Imperial Tobacco Earnings Decline on Supply-Chain Changes

Imperial Tobacco Group Plc, Europe’s second-biggest tobacco company, said first-half earnings from cigarettes declined as it implemented a program to improve its supply chain and invest in its brands.

Adjusted operating profit for tobacco fell 5 percent to 1.3 billion pounds ($2.2 billion) in the six months ended March 31, the Bristol, England-based maker of Davidoff and Gauloises Blondes said today in a statement. That compares with the 1.33-billion pound average estimate of nine analysts surveyed by Bloomberg.

“Our stock optimization program has inevitably impacted some of our numbers, but I’m pleased with our underlying performance,” Chief Executive Officer Alison Cooper said in the statement. “Actively managing our cost base is releasing funds to invest” in brands, she said.

Imperial said its supply-chain program is on track to deliver incremental savings of 60 million pounds for the full year, even as it reduces inventories in growth markets, particularly in Russia and Iraq. Imperial reiterated its full-year earnings outlook, and boosted the dividend by 10 percent, matching analyst estimates. The company will start quarterly dividend payments in 2015.

Results were “very much in line, both in shape and magnitude, and no change to the guidance is the halfway message,” analysts at Credit Suisse said in a note to investors.

The shares traded at 2,531 pence as of 8:08 a.m. in London, up 0.6 percent.

Growth Brands

Underlying volumes rose 4 percent in the period among Imperial’s so-called growth brands, which include Davidoff and JPS. The performance reflects “the quality of growth we’re targeting and were achieved against a backdrop of market declines of 4 percent,” the company said.

Imperial said its share of business in its growth regions declined because of regulatory changes in Russia, where there are “difficult market conditions.” Excluding Russia, market share improved in growth countries.

Although underlying volumes improved, “with market share negative and very limited volume/share disclosure we think investors need more to take confidence,” James Bushnell, an analyst at Exane BNP Paribas, said in a note to investors. He has an underperform recommendation on the stock.

BAT Ahead

Imperial shares gained 7.7 percent this year before today, buoyed by an improved economic outlook in southern Europe and the introduction of the company’s first electronic cigarette in February, catching up with competitors such as British American Tobacco Plc, which released its Vype e-cigarette last year. Still, U.K. profit, which accounts for about a fifth of the total, is under threat as the government plans to outlaw branded tobacco packaging as early as next year.

Imperial will launch one new e-cigarette this year, CEO Cooper said on a conference call.

The company started selling its Puritane e-cigarettes in the U.K. through the Boots drugstore chain starting in late February. Imperial has been viewed as a laggard on alternative nicotine products as BAT introduced its Vype e-cigarette in the U.K. in 2013 and is awaiting approval for an aerosol-based nicotine delivery device that could go on sale in the country as soon as this year.

The use of e-cigarettes in the U.K. has tripled over the past two years and 2.1 million Britons now use the devices, according to a YouGov survey commissioned by anti-smoking group ASH.

Logistics Unit

Imperial also said today that it’s continuing to review an initial public offering for its Logista unit. The European logistics business was acquired in 2008 as part of the 12.6 billion-euro ($17.5 billion) takeover of cigarette maker Altadis SA. Imperial inherited a 59.6 percent stake and bought the rest in a deal that valued Logista at 2.3 billion euros.

Introducing standardized packaging will bring the U.K. into line with Australia, where cigarettes have been sold in uniform packages since December 2012. The governments of Ireland, Scotland and New Zealand are also proposing to ban branded packs, while European authorities are taking a tougher stance.

On Feb. 26, the European Parliament voted to require that cigarette packs feature a combined pictorial and text warning covering 65 percent of the front and back, and banned cigarettes and roll-your-own tobacco with distinguishing flavors including menthol.

While cigarette sales in the European Union, which account for more than 60 percent of profit, remain “subdued by historical standards,” the “indications are that the worst might be over, not least in Spain,” Martin Deboo, an analyst at Jefferies International in London, said before the earnings announcement.

The smoking rate in the U.K. has dropped below 20 percent, probably the lowest in 80 years, according to a study by University College London, published in February.

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