UK. British American Tobacco (BAT) announced today that its first-half pre-tax profits had declined -25% to £762 million from £1,018 million a year earlier. The results were significantly impacted by an exceptional charge of £279 million for redundancies and asset write downs in the UK and Canada.
Earnings per share fell to 12.25 pence, reflecting the exceptional costs of the restructuring costs in those two key markets. Volumes (see below) rose +1% and were ahead in all regions except Asia Pacific, which was hit by SARS and the downturn in duty free sales, caused by the health crisis and the Iraq war.
Operating profit before goodwill, amortisation and exceptional items grew +2% to £1,339 million.
Chairman, Martin Broughton said: “In a challenging year, we remain very much on track and are underlining our confidence in the future by a +10% increase in the interim dividend”.
The Group’s “global drive” brands, Dunhill, Kent, Lucky Strike and Pall Mall grew by +17%. Pall Mall was the star performer in volume terms, increasing by +42%. Among the high margin brands, Kent was up +23% and Dunhill rose +13%, while Lucky Strike improved compared to the first quarter and, as a result, was -4% down for the first half.
Earlier this month, the company agreed to acquire ETI (Ente Tabacchi Italiani) Italy’s state tobacco company, for a higher-than-expected €2.3 billion (US$2.6 billion). The acquisition elevates BAT to the number two position in Italy (the second largest tobacco market in the EU).
BAT said it expects the ETI acquisition to be earnings enhancing in its first full year and, over the medium term, easily to exceed its cost of capital, creating significant shareholder value.
Group volumes at 383 billion rose +1%, boosted by the strong performance of the four global drive brands, Kent, Dunhill, Lucky Strike and Pall Mall, which achieved the +17% increase, despite the impact in the second quarter of the Iraq war and SARS.
Kent continued to grow strongly, up+23% with excellent performances in Japan, Russia, Iran and Romania. The Dunhill brand continued its outstanding performance in South Korea, with good growth in Malaysia, Australia, South Africa and Taiwan contributing to volumes rising by +13%.
Pall Mall maintained its strong growth with volumes up +42%, as the US, Russia, Germany, Ukraine, Italy and Romania reported excellent progress.
But profits from the America-Pacific region were down £14 million to £474 million, after a £16 million exchange rate hit. “A significantly lower contribution from the US cigarette business” was blamed on continuing price wars and was only partly offset by strong profit increases from Japan and South Korea. Profits from Canada were flat. Volumes in the region were down -3% to 51 billion as a result of lower industry volumes in Canada and the US.
Imperial Tobacco Canada contributed £208 million of profit, before restructuring costs, in line with last year. The company said this was a reassuring performance considering the steep decline in industry volumes as a result of continued high increases in tobacco taxes and the growth of the lower-priced segment, including the resurgence of illicit trade. While Imperial is present in all product categories, it chooses to focus on the premium segment where volume and margins are the highest.
As a result of the good performance of du Maurier, share of the premium market was only slightly down.
The US market remained very competitive as pricing and promotional activities eroded margins, while industry volumes fell by -8% as a result of state excise tax increases and lower wholesale inventory levels.
In Japan, overall market share was higher as Kent and Kool continued their share growth, while all brands benefited from the surge in industry volumes in anticipation of an excise increase on 1 July.
The strong growth of Dunhill Lights in South Korea continued, following the smooth transition to local manufacture, pushing the market share and volumes to record highs.
In Asia Pacific, regional profit of £228 million was £11 million above last year with the increases in Australia, Malaysia and India being partially offset by reduced profits from Cambodia and regional duty free. Regional volumes at 96 billion were slightly lower than last year, with increases in India and Vietnam largely compensating for declines from Indonesia, Cambodia, Pakistan and duty free sales.
Australia delivered strong profit growth through higher margins and lower overheads. Volumes were in line with last year with market share up, reflecting the performance of the key brands Dunhill and Winfield. New Zealand profits were higher despite lower volumes, as a result of cost savings.
In Malaysia, strong profit growth was achieved as volumes increased and costs were reduced. Dunhill further increased its share and there was good growth from Pall Mall, resulting in a higher overall market share.
In Vietnam, price increases and continued strong performances by State Express 555 and Craven ‘A’ resulted in a significant growth of profit, volume and market share. Profit in Cambodia was seriously affected by lower volumes. The government-mandated price increases in Indonesia resulted in reduced volumes and profit, though market share has stabilised.
In Latin America, profit of £220 million was slightly up, despite the currency devaluations and the difficult economic conditions in many of the countries in the region.
In Central America, volumes increased but profit was affected by competitive pricing and increased taxation.
Excluding restructuring costs in the U.K., total profit in Europe was up £5 million to £264 million as the strengthening of the euro, strong growth in Russia, Hungary, Romania and lower costs in the UK more than offset lower profit from Germany, France and Italy, as well as the move to local manufacturing. Volumes for the region increased by +7% to 117 billion with increases from Russia, Italy and Romania partially offset by decreases in France and Germany.
In the Africa and Middle East region, profit at £153 million was up by £21 million. The good profit contributions from many markets and the impact of the stronger South African rand are masked by the costs of continuing investments being made in this region.
Volumes were up by +4% to 47 billion with strong growth in Nigeria and volumes from new investment in Turkey. In the Middle East, profit was up despite a volume decline resulting from the weakness in US international brands in a number of markets following the Iraq war. However, there were volume gains by Kent in Iran, where overall market share currently stands at 15%.
