, the introduction of the products without some of the ingredients, because some of them are still allowed, such as sugar, of course, it will be in September 2013. So we are ready to come to the market with a new -- with the products, with -- according to the new law.
Some of change have been made already. We don't fully see big change in terms of the costs for the company.
James Bushnell - Exane BNP Paribas, Research Division
James Bushnell from Exane BNP. Two questions on volumes.
Your volumes in the Asia region seem to tail off a little bit in Q4. I wonder if you could just talk about moving parts, and how we should think about that going to 2013?
And then secondly, in Western Europe, conversely, your volumes seem to have gotten a little bit better, in terms of the declines. You've obviously had a few different things from your competitors about how they see Europe.
What are you thinking about Europe? Are you seeing it as a stable volume decline situation?
Or one with up or downside?
Nicandro Durante
Okay. In the case of -- first of all, it's very difficult to analyze volume trends when you look for quarter-by-quarter base, because you have loads in one quarter as compared to the other, as you saw in places like in Brazil before the price excise increase, in Philippines and things like that.
So probably, we will see the impact, for example, in our case, in Quarter 1, in Brazil. That probably volumes are going to be lower than the Quarter 4.
It doesn't mean that the underlying dynamics of the market have changed dramatically. That's the first point that I'd like to highlight.
The way that I see the market going for 2013, overall market, from a consumption point of view, it's going to be pretty much similar that what we saw in 2012, that would be a stable to a slightly growth. Of course, the duty paid market, we saw that decline around 1% to 1.5%, because Fine Cut grew strongly in Europe, for example, and illicit trade, in a global base, was a little bit higher last year than it has been in previous years.
So in terms of volume trends, I don't see big change, 2013 against 2012. But looking the volumes at a quarter-by-quarter base, it is very difficult.
In the case of Western Europe, how I see the evolution of Western Europe, that -- I think, that was your question. I don't think -- if you look at -- it's a very large region, and when you talk about a region, in reality, you are taking a temperature of someone that's maybe cold at his head and very, very warm at his feet.
But I see that volumes, looking at quarter-by-quarter in Europe, mainly in the Southern European countries, it's not getting any worse but it's not getting any better. I see similar rates of decline that you saw in the first half of the year.
You'll have, in some places, of course, a slightly better trend, and some other place a slightly worse trend. Our numbers in Europe -- we declined less than the competition, because we are growing share.
We are doing very well, we announced, in Western Europe, mainly driven -- powered by Lucky Strike performance. That's why Lucky Strike -- that is the strongest region for Lucky Strike in Western Europe.
We grew Lucky Strike volume 11% in 2012. So that is the situation.
In terms of Asia-Pacific, as I said, it's very difficult to analyze quarter-by-quarter. The region had an outstanding performance in 2012.
In 8 out of the 10 top markets, the markets that we face some issues were Indonesia, in which we have some volume losses because of the introduction of the new excise structure. But our -- the share has stabilized in the last 4 months, and also, our strategic portfolio is much stronger, it's more than half of the volume now, and 12 months ago, it was 20% of the volume.
And also, we had the issue in Korea, that's a tough comparator against previous year.
Unknown Analyst
In terms of the -- how should we think about volume growth in Asia the next couple of years? We've had a few -- Japan and other things going on in the last year or 2, how would you think about that?
Nicandro Durante
Well I think that region -- Asia is one of the regions that we should see volume growth. I'm talking about the region consumption point of view.
Talking about BAT, I think that we have a very strong portfolio. We have very good plans in place, a very good pipeline of innovation and we expect to grow faster than the market.
Unknown Analyst
So Nicandro, I think, for you, which markets, among your top 15, you feel most opportunistic about for 2013? And one question for Ben.
I think you have a very good visibility [indiscernible] probably on the savings that will come from the SAP rollout in Australia and the productivity plan in place. Would you say that the amount of cost savings for this year in Japan is higher than last year?
Nicandro Durante
Regarding your questions about the top 15 markets, the biggest markets in BAT, how did I see in terms of growth potential for 2013. And I think that you are talking about not volume, but profitability, volume and share.
And I think that, as I said in my statement this morning, we think that we are in a very good position. In some of the markets, I think that we have made some good inroads in those markets such as Canada, that we now see, for 2 years in a row, BAT growing share, profit has been stable, so I see this with optimism next year.
In places like Mexico, we are back to growth. We have a very strong portfolio, but overall, I'm optimistic about all big markets.
And in some others, such as Indonesia, we are making the right calls to start growing. So I am optimistic about our top markets.
John Benedict Stevens
In terms of savings, obviously, the nature of savings in BAT is changing, so it's sort of ending the closure of factory type savings. We're going through the collection of back-office overhead into shared-service type savings, once we got SAP then we'll see further savings coming in working capital.
I'm not going to split those savings out between SAP and non-SAP savings or even within SAP, but they all underpin the growth in operating margin. So that's why we're comfortable, it's sort of signaling a continuing growth in operating margin for the foreseeable future, because the things we need to do to deliver those savings we're already doing, which is putting in a consistent set of business processes, backed up by single instance SAP around the group.
John Benedict Stevens
It's a steady pace. Yes.
And remember, the program will go on for 4 or 5 years. So this is not a sort of one-hit wonder.
Unknown Analyst
Two questions. Can you talk about what's happening in Russia?
And in particular, within premium, how Kent is doing? That is one question.
The second question is how should we think about the innovation program, you've obviously ruling out natural around the world. Are you still -- have you still got further to go on capsules [ph]?
And is there anything else coming up shortly that we should think about, even if you can't be specific as to what it is, that's meaningfully new or which could be?
Nicandro Durante
Well let's talk about Russia, first of all. In Russia -- what we have seen in Russia, we have a large excise increases at the beginning of '13, as you are aware.
But more importantly than the excise increase is how it's changing the dynamics of the market, because the excise increase is moving low-priced brands up faster than premium brands. So it's compressing the gaps -- the price gaps.
So we saw, for example, in the last 18 months, low-priced brands in Russia, going up, in terms of pricing, 40%, and premium brands, 23%. If you look at January, for example, low-priced brands in Russia in December -- in December, January, went up 20% and premium brands went up 11%.
And this plays quite well with our portfolio. We have 46% of the share in the premium segment in Russia.
So this up-trading that we are seeing in Russia plays in our favor. Kent is doing well with Russia.
As we saw some growth of market share in Russia in Kent, I think that we left 2012 with a very strong position in terms of market share. As I said, driven by Kent and the Rothmans launch that's doing extremely well in Russia, it's one of the best launches that we haven't seen in Russia in the last years.
We have 0.5 market share, December 2012 against December 2011, so exit, exit. So we are doing very well.
But I think that the change in excise structure in Russia plays in our favor. That's the first question.
Your second question, Adam?
Unknown Analyst
Talk about innovation.
Nicandro Durante
Innovation. Okay.
Innovation. You have to understand, first of all, that you have to sweat [ph] out our assets.
There are a lot of investment behind innovations, as I said last year, so why won't you roll out innovation to the majority of our brands? Innovations account for 16% of BAT volume, and 45% of the GDB volume.
So that is our way to go. Our share of the capsule segment, for example, that's the advantage of being the first mover, is 53%.
So we have a long way to go in the current pipeline with all-natural. And I can guarantee to you, we have a very good pipeline of innovation for the coming 2 to 3 years.
We just have to careful to, as I said it's a slight innovation, because bringing innovation to the market, it doesn't mean that the consumers understand the following morning. It takes one year, eventually, some of the markets, to take 2 years to get the awareness and the purchase that you expect.
So that's the moment you come with a new innovation. So it's not about bring innovation every year to the same markets.
So we are trying to sweat what we have to rollout, and we are being successful because 2011 volume of innovation against 2010 was 20%, 25% higher. 2012 against 2011 was 20% higher.
In a market that is declining between 1% to 1.5%, and I think that is the reason that the GDBs are growing faster than the markets because the GDBs are the primary vehicle to drive innovation, not only the brands that you are driving innovations, we try to put in our premium portfolios. And you have some very strong premium brands across the world.
I think that you have a question?
Jonathan Leinster - UBS Investment Bank, Research Division
Yes. Jonathan Leinster, UBS.
Can you give us some -- looking back last year and going into 2013, can you try and give us some guidance in terms of cost outlook [indiscernible] margins improved by [indiscernible] particularly, in your last year and give us an outlook on '13, and also whether innovation probably a little bit less this year, whether the marketing costs [indiscernible]?
John Benedict Stevens
Yes. I mean, in terms of margin increase for last year, you've got a number of impacts from the margins.
You've got pricing, obviously, which works in our favor, you've got mix, because more of our growth is in lower-margin markets. That's what we get with developing markets.
You got cost of sales increases, and then you've got productivity savings. So in terms of the overall margin improvement last year, the pricing benefit offset the volume and mix and cost of sales decline and the true underlying margin increase really came through from the cost-saving program.
In terms of guidance for next year, couldn't possibly give you guidance on the breakdown of the margin increase next year. Remember in terms of the SAP program, we only put in SAP in Malaysia in Q4 of 2012.
We're doing Australasia and South Asia in 2013, but it's not until 2014 that the real industrialized rollout of SAP starts happening in BAT. So more of those savings later on.
Unknown Analyst
Can you give us some idea in terms of leaf costs [indiscernible].
John Benedict Stevens
In terms of leaf cost, leaf costs are going up about 5%. So no real significant difference in leaf cost through [indiscernible] leaf, which is our major leaf, is slightly lower than [indiscernible] leaf, but they're all in the 5%, 6% region, so no real significant increase in costs.
Unknown Analyst
I read in one of the [indiscernible] this morning that you passed on already somewhere in the 80% of the price increases that you were planning for this year. Are those the absolute level of pricing compared to, say, last year, are you seeing the same level into [indiscernible] terms?
And then my second question is on Brazil. Minimum wage is increasing 3.5% this year, versus, I think that was 7.5% last year.
Do you think that pricing in that particular market is going to be a little bit more difficult in 2013?
Nicandro Durante
Well the -- let me start with, honestly, the second part of the question, the Brazil price increase. The price increase this -- in 2013 is lower than the previous year.
But don't forget that's it's still a large price increase on top of another large price increase at the beginning of last year. And as I said, the impact in the market is pretty much dependent on the economics.
And it is about unemployment and disposable income. If unemployment in Brazil improves this year, and I don't think that there is any indication that the situation is going worse there.
And disposable income stays as it is or improves, I think that you'll be well-absorbed. But it's very difficult to predict, to be honest, because it's a large excise increase on top of another large excise increase, so it's very difficult to predict how it's going to be the market reaction.
And the first question can you just...
Unknown Analyst
I read this morning from...
John Benedict Stevens
About the pricing, sorry.
Nicandro Durante
Yes. As I said in this morning, we've got already 80% of the pricing that we were expecting to have in 2013.
It's just to highlight that we are in a very strong pricing, a good pricing environment. When I was here last year, and I said, that was around 65% or even 70%.
So it's slightly better, and I cannot, unfortunately, disclose the amount of pricing, but as I said, we make our projections based in the targets -- financial targets that we have, and we have already 80%. So it's a very strong price environment.
Unknown Analyst
Two things. First of all, on the [indiscernible] appointment, I wonder how we should interpret that.
Does that represent a step-up in your efforts on next-generation products? And is that mostly U.K.
as of the moment? Or is it going to be a global thing?
And then just quickly on the Philippines, I'm wondering what your ambitions are there? What's a reasonable goal for the next 5 years?
And even have to spend a little money there initially to get the position you want.
Nicandro Durante
Well let me start with NGP, next-generation product. This is a natural development of our strategy.
We have been working very hard in the last couple of years in the harm reduction. That's not a new thing in BAT.
And the acquisition of CN Creative at the end of last year is part of this program. They have a small innovative company, developing novel nicotine devices.
And we set up Nicoventures 2 years ago, also part of the strategy. And we hope that we can bring to market some products in the next couple of years.
That's the reality. I thought and we thought that having a focus on all those developments under the same umbrella was the right thing to do.
So it's something that we thought through, and we were discussing for the last one year, came to fruition. But to be honest, it was already working in that way.
But going through one of our current board directors, we thought that we need a special focus on that, that's why deserved a management board position for that. Regarding Philippines, we are extremely happy that now we have a level playing field in Philippines.
Philippines is one of the top 10 markets from the volume point of view. So, of course, we are going to invest in Philippines to grow.
And how successful we are going to be is very difficult to predict, but are we going to invest in Philippines? And I'm going to invest behind our brands and trades in order to get our market share there, the answer is yes, but unfortunately, it is very difficult to give you targets of where we want to be in 5 years time.
We're going to be -- we want to be as high as possible. But we have a local competitor, a strong competitor there that has the majority of the market share, it's going to be tough.
They have strong brands as well. But we are going to make the investments in order to grow there.
Eric?
Eric Musau - Standard Investment Bank Ltd., Research Division
With respect to Canada, quite favorable development in the last 2 years. I'm wondering does that outlook change, since it sounds like a number of provinces are taking tax increases.
Or is it simply you're going to be able to price and offset the accompanying volume declines and perhaps increase in illicit? The second question is with respect to the regulatory outlook.
Does -- if you could comment on what you see happening with the Tobacco Products Directive and also then the appetite of countries for plain packaging, given what we know at this stage in the game?
Nicandro Durante
Okay. So the first question is about Canada.
Yes, I think that we are in a much better position in Canada than we were 2 years ago or 3 years ago. I always came here and said, "This is one of the markets that we have to step-up our games."
We have done so, we have been growing share, and we are in a very good position there. The profitability has been declining for 3 or 4 years in a row.
We have stabilized that. I don't think that you'll see large excise increases in Canada this year.
As far as we know, those are excise increases more or less according to the inflation. That's something that the industry can cope.
Illicit trade in Canada, to be honest, is slightly down in 2012, 0.4 percentage points only, but slightly down. Because we don't see huge excise increases and because the government has been focusing on fighting illicit trades, I think that we have a good potential for growth in Canada in 2013.
But we have to wait and see. It's still February, a long way to go, but so far, it seems that we haven't seen anything that could disrupt the trend.
Regarding the regulation, and I think that your question is about the TPD and plain packaging, and I think that I will start with plain packaging. As you know, we introduced the plain packaging implementation in Australia.
We started in December, and as I said during my speech, we haven't seen any changes in the market. You have to consider that with display then, the consumers [indiscernible] for the brand anyway, so we haven't seen any change, but it's too early to call.
So we have to wait and see. Regarding New Zealand, New Zealand have listened to the arguments for and against this measure, and they have a knowledge, the importance of their trade obligations and the WTO challenge that's going through against Australia.
So the they postponed the implementation until we have a resolution of the WTO challenge that we should see in 2014. So we are glad that they made this call.
And then the third country in which we're analyzing is U.K., as you know. And U.K., we have a consultation, we have hundreds of thousands submissions.
We should see the results of the consultation in the coming months. But the fact of the life is that just 3 countries are moving to this direction.
We have a lot of noise around the word, but we haven't seen any consultation or we haven't seen anything to progress so far. I'm not saying that it's not going to happen, but the fact is just 3 countries are looking at that carefully.
In terms of the TPD, we believe that the draft legislation contains provisions not based on science. We expect to see further amendments in the European Parliament.
They are going to analyze this at the end of the year. You know that there are measure in packaging, ingredients and formats of packs and things like that.
I don't think that any of those provisions are based on science, and we are against it. I don't -- I think that at the end of the -- will bring unintended consequences if those measures are implemented.
So we will have to wait and see if the European Parliament to debate it. It should happen at the end of this year, but my expectation is that there will be some amendments, if you ask me the question.
Because it's just measures that are not based on science are not going to meet any public health goals that they set by themselves.
Dirk Van Vlaanderen - Jefferies & Company, Inc., Research Division
It's Dirk Van Vlaanderen from Jefferies. Just wondering if you could give us a look on CapEx in 2013 and beyond.
And then also, maybe, just on working capital, is there a structural reason why it's an outflow? And where do you see opportunities for improvement there?
And could SAP be the enabler?
John Benedict Stevens
Yes. Just on working capital, the increase we faced this year was largely staff builds, so that happens every year in a sense.
But we have staff builds in Brazil this year, we have staff builds in Russia. So you're just seeing the natural flow-through of those staff builds.
Nothing particularly unusual there, and much better than the position at the half year, of course. In terms of net CapEx going forward, we've got the rollout of SAP to do, and of course, as you roll out the innovation strategy, you're buying machines to put that volume onto as well.
So you'll see CapEx staying actual just marginally above the current levels for the next year or 2, before coming down again once the SAP program is rolled out.
Nicandro Durante
May I have one more question? Yes?
Unknown Analyst
[indiscernible] Tax rate. [indiscernible] businesses that don't have direct [indiscernible] exposure.
[indiscernible] whole value of the operation [indiscernible]. Do you see upside on that?
Where is that on your to-do list?
John Benedict Stevens
Tax rate is largely a result of mix in profits, so I don't see any substantial changes coming down to substantially reduce the tax rate, no. We do what we can.
So we are conservatively aggressive when it comes to tax planning, that's the way we like to describe it. So we don't push the envelope in terms of tax planning, but where there are established schemes that we tend to use them.
So I can see the tax rate staying around the current level going forward.
Nicandro Durante
Okay, one more question and...
Henry Davies - BofA Merrill Lynch, Research Division
Henry Davies, Merrill Lynch. Just wondering with these efforts, how do you view the size of the long-term opportunity in e-cigarettes versus modified risk cigarettes versus some of the other nicotine delivery devices you have?
And are you seeing any signs of governments or regulators becoming more accepting of a reduced form approach to reducing smoking?
Nicandro Durante
Well there is a growing interest in terms of a nicotine device. So the consumers are interested on that.
And that's why we are stepping up our efforts in this area. We think that it can be an important category in the long-term.
I don't think that in the next 5 years, you'll see big change of switching from combustible to noncombustible, but mid long-term, it can be an important category. That's why we are stepping up our efforts with everything that I just said.
In terms of the regulatory bodies, we have been in contact with them, mainly NHRA in U.K., and I think that is very difficult to predict how they react when you start having those products in the market. Nowadays, excise, when it exists, is very low.
And I think that should be kept like that, if you're thinking that the harm reduction strategy -- the harm reduction concept should work and that is my expectations going forward. So we intended to develop a range of products inside the risk continue not only e-cigarettes.
That's why we are stepping up our efforts for Nicoventures, CN Creative and some internal initiatives. So thank you.
This session is over. Thank you very much.