Imperial Tobacco Reports First Profit Decline in 17 Years

Imperial Tobacco Group Plc, Europe’s second-biggest tobacco company, reported the first drop in earnings since it listed on the stock market 17 years ago because of worsening conditions in Europe.

Adjusted operating profit fell 6.5 percent to 1.43 billion pounds ($2.22 billion) in the six months ended March 31, Bristol, England-based Imperial Tobacco said today in a statement. That compares with the 1.4 billion-pounds average estimate of four analysts surveyed by Bloomberg.

Per-share earnings growth for the year is expected at the lower end of the company’s model of 4 percent to 8 percent, the maker of Davidoff and West cigarettes said in the statement. Business conditions were “difficult” in the European Union, particularly in Spain, France and Germany, where economic pressures are “more pronounced,” it said. Chief Executive Officer Alison Cooper pledged that the company will “strengthen delivery in the second half and into 2014.”

Europe’s economic slump has also dented volumes at larger competitors British American Tobacco Plc and Philip Morris International Inc. Imperial, which flagged a probable drop in first-half profit in January, is facing a threat to its business from the prospect of a plain-packaging requirement in the U.K., where it’s the leader with about 45 percent of the market.

Cost Reductions

A change to U.K. law on packaging may be announced in the Queen’s speech on May 8, the Guardian newspaper said on March 6, citing an unidentified government official.

Imperial Tobacco rose 0.2 percent to 2,303 pence at 10:20 a.m. in London trading.

In Australia, which introduced plain packaging on Dec.1, there has been “no material impact on consumption,” Cooper said on a conference call today, and “I don’t see any disadvantage from being market leader” in the U.K.

Imperial plans to cut costs to make savings of about 300 million pounds a year by September 2018, including 30 million pounds in the second half of this financial year to boost earnings, Cooper said.

“The headwinds are turning into a longer and more severe storm than we thought, hence they need the 30 million-pound cost savings to deliver for the full year,” said Erik Bloomquist, an analyst at Berenberg Bank in London.

New Products

Imperial Tobacco is trailing rivals such as BAT and Philip Morris International in developing so-called new-generation products, which the companies say are less harmful because they deliver nicotine without having to burn tobacco.

BAT plans to sell its first such product, which isn’t an electronic cigarette, as early as next year, while PMI has earmarked 2017.

Imperial has a division called Fontem Ventures that is “looking at new consumer experiences which are adjacent to tobacco, but not tobacco,” Cooper said. It’s too early to reveal any details and “we should have something to talk about next year,” she said.

Imperial’s lack of a pipeline “is a source of frustration for many investors,” Bloomquist said. “It’s where the growth is and many competitors are driving this very aggressively.”

The quantity of cigarette equivalent volumes sold by Imperial Tobacco in the first half fell 5.9 percent. Tobacco companies are relying on higher prices as well as growth in emerging markets to offset declining consumption and rising government levies in western Europe and North America.

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