BAT Fourth-Quarter Profit Climbs 26% on Takeovers, Price Rises

Source from:  Bloomberg 03/02/2009

British American Tobacco Plc, Europe's largest cigarette maker, reported a 26 percent increase in fourth-quarter profit on price rises and acquisitions, and said smokers are still buying its more expensive brands. Net income climbed to 604 million pounds ($862 million), before minority interests, from 481 million pounds a year earlier, the London-based maker of Lucky Strikes cigarettes said today. The annual dividend was raised by 26 percent. BAT and rival tobacco-product companies increased prices and expanded through takeovers after smoking rates declined in the U.S. and western Europe. The maker of the Kent and Pall Mall brands took over Turkish cigarette maker Tekel in June and bought most of Skandinavisk Tobakskompagni A/S a month later. Fourth-quarter sales rose 26 percent to 3.42 billion pounds. "People who smoke cigarettes regularly see them more as an essential part of daily life," said Jonathan Fell, an analyst at Deutsche Bank AG in London with a "buy" recommendation on BAT. "They're obviously habit-forming." BAT rose as much as 3.4 percent in London trading and was up 1.6 percent to 1,743 pence as of 11:03 a.m. U.K. time. The cigarette maker has been no "significant acceleration" in "downtrading," Chief Executive Officer Paul Adams said in a Cantos interview. Shipments of so-called premium brands rose 5 percent in 2008, compared with overall growth of 1 percent in the quantity of cigarettes sold, excluding acquisitions. Adams also said unchanged volumes in 2009 wouldn't "bother" him, adding that he wasn't making a forecast. The company's priority is revenue growth, he added. 'Well Balanced' BAT is "alert to the possibility" of smokers switching to cheaper brands, Chairman Jan du Plessis said in the statement. BAT has seen a "slight deceleration" in the number of consumers in rural areas of Russia switching to more expensive brands, which the company said is not "significant." "Our well balanced portfolio of brands covers all major price points, while our geographic diversity further mitigates the risks for shareholders," du Plessis said. Tobacco lends itself to price increases because nicotine is as addictive as heroin and cocaine, according to the U.K.'s Royal College of Physicians. BAT spent about $5 billion in total for Tekel and Skandinavisk Tobakskompagni, gaining control of 36 percent of Turkey's cigarette market and 60 percent of Scandinavian sales. More than three-fifths of male Turks aged 15 and older are smokers, according to the World Health Organization. Refinancing Plan BAT plans to refinance debt that it took on to purchase Tekel this year, going to banks for 60 percent of the amount and paying off 40 percent with cash from operations, Michael Prideaux, a spokesman, said in a phone interview. Shareholders will receive a final dividend of 61.6 pence a share, raising the annual total 26 percent to 83.7 pence. BAT said it's suspending its share buyback to preserve financial "flexibility during a period of economic uncertainty." CEO Adams has exceeded BAT's goal of raising per-share profit excluding one-time items by a "high single digit" amount every year since starting the job in 2004. Earnings per share rose 19 percent on that basis in 2008. The company aims to boost its operating margin to 34 percent by 2012 and aims to cut 800 million pounds of costs a year by then, Chief Financial Officer Ben Stevens said. Full-year net income rose 15 percent to 2.46 billion pounds, missing the 2.55 billion-pound average estimate of six analysts surveyed by Bloomberg News. Enditem