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Imperial Tobacco Earnings Advance on Higher Cigarette Prices

Imperial Tobacco Group Plc (IMT), Europe’s second-biggest cigarette maker, reported higher operating profit as the maker of Davidoff cigarettes increased prices to combat declining shipments in Europe.

Adjusted operating profit climbed to 3.16 billion pounds ($5.1 billion) in the 12 months ended Sept. 30 from 3.1 billion pounds a year earlier, the Bristol, England-based company said today. That compares with the 3.19 billion average estimate of eight analysts surveyed by Bloomberg. The stock rose as much as 2.5 percent, the most since Sept. 20.

“Some skeptics are likely to remain unconvinced by today’s results, but we believe that the company is making good progress,” Damian McNeela, an analyst at Panmure Gordon, said in a note to clients today.

Imperial Tobacco has debuted packs that flip open with one hand and flavored filters to goose demand and offset lower consumption in Spain, where a worsening in the economy led it to take a 1.2 billion-pound non-cash impairment charge. Price increases in the U.K., where Imperial is the market leader, also contributed to growth. Profit in the European Union rose 4 percent.

“The EU is tough,” Chief Executive Officer Alison Cooper said in an interview with Cantos. “But we’re growing.”

The stock was up 1.4 percent at 2,364 pence at 9:36 a.m. in London. It has gained 5.1 percent over the past year, including reinvested dividends.

Pricier Smokes

The operating margin for tobacco widened to 42.7 percent from 42.3 percent, which Jefferies analyst Dirk Van Vlaanderen said was “laudable” amid increased marketing spending on the company’s brands.

Imperial raised the full-year dividend 11 percent to 105.6 pence a share, resulting in a total payout of 52.5 percent of earnings. Analysts polled by Bloomberg had expected 104.5 pence. The company also said it has bought back 528 million pounds of its own stock.

Tobacco revenue rose 4 percent in constant currencies to 7 billion pounds. Volume fell 2.7 percent, better than the company’s September projection of a 3 percent decline and an improvement on the 4.1 percent drop in shipments during the first half. Shipments in fiscal 2013 may drop 0.5 percent, Barclays analyst Simon Hales estimates.

“Imperial is continuing to face challenging trading conditions in many of its core western European markets,” Hales said in a note published before the results.

Contraband Tobacco

Philip Morris International Inc. (PM), the world’s largest publicly traded tobacco company, this month reported third- quarter profit that trailed estimates after sales tumbled 15 percent in the European Union, where smokers have cut back or switched to contraband cigarettes or roll-your-own varieties.

Imperial is the market leader in Spain and the second- biggest tobacco seller in France and Germany. In Germany, Imperial’s market share fell by 0.8 percentage point to 25.8 percent as smokers chose cheaper brands.

Canaccord Genuity analyst Eddy Hargreaves deemed the results a “creditable performance against the tough economic backdrop.”

Total shipments of the Davidoff, Gauloises Blondes, West and JPS brands gained 7 percent. Those brands make up 30 of Imperial’s volume, the company said in the statement. Fine-cut tobacco volume was little changed.

U.S. Decline

“We are encouraged by the strong growth in key strategic brands,” Panmure’s McNeela said.

In the U.S, which accounts for about 9 percent of Imperial’s tobacco revenue, both revenue and profit declined 11 percent amid a 4 percent contraction in the cigarette market. Imperial has overhauled its U.S. management team and consolidated its cigarette and cigar sales forces to boost market share, which fell last year.

“It’s not been a good set of results in the U.S.,” Cooper told reporters. “This is a key year for me there.”

Imperial’s market share in Russia declined “slightly” to 9.3 percent, the company said.

The government in Russia -- where Imperial derives 10 percent of its volume, according to Barclays -- is due to submit a bill to lawmakers this week proposing to outlaw all cigarette advertising and sponsorship as well as kiosk sales.

Australia this year became the first country to require cigarettes to be sold in plain packs without any logos. New Zealand and the U.K. are among countries whose governments have indicated interest in implementing similar action, which takes effect in Australia Dec. 1. Cooper said plain-packaging laws will move “a lot slower” outside of Australia.

To contact the reporter on this story: Matthew Boyle in London at mboyle20@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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