Imperial Tobacco sparked up by growth brand migration
Strong performance from its growth brands in the first quarter helped offset declines elsewhere and left Imperial Tobacco confident of hitting its full year targets, though currency rates will hit earnings more than previously warned.
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Although it is still early in the new financial year, the company warned that the expected impact of foreign exchange rates on full year earnings was now looking like being nearer 4% than the 2% indicated in November.
For the three months to the end of December, the FTSE 100 group maintained a stable overall market share, with net revenue down 1% and underlying tobacco volumes down almost 4%, in line with the end of last year and the wider market.
Analysts at Credit Suisse said volume were distorted by the trade de-stocking that took base last year making for a very soft base. While reported volumes were up 1%, the underlying volumes were off 4%, which was pretty much the run-rate seen at the end of last year, and is in line with the group's markets.
Imperial said revenues were hit by the timing of pricing activity in a number of markets, the impact of reduced trading in Iraq and the mix impact of lower sales of mass market cigars in the US ahead of a brand re-launch.
That group declines in revenue and volumes were not lower was down to the strength of growth brands, including Gauloises, Lambert & Butler and John Player Specials, which delivered a 15% increase in net revenue and an underlying 11% growth in volumes, aided by an ongoing 'migration programme' of converting popular local and regional favourites into global products.
Combined with specialist brands, such as Golden Virginia, Rizla rolling papers, Skruf snus in Scandinavia and Montecristo cigars, growth and specialist brands now make up to 60% of reported tobacco net revenue.
Reiterating management's commitment to dividend growth of at least 10%, chief executive Alison Cooper said: "We've continued to make good progress against our strategic agenda in the quarter and confirm our outlook for financial year 2015."
She added: "We continue to focus on our priorities for success in our growth and returns markets and are well advanced with our US integration plans."
Since the period ended, shareholder approval has been gained for the company's acquisition of several US cigarette brands and the Blu e-cigarette brand in the USA from Reynolds American, which is expected to go ahead once regulatory approval is received in spring.
Credit Suisse said the message from the updates was clear enough: "underlying trading is in line with expectations and the group is making good progress on its strategic initiatives".
It said the performance of growth brands was certainly impressive thanks to brand migration, which along with the confirmation of £85m of cost savings this year, will be positive for margins in the long term.