BAT Sales Top Estimates as Higher Prices Offset Lower Volume

British American Tobacco Plc, Europe’s largest cigarette maker, reported first-quarter revenue growth that beat estimates as the maker of Pall Mall and Dunhill raised prices to offset falling consumption.

Sales rose 5 percent excluding currency shifts, London-based BAT said in a statement today, compared with the 3.7 percent average estimate of six analysts surveyed by Bloomberg. Shipments in the three months ended March 31 fell 3.4 percent, compared with the average prediction of a 3.5 percent drop.

The company said “strong” pricing momentum is more than offsetting reduced volume. Shipments fell in all regions other than Asia Pacific, led by reductions in Brazil and southern Europe. Revenue growth of 1 percent in the quarter was restricted by adverse currency shifts, though BAT said that if current rates persist the effect will reverse for the year.

“The recurrent theme is very weak volumes in Europe,” said Martin Deboo, an analyst at Investec in London. “The first quarter was a tough one so we expect the full-year volume to be better than this suggests.”

BAT rose as much as 3.2 percent in London trading, the steepest intraday advance since Sept. 18. The stock was up 2.1 percent at 3,624 pence at 1:30 p.m., giving a gain this year of 16 percent. The U.K. benchmark FTSE 100 Index has appreciated 9.3 percent in the same period.

In addition to declining cigarette consumption, volume in the quarter was affected by comparison with a leap year and an excise tax increase in Brazil late last year, BAT said.

‘Good Start’

The company’s four global “drive brands” -- Dunhill, Kent, Lucky Strike and Pall Mall -- increased volume by 1 percent as they boosted market share in their top 40 markets.

“It is a good start and I remain confident of another year of earnings growth in line with our long-term strategic goals,” Chief Executive Officer Nicandro Durante said in the statement.

Tobacco companies are battling tighter regulation, with the U.K. considering following Australia and New Zealand into making plain packaging compulsory for tobacco products. Russia on Feb. 25 introduced anti-tobacco measures to curb demand in the world’s second-largest cigarette market.

Companies are fighting back by developing alternative nicotine products and BAT said Feb. 28 it could have a “tobacco inhalation device” that is not an electronic cigarette ready to sell in the U.K. as early as next year.

Plain Packaging

“We see these nicotine products as an important growth area for us,” Chairman Richard Burrows said today at a press conference. “We have to start small, finding our way in what is largely uncharted scientific and regulatory territory, but in the medium to long term, the revenues could be material.”

Even if the U.K.’s Department of Health were to recommend the introduction of plain packaging, “we do not believe the government will try to implement the policy aggressively,” said Erik Bloomquist, an analyst at Berenberg Bank in London, who has a buy on BAT. Consumer behavior in Australia showed little change after the introduction of plain packaging, he said.

In Australia, cigarette packets have since Dec. 1 contained warnings that include photos of a gangrenous limb and a cancer victim. All cigarettes in Australia must be sold in uniform packs, with the brand name relegated to the bottom quarter of the package on a drab brown background. The law is being challenged at the World Trade Organization and at arbitration.

(Updates with chairman’s comment in 11th paragraph.)
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