BAT Revenue Misses Analysts’ Estimates on Delayed Pricing

British American Tobacco Plc, Europe’s biggest cigarette maker, reported first-quarter sales growth that missed estimates as the company delayed price increases until the second half of the year.

Revenue at constant exchange rates rose 2 percent in the three months through March 31, the London-based company said today in a statement. That compares with the 4 percent median growth estimate of 11 analysts surveyed by Bloomberg.

A decline in the volume of cigarettes sold moderated in the quarter, though benefits from higher prices were less pronounced than in previous periods. BAT, which for years has been relying on price increases to offset falling cigarette consumption, said the benefit this year will be weighted toward the second half. The company didn’t provide an explanation.

“We believe the weaker pricing performance in the quarter shouldn’t be a surprise given the tough comparison of 8.7 percent in the first quarter of 2013,” Damian McNeela, an analyst at Panmure Gordon, said in a note. “On the plus side the volumes were better than expected.”

BAT stock dropped as much as 2.4 percent in London and was down 2.3 percent at 3,407 pence as of 3:12 p.m. The shares have advanced 5.1 percent this year.

The volume of cigarette sold by subsidiaries fell 1 percent in the quarter, BAT said, beating the average estimate for a 2.3 percent drop. Total tobacco volume declined 1.1 percent.

Foreign Exchange

Foreign exchange “remains an issue” for reported results, Chief Executive Officer Nicandro Durante said in the statement.

Revenue declined by 12 percent in the quarter at current rate of exchange, hurt by sterling’s strength against currencies such as the Brazilian real and South African rand.

BAT is also battling stricter government rules on smoking. The U.K. plans to require plain tobacco packaging as early as next year, while European lawmakers have increased the size of health warnings on cigarette packs and banned flavored tobacco.

Still, Durante said he’s “confident of delivering consistent growth in earnings in constant currency terms, which we will recognize with an increase in the dividend.”

BAT owns 42 percent of Reynolds American Inc., the Camel cigarette maker that investors speculate may bid for Lorillard Inc., whose brands include Newport menthols. BAT could help fund such a purchase, analysts at Exane BNP Paribas have said.

Durante declined to comment on whether he would support an offer by Reynolds for Lorillard.

Standstill Agreement

Speaking after the company’s annual meeting in London, the CEO said July’s expiration of a standstill agreement barring BAT from increasing its stake in Reynolds without the approval of Reynolds’s board “doesn’t change anything.”

“You would always go to the board, we’d never go to Reynolds with a hostile takeover,” the CEO said. “Reynolds’s management agrees with us.”

BAT analyzes its cash position at the end of each year, looking at the potential for share buybacks, dividends and buying minority stakes, Durante said.

“In five years’ time, will I go for Reynolds? We look at it on yearly basis. Not only Reynolds, we look at all the investments in the world, we have a lot of minority” stakes.

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