Imperial Tobacco Profit Gain Matches Estimates on Prices

Imperial Tobacco Group Plc, Europe’s second-biggest tobacco company, reported growth in first-half earnings that matched analysts’ estimates after raising prices for cigarettes across its main U.K. market.

Adjusted operating profit rose 3 percent to 1.52 billion pounds ($2.5 billion) in the six months ended March 31, the Bristol, England-based company said today, equaling the median estimate of four analysts surveyed by Bloomberg.

Imperial Tobacco is market leader in the U.K., where profit rose 9 percent after price increases in October and March. Selling volume in Britain rose 6.5 percent as some smokers switched to cheaper brands such as JPS Silver, or to fine-cut tobacco. British consumers “continue to economize,” Chief Executive Officer Alison Cooper said in a statement.

“Underlying profits are going up in the U.K., and that’s the most important thing,” Chris Wickham, an analyst at Oriel Securities, said in a phone interview.

Imperial Tobacco rose 3.7 percent to 2,556 pence at 4:35 p.m. in London trading, the third-biggest gainer in the benchmark FTSE 100 Index.

In the U.K., enduring its first double-dip recession since the 1970s, Imperial Tobacco sales rose 12 percent even as the overall market declined by 2 percent. The company controls about 45 percent of the British cigarette market and got 21 percent of tobacco profit from the country in the first half.

Declining Volume

The shift by consumers toward cheaper brands led to a contraction in the company’s U.K. operating profit margin to

65.5 percent of sales from 67.2 percent a year earlier. The margin should widen in the second half of the year, Cooper said today in a meeting with analysts.

“If I look at the U.K. market, even though you can see declines in the cigarette market, we’ve got growth in fine-cut, and that’s coming through very strongly,” Cooper said in an interview on Bloomberg Television’s “The Pulse.”

The total quantity of cigarettes sold by Imperial Tobacco fell 1 percent in the second quarter, improving on a 7 percent decline in the first three months of the year.

In Spain, which yesterday announced it had plunged into its second recession since 2009, Imperial boosted its leading share of the market with increased sales of Fortuna cigarettes, fine-cut tobacco, and Cuban cigars. Those were “positive signs” in a market that the company expects to contract about 9 percent in 2012, Cooper said in a teleconference with reporters.

‘Beyond Dreadful’

“External conditions present challenges, but we have consistently demonstrated our ability to grow our business in such environments,” Cooper said in the statement.

Profit fell 21 percent in the Americas, a market that Oriel’s Wickham called “beyond dreadful.” Imperial has installed a new management team and integrated its cigarette and cigar sales forces to improve sales in the U.S., where “we have work to do” to counter declining volume and market share, Cooper said.

Altria Group Inc., the largest seller of tobacco in the U.S., last week reported a 3.8 percent increase in first-quarter profit, helped by an increase in Marlboro’s market share and higher prices. Also last week, Lorillard Inc., the third-largest U.S. cigarette maker, posted first-quarter profit that trailed analysts’ estimates on a 2.7 decline in shipments.

Emerging Markets

As well as higher prices, tobacco companies are relying on growth in emerging markets to offset declining consumption and rising government levies in western Europe and North America.

Cooper said she was “pleased” with sales in Russia, Australia and Taiwan. Australia has passed a law, challenged by tobacco companies, requiring cigarettes to be sold in uniform packages starting in December. The U.K. government is also holding consultations on plain packaging, which Cooper said is “an unnecessary move, not supported by any credible evidence.”

Volume for the company’s largest brand, Gauloises Blondes, rose 11 percent over the six-month period, helped by sales in the Middle East and North Africa.

Net revenue from tobacco rose 3.3 percent at constant exchange rates to 3.39 billion pounds in the first half, the company said. The cigarette maker raised its interim dividend 13 percent to 31.7 pence a share and said it will continue buying back shares at a rate of 500 million pounds a year.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE